Brickell Biotech, Inc.
Q4 2007 Earnings Call Transcript

Published: 6 Mar 2008

[Operator:]

Good morning and welcome to the Blockbuster Inc. fourth quarter 2007 earnings release conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Ms. Angelika Torres, Blockbuster's Director of Investor Relations. Ms. Torres, you may begin.

[Angelika Torres:]

Good morning and welcome to Blockbuster's fourth quarter earnings call. Today’s earnings call may include forward-looking statements relating to our operations and business outlook, financial and operational strategies and goals, including our expectations about our financial performance in 2008 and other matters that do not strictly relate to historical or current facts. Actual results may differ materially from those projected in the forward-looking statements. For additional information regarding the forward-looking statements and factors that could cause actual results to differ materially, please refer to the cautionary statements in today’s earnings release and in our public Securities and Exchange Commission filings, including our upcoming Form 10-K. Today’s earnings call may also include a discussion of certain non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliation to the most directly comparable GAAP financial measures and other related disclosures. Our earnings release is available on our website at Blockbuster.com under the link for investor relations. With that, I will now turn the call over to Jim Keyes, our Chairman and Chief Executive Officer.

[James W. Keyes:]

Good morning, everyone. I’m sure you’ll agree this is a very exciting time for the entertainment industry and certainly for Blockbuster as well. What we are seeing in the marketplace is a lot of change -- transformational change and that change we see as a convergence between technology, media, and retail, and it plays to the many strengths of Blockbuster. Blockbuster is uniquely positioned to be a provider of convenient access to media entertainment across all platforms in store, by mail, and online, so as new entertainment technologies emerge, consumer options multiply, and customer use occasions increase, all of this means new opportunities for Blockbuster. Today, it’s all about access and convenience in media entertainment. A company whose only business is DVD rental would have some reason for concern. A company whose core offering is convenient access to media entertainment, like Blockbuster, has virtually unlimited avenues for growth. To position the new Blockbuster for these opportunities, we had some work to do and I am pleased to report on some outstanding progress to date. Last quarter we referenced a reduction of nearly $50 million in G&A expense but I also said we were not finished. We’ve since found further reductions that will bring our total annualized savings to nearly $100 million. We stabled the total access subscription program, changes in pricing, terms -- changes in pricing and terms caused some additional churn, yes, but this pruning process allowed us to build what is a now profitable model that’s well-positioned for growth. We significantly improved our in-stock availability, merchandising, leading to same-store sales increases for the first time in a long time. We achieved worldwide revenue increase of 3.6% in the fourth quarter, with nearly 10% fewer stores, but had the first positive domestic same-store sales comps in many years. In fact, November we think was the first month in over five years, just barely missing the second month in December by a very small amount, which led to domestic same-store sales for the fourth quarter of a decline of only 0.9%, representing a huge improvement to the previous year and to a couple of years before that. So I would like to clarify also that from now on when we refer to same-store sales, it represents a true store comp without the impact of by-mail subscription as reported in the past, so you’ll clearly be able to see our comp numbers, both in-store and by-mail. We continue to make progress in a number of other areas. We are building a world-class team, recently adding Kim [Olleman], a seasoned HR professional to lead our people transformation, promoting Tom [Kirkoff] from within our company to lead our North American store operations, and a number of other exciting new people to bring to the team as we round out our management structure. I hope you’ll share my enthusiasm for these measures of favorable progress and agree that our strategic focus is slowly beginning to translate into promising improvements in both sales and profits. I am pleased to share some of the profits along those strategic fronts since the last quarter in three areas of focus. First, we talked about restoring and growing our DVD rental business, both in-store and by mail. We are more than ever convinced that the core DVD rental business can and will continue to be a solid profitable business for a number of years to come, both in-store and by mail. With the recent changes in our by-mail subscription offerings, we are now competitive across the board versus Netflix, giving our customers better value and more options, whether it’s our $3.99 versus their $4.99 introductory offering, our $15.99 for three out versus their $16.99 by mail only, or our $19.99 for three out with five free exchanges in the store, representing a $20 value. And finally, our $34.99 all-you-can-eat in-store or online buffet, which is an unmatched offering anywhere in the marketplace. We are finding innovative and cost effective ways to grow our subscription channel profitably. First, as I said, we had to fix the business, stabilize the business, and now plan to grow the business. For example, our relationship with Facebook leverages their social networking for viral marketing. In addition, we’ve signed a web media deal with Yahoo! that enables us to market our by-mail and other Blockbuster.com offerings through one of the most trafficked Internet destinations in the world and one of the biggest destination sites for movie-seeking audiences. The emergence of Blu-ray as a format of choice during the quarter represents a big upside for Blockbuster. As customers adopt the new format, it will provide an extended life cycle for DVD rental and will stimulate new retail opportunities as well. We were the first national retailer over six months ago to accurately predict the winner of the high definition format war by simply following our consumer demand and we are now very well-positioned to be upper most in the minds of consumers when they make the decision to adopt this new format. With the help of Sony and our studio partners, we’ve installed Blu-ray demonstration kiosks and sales kiosks in about 2,000 stores to drive home the advantages of high definition and its availability for sale and rental at Blockbuster. Turning back to in-store, we have many more opportunities for growth in our core business. The biggest opportunity in-store is to leverage our competitive advantage, a 30 to 45-day home video window, by improving our in-stock availability for our customers, having the movies they want in stock on Friday and Saturday nights. We’re working with each studio on new collaborative approaches to improve selection and in-stock for both rental and retail titles. We also continue to make progress on exclusive content. For example, the recent announcement of our exclusive video rental relationship with IFC. This two-year agreement gives us a true 60-day exclusive rental window for IFC entertainment titles, which means that customers won’t find these titles for sale anywhere and they will only find them available for rent at Blockbuster -- only at our stores, through our by-mail programs, and digitally on Movielink.com. In-store pricing is another opportunity we’ve discussed and we’ve already made a number of changes in locations where we were somewhat more aggressively priced in the past. Our test of various rental pricing terms and -- pricing and terms combinations continues and we recently launched another round of tests to validate those results and to fine-tune some of the alternatives. I can assure you though there is no urgency to make a nationwide price change because the near-term pricing moves that we’ve made have mitigated any gross profit concerns and will allow us to take the time necessary to develop the optimal consumer value proposition. And finally, new management field structures, new communications processes, new training processes, and the new approach to merchandising at each store is helping our store employees to transform their stores from the inside out, serving us well as more store-based competitors continue to close their doors. The second leg of our strategy, transitioning from rental to retail, is also showing promise. Beginning the expansion of retail opportunities with hot new DVD releases, our strong presence on the new release wall, which has previously been utilized for rental product only, is bringing strong results. This approach has been instrumental in increasing our retail market share and especially on tent-pole titles. We’ve also added more entertainment related merchandise, such as movie posters, soundtracks, licensed memorabilia, along with continual improvements in product assortment among confection and snack items. The sales of gaming consoles and accessories represents another promising area of opportunity for Blockbuster, with gaming being a growth business and innovative products, like Nintendo Wii, broadening the gaming audience even further to attract more casual gamers. We believe that that new Nintendo Wii customer is perfectly suited to the Blockbuster format and in many cases is our existing customer. We recently offered exclusive Blockbuster PlayStation 3 bundles for $599 throughout the holiday season and continuing in the first quarter. One of the highest ticket items we’ve ever sold at Blockbuster is this bundle and we’ve sold more than 11,000 of these packages since the fourth quarter of last year. Additionally, we are working to reenergize the store experience and as we’ve mentioned, have installed several new better Blockbuster store prototypes here in Dallas, with the prototypes featuring brighter paint, lower shelves, modern fixtures, as well as new ways of merchandising. For a relatively small investment, these changes can play a big role in enhancing the in-store experience and in transforming Blockbuster into a media entertainment destination. While it is still early, we are pleased with the results we are seeing in these stores and look forward to sharing more with you about these prototypes in the near future. The third leg of our strategy is to transform the ultimate DVD format into also a digital presence. We added an important new dimension with our acquisition of Movielink in the year 2007, allowing Blockbuster to provide customers with digitally delivered content to your PC, to your portable device, and eventually to your television at home. Recently we launched a new improved Blockbuster.com website that sets the stage for multi-channel offerings. As planned, we’ve enhanced the functionality and improved the user interface of Blockbuster.com and are well underway with the integration of Movielink into our site, which we should have completed and ready for customers some time during the second quarter. We’ll begin testing here during March and then hope to have the rollout for all of our customers in the second quarter. Also, we’re doing some innovative things in the digital space. For example, partnering with Paramount and MTV to make Jackass 2.5 available, the first ever studio-backed feature to be first offered online. And through our relationship with IFC, we also acquired not only the exclusive DVD rental rights but also 60-day exclusive digital rental rights for all of their titles. All of this underscores our determination to position Blockbuster as the only provider of media content across all platforms -- in-store, by mail, and by digital download. All in all, 2007 was a year of transition, reinvention, and repositioning for our company. During the last six months of the year, we established financial stability and took decisive steps to grow our rental business, to diversify our revenue streams, and to broaden our channels of distribution. I am looking forward to sharing more with you in the upcoming quarter and now I’ll turn it over to Tom for some financial recap. Tom.

[Thomas M. Casey:]

Thanks, Jim. Good morning, everyone and thanks for joining us. Fourth quarter results led to a great ending to a somewhat challenging year. The top financial stories for 2007 are first that we restored financial stability and second, we established a platform for profitable growth in 2008. We are especially pleased with our strong financial performance in the fourth quarter. I’ll give you some of those highlights. First, a 16.2% growth in reported EBITDA; adjusted EBITDA increased 23.2%; total revenue increased 3.6%, with about 500 fewer stores; same-store retail revenue grew by about 12% in the U.S. and 20% internationally. Subscription business, even with the cost of the total access exchanges, was profitable. We ended the quarter with 3.1 million subscribers. Our in-store domestic comps excluding subscription were down about 1%, a dramatic improvement from last year, and finally net income increased about $30 million. Before reviewing the specifics of our fourth quarter results, I would like to bring your attention to a few improvements to our disclosures. Enhancing clarity and transparency of financial reporting was a priority in the fourth quarter and starting now, we will present our financial results in two reportable segments, domestic and international. Our goal is to closely tie our financial reporting to our strategy and clearly reflect the drivers of our transformation, particularly in the U.S. We also wanted to highlight that our international business is a strong and growing segment and accounts for approximately 35% of revenue and 31% of our gross profit. Additionally, we’ve made several other improvements to help our investors better understand the drivers of our revenues, gross margin, and expense structure, including more detailed G&A breakdown. As for a year-over-year comparison of quarterly results, I’ll start by briefly talking about same-store sales. Worldwide same-store and by-mail revenues increased 7.4%, driven by a significant improvement across all sectors of our business -- domestically and internationally. We are beginning to see positive trends emerge and we are particularly pleased with almost 5% improvement in our domestic same-store sales. We believe that presenting our same-store sales comps without by-mail revenues allows us and our investors to clearly see that both our in-store and by-mail businesses are viable and growing. Our gross profit increased by about $17 million relative to the fourth quarter of 2006. The year-over-year change in gross profit is best explained by breaking it into two components, domestic and international. Domestic rental gross profit increased by 5.8% in the quarter. Excluding the impact of the 53rd week, store closures, and the cost of in-store exchanges, which were $27 million, domestic rental gross profit was up about 3% for the quarter. As for international, gross profit increased about 5% on an apples-to-apples basis, backing out the impact of the game station sale in the 53rd week. On a purely reported basis, gross profit declined about $4 million internationally. Our SG&A expenses for the quarter were essentially flat as compared to the same period last year. The best way to understand the change in SG&A is to refer to the new SG&A disclosure we provided on page three of the financial tables, so if you look at the three components of SG&A, advertising was down $12.5 million, or about 26%; corporate G&A was down $18.8 million, or about 20%; reported corporate G&A for the quarter includes $13.3 million in severance expense. Additional cost containment actions in the fourth quarter and early this year will result in approximately $100 million 2008 run-rate G&A reduction. Lastly on G&A, there’s a $31 million increase in our store G&A related to the 53rd week. Two final points on the quarter; first, we paid down a little over $79 million in debt and have zero balance on our revolver at year-end. And finally, I’d like to note that our working capital is lower than normal as a source of cash this quarter because of a change in the timing of our fiscal year-end. Now turning to the outlook for 2008, with the considerable improvement in our business in the fourth quarter, as well as our performance year-to-date, we have confidence in our ability to execute on our plan and deliver increased value to our shareholders in 2008. For the full year 2008, we are expecting adjusted EBITDA in the range of $290 million to $310 million. The three key factors driving that improvement are

[James W. Keyes:]

Thank you, Tom. I hope you will share with us a view of a very different Blockbuster. Through aggressive cost reductions, repositioning of our subscription programs and our renewed focus on store merchandising, we have gained momentum in both sales and earnings. But these steps are not intended to drive short-term performance only. They are also allowing us to restore our financial strength while providing new resources to reinvest in our future. The new Blockbuster has a clearly defined path forward, strategically and financially, and we are now very well-positioned to return the company to profitability in 2008 and beyond. Let’s turn it over to you now for some questions.

[Operator:]

(Operator Instructions) Your first question comes from Tony Wible with Citigroup.

[Tony Wible:]

Congratulations on the quarter. I was hoping we could start off by talking about the kiosk strategy that you briefly mentioned. Can you explain any internal targets that you might have for rolling out kiosks and how you plan on financing that? Do you anticipate leasing or do you anticipate owning the hardware? Do you anticipate retailers stepping in and taking some part of that investment? Any information would be helpful.

[James W. Keyes:]

Tony, it is very, very early to discuss kiosks. We’ll have more for you later in the year but as we’ve been saying from the beginning, we think that convenience is at the core of our business. Clearly we see a lot of momentum with vending in the marketplace. We think there is some attributes to the convenience offered through vending that Blockbuster is interested in pursuing and we have some test underway now to learn more about that channel. But we also see a future of a more sophisticated kiosk capability beyond vending, where you can leverage the power of a Movielink or a Blockbuster.com download in a kiosk environment to make electronic content more readily available and more conveniently available to the consumer. So yes, we are aggressively pursuing this but it is a very future oriented opportunity. It is very early to talk about financing the structures but there are many alternatives for financing. In fact, I’ll share with you an analogy -- if you look at the ATM market, which is the largest kiosk market out there today, few retailers provide their own ATMs, or even banks in many cases partner with others to roll out the physical hardware while the banks or the retailers retain the transaction fee associated with the use of those devices. So there are many ways to fund these. Primarily now, we’re just seeing it as an opportunity to expand the footprint and the continued consumer friendly level of convenience that Blockbuster has always represented.

[Tony Wible:]

Is it feasible to think that kiosks could be a cost savings driver in 2008 at some point, whether you could put them outside of stores as a savings device?

[James W. Keyes:]

I think we’ll see little impact financially one way or another in 2008. As I said, it’s very early and we are going to try to approach this new opportunity carefully. We think it’s a big opportunity for the future but there will be very little impact expected in 2008.

[Tony Wible:]

Okay and the last question here, what are the latest thoughts on international? I guess if we look at the new format of your disclosures with international obviously being broken out in more detail, is that a sign that this is the portfolio that you want to run with, or do you anticipate further changes in selling off some of those assets to pay down the debt?

[James W. Keyes:]

I wouldn’t interpret the new approach to provide greater transparency on the financial side as anything more than that. We think that we have had somewhat confusing results in the past because we rolled too many of our different operations into one number. The same thing applies to reflecting same-store sales separately from our by-mail business. We’re intending to provide greater transparency and an easier process for our investors to understand the progress we are making in various channels. We are also confident in the progress we’ve made on the international front. We have had some challenges, as you know, internationally in the last few years and yet we do have a business plan in place. We have a new management team in place and we believe there is upside potential in the near-term on our international operations as well as our domestic operations.

[Tony Wible:]

So could we still see international sales?

[James W. Keyes:]

I’m sorry, Tony, could you say that again?

[Tony Wible:]

So could we still see a sale of any of the international units?

[James W. Keyes:]

I see. We are continuing -- I’m sorry, I didn’t understand your question. We are continuing to look at every one of our international markets. There are some markets that have very little presence, would require a great amount of incremental investment to develop, fully develop, and I think you’ll agree that we’ve got our hands full with our resource requirements here domestically. So we don’t anticipate a significant new investment in international markets. In turn, we will look at virtually all of our markets to make a decision over time which markets stay as a direct operation or which are candidates for a licensed operation. You probably won’t see us completely exit any markets. We have no intention of doing that but we do think licensing in some select locations can be a good alternative for us.

[Tony Wible:]

Thank you.

[Thomas M. Casey:]

Tony, I’d also just -- you had referred to would we do it to pay down the debt. Just to be clear on that, if you look at our expectations for 2008 at $300 million of EBITDA and our year-end debt of 757, it’s not a very -- the leverage is coming down significantly, so just to make the point that there is no reason to sell assets to reduce debt. We are paying down debt with strong cash flow.

[Tony Wible:]

And Tom, would there be about 200 and change of debt that would have to be paid in 2009?

[Thomas M. Casey:]

Yes, that’s approximately correct.

[Tony Wible:]

Okay. Thank you.

[Operator:]

Our next question comes from Barton Crockett with J.P. Morgan.

[Barton Crockett:]

Okay, great. Thanks for taking the question. I guess initially, you guys have historically given us some sense of online subscribers. I know you’ve said you want to get away from that, but as kind of a bridge, can you just give us some sense -- I mean, did they trend up or down? The verbiage was a little bit unclear to me there. So that’s kind of the first question.

[James W. Keyes:]

Good morning. As it relates to our subscribers, we have a unique advantage here. We can pick up subscribers now in three different ways -- online, in both digital form, online via by mail, or in-store. And we can take our subscribers across channel, so we are by design trying to meld our subscription business into one because the unique advantage of our subscription is to be able to offer, as you saw with total access, true total access across all channels. So increasingly, we are looking at our subscription business internally as one as well as externally, so that’s why we are putting it all together. And candidly, we would prefer, since our competition is mostly in one channel today, which is the by-mail, we prefer to keep our segment information somewhat to ourselves for a while going forward.

[Barton Crockett:]

Okay. All right, so I guess that answers that. And then in terms of the guidance, you know, if I heard you correctly, you talked about $100 million improvement in total access, $100 million reduction in G&A, which is $200 million you would add to the $180 million of EBITDA you did in ’07 to get you well above your guidance range, so what’s the delta there? And I guess as part of that, what’s the basic revenue assumption that’s going into your guidance?

[James W. Keyes:]

Well, the delta there is I mentioned some investments in the future of the business relating to the digital media strategy, relating to satisfying customer demand in-store by greater in-stock, more store labor to improve the experience for customers in-store, and really initiatives related to those areas are things that we feel are important to keep the company on the right trajectory to recover over the next two to three years, as opposed to a significant jump. We already have a significant jump in 2008 over 2007, but we think it’s most important to put the company on a solid growth curve over the next several years.

[Barton Crockett:]

Okay, and that makes sense but the revenue kind of assumption that’s implicit in your guidance, I mean, are you -- can you give us any color there?

[Thomas M. Casey:]

We’re not really in a position to give guidance on revenue, though I think if you just reflect on the strategy that we’ve undertaken here, you would expect to see that retail would continue to grow well, you would expect our rental business to continue to grow, and it’s really -- it’s a continuation of the growth that you saw in the fourth quarter.

[Barton Crockett:]

Okay. All right, and then a final thing and then I’ll hop off; if -- to what extent you guys believe you need to match the watch now feature at Netflix, where essentially you get a lot of content for free streamed as part of your monthly subscription? You know, it cost them $40 million in ‘07, more than that and more than that in ’08 based on their disclosures. I mean, do you need to match a feature like that as you integrate Movielink or is there a different way to get at this, do you think?

[James W. Keyes:]

Barton, we’re just now developing our digital offering formats and we think that there is a different approach that we can take. We think we will have an opportunity, as with our other forms of competition that we can offer some things that are similar to the competition and match some free offerings in the marketplace, but also have a more robust offering that provides both subscription access and transaction or a la carte access in a much broader fashion.

[Barton Crockett:]

Okay. All right, I’ll leave it there. Thanks a lot.

[Operator:]

Our next question comes from Arvind Bhatia with Sterne Agee.

[Arvind Bhatia:]

Good morning. I’d like to add my congratulations and also thanks for providing a lot more detail on your financials. I wanted to address the top line question a little bit more. Can you tell us what you are expecting in terms of store closures in 2008? And then also, for your DVD by mail business, I know you are not providing a lot of detail but you are still expecting that business to be up year over year, given where you ended up in terms of number of subscribers. That would be my first question on the top line. And then a second question is could you clarify one more time the CapEx increase that you are expecting? I think I missed part of that. Thank you.

[Thomas M. Casey:]

I’ll take the CapEx first. I said $130 million for 2008, okay? So that’s $60 million including maintenance CapEx and store enhancements and other strategic initiatives domestically. Then international is 30, and about $40 million will go towards IT improvements and digital strategy, so that’s the breakdown there.

[James W. Keyes:]

Okay, and Arvind, the number of stores, to address the number of stores closing, we normally do have lease expirations. Some neighborhood changes, et cetera that have caused a poor performance in stores. We are doing a minimal number of store closures this year. We haven’t yet announced anything specifically but don’t -- I wouldn’t look to the same numbers that we have closed in the past. That’s by design. As I mentioned before, we’re getting some pretty interesting results from our early, more cosmetic adjustments that we’ve made in the better Blockbuster stores that I’ve mentioned and as we continue to test other formats that look at a greater game presence, for example, before we close more stores we want to give ourselves the best shot at transforming those stores into a more profitable retail location. So you’ll see us be a bit conservative on the store closure side but you will see some close as a result primarily of lease expirations or significant changes in a neighborhood situation.

[Arvind Bhatia:]

Tom, going back to the CapEx, what does the guidance imply for free cash flow for 2008?

[Thomas M. Casey:]

Well, if you were just to take $300 million of cash flow, take out $130 million of CapEx, our interest expense in 2007 was about 75, so it’s about $100 million. One thing I want to clarify related to that question is somebody had asked before about the debt maturities in 2008. I gave a cumulative number. 2008 is actually $45 million of scheduled maturities. 2009 is 56.5, and so we have the term loan A facility and the term B facility which mature in 2009 and 2011.

[Arvind Bhatia:]

And then you know, online I guess you guys are saying you’ll pick up about $100 million of EBITDA. My impression was that that business was losing more than $100 million and you guys are talking about it looks like being profitable in that business, so that would imply more than a $100 million pick-up. I’m just trying to reconcile that a little bit.

[James W. Keyes:]

I might reference Tom’s comments just now about cash flow and our comments previously about the pick-up in the online, or the subscription business. Both of these numbers are very, very directional and you know, some of the feedback that many of you have given last time is that we have so many ins and outs in this transformation process that we are underway with that we’ve tried to take a look at this as somewhat of a -- imagine a [T] account, if you will, with debits and credits and just directionally, we’ve said that on the credit side, obviously we are reducing G&A, we have significant improvements we’ve seen in retail, we’ve got -- Tom mentioned approximately $100 million but it’s a very, very directional number in improvement in online. We’ve got potential improvements in pricing -- those are all in the credit side. And then on the debit side, if you will, we’re reinvesting significantly in more labor at the store for better customer service. We’re putting more inventory on the shelves to be able to be in stock. We’ve got new investments in digital and integrating Movielink.com and providing new digital offerings. So we’re trying to give a little bit of color but at the risk of implying more accuracy than is intended with these sort of directional statements that we’ve made, so please take it in the spirit that it’s intended, as more directional than specific.

[Arvind Bhatia:]

That’s helpful. And the last question is back at the analyst day, you guys had provided a couple of metrics that were pretty interesting in terms of the average rental pricing, number of days out and things like that. I wondered if there was any change one way or the other to those kinds of metrics that you might want to update that.

[James W. Keyes:]

Well, as I mentioned we are in the process of testing various pricing alternatives that we I think have talked about a little bit in the past. There’s basically two or three different ways we can approach it. We can reduce our price and increase our terms. If we went to five days, for example, instead of two or three days, you can perhaps have an increased price relating to longer terms. You can have tighter terms and decrease the price, perhaps, and have a per diem price, for example, at a lower average. And that helps the inventory turns. We’re testing both of these and even a third that more melds our subscription/membership approach with a different kind of in-store pricing, so these are three of the basic formats that we are trying to get better learnings about in the markets where we have these tests underway. And frankly, we’ve gotten some interesting results already that we are now expanding to other markets to validate. The reason for our continued testing and extending this for at least another quarter, as I said before there is less urgency today because the price changes we have been able to make already in the stores have mitigated some of the concerns we had about our gross profit performance in the near-term, so we think we basically bought ourselves more time to do this right and we see a significant opportunity in coming up with a better consumer proposition that is simpler, easier to understand, and presumably provides better value to the shareholders.

[Arvind Bhatia:]

So Jim, in terms of in-stock, is there any way to give us some direction on how that has improved or changed since that’s such an important part of the strategy?

[James W. Keyes:]

Well, it’s a delicate balance because the traditional pricing programs from the studios were in some cases back to a straight wholesale purchase for rental and I recently read about the -- a little bit of the history of Blockbuster going all the way back to the mid-90s when the single biggest problem that Blockbuster had in the 90s was in-stock availability. The solution to that at the time was a revenue sharing agreement that was both innovative and transformational and it helped to restore Blockbuster in the mid-90s. But since that time, we’ve actually slipped backwards a little bit back to a straight wholesale purchase in some -- in the case of some studios and with increasingly high minimum guarantees on some titles that basically have forced us to make a choice between availability and margin. And the discussion that we are having with our studio partners is there is a win-win opportunity, because if we can increase their transactions and if the consumer is willing to pay a bit more for availability, for the convenience of better availability in-store, we are basically collaborating with those studios to say let’s find new creative ways to fill the shelves, stay in stock, and provide more income opportunity for both the studio and for Blockbuster. Recent examples of those programs, American Gangster, we decided to put as many as 230 copies on average per store on the shelves with also a significant presence for retail. So 230 copies for rental and another significant amount for retail in the store. We are trying these higher levels in some cases with our own margin balance at stake, in some cases with a win-win relationship with the studios and through testing various alternatives, we think we will settle on a format with all studios that gives us better in-stock presence in the longer term. Bottom line, work in process. I think some of the improvement in same-store results you see reflects both better retail presence and improved availability on the rental side.

[Arvind Bhatia:]

Great. Thank you, guys.

[Operator:]

Our next question comes from Carla Casella with J.P. Morgan.

[Carla Casella:]

I have a follow-up question on gross margins. The margin was stronger than we expected on the rental products, so rental gross margin in this quarter and I’m wondering if this is a good run-rate number to use, given that it includes the price changes you’ve made.

[Thomas M. Casey:]

I would say that the gross profit, particularly on the rental, is going to move around a little bit. As I said, we’re testing a number of different approaches. In some cases, we are more aggressively taking an inventory position that could adversely affect margins. In other cases, we are working with studios in ways that will favorably improve margins, so the results as we settle on -- as we continue to test different methods of getting in-stock, we will see a little bit of movement in the margins, so I wouldn’t lock down at this point on anything directionally.

[Carla Casella:]

Okay, great. And then, was there any -- do you trigger any of the free cash flow [sweep] this year for the term loan payments, or none this year but it sounds like you should next year?

[Thomas M. Casey:]

We haven’t disclosed that but there are no issues there.

[Carla Casella:]

Okay. It looks like your debt payments required for ’08 and ’09 were a little lower than we expected. Is that because of pre-payments you’ve made before or --

[Thomas M. Casey:]

If you take a look at our -- our 10-K comes out this afternoon, so you’ll see the full disclosure but it’s simply the term loan A facility matures in ’09 and that’s 56.5 is the scheduled maturity where. We have 44.7 in ’08 and then it steps up in 2010, so --

[Carla Casella:]

Okay, and then have you started -- do you have a sense for when you may look to refinance the revolver that comes due in ’09, and whether you’ll even refinance the term loan A facility?

[Thomas M. Casey:]

It would be logical for us to look at that in the second half of this year.

[Carla Casella:]

Okay. Okay, great. Thanks a lot.

[Operator:]

Our next question comes from Jeff Logsdon with Bank of Montreal.

[Jeffrey Logsdon:]

Thank you. First question relates around Blu-ray. Did you guys receive any type of benefit from Sony on pricing because of your commitment to exclusivity? And then if you did, does that change at all now that Toshiba is out of the marketplace? And then the second question just relates to -- are you guys still franchising stores or selling franchises to new franchisees?

[James W. Keyes:]

To the first question about benefits, pricing, no, there -- Blu-ray is a new format. Studios are offering various approaches to incentify retailers to stock Blu-ray. Nothing is unique to us that isn’t available in the marketplace that we are aware of, and so we wouldn’t attribute any specific incentives relating to pricing to Blu-ray. On the franchise side, we are not proactively working on additional franchises. We do think we have an opportunity to improve our existing franchise base and to find ways to help our franchisees succeed going forward and that’s really a prerequisite of us to consider before we look at expanding the franchise program.

[Jeffrey Logsdon:]

Great, thanks.

[Operator:]

Our last question comes from Matt [Aronsky] with Citigroup.

[Matt Aronsky:]

Good morning. Just to follow-up on Carla Casella’s phone call question, I just wanted to ask about your maturities. Is there any contemplation that you will think about sort of a more wholesome refinancing of all the credit facilities, including the term loan B, given that your amortization payments in both the term loan A and term loan B start ballooning toward the end of this year?

[James W. Keyes:]

Look, one of the nice things about the trajectory we are on is we have significant free cash flow. We don’t need to do anything but it may be advantageous for us to look at that, so I guess I would just leave it at that.

[Matt Aronsky:]

Thank you.

[Operator:]

I will now turn the call back over to management for closing remarks.

[James W. Keyes:]

Thank you. We appreciate everyone’s participation today and I hope you will take away from this call the continued improvement in Blockbuster performance but also to keep in mind that we have a unique opportunity in our multi-channel presence. We are not only the leader certainly in-store but also have by-mail offerings and are developing our digital download capability after our acquisition of Movielink. It puts us in a great position to leverage both our in-store presence, our by-mail presence, and complement that convenient offering now with digital download capability going forward. So Blockbuster is the only one in this space to offer that cross-channel capability and we hope that we will be able to continue to leverage our strength and to continue to provide convenient access to the customers and improve our relevance across the board. With that, I think you will continue to see our improvement in both sales and profits going forward. Thanks for your participation and we look forward to continuing to update you as we go forward.

[Operator:]

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.