JAKKS Pacific Inc (JAKK) 2002 Q1 法說會逐字稿

Ladies and gentlemen, Thank you for standing by. Welcome to Jakk's Pacific 2002 first quarter results teleconference. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. At that time we'll provide a structure for those interested in interesting the queue for the Q&A. As a reminder this conference is being recorded ,Tuesday April 23rd,2002. Representing Jakks pacific today are Jakks Friedman, Chairman and Chief Executive Officer Mr. Stephen Berman, President and Chief Operating Officer and Joel Bennett, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Mr. Friedman. Go ahead, sir. You may begin.

Good afternoon, ladies and gentlemen. Thanks for the short wait here. I'd like to begin with your Safe Harbor clause. During the course of this conference call we may make projections or other forward-looking statement regarding the future events of the future financial performance of the company. We wish to caution you that actual results may differ substantially. We refer you to the documents the company filed with the securities and exchange commission, specifically the company's last filed form 10-K form 10-Q filed in Washington, D.C. These documents contain important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. I'd like to begin with a few highlights from our release, that we released a few moments ago. Jakks Pacific reports first quarter financial results net income increased to 16.1%. Today Jakks reported first quarter operating results for the three months ended March 31st, 2002. First quarter net sales were $59.9 million compared to $60.0 million during the same quarter in 2001. Excluding a one-time restructuring charge of $6.6 million relating to recent acquisitions net income for the period increased 16.1% to $7 million or thirty-five cents per diluted share from $6 million or thirty-two cents per diluted share last year. Additionally Jakks announced that it has filed a Securities Exchange Commission registration statement for a public offering of 3.5 million shares of common stock. Of the anticipated offering, three million shares are being sold by the company and 500,000 shares by selling stockholders. In addition the company has granted the underwriters an option to purchase up to 525,000 shares, additional shares to cover over allotment. The anticipated proceeds from this offering will allow continue the growth of our company by capitalizing on the numerous acquisition opportunities we believe exist. Our financial position remains solid. We ended the quarter with $31.6 million in cash and marketable securities, $81.9 million in working capital, virtually no debt and stockholders equity of $12.89 per share. Some of the highlights of our quarter are the following. Our Evergreen products philosophy at Jakks that we focused on since our inception has continued to be successful. We are getting more and more shelf space at all of our major retailers and continue to become a more and more important source and important supplier to all of our retailers. Our company is more diversified than ever before. Our business breaks down into four categories, traditional toys which consists of our action toy division, WWF action figures and accessories, road camps which is our die-cast collectibles and premiums and other licensed vehicle products such as Battle Box, Junk Yard Wars. Remco is our line that exclusively for mass retailers and child guidance are Preschool and Sleeping bag, Plush foam mats and Puzzle line. Our craft and activities which is under our Flying colors brand, we have a broad range of licensed and unlicensed products, to name a few, Nickelodeon brand, contents like Sponge Bob, Blues Clues, the Disney brand, classics like Winnie the Pooh, Mickey Mouse, Tigger and a movie classic toy story, Lilo, Stench, and many more to come, Hello Kitty, a growing brand for us, and our own brand, It's a Girl Thing. Additional our line of compounds which include Goose, Squeeze,and [INAUDIBLE] continue to grow. Our Pentech stationary and back to School brand continues to grow rapidly, and our WWF video venture continues to grow as well. Going forward with the addition of Toy Max and its divisions, basic divisions of Go Fly a Kite and Fun Noodle, Jakks is even more strongly positioned for future growth. Under our WWF video game venture, in the second quarter we will be introducing Wrestle-Mania 8 on June 12th, expected on Nintendo Game Cube, on Microsoft X-box brand extension games in Q1 2003, under Sony Playstation in Q4 wrestling game and brand extension Q1 2003. Under PC, a Wrestling game in Q4 2002, and under Game Boy Advanced a wrestling game in Q4 2002. In the United Kingdom, which is a very important market Wrestle mania 8 in Q4 2002, Microsoft X-box will be WWF raw, in Q4 2002 and Sony Playstation II, a new wrestling game in Q4 2002. At this point I'd like to turn this over to Joel Bennett our Executive VP/CFO to go over the financials and then I'll get back on the call.

Thank you. For the three months in our first quarter ended March 31, 2002, net sales were $59.9 million, comparable with the $60 million in 2000. Gross profit we're pleased is up to 44.4%, from 40.8% in the first quarter of '01 primarily because of a product mix with more nonlicensed Pentech products and lower royalty Flying Colors products including the Nicktivities and Nickelodeon compound products. The net income excluding the restructuring costs were $7 million or 11.7% of net sales representing earnings per diluted share of thirty-five cents. This compares with $6 million in the prior year of 10% of net sales or thirty-two cents per diluted share. SG&A, excluding restructuring costs were higher in 2002 than in 2001 primarily to higher media buy rates, which are included in direct selling expenses. SG&A accordingly increase as a percentage of net sales from 28.2% in 2001 to 30.8% in 2002. Profit from our joint venture increased to $1.3 million in 2002, with a new release of an X-box title up from $700,000 in 2001 which only had carryover title sales. Interest income decreased $200,000 dollars, year over year due in part to the cash dispersed in the Toy Max acquisition. Outstanding common and equivalent shares increased to 20.2 million shares, up from 18.9 million in 2001 as a result of stock option exercises as well as stock issued in the Kids Biz and Toy Max acquisitions. For the first quarter of 2002, cash flow from operations increased $17 million dollars to $26.7 million up from $9.7 million in 2001, excluding changes in marketable securities. As far as our financial position, it remains very strong with $260.9 million dollars of net assets, $31.6 million was in cash and marketable securities. Working capital is down to $81.9 million from $116.5 million in December 31, primarily through the cash dispersed through the Toy Max acquisition. Accounts receivable increased sequentially from December 2001 to $66 million at March 31, 2002, due in part to the acquired Toy Max accounts receivables of $13.5 million. DSO's and accounts receivable increased from seventy-eight days at December 2001 to eighty-six days in March 2002, the increase is due in part to increased domestic sales which carry longer terms in our FOB business. Excluding the Toy Max inventory, our core inventory decreased $1.5 million or 5% from December 31, 2001, as well as sequentially from September 30, 2001-- I'm sorry. The decreases reflect our careful management of the domestic business and we expect the inventory balances to continue to decline over the ensuing quarter. Day sales in inventory in the first quarter increased to 107 days from 92 days at December 31, 2001, which reflects increasing inventory for Back- to-School season which we're soon approaching. Overall levels reflect the shelf space garnered by the various product lines for which we maintain the inventory to support these domestic programs. In addition to the announcement of our offering we'd like to indicate that the lead bankers for the deal are Bear Stearns, US Bank Corps, Piper-Jaffrey and Advest. I'll turn the call back to Jack Friedman.

Hello again, everyone. Jakks Pacific in spite of very difficult economic times and retailers striving to keep very low inventories, our inventories at retail are extremely low, being monitored by the retailers and by us. We remain extremely excited about the balance of the year. Our business is looking very, very good. Our Q2 bookings so far continue to be very strong, at minimum on target. The consolidation of Toy Max and Kids Biz is going ahead of schedule. Our balance sheet remains strong, we're very excited about our new offering and having some new investors in our company and the additional capital continue to be able to continue our rapid growth. As we previously announced, we are now the number three Toy company in North America. We're very proud of that accomplishment in terms of what it's done to us in the marketplace. We have many, many more SKU's every quarter over quarter previously and we continue to grow our business. We think there are many exciting opportunities for additional acquisitions out in the marketplace. I'm going to go back to Joel Bennett for a few moments, then I'll get back on again. Joel has a few other financial statements to make.

In light of the offering, we also wanted to in this call reiterate our guidance for 2002. With sales forecast of $360 million to $380 million, as we announced previously, and with the impact of the offering and excluding the restructuring charge the earnings per share forecast is $1.80 to $1.92.

With that we'd now like to open our conference call as we usually do to Q&A, the part we think is the most important part of our call.

At this time we'll begin the question and answer session. If you have a question, please press star one on your telephone touch pad, if you are using speaker equipment, you may need to lift your handset prior to pressing star one, If you wish to cancel your question or if your cancel has already answered, you may simply press the star key two. once again star one if you have a question and star two to cancel. One moment while the questions register. Our first question comes from Tony of U.S. Bank Corps Piper-Jaffrey.

Good afternoon, guys. A couple of questions. First of all, given that the company's going to be producing more Universal Toys looking forward, how should we expect international sales to ramp? And what percentage of sales could be international looking forward perhaps in 2003 and 2004, do we think we could get to 20% plus?

That is exactly our goal, to get to 20%. We're not sure it will get there. It is a slow growth for us, as many things in our company, we run our business very conservatively and we don't want to give out credit in the European marketplace. In Q1 last year, --

Tony, our run rate right now is about 14.1% for the fiscal year 2001

And with our acquisition of Kids Biz we hope that to be the jump off point for us for the rest of Europe and hopefully grow our business in the far East. We are having a more difficult time growing our business in the far East than in Europe, and we hope we can make some bigger inroads there.

Great. And the second question is how is the integration of Toy Max moving forward right now, and then maybe just touch on your acquisition strategy looking forward, the types of products, and are there any International opportunities?

The first part of your question, our strategy is to make good deals. To date the companies that we have bought have been companies that we thought needed additional strength in terms of management and monitoring overhead and margins, etcetera. There have been pretty good product lines, with our strategy if something doesn't measure up to our margins, we drop those products or do something about changing the products around to bring them into the margins that we find necessary. We're still feeling very aggressive about acquisitions, as previously mentioned we are absorbing Toy Max and Kids Biz in a much faster raid than we had anticipated. I would imagine on that we're getting more sophisticated and have the right I'll call it swat team in place to be able to do these integrations. There is no specific type of product, it's not even exactly limited to toys as Pentech was in the novelty writing instrument business. We are looking at things similar to that as well as traditional toys, but we're certainly not going to go far afield from what we are currently doing.

Thanks, guys.

And in the International community, I don't think we will be doing any acquisitions of additional distributors. I think being based in the UK Is the right place for us.

Thank you.

Our next question comes from Brett Jordan of Advest.

Good afternoon. A couple quick questions here. One, given the fact that the gross margins are a little higher than I was looking for, do you have a feeling of what that aggregate royalty rate was in the quarter,Joel and I guess given the fact Toy Max is a less likely product line, do you have a royalty expectation for the year 2000 as you integrate it?

They do have some inventor items, it will be closer to our what I'll call our normal rate, but for the quarter it was 5.6%, last year first quarter was 9.2%. As an example of one of the lower royalty items, while it is a licensed item, Nicktivities and those products just marketed with the Nickelodeon brand carry about half the royalty than the royalty for a Nickelodeon show such as Rugrats or Blues Clues.

And a question on integration the Kids Biz and Toy Max, as you look at Kids Biz and they did some distribution of non-Jakks related products, do you have a feeling of what the run rate on Kids Biz might be some unprofitable sales that you're going to call out and I guess a similar question on Toy Max, as you look at the whole product line and clearly there was some product there you weren't going to keep, do you have a feeling for what the normalized run rate revenues might be there?

In the Kids Biz area, since they were a smallish private company, they saw fit to run certain products even close to a commission basis, if you will, those types of products we will be dropping. We do anticipate the overall revenue of Kids Biz to exceed last year by picking up the additional Jakks products and down the road, some Toy Max products as well. In terms of Toy Max, we expect to be able to maintain margins under the roughly the same ballpark as Jakks margins have been running by looking at [INAUDIBLE] there was agency fees that will be ending in this quarter which will save us on net costing of the product and therefore increase margins on the overall product line.

Ok. And Kids Biz margins more or less in line with yours? You have any kind of pricing premium on the European business most it it was UK, as I recall, but there is any pricing differentia there that gives you a margin boost or margin deterioration?

I would say that margins at Kids Biz are pretty near ours, within that because of we own it now, we pay the royalty, we at Jakks, when you change that out, margins are pretty similar.

Ok, great. Thanks.

Thanks, Brett , Our next question comes from Brad Henderson of B. Riley, incorporated.

Good afternoon, guys, How are you doing?

Hey, Brad.

Joel, the tax rate I think [INAUDIBLE] is 27%, do you have more visibility on what that will be for the year or are you thinking it will be 27%, I had 28 and a half before?

We historically would go out in the low 20s, like 28 and change. Last year we were at 20 I think 5.7. 27 based on the current mix between Hong Kong and the US, so that's our expectation through the end of the year.

Ok. That's what your guidance is obviously based on. Did you at the end of your prewritten comments there give an adjusted [INAUDIBLE] given secondary?

The restructuring was about twenty-three cents.

Ok.

Sorry, The question was with the dilution of the pending offering, we're giving guidance of $1.80 to $1.92 for the year fully diluted.

$1.80 to $1.92.

Correct.

Just want today make sure I had that straight. Jack, you guys have said at times in the past and you eluded to it today that the acquisition strategy might include things that our a little outside the traditional toy business and I guess we're taking that to mean crafts and activity sets. Are you taking about something even beyond that or what are we talking about there?

I can't give you guidance on that because we're looking at things, sometimes people show us things or we come up with ideas. Just as an example, as an example, we were shown a deal last year on a price basis and growth basis looked great but it was too far afield and we made the decision that it wasn't for us, and we think it was the right decision and the company has continued to prosper, so our case in looking at the company was right but we didn't belong in that deal.

I guess without being too vague, it's fair to say that you would do something beyond crafts and activity sets in traditional toys but it would have some synergies back to those businesses?

Yes.

We would leverage off our distribution and also our manufacturing capabilities.

Ok. Then Jack, you named the video games going out, Would you mind reviewing that? I missed those. You were going pretty fast, and I kind of want to write them all down. JACK FRIEDMAN In the US, Nintendo Game Cube, June 12th is the expected release date for Wrestle-Mania, June 12th, somewhere between June 12th and June 18th. Microsoft X-box brand extension game in Q1 2003, Sony Playstation II a game being released in Q4 2002 and a brand extension game in Q1 2003. In PC there will be a expected release in Q4 2002 and Nintendo Game Boy Advance, a game release in Q4 2002. Would you like me to repeat the US, As well again?

Yeah, if you don't mind, Jack.

Nintendo Game Cube Wrestle-mania in Q4 2002, Microsoft X-box, WWF Raw Q4 2002, and Sony Playstation II a wrestling game in Q4 2002.

Okay, as I catch up to you, writing here And then Cap-X for the quarter, Joel, and expectations now that the acquisition is somewhat integrated for the year.

Cap-X is about $2.1 million, basically on track for about the ten that we're expecting.

Ok. That's all I've got. Thanks, guys.

Our next question comes from Russell Cleveland of Renaissance Capital.

Hello fellows, You know, real long-term shareholder here. I've got a big fundamental question for you all. You have a superb balance sheet, we've been very big fans of the company, superb record. Why would we want to sell shares at ten times earnings? You know, we're very, very undervalued ,vis-a-vis the market and other things. Just seems like the wrong time, because you could certainly borrow some money and then do a secondary when our stock is trading at more acceptable levels, so give me a little insight here as to your thinking.

Very candidly, Russell, we have been since the inception of our business and actually no one should know it better than you kind of shy about getting into debt. We do have a bank line if we do need it when the right deal comes along. We feel that there are opportunities out there, we've done very, very well in doing acquisitions, we think our business is strong. We hope that when we get out there during the road show and be able to tell our story that some new people will understand our story and the last time we did a secondary we did it at a price about 20% higher then we had been selling when we filed the deal. We hope, no guarantees, of course, that we will get some momentum over the ensuing weeks and of course we don't know if we will be reviewed or not so we don't know the timing of the road show yet. Our business is strong, we have momentum, we want to keep that momentum, we want to keep building our importance in our industry to the retailers that we deal with, and we just -- you're in a little bit different business than us. We just can't look at it from a PE point of view. Within reason at one point if you recall a year or so ago our price got ridiculous and we did do a share buyback.

Yes. OK. I appreciate it. Thanks so much.

Our next question comes from Bob Deleen of Morgan Keegan.

Hi, Bob.

It looks like on the first portion of the Toy Max was acquired on March 12th, and did you announced, what kind of sales did you do from Toy Max in the quarter?

About $4 million.

$4 million. And, Joel, I got the receivable number attributable to Toy Max. I didn't catch the inventory number. If you gave it. I don't recall.

$9.2 million.

Ok. $9.2 million. Both that and the inventory side, how much of that needs to be liquidated or is it all clean and good inventory? How would you characterize that?

They have a couple of elements to their business, the Go Fly a Kite is the obviously the Kite business, that their product has say a longer life than the toy products, so breaking that off which is about a third of that amount. The rest of it is pretty clean. They don't do as much as we do domestically on a proportionate basis and we've gone through it pretty well and we're comfortable with the levels. And in the allocation process of the purchase price, we definitely evaluated that and we're very comfortable with the current levels. Both in terms of quantities and values.

Ok. With respect to the $6.6 million restructuring charge, can you break that up into what of that is reserved for inventory liquidation, what's for plant closing, what's for severance, that type of thing?

Sure. Severance is approximately $400,000. Most of it are lease terminations of $5.8 million. There are Hong Kong show rooms, New York showroom, New York headquarters. Basically it's all the leases. About $300,000 in fixed assets. What am I up to? Anyway, that's about --

That's most of it, huh?

Right.

And then I had a question with respect to the closing of Toy Max. Do you guys have any closer date. You said towards the end of Q2, is that still?

No change to that time-line.

Ok. And the other thing I noticed from the P&L that the minority interest was positive, so obviously Toy Max was profitable for the three weeks you had it.

Correct.

Finally, what was the amortization of goodwill in '01?

It's most of the change from '01 to '02. Bear with me for one moment. About $600,000.

That's for the quarter.

Yes.

I'm guessing, Ok. Thanks a lot.

Our next question comes from Vincent [INAUDIBLE]of Hershey Trust.

Hi. My question was already asked and that was about the reason for the secondary, but I must say what I thought was a long-term shareholder here. With your balance sheet and selling at ten or eleven times earnings, to be putting out by self admission a diluted secondary is a bit maddening. If what you're really trying to do and what your answer was is to go out and tell your story, I wish you would just do it without diluting it.

This is Jack Friedman speaking, In terms it's not specifically -- maybe I mis-stated that or overstated that. At our size and the type of business that we're in, most acquisitions that we look at will not do a deal with us subject to financing. They want to know that we have the money on hand before they expose themselves to their employees and to the trade. They feel it will deteriorate the business and we could walk away from a deal if we don't get the proper financing. It's been a strategy that we have been doing almost from day one that we keep, to use a crude word on it, reloading to be in advance of doing acquisitions. For us the strategy has worked. If it upsets you, we're sorry, but we're doing the best we can, and our business is strong, solid, and we want to keep growing rapidly.

Thank you. And at this time I currently show no further questions in queue, I am going to turn it back over to our speaker for further remarks.

Just, this is jack friedman speaking. Thank you all for your time. I'd just like to emphasize one more time. We're delighted with our business, our business is going very strongly and in still a difficult environment, we're watching our inventories carefully, we're watching our retailer inventories carefully. I believe that we have a wonderful management team in place at this company and we're extremely proud of our performance and we expect that to continue into the future. Thank you all very much.

Thank you for joining today's Jakks Pacific 2002 first quarter results teleconference and at this time all parties may disconnect. Thank you.