Gaiam, Inc. Q4 2008 Earnings Call Transcript

| About: Gaia Inc. (GAIA)
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Gaiam, Inc. (NASDAQ:GAIA) Q4 2008 Earnings Call Transcript March 10, 2009 4:30 PM ET


John Mills - Investor Relations, Integrated Corporate Relations Inc.

Jirka Rysavy - Chairman and Chief Executive Officer

Vilia Valentine - Chief Financial Officer and Treasurer

Lynn Powers - President


Mark Argento - Craig Hallum Capital Group, LLC

Ed Aaron - RBC Capital Markets

Michael Harkins - Levy, Harkins & Co.


Good afternoon and thank you for standing by for the fourth quarter 2008 financial results. Everyone now is in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator instructions) Today's conference is being recorded. If you have any objections you may disconnect at this time.

And now, I would like to introduce Mr. John Mills. Mr. Mills, you may begin.

John Mills

Thank you. Good afternoon everyone and welcome to Gaiam's fourth quarter and full year 2008 earnings conference call. The following constitutes the Safe Harbor statement of the Private Securities Litigation Reform Act of 1995. Except for historical information contained herein, the matters discussed in this call are forward-looking statements that involve risks and uncertainties including, but not limited to, general business conditions, integration of acquisitions, the timely development of new businesses, the impact of competition, and other risks detailed from time to time in the Company's SEC reports. The Company does not undertake any obligation to update forward-looking statements.

On the call today representing Gaiam is Jirka Rysavy, Chairman and Chief Executive Officer, Lynn Powers, President, and Vilia Valentine, CFO.

And now, I would like to turn the call over to the Company's Chairman and CEO, Jirka Rysavy. Go ahead, Jirka.

Jirka Rysavy

Thank you, John. So as widely discussed in the media as you probably know consumers took very conservative approach to holiday buying and retails heightened the focus on inventory, so our revenue for the quarter which ended December 31 decreased about 8.9% to $74.5 million from $81.8 million which we reported in the same period of ’07, and also driven by the decline in our market price of our common shares. In the fourth quarter, we have to look at FAS 142 and take goodwill impairment charge of about $42.3 million of which about $27.2 million was from consolidating our 56% on subsidiary impairment charge and $15.9 million was related to incurring goodwill in our direct segment of Gaiam.

Including these charges, we reported a net loss of $30.1 million or a $1.26 per share, excluding these charges, the disposition of businesses and loss from consolidating our real goods, we have about $0.05 loss for the quarter.

For the year, our revenue was $257.2 million, which is 2.2% decrease from $262.9 million in ’07, including impairments and the reported loss of $35.5 million or a $1.45 per share excluding that these impairment charges, disposed businesses and loss from consolidating real goods together with report a net income of $800,000 or $0.03 per share for the year. These impairment charges generated $8.4 million tax refund and also $7 million tax credit, both of those you can see as in a separate line in our current asset and balance sheet.

We continue to evaluate the opportunities which this environment brings companies like ours and in the Company that no debt and good balance sheet and good credit position. We still see additional opportunities to drive additional controlled space at retailers, and also expand our category management program, but store-to-store definitely is going to be our focus.

We ended the quarter with over 10,000 stores within a store and which is up from 7,000 at the end of ’07 and right now over 3,000 doors of category management which is obviously dramatically up from none from years ago because this program, it is relatively new for us.

Let me compare our results to the market or to our competitors, we actually deliver superior sell through for most of our retailers so we expect to gain additional stores. We are also continuing the transformation of our direct business from transactional selling through relationship model, through our communities and subscription club, and as of December, we grew the membership to over 250,000 but because of the current state of the economy we are changing our focus from rapid growth to foster elimination of our P&L losses in our community business. The losses were $0.04 in fourth quarter and $0.14 for the year.

Our cash position remained strong at $32 million and we also have additional $5.4 million of concurrent deferred tax benefit lines I mentioned which confers the tax refund and reflected as a credit. We still have no debt. We have a credit ratio of 3.9 and on top $15 million line of credit.

Free cash flow which we define as cash flow from the operation, operation less CapEx, it is our new mantra. That is why we want to focus company owned right now. They are already in process of streamlining our business units that experience the negative cash flow last year.

We also restructured company and took big savings from our payroll and Lynn will cover that. But Lynn, who is our president and CEO of North America for many years and she is my only report for last four or five years. She will assume the CEO title in addition to her title as the president. She will continue to report to me. Lynn will be focusing on making 2009 our highest revenue and best cash flow year ever and I will on going our community and making it an income contributor.

Because of our 2008 initiatives especially our aggressive expansion of our store-in-store and the category management concepts, we believe that even without an improvement in our world economy the 2009 is going to be our best year ever in both our revenue and free cash flow. We expect our free cash flow for the year will be over $20 million and depreciation, amortization or stock comp will be approximately $9 million, this CapEx maybe half of that.

Now, I will turn it to Vilia who will provide you more details with numbers and Lynn for the overview of our business.

Vilia Valentine

Thank you, Jirka. As Jirka mentioned, the first half of 2008 was profitable, the second half was impacted by the economic downturn.

For the full year 2008, revenue was $257.2 million, a 2.2% decrease from $262.9 million in 2007. Revenue from our solar segment increased from $18.9 million to $39.2 million, reflecting the acquisitions of three California based solar companies in 2008. For more information concerning results about solar a separate earnings call will be held tomorrow, Wednesday March 11, 8:30 am pacific daylight time.

Revenue was generated by direct to consumer segment decreased 2% to $129.8 million from $132.5 million in 2007. We reduced and focused our catalog circulation and direct response-marketing spend to improve our return during this challenging retail time.

Revenue from our business segment decreased 20.2% to $88.9 million during 2008 from $111.5 million last year, primarily due to the conservative retail buying in the second half of the year and lower international revenues.

International revenues were $5.1 million compared to $32.7 million in 2007 as it shifted to an international licensing model and disposed by UK operations in March 2008. Excluding international revenues, our business segment revenue increased 6.4%.

Overall gross margin was 58% of revenue compared to 64% of revenue in 2007, with our lower margin solar business growth accounting for the 50% of the decline. Other factors contributing to the margin decline include discounting early in the fourth quarter to promote products and reduce inventory levels; a shift in our retail product mix includes solar margin category management fitness media associated with our category management rollouts and store-within-store strategies. In connection with these strategies we incurred charge backs from our retailers. We also made a decision to scale back our high margin [DRTV] business due to the high cost of media during the election and holiday seasons.

Our selling operating expenses decreased 1.6% to $142.4 million from $144.8 million in 2007 reflecting cost control initiatives including reduce target catalog circulation and media spend and payroll reduction. [Operating] improvement for the year-over-year increased in our reserve for bad debts. We increased our bad debt reserves by approximately $1.4 million bringing our reserve balance from $1.3 million at the end of 2007 to $2.7 million as of December 31st. Although historical bad debt experience has been good, current market condition changed dramatically in 2008 and as a result additional reserves were required to minimize these new risks.

Our corporate general and administration expenses decreased slightly to $13.1 million from $13.2 million in 2007. As Jirka mentioned, we recorded noncash charges of $82.9 million for the full year consisting mainly of impairment of goodwill, intangible assets including media libraries acquired from the good times and line acquisition and other related assets.

The goodwill impairment resulting for applying the standards of FAS 142 is primarily driven by adverse financial market conditions that have reduced our market capitalization below net carrying value.

The noncash impairment charge does not affect our cash balances, liquidity, or operating cash flow but does effect our income statement. The operating loss for 2008 was approximately $89.1 million compared to income of $10.5 million for 2007.

Turning to the fourth quarter, we reported revenue of $74.5 million down 8.9% from $81.8 million in the fourth quarter of 2007, due to the decrease of consumer and retail spending as well our shift to international licensing model and sale of our UK subsidiary the first quarter of this year.

For the fourth quarter 2008, revenue from our solar segment increased $7.7 million from $5.8 million to $13.5 million reflecting acquisitions of California based solar businesses during the year.

Revenue generated by direct to consumer segment decreased 16.1% to $30.4 million from $41 million in the fourth quarter of 2007, in part due to the decision to reduce catalog circulation and direct response marketing media spend as well as the overall economic environment.

Revenue from our business segment decreased 24.1% to $26.6 million during the fourth quarter of 2008 from $35 million in comparable period last year due to the conservative holiday orders from our retail customers. These results include the acquisitions of SPRI and a sale of our UK subsidiary both in the first quarter as well as our move to licensing arrangements.

Our gross margin was 51.4% of revenue for the fourth quarter of 2008 compared to 62.5% of revenue in the fourth quarter of 2007, reflecting the growth in our lower margin solar business, absorption of increase raw materials and freight costs and our aggressive approach to retail expansions.

Our sale and operating expenses decreased 3.7% to $39.7 million from $41.2 million in the same period last year, reflecting the impact of cost control initiative partially offset by an increase in bad debt reserve.

Our corporate, general and administration expenses increased slightly to $3.5 million from $3.3 million in the same quarter last year. For the quarter, depreciation, amortization and stock compensation expenses totaled $2.1 million. During the quarter, we recorded other expense a charge of $42.3 million consisting mainly of impairment charge goodwill and intangible assets. Of this amount, $27.2 million related goodwill impairments from our 56% owned solar subsidiary, real good solar and $15.1 million related the goodwill and intangible asset impairments and our direct segment.

Our interest income for the fourth quarter 2008 decreased approximately $220,000 from $773,000 in the same period last year, reflecting a decrease in short term interest rates and lower cash investments. During the year, we used cash to acquire new headquarters in Colorado, repurchase our shares, acquired businesses, and investing infrastructure. Including the impairment charges, we recorded net loss of $30.3 million in the quarter or $1.26 per share compared to earnings of $4.2 million or $0.17 per share in the fourth quarter of 2007.

As of December 31st, 2008, our balance sheet remained healthy. We ended the year with $32 million in cash and cash equivalents, no debt and no amount outstanding on a revolving credit facility.

Our inventory increased $5.9 million from $29.8 million at the end of 2007 to $35.7 million at the end of 2008. Including inventory prior in the acquisitions by products, inventory for the business segment end of the year $17.3 million compared to $14.4 million at the end of the prior year.

The extraordinary retail climate that developed toward to end of 2008 but many of our key retailers to initially postpone holiday purchases as they thought they had taken a conservative position on inventory. However, in the first quarter of 2009, we expect to recover some of these delayed orders from our large retailers.

Our business segment inventories have already been reduced $4.3 million as of today. Our success to reduce indirect segment levels mitigated higher inventories in the business in solar segment. Our total company inventory turns remained relatively constant at 3.4 times to 3.5 times in the prior year.

Depreciation, amortization and compensation expenses totaled $10.1 million for 2008. Our 2008 capital expenditures totaled $28.9 million; expenditures include $19.4 million for new corporate facilities and related equipment and $6 million of media library additions. Our total expenditures for 2007 were $9.5 million.

Our day sales outstanding for the fourth quarter of 2008 increased to 48 days in 38 days at the end of 2007, primarily due to the increase accounts receivable associated with recent acquisitions, approximate 72% of our receivable to the trade division are comprised of our top 10 customers, household name such as Target, Wal-Mart, Dicks and Amazon.

In 2008 we repurchased $1.3 million shares of our Class A common stock for a total of $18.4 million. We had $23.9 million share of the common stock outstanding as of December 31st, 2008. We are now highly focused on free cash flow and prudent cash management.

Our solid liquidity afford us the flexibility to both sustain a prolonged downturn in economy and to continue to grow market share and build brand loyalty with our customers, we are taking the right steps to the vision of Gaiam for long term growth when the economy improves and consumers spending resume.

Now, I will turn the call over to Lynn to provide more detail on our growth initiatives and business segment.

Lynn Powers

Thanks, Vilia. In the next, due to the adverse macroeconomic conditions, we remained focus on the quarter growth strategies that we have discussed on past calls. These strategies will leverage our sound financial position to capture additional market share, increase sales, expand our rollouts category manager and then enhance existing distribution to the store-in-store concept.

In addition to these growth strategies, we are mindful of the revenue impact of the current macroeconomic shift that has occurred and implement cost saving measures, aligning our overhead structure with the revenue base, ultimately realizing meaningful efficiencies.

This year we will focus our efforts on free cash flow and run the business accordingly. We are committed to a long term outlook of growth and profitability while maintaining a strong commitment to our brand and mission to provide products and services that better the lives of our customers especially in times like this where consumers are facing, but ever increasing financial pressures and stress.

I would now like to provide you some more detail on results by business segment. In 2008, cost sales to the domestic business segment were flat year-over-year, reflecting strong first half performance of 25% comps highlighted by the launch of our fitness media category management initiative followed by the circle of second half that was impacted by average of sales by the economic downturn which begun in third quarter and intensified in the fourth quarter. To the last half, cost sales in the business segment declined 16% reflecting the conservative inventory positions taken by many of our retail partners leading into the holiday season.

Many of our largest retail partners cut their buying significantly in the fourth quarter resulting in low stock positions at retail that were carried through the holiday buying season. Well, we have seen some nice resurgent with certain accounts after year end, the overall retail environment remained cautious. While many of our retail partners took a very conservative approach to holiday buying, our consumers maintained their commitment to Gaiam at retail.

For the year, our sales-through with our largest account was up over 30% with every month ahead of 2007 on a comp basis. With a 43% market share in fitness media, our position in the market relative to other fitness media players is strong. Continued growth in our category management and store-within-store initiatives are key strategy in maintaining our status as the clear leader in fitness media.

After successfully implementing media category management with target we have secured future expansion of the strategy and sporting goods in our rack account. With our recent rollout at category management we have now implemented the strategy in over 3,000 doors.

We continue to expand our retail distribution and ended the fourth quarter with placement in over 73,000 doors compared to 70,000 at the end of ’07. Our store-within-store growth continues to enhance the quality of our distribution with over 10,000 doors as of the end of ’08 up from 7,000 at the end of ’07. This is an essential part of our long term retail strategy and a key step in securing additional shelf space during this market downturn. Although costs are incurred as a result of expanding the strategy we are committed to this presentation as a means of capturing additional market share and maintaining our status as a leader in fitness media for the long term.

As a part of our aggressive retail approach, we continue to absorb all costs increases from our manufacturers due to currency fluctuations and the increase cost of raw materials and freight. We felt it was important that we maintain our retail price points and then contract our margins in order to build our long term branded presence at retail during these difficult times.

The recent uptick in the dollar has aided in our efforts to renegotiate manufacturing and freight costs which will offset the effects at maintaining retail prices after we move through our inventory in early 2009.

Given the deteriorating risk environment, we are focused on maintaining strong relationships with our top retail partners and closely monitoring the market for potential retail failures. We have not been immune to the effects of retail fallout in 2008. However, we were very successful and closely monitoring those partners at risk and managing our exposure.

Despite large accounts such as Linens ‘n Things, Mervyns, Gottschalk, Busy Body and Circuit City filing for bankruptcy protection and in some cases liquidating. We managed our exposure well in this area of heightened credit risks.

As Vilia discussed earlier, we took action in the fourth quarter to closely analyze our exposure in this climate and to increase our reserves, feel we have adequately reserved for this risk as we move into 2009.

Our direct to consumer segment which includes results from direct mail, internet sales, community subscriptions and our direct response campaign experienced some contraction as a result of temporary consumer spending amid the economic downturn. In 2008, we streamlined our direct to consumer segment in a number of ways.

First, we made a decision to consolidate our catalog under a single Gaiam brand. Second, we reduced total circulation by 16% approximately $2.5 million catalog, reflecting our shift away from direct mail prospecting towards online prospecting. Prospecting through the web yields similar response rates, greater flexibility and costs that are less than half that of direct mail.

Finally, we focused our efforts to drive growth in our subscription and community based services. In the direct segment, we also initiated a number of cost cutting strategies that were implemented during 2008 and early ’09. These strategies include renegotiating our inbound and outbound freight contracts to take advantage of lower fuel costs, renegotiation of manufacturing costs, consolidation of our mail order catalog, implementation of a reduced and optimized circulation plan, inventory reduction strategies, and overhead reductions associated with underperforming direct divisions.

Some of our overhead reductions were completed in ’08, but the benefit realized in the fourth quarter and we further reduced overhead in March in an effort to right size this segment and better position us for profitability, which is the 50% reduction in on-hand inventory year-over-year in the direct segment by implementing new inventory management and purchasing strategies.

In the fourth quarter, revenue comps for the direct segment declined 15.8% on a planned 30% reduction in catalog circulation, and overall slower consumer spending in the quarter. Similar to the widely publicized strategies that were employed at retail during the holiday season, we chose to sacrifice the margin to drive traffic through aggressive pricing and additional free shipping promotions in the fourth quarter.

Within our direct to consumer segment, direct response revenue declined 15.3% reflecting our decision made in the third quarter to reduce media spending as media airtime costs spiked due to election campaign advertisements. While this decision impacted our revenue in second half of ’08, we felt it necessary to reduce the negative impact on operating income. We continue to assess the return on investment based on market pricing of airtime.

In summary, we believe we have a strong brand recognition and momentum that we will continue to leverage during 2009. We will focus on the following strategies for growth.

We will increase our media management footprint by adding specialty, sporting goods and rack stores to our mix. With increased pressure on retail to cut their overhead, this management strategy works well in the current environment.

We will focus on additional space for store-within-store exposure both with current retail partners as well as new store growth, and our brand continues to perform well at retail we expect to be able to expend a new category in our larger footprint with our current partners.

We are looking to add titles or new brand to our Conscious media library of titles. We will add a new brand through our fitness portfolio to expand our demographic to men and younger women. We will continue to extend our rich in other categories such as wellness, through content, as well as licensing, to expand internationally with the focus on Europe and Asia, to grow our subscription based and subscription products including online dating and fitness DVD club and advertising revenue to our direct to consumer segment and build a digital download site and extend our online store-within-store capabilities.

We will remain focus on growth opportunities at the same time we are reviewing every expense line to look for cost savings. We have already taken action on the following items, reduction in force that occurred in late 2008 and in March 2009, which we reduced payroll at $6.5 million on an annual basis. We also reduced expenses through consolidation of all of our hosting site, a renegotiation of our freight contracts, paper and printing costs, decreases associated with our strategy to produce one catalog title versus two. The total reduction in costs for all of these initiatives is approximately $8 million on an annual basis. All of these cost reductions should be fully appreciated by Q2.

Starting with the UK and business publications in Q1 of ’08, we disposed of several business units that accounted for approximately $2 million in operating losses for the year. We also negotiated in all of our product costs to improve our margins by mid-2009.

In conclusion, we believe we are well positioned to continue our strong brand momentum and leadership in the LOHAS industry. We are committed to expanding our high quality, socially responsible content and brands, and we will continue to review and revise strategy across all of our business units to better position Gaiam for future growth and a return to profitability.

The solid financial foundation we have built continues to afford us flexibility in the consumer market that many highly leverage companies do not have in this difficult climate. We continue to push aggressively to gain placement and market share in retail, creating a distinct competitive advantage for the Company today and in the years to come. We intend to focus on free cash flow and believe 2009 will be our best year ever in both revenues and free cash flow.

I would now like to open the call up for questions. Operator?

Question-and-Answer Session


(Operator instructions) Your first question comes from the line of Mark Argento.

Mark Argento - Craig Hallum Capital Group, LLC

Questions around kind of trends you are seeing kind of selling versus sell through, I know you had mentioned some numbers for ’08, but can you give us any granularity around kind of severity of the fullback in terms of buying in Q4 relative to kind of sell through, and maybe what you are seeing until able to gain back some of those sales that might have slipped out at Q4?

Lynn Powers

Mark, it is Lynn. In our largest account, our sell through comp in fourth quarter was over double digit and then net orders to us were negative double digit costs, so that gives you some indication that consumers were still buying but the retailers were limiting their inventory purchases.

Mark Argento - Craig Hallum Capital Group, LLC

I assume at some point they run out of inventory, so have you seen a pick up then, a corresponding pick up for Q1 in terms of replenishment?

Lynn Powers

We are seeing some nice resurgence there and they were definitely some out of stock that I noted throughout fourth quarter and many of our major accounts.

Mark Argento - Craig Hallum Capital Group, LLC

In terms of the new, I know you guys, it looks like you did a good job in terms o getting additional store-to-stores, even despite tough environment. I am sure retailers took up on your an offer in terms moving some products through and taking shelf space but any specific new accounts that you can talk about and what brands you have at new account?

Vilia Valentine

Most of the gain came from our rack accounts which is mostly direct drug and grocery and that would include mostly the FIRM brands.

Mark Argento - Craig Hallum Capital Group, LLC

The FIRM, is that brand formed in performing better or worse in this environment? I know it is more of a value focused mass market brand, is a brand that people trading down to that brand?

Lynn Powers

I think it is more. We look at the brand by channel and we keep the Gaiam brand in Target and above in the specialty retailers in sporting goods and then we use the FIRM brand more in the grocery and drug channel. So as people change the channel in which they shop and trade down, we are seeing a growth in the FIRM brand.

Mark Argento - Craig Hallum Capital Group, LLC

In terms of the catalog, two brands to one brand, is that impacted at all in terms of your customer acquisitions vehicle, I know that has always been a key vehicle for you guys in the catalogs. Any thought about how you could continue to drive customers even though you might have fewer, one less brand and fewer catalogs out there?

Lynn Powers

As I stated earlier, we are really moving from prospecting through direct mail, the prospecting through internet or using affiliate marketing, search engine marketing, email campaigns to acquire our customers. It is about half of the cost of traditional direct mail, and it is working very well for us right now.

Mark Argento - Craig Hallum Capital Group, LLC

And then Jirka in terms of the communities, it seems like that is still a part and going to be increasingly bigger focus for you. Can you talk about some of the ways here that we will reduce the losses and then I think you said it was about $7 million loss if I am not mistaken for the full year ’08, anything that you can point to here in terms of ability to take down those burn rates?

Jirka Rysavy

Yes. So, you are exactly right. My focus will be…yes, I mean we try to really aggressively build it this year and we kind of said we kind of have a lot of cost, we kind of launch couple new program as actually even recently right now in fourth quarter. Right before Christmas we launched Illumination University, which is an educational and just right now in first quarter, we launched Gaia Soul Mate which is a dating site, and so we go into probably pair down to the new club developments and because that is mostly a lot of cost is and development and testing new clubs, so rather than that then we kind of plan to also in fourth quarter before aggressively market but because of the consumer spending, we decided not to do that. And while we want obviously grow the communities we refocused on the clubs that are already established and more profitable, and counted costs from development and new clubs and so that is the most savings will come from but they are going to put several club together and start to do more offering across the clubs. We spend a lot of money to putting new community, so we will continue this system for the community because we could not really get one on the market. There is not one existed, so we have to write it.

So we did it and I assume that all these launches will cut the additional club launches and so that is mainly most of the savings will come from. So, it is not we do not want to keep growing, but we really want to make it as soon as possible, income contributor rather than chasing the number of members, we really want to get positive cash flow as soon as possible.

Mark Argento - Craig Hallum Capital Group, LLC

And you have mentioned that you guys had reduced payroll by over $6 million, in what areas did you find that you could trim back and not really jeopardize the future growth of Company?

Lynn Powers

We trimmed back in all areas with the exception of sales.

Jirka Rysavy

We cannot trim…

Lynn Powers

Priority came from the integration of acquired businesses such as SPRI and [New Mart] bringing them all in house and really leveraging our corporate facility and shared services here in Colorado.

Jirka Rysavy

Basically, consolidating acquisition was a big part and we are not really planning not saying we will not do but we will not definitely focus acquisitions, and so we can try to reap the benefit from the work we already did, but so have in mind, a lot of the savings actually came now just recently in March so there are also some severances and stuff by that and it is a big hit on the net of...possible $6.5 million annual basis, annualized basis obviously now going on, moving forward.

Mark Argento - Craig Hallum Capital Group, LLC

The freight paper printing, what have you that take that number up to $8 million for the full year?

Lynn Powers

That is correct.

Mark Argento - Craig Hallum Capital Group, LLC

Then last, in terms of, it sounds like that you are going to be more focused on trying to generate cash especially in this environment, is this operating cash flow less CapEx kind of [pre-tax metrics], if I look back in ’07 you guys did over $30 million in operating cash flow so it is basically that number less whatever CapEx that you spend that is how you guys define free cash flow, I just want to make sure I look at this the right way going forward?

Jirka Rysavy

Yes. It is right from our cash flow statement in the Qs, okay, so basically you take the cash flow from operation in the less CapEx, so that is how we define it. So you can kind of see it right, it is technically reported number.

Mark Argento - Craig Hallum Capital Group, LLC

And for ’09, so you had mentioned of about $4.5 million in CapEx is kind of your assumption that this $9 million stock comp on the first half and have less CapEx.

Jirka Rysavy

Yes, that is roughly as you know our maintenance CapEx is probably like $2 million minus. The rest is kind of immune titles for our media and we are also probably going to have this year like $1.5 million to finish our facilities so we can do all the production and catalogs, photographs, everything in house, so that will still be well it is pretty much already finished, but it is kind of run through this first quarter but X of that it is probably really less than $4 million.

Mark Argento - Craig Hallum Capital Group, LLC

And in terms of, any of the additional write-downs, I know in the last couple of quarters you took some impairment and you are able to use tax benefits, any additional tax benefits from any of the additional write-downs in the second quarter?

Jirka Rysavy

Not really meaningful because this was really goodwill and so the goodwill was pretty much just driven by the FAS 142, because our stock price went so low that our carrying value, the book is effectively higher than market values so the goodwill is in excess, so in the segments where we experienced losses like solar and direct we basically had to impair goodwill. So there is really no tax saving on that and we basically generated $15.5 million of tax and we already received for $3 million from IRS and now we are still going to get another $5.5 million. So, obviously cash flow position is going to…at the end of the year was $32 million and it is really a question where we are going to have a really nice cash flow this year as to deliver, we expect over $20 million of free cash flow. So that should stay in balance sheet unless we buy shares or do something like that.


(Operators Instructions) Your next question comes from the line of Ed Aaron.

Ed Aaron - RBC Capital Markets

Thanks. Good afternoon everybody. Lynn, congrats on the promotion.

Lynn Powers

Thank you.

Ed Aaron - RBC Capital Markets

At this time I had better understand your retail strategies and I was just hoping you can help me give my head around some of the structural differences between the category management and store-within-store, and also could give me a sense where the penetration rates on both those could kick over time and what that might mean for margins from the mix standpoint?

Lynn Powers

First, the category management strategy or media category management as where we go in and offer to manage the media section for retail, by doing this we bring in third party product to round out the assortment and on the third party product we take a lower margin but we do then control the space and we manage it for the retailer to spend very successful for us at Target, and we are looking to really grow that business particularly in the sporting goods channel, and we are talking to most of our major sporting goods retailers about this kind of category management right now. So, that is one position.

Then on store-within-store which is really all Gaiam branded product, Gaiam branded or FIRM branded or a combination of the two, there is still additional growth just within even our own retailers that we already have store-within-store by expanding our footprint. We are working with several of our sporting goods chains right now to develop the yoga shops versus just the fitness category and to expand our footprint and the book channel with our personal development media.

So, lots of opportunity with current retailers and then expansion in grocery and drug with our mass market brand under the FIRM.

Ed Aaron - RBC Capital Markets

Okay. How much of your sales fall into what you might call it in other bucket not a store-within-store and not category management?

Lynn Powers

I do not have a break out on that.

Jirka Rysavy

We never, never…

Lynn Powers

Never look at that way but our largest accounts all the store-within-store with the exception of Wal-Mart that buys individual titles.

Ed Aaron - RBC Capital Markets

Yes, okay. And then just one last question, did you see any differences on the inventory destocking when you are comparing your category management versus store-within-store versus other?

Lynn Powers

In the destocking?

Ed Aaron - RBC Capital Markets

Yes. It sounds like your retail accounts were working down inventories in the last quarter. I just wondering if that consistently happened regardless of the way you service those accounts or if where you manage the store-within-store that maybe it would have been less?

Lynn Powers

Where we did the racking then we control that inventory and yes we saw that those were filled in because we actually do the racking and write the orders, but any of the other retailers I believe it probably came down from upper management to cut their inventories and it did not matter where, they just had to cut their buying.


Your next question comes from the line of Michael Harkins.

Michael Harkins - Levy, Harkins & Co.

But my question has been about the destocking. It is really quite remarkable but you have answered it. Thank you very much.


We have no other questions in queue at this time.

Jirka Rysavy

Thank you. So, we would like to thank everybody for being with us in these difficult times, hopefully you will be with us next time. Thank you very much.

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