Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Kellie Nugent - IR - The Shelton Group

Thomas Casey - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

James Keyes - Chairman and Chief Executive Officer

Analysts

Emily Shanks - Lehman Brothers

Tony Wible - Janney Montgomery Scott LLC

Colleen Burns - Oppenheimer

Carla Casella - J.P.

Karru Martinson - Deutsche Bank AG

Mary Ross Gilbert

Blockbuster (BBI) Q1 2010 Earnings Call May 13, 2010 4:30 PM ET

Operator

Good afternoon, and Welcome to Blockbuster's First Quarter 2010 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Kellie Nugent, Blockbuster's Director of Investor Relations. Kelly, please go ahead.

Kellie Nugent

Thank you, Jonathan, and thank you everyone for joining us today to discuss Blockbuster's first quarter 2010 financial results. With me on today's call are: Jim Keyes, Chairman and CEO; and Tom Casey, Executive Vice President and CFO. As Jonathan mentioned, this conference call is being recorded. It is also being broadcast via live in voice mode over the Internet and may be accessed within Blockbuster's website at blockbuster.com. After the market closed today, Blockbuster issued a press release regarding its financial results for the first quarter ended April 4, 2010. By now, everyone should have access to the press release and financial tables. However, if you do not, they are available via the company's website.

Please be advised that matters discussed in today's teleconference contain forward-looking statements relating to the company's operations and business outlook, financial and operational strategies and goals, including expectations regarding the company's financial and operational performance in 2010, and other matters that do not strictly relate to historical or current facts. We caution you that statements are, in fact, such predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially. Additional risks and uncertainties that could cause actual events or results to differ materially from these forward-looking statements may be found in the company's filings with the Securities and Exchange Commission on Form 10-K.

Forward-looking statements are based on the company's beliefs as of today, Thursday, May 13, 2010. Blockbuster undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason, except as required by law, even if new information becomes available or other events occur in the future. Additionally, in the company's press release and during the teleconference, management will discuss certain measures and information in both GAAP and non-GAAP terms. A reconciliation of GAAP to non-GAAP is provided in the financial tables following the text of the release.

I will now turn the call over to the Blockbuster's Chairman and CEO, Jim Keyes.

James Keyes

Thank you, Kelly, and thank you, everyone, for joining us this afternoon. During the first quarter, we continue to make progress to recapitalize our business. We've now received several proposals from bondholders and both financial and strategic investors. And we appreciate the support these constituencies have provided. And we're conducting due diligence now to carefully evaluate each of these opportunities. As you know, we’ve delayed the shareholder meeting until late June to have the opportunity to report progress on our recapitalization plans.

During the quarter, we experienced better same-store sales trends and achieved one of our key goals: establishing a significant cross-channel competitive advantage by securing agreements with three of the major studio partners. With these agreements, we not only demonstrated positive studio support, but we established a significant competitive advantage, receiving day-and-date cross-channel access on nearly 50% of major new releases. These are movies that are national competitors like, Netflix or Redbox, will not have for 28 days.

In March, we announced an agreement with Warner Home Video providing a 28-day advantage beginning with the movies: The Blind Side and Sherlock Holmes. Two weeks later, we announced similar agreements with Fox and Universal.

Since over 60% of the industry's $22 billion rental and retail business represents new releases during the first 28 days of street date, we believe that these agreements provide a significant competitive advantage for Blockbuster's stores and for our cross-channel offerings.

Ideally, we'd support these new release windows with aggressive advertising. But given the continued need to manage the business to maximize liquidity, we've been unable to spend incremental dollars to date or significant incremental dollars at least, on advertising. We do believe this is a significant opportunity going forward and for the first time in many years, we now have a tangible advantage to communicate. And we hope that additional funds and studio co-op advertising can be used to promote this advantage.

Finally, we believe more studios are likely to introduce a window and that, over time, this will strengthen this virtual exclusivity, if you will, in new release rentals in DVD.

We have taken important steps also to improve our comparable trends, including the rollout of additional daily rates, improving the customer shopping experience, introducing direct access that allows our customers, By Mail access to as many as 100,000 titles, and providing exclusive products.

As I said in the third quarter of last year, when you manage the business for liquidity, you have to sacrifice in some cases top line growth. And I also said that it would take several quarters to restore our ability to improve same-store sales.

During the quarter, we made steady improvement in top line performance with sequential improvement of domestic rental same-store sales comps coming from approximately minus 15% in the third quarter of 2009 to minus 11% in the fourth quarter of '09, and now minus 6% in the first quarter of 2010.

We believe the windows associated with The Blind Side and Sherlock Holmes, for example, contributed to actually positive same-store sales comps during the month of March.

We continued also the portfolio rationalization during the quarter to achieve the optimal balance between domestic company-owned stores and our franchised stores and our new Blockbuster Express kiosks through our alliance with NCR.

We ended the first four months of the year with almost 3,500 domestic, company-owned and franchised stores. And with NCR, we significantly increased kiosk deployments recently adding, for example, 1,400 machines in Safeway stores throughout California. Through this alliance, we now have over 4,000 Blockbuster Express kiosks deployed and NCR remains on track to deploy a total of 10,000 kiosks by the end of 2010.

The net points of presence between our full-service stores and our new automated retail kiosks provide our customers with about 7,500 convenient locations today, with many more to come as we continue to rollout to this target of 10,000 kiosks during the year.

The way we're looking at this business going forward is not stores versus kiosks, but rather increasing consumer availability for Blockbuster content through a combination of full-service stores and automated retail locations.

We continue to enhance also our By Mail offering. First, due to the 28-day window, we now offer day-and-date on all new releases and are the only competitor able to provide that promise to its customers. Second, based on the success for our test, we are going to rollout games By Mail region-by-region during the remaining months of the year 2010. And third, we have continued to make progress towards strategic partnerships. And we'll have more to discuss about that during our shareholders' meeting in June.

Finally, we expanded our digital presence. When looking at video and demand rentals, the first quarter increased 78%, when compared to the fourth quarter. And we expect exponential increases going forward as more and more connected and embedded devices become available in the marketplace.

In addition, we became the premier movie download experience embedded in T-Mobile's new HTC smartphone, which was officially launched in the U.S. in March.

Through our alliance with Samsung for BLOCKBUSTER ONDEMAND, we've now been embedded in over 60 products, including Internet-ready televisions, Blu-ray players and home theater systems. Most exciting about this service is the access to BLOCKBUSTER ONDEMAND with the simplicity of a button on the remote control. We continue to make progress with all leading consumer electronics and device manufacturers. And we'll have additional news over the next several months.

With our unique multichannel capability to offer DVDs in store, By Mail and via kiosk, and with a world-class digital offering that is gaining momentum, we believe we are very well-positioned for the future. With all of these exciting opportunities for future growth, I can assure you that we are working very hard to successfully recapitalize the company today. And the challenge, as it continues, as it has been for the past year and still remains, is our liquidity, given the heavy debt amortization that we face.

We remain optimistic about the long-term viability and success of Blockbuster's iconic brand, especially now with the completion of our cross-channel capability, the emergence of a new rental window and the closing of Movie Gallery and Hollywood stores, our largest brick-and-mortar competitor.

As we continue to transform this business model and to restore top line growth, we do require adequate liquidity, of course, to succeed. Given the reality of continued tightness in our non-studio credit terms and the high one-time costs of advisory fees, both offset by the positive but uncertain timing of favorable effects of the windows and of the Movie Gallery, Hollywood video store closings, in our 10-Q filing you'll see cautionary language as required by the SEC.

We hope that our various stakeholders will allow us to the stay the course towards a continued and successful recapitalization that will allow Blockbuster to continue this exciting business transformation. We're optimistic that a recapitalization is possible. And we're pleased that we have several excellent options that we believe can provide the balance sheet improvements necessary to continue our transformation.

I'll now turn the call to Tom, who will review the first quarter results in more detail and then we'll go to Q&A. Tom?

Thomas Casey

Thanks, Jim, and good afternoon, everyone. My comments today will focus primarily on how we're tracking to our cash maximization strategy.

Beginning with the cash maximization items that we successfully completed during the first quarter. First, we enhanced our payment terms with several of the major studios by granting a lien on our Canadian assets. Additionally, we eliminated our letter of credit requirements related to Viacom lease guarantees. Second, we continue to optimize our domestic store portfolio. We reduced the number of unprofitable domestic company-owned stores from 30% to 15% of total domestic stores, while minimizing lease termination payments and realizing good value for product and liquidation.

In line with our full-year expectations, we closed 470 underperforming domestic company-owned stores so far this year, including 288 in the first quarter and an additional 182 in April.

Consistent with our September 2009 8-K filing, we expect significant benefit to 2010 adjusted EBITDA from revenue transfer and loss avoidance from 2009 and 2010 domestic company-owned store closures. And for the first four months of 2010, we successfully renegotiated leases on 536 domestic company-owned stores.

Finally, we simplified our domestic stores’ movie rental terms and prices. In addition, we implemented an additional daily rate in all of our company-operated stores. These two accretive pricing actions will improve rental gross profit.

So in addition to what we accomplished in the first quarter, we continue to work on the following cash maximization alternatives. First, we remain on track to reduce G&A expenses by approximately $200 million, excluding certain items. You'll note during the first quarter, G&A was about $7 million above last year, but that increase was primarily attributable to a few items: A $20 million cost related to store closures, $10 million related to severance, $4 million related to professional fees for our recapitalization initiatives. We also incurred unfavorable foreign currency exchange of $15 million. Excluding these items, G&A was reduced by $43 million year-on-year.

Second, we continue to pursue the sale of our international assets, while maintaining our brand presence in those countries. We're pleased with progress we've made and are in advanced discussions with respect to the sale of Europe.

Finally, we will maintain capital expenditure levels of approximately $30 million for the full year, and aggressively manage working capital through the sale of less productive rental inventory and more efficient retail product size.

Turning to the balance sheet. Our cash and cash equivalents balance was $110 million for the quarter ended April 4, as compared to $189 million at the end of fiscal 2009. Primary use of cash during the first quarter was over $80 million related to January and April interest payments on the senior secured notes and principal payments for the 11 3/4 senior secured notes. There's a $13.5 million interest payment in March with the 9% senior sub-notes, all of which was offset by a $23 million positive from the release of the Viacom letter of credit in January.

Then looking at working capital. Due to the seasonality of our business, first quarter is typically a use-of-cash. In first quarter 2010 it was a use of only $16 million, a significant improvement over the $153 million used during the same period a year ago. That represents about $140 million improvement in cash from working capital, principally related to changes in vendor payment terms year-on-year. So that concludes my prepared remarks.

Operator, we'll now open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Karru Martinson with Deutsche Bank.

Karru Martinson - Deutsche Bank AG

The changes in the vendor payment terms that you just referenced, is that a timing in terms of the payments, so that we'll see that cash flow out in the second quarter?

Thomas Casey

We achieved that success as I noted, Karru, in the first quarter in payment terms with the film studios in exchange for first lien on Canada. That agreement was struck in the middle of March. So that benefit will inure to us through the balance of the year. So that's the first part of it. And then the other part is just sort of normal vendor management.

Karru Martinson - Deutsche Bank AG

And outside of the film vendors, the studios who obviously are your largest, what kind of terms you are seeing from your other vendor partners?

James Keyes

We're pleased with the support of our vendors, generally speaking.

Karru Martinson - Deutsche Bank AG

And in terms of the 50% agreement on the window here, is that just against Redbox? Or is that against Netflix as well?

James Keyes

That's both against Redbox and Netflix. Both of them have now signed agreements with three of the major studios that give them in exchange for a lower cost of goods, they traded that off for a 28-day window, which we believe is a good thing. Basically, what they're saying is Netflix is committed to their longer tail content and saying that their customers will willingly wait for a new release. Our business model, as you know, is somewhat different. We think when people want Avatar they want it from us and expect it from us immediately, day-and-date upon release. We are pleased to be able to offer Avatar in stores, By Mail and as soon as it was available, which I believe was just last week in video-on-demand, we had it, of course, available electronically for streaming BLOCKBUSTER ONDEMAND. And many of you may notice, but Netflix won't have that for their Watch Now streaming service for, I would guess quite some time, potentially several years.

Karru Martinson - Deutsche Bank AG

And in terms of the comp trends that you saw, I think if I heard you correctly, some positive March comps, correct?

James Keyes

We did. We don't want to -- generally, we don't provide inter-quarter numbers. But to us, it was significant that we have made steady improvements in our comps over the last three quarters, as I referenced. And we were pleased that contributing to that improvement, there are a lot of things that went into it, including putting on a daily rate and improving our exclusive offerings. And then a lot of in-store initiatives. But the availability of a 28-day window on two very important titles, we think certainly contributed to our improvement. We expect our comps to be choppy going forward. We don't want people to expect that every month now going forward we're going to have same-store sales comp increases. We are still vulnerable to month-by-month differences in title strength. Certainly, we still have a strong competitive environment. And as I referenced, we don't have the ability to get out with an aggressive advertising campaign right now. In the future, we see that as an opportunity and we'll certainly complement our ability going forward to sustain and hopefully improve our same-store sales comps.

Karru Martinson - Deutsche Bank AG

You mentioned that you were in advanced discussions with the sale of the European assets. How does that fit in with the proposal that you’ve gotten from bondholders, strategic and financial investors? Or is that in conflict or are both of those separate things?

James Keyes

It's not really directly related. I would look at them as separate things. Of course, everything in that we're doing is complementary. All of these various initiatives are designed to improve our balance sheet and improve our liquidity going forward, to provide the access to capital that we needed to keep this transformation moving in the right direction.

Operator

You're next question comes from the line of Mary Gilbert with Imperial Capital.

Mary Ross Gilbert

I just wanted to confirm the cash balance is after making the interest and amortization payments on the 11 3/4, correct?

James Keyes

Correct.

Mary Ross Gilbert

I wondered if you could characterize the types of strategic interests that you're receiving in the company's business. And what kind of form we might see that take place?

James Keyes

We can't be specific, but we have referenced over the last couple of years the desire to partner with cable, telecoms, satellite or other strategic partners that are like-minded in being able to provide, let's say, an enhanced consumer offering in the movie arena. There are partners that can help us on the digital side of the business. There are partners that can help us on the physical side of the business. And in many cases, those partnerships, strategic partnerships are actually complementary that they don't overlap. And that we can go down a path with both a strategic partner for physical. As we already have, you'll note that our NCR agreement is a good example of a strategic partnership that provides a win-win, both for them and for us, in providing a world-class, automated retail capability. At the same time, we have similar opportunities in the digital side of our business to partner with those who can help enhance and maybe even accelerate our digital offerings. So those are the kinds of initiatives that we're pursuing.

Mary Ross Gilbert

So it would be a combination. It's not that it's going to be one strategic partner. It could have to be several. And is that the potential strategic partnering, is that going to be separate from a recapitalization or part of a recapitalization? And is that the reason why we haven't seen additional strategic partnering before?

James Keyes

As I said before, all of these transactions that we're pursuing are complementary. And I wouldn't characterize them as individually part of a strategic recapitalization. I think they all contribute, whether it's the sale of our European assets, partnering with a -- perhaps someone on the digital side of our business. All potentially enhance our liquidity and our ability to recapitalize the business going forward. So they are complementary. I wouldn't look for just one strategic partner. I'd look for us to continue to partner going forward. This isn't something new. And it's not something triggered by our liquidity needs. It's actually a strategy that we set forth about almost three years ago now where we said the transformation of this business is not going to be done by Blockbuster alone, on our own balance sheet. It would require strategic partnerships with others. NCR being a great example on the automated retail side and certainly in the digital side, we know we can't go it alone. And we don't think anyone is going to win that game in terms of digital capabilities by themselves. We think that strategic alliances will be the name of the game going forward.

Mary Ross Gilbert

Can you talk about the comps in April? I wanted to get an idea of what you're seeing with a 28-day window. So do we have some good comps coming out in April that's showing that you are getting some traction? Or is the fact that you're not able to advertise holding you back somewhat?

James Keyes

I did reference the fact that we aren't able to advertise. It is going to hold us back in a sense. I mean, let's face it, our competitors aren't rolling over. I haven't seen any advertising from Netflix bragging about the fact that their customers are going to have to wait 30 days. I doubt they'll do that. Redbox is still putting up Avatar signage saying, coming soon. They're not announcing the fact that they are not going to -- that soon is 28 days, which is an eternity for a new release. So realistically, it's up to us to take advantage of this strategic opportunity. We don't have the liquidity at the moment to get out with an aggressive campaign. We are doing some things. We're relying on our studio partners for co-op advertising. They've been helpful there. You've seen some print advertising. We've had full-page ads in the USA Today talking about this advantage. And if you go to any of our stores, it's all over the front of our store that we have cross-channel day-and-date availability. But that approach to communicating this strategic advantage is going to take time. So back to your question, what about April? We aren't going to get into the habit of trying to provide month-to-month sales comps. I did reference that it is going to be choppy for a while. And that you shouldn’t expect continued same-store sales improvement month after month, but we are optimistic that we will be able to continue over time a favorable trend in restoring our top line.

Mary Ross Gilbert

With regard to the first quarter EBITDA, how much of the $31 million reflected foreign exchange?

Thomas Casey

A $15 million hit relative to unfavorable foreign exchange.

Mary Ross Gilbert

Unfavorable?

Thomas Casey

Yes.

Mary Ross Gilbert

And that's to EBITDA as well. So does that suggest that the EBITDA would’ve really been over $40 million?

Thomas Casey

No, no, no. That's basically the $15 million is in our -- what I referenced was the $15 million hit to our G&A in connection. So that's really the nominal impact on EBITDA.

Operator

You're next question comes from the line of Richard Greenfield with BTIG.

Richard Greenfield

I just wanted to follow up on the question about the better comps in March. Because I think it is very important that you're getting a benefit from the exclusive content that you have for this window. But curious, you obviously did spend a lot. When you looked online, there was a lot of Blockbuster advertisements online promoting the fact that you didn't have a window and that other By Mail and kiosk companies did. And I'm just curious, when you look at the kind of the ROI of the month, how did that look in Q? And any type of color you could give us on the spend, the incremental spend from February versus March as the comps turned would be great.

James Keyes

Yes, Rich, actually we spent less in the month of March than you might think. We got a lot of presence for it, but we didn't spend even as much as we did in the month of January on advertising. So I'd say we haven't had sufficient presence at this point to really get a meaningful return number. We do believe there's a benefit. If you just go back to the fundamental of 60% or more of the business of the consumption being new releases in the first 28 days. Customers aren't going to immediately change their patterns and decide that they're okay waiting another 30 days to see Avatar. They're going to want to see it day-and-date. It will take a while to get that message across the way we're doing it now. But as we get improved liquidity, we believe going forward, there certainly is an opportunity. This is one of the first places we would go to spend incremental capital as we have it available to us that will provide us the opportunity to get out with that message in a bigger and broader way. More to come.

Operator

You're next question comes from the line of Carla Casella with JPMorgan.

Carla Casella - J.P.

I have one follow up on the working capital question that Karru had. So given where working capital is so much better than we expected for the first quarter, should it be a source of cash or use of cash for the second quarter? And then for the year, do you still expect it to be a source of cash?

James Keyes

Yes. For the year, Carla, as we've said previously, we expect working capital to be a source of cash. So that continues to be our expectation.

Carla Casella - J.P.

But second quarter, given that first quarter was so much better than we expected, will some of that reverse in second quarter? Or will more of the use be in second? Or could that be a source of cash?

James Keyes

No, second and third quarter, as you know, are seasonally weak. And working capital is something that we aggressively manage. So we intend to do our best to stay on track with it and I guess is what I would say.

Carla Casella - J.P.

I missed the number of stores that you added an additional daily rate. Is that a late fee?

James Keyes

No. We're very careful not to call it a late fee. Late fee is a thing that you get at the library when you keep a book out for too long and it's actually a punitive charge to keep you from doing that again. In some cases, it could be more than the cost of the book. This is what we used to have when we charged late fees. In many cases, it would rack up a charge that was greater than the cost of the movie itself. That's not what we're doing. What we're doing is, actually, a nod to our kiosk competitors that got the customer comfortable with a thing called a daily rate. Well, that's what we've done. Instead of providing a 30-day forgiveness, which in effect is what we had, we let you keep a $18 wholesale-price DVD for 30 days and only charged you $1.25 when you brought it back. It may only be worth $5 when you brought it back, but we'd only charged you a $1.25 restocking fee. That wasn't fair to our shareholders. And realistically it wasn't fair to our customers who wanted new releases available on the shelf. So what we've done is not to go back to a late fee, but to let our customers know after a five-day rent that is now in most of our stores, we allow our customers to keep the movie for five days, which we think is a bit of an advantage versus those who have only a daily rate. After five days, then we have begun charging our customers a $1 per day rate for as many days as they want to keep it. That gives them the flexibility. If they want to keep it out another week, they can keep it. And they'll pay on a daily basis for the amount of time they keep the movie. We added that to about 2,400 stores for movies alone, in the first quarter. And that has been actually accretive to our results, slightly accretive as customers have been willing to pay it. And frankly, we haven't had much feedback. There was a little bit of a smattering of press the first week we did it about a return to late fees. But customers, thankfully, haven't seen it as that.

Carla Casella - J.P.

And has it capped at a certain amount? Or could it end up being more than the cost of the movie?

James Keyes

No, it caps out, I believe, after 10 days. We then charge the customer the retail price for the movie. So it's fair. It's exactly the same thing competition has been doing with their daily rates. And we think our customers will be fine with it.

Carla Casella - J.P.

Now that Redbox has been up and running for some time and your own kiosk program has been up and running, have you seen any kind of a -- how much cannibalization you get from a store that's within say, a mile or less? Or is there any kind of metric that you're looking at yet?

James Keyes

No. The difference actually between our approach and the Redbox approach is that we're seeing the automated retail location, as we're now trying to call it, as complementary to the store. So instead of looking at cannibalization, we're looking at this as an extension of the trade area. We have a lot more work to do with NCR to fully integrate this automated retailing into our store with a hub-and-spoke kind of distribution advantage. But it's not a question of taking business away from the store, it's a question of being able to complement that store by balancing the inventory between stores and kiosks and providing greater convenience and availability. I mean ultimately we want, between our kiosks, and our stores, and our By Mail service, we want to make the Blockbuster brand ubiquitous. And make it virtually everywhere you go that our customers have ready access to it. Whether they're wanting the convenience of DVDs By Mail, or to pick up a movie at the supermarket on the way home, or to have the retail experience of discovery, if you will, of browsing in the store, perhaps on a Friday night, we can provide that all.

Carla Casella - J.P.

And just one clarification on Mary's question, the $15 million hit was to G&A? Or that was the full hit to EBITDA for FX?

James Keyes

To EBITDA.

Carla Casella - J.P.

Okay. That was the EBITDA impact.

Thomas Casey

No, no, no, I’m sorry, G&A impact.

Carla Casella - J.P.

G&A, right. And did you give the gross profit impact?

Thomas Casey

The EBITDA impact was $3 million.

Operator

You're next question comes from Tony Wible from JMS.

Tony Wible - Janney Montgomery Scott LLC

If we could talk about the advertising lead time that you would need to the extent you do the successful refinancing. How long would it take you to reinvest in advertising?

James Keyes

We've got storyboards already done that are pretty much interchangeable for new movies. You've probably seen some of the print ads that we've had. It's very easy for us to modify that print ad to adapt to the new titles coming out. And we've got TV ready to go. We'll basically plug-and-play the new titles. So we can move pretty quickly.

Tony Wible - Janney Montgomery Scott LLC

On a more recent Viacom title, The Lovely Bones, I just happen to notice from store check that you're running very thin inventory in all the stores on that particular title. Is there something just with that title? Or is there some kind of negotiation still ongoing with Viacom and windows and cutting a new deal?

James Keyes

Frankly, it's pretty simple. There’s some studios working proactively with us with day-and-date windows. And we want to support them and reward them. They’ve been very helpful to us in being able to provide a competitive advantage. Those studios who are still providing our competitors with an advantage, you know, not so much. We're going to work with them, but if we’re out of stock on a movie that is in-stock with our competitor, so be it. We're going to help those who are helping us.

Operator

You're next question comes from the line of Colleen Burns with Oppenheimer.

Colleen Burns - Oppenheimer

Just to clarify, the impact in EBITDA on the FX was a $3 million a negative impact? Or a positive impact?

Thomas Casey

Yes, a $3 million positive with EBITDA. $15 million negative FX.

Colleen Burns - Oppenheimer

So it was a $3 million positive benefit. And then just as far as kind of your working capital, do you expect your first quarter to be like your peak use here, for the year?

Thomas Casey

First quarter is typically the peak use. And obviously, historically, it’s been more of a use than what it was, this quarter. And as we've said before, typically fourth quarter is the significant positive quarter. And Q2 and Q3 are the seasonal low points and there’s some variability in there, but they matter less than Q1 and Q4.

Emily Shanks - Lehman Brothers

And then as far as cash balances, what is the cash in the system at peak in the October timeframe?

Thomas Casey

Yes. It varies somewhat through the year. In the earnings call back in February, I mentioned the number of $40 million, which is a good working assumption with respect to that. I wouldn't go beyond that to talk about seasonal variances in that, but that's a good working assumption.

Emily Shanks - Lehman Brothers

And that you wouldn't go using even a peak? That would be the number you think is helping the system?

Thomas Casey

That's a good number to use.

Emily Shanks - Lehman Brothers

And then just on kind of all the store closures, what's your dark store lease cash cost running?

Thomas Casey

This will be some disclosure in our 10-Q that breaks that out. It’s about, in the first quarter, $3 million.

Emily Shanks - Lehman Brothers

$3 million. And what do you expect it to be on an annual basis? Do you expect it to accelerate? $3 million a quarter? Or should it be higher than that by the end of the year?

Thomas Casey

Yes. I mean, we don't expect to close that many more stores this year. So I think maybe slightly higher as a run rate.

Emily Shanks - Lehman Brothers

And then just lastly on the cost save that you laid out kind of the $70 million that you're kind of expecting in overhead. Are you expecting to see most of that in the back half of the year, hitting G&A?

Thomas Casey

Well, we referenced when you back out the things I've talked about, the store closures, severance, professional fees and ForEx of $43 million reduction in G&A, on sort of an apples-to-apples basis, if you will, so relative to our target of 200. That's basically on track. The actions that we took; a number of actions early this year. But I think that basically what you see flowing through the year are obviously the benefits of the store rationalization program as it relates to cost as well as some specific overhead cost reductions that we took in the first couple of months of this year. So there's a bit more on a quarterly run rate basis than Q1. But basically, the headline is we're on track.

Operator

You're next question comes from Mary Gilbert with Imperial Capital.

Mary Ross Gilbert

I wondered where your By Mail subscribers stand at the end of the quarter.

James Keyes

Mary, we haven't provided any data on individual subscriber numbers. And as I said, we're really retooling that business as we look now at trying to leverage the day-and-date availability, the gaming business and the addition of games to our mix, and the continued work that we've been having toward finding the appropriate strategic partners to move forward with that business. So we're not really giving any numbers at this point. Stay tuned for more to come as we reposition that business going forward with it. I think what you'll find to be a very different approach.

Mary Ross Gilbert

And then can you give us any granularity on what form of a recapitalization we might be looking at? And the timing of when you expect to complete your negotiations?

James Keyes

We really can't provide any details at this point. We're shooting for having more clarity around this for the June shareholder meeting. In fact, that's why we backed it back for about 30 days so that we could provide more clarity around it. As I said, we're actually in the favorable position right now of looking at several different alternatives. It's not as if we only had one or two, even. We have a number of different avenues and possible combinations that we're looking at. So as I said, we're in due diligence now and more to come on that in the next few weeks or certainly between now and the shareholders’ meeting.

Mary Ross Gilbert

In looking at your sources and uses of cash in the first quarter, and I know we don't have complete statements until the Q is out, but were there any timing differences at all in the quarter that could've benefited cash? Or would you say that all the payments, everything that has been made, is sort of more typical for the quarter?

Thomas Casey

I think it's pretty straightforward. I mean, there’s nothing really that significant. I mean, we had all the debt items are as you would expect in terms of the interest payments January 4, and April and March and the principal payments of January and April, offset by the Viacom benefit. So you sort of had a net use of cash related to those transactions of around $75 million. And then you just look at our financial tables with the press release, you see what the adjusted EBITDA is, the lease termination costs severance and professional fees, CapEx, taxes, working capital. You really get to the difference between the $189 million and the $110 million. There's nothing really unusual in there.

Operator

You're next question comes from Carla Casella with JPMorgan.

Carla Casella - J.P.

On the store closings that happened in April, the 182. Would you say what the store closing costs were?

Thomas Casey

No, we don't disclose that, Carla.

Carla Casella - J.P.

I think you’d said $30 million for the year. So is that still fair? Being that you did $20 million in the first quarter, it’d be maybe $10 million left?

James Keyes

What we’re paying in store closure costs is a, obviously, an important negotiation with landlords. I would just tell you that we're pleased with how we've been able to do that. And then if you go back to our 8-K in last September, it's consistent with our assumptions in that disclosure.

Carla Casella - J.P.

And then on the SG&A, the run rate was running a little bit higher than we expected in the first quarter. And I’m wondering if it was just timing of the store closures, potentially. Should we see, I mean, I guess, can you say how much of your general and administrative expenses were related to stores that are now no longer open?

James Keyes

Yes. So we said $20 million of the G&A change was related to store closure expenses.

Carla Casella - J.P.

So $20 million of the change year-over-year from first quarter last year was because of store closures?

James Keyes

Right.

Carla Casella - J.P.

There’s probably more to come though? Wouldn’t second quarter be higher than that number? Because you would have had a bit more stores closed for the full fourth period?

James Keyes

No, Carla. I wouldn't make that assumption.

Operator

Ladies and gentlemen, that concludes our Q&A portion. I'll now turn the call back over to Mr. Keyes for closing remarks.

James Keyes

Thank you, operator. Thanks, everybody, for your questions. As you can see, we're continuing to focus both on the recapitalization of the company, but also on transforming the core business, and making the necessary adjustments to position ourselves for the future. I just want to highlight in closing the very unique opportunities that we have. We are now the only national chain with day-and-date availability cross-channel across virtually all movies, a 28-day window advantage on a number of new releases. We have the advantage of the Movie, Hollywood closings that will provide some tailwinds to us. We have strategic partnerships in vending now and very active discussions underway for By Mail and digital. And we have what we think is a world-class digital streaming offering, one of the few that offers new releases, availability of new releases. So we have a lot going for us. Yes, we have our near-term challenges. But we have every reason to stay the course and to make sure that we have adequate liquidity going forward, and doing the things that we can do to provide the balance sheet necessary to continue with this exciting transformation. We appreciate your continued support. I know it's been challenging, not only for you, but for us. But we're really looking forward to sharing more with you at the shareholder's meeting coming up at the end of June. Thank you very much for your continued support. Okay, operator, that concludes our call for today. And you can go ahead and release the call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation on today's call. The call has ended. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Blockbuster Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts