JAKKS Pacific Inc (JAKK) 2004 Q1 法說會逐字稿

Good afternoon. My name is Miles and I will be your conference facilitator today. At this time, I would like to welcome everyone to the JAKKS Pacific 2004 First Quarter Financial Results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question and answer period. If you would like to ask a question during this time, simple press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. Thank you. Mr. Friedman, you may begin the conference.

Good afternoon, ladies and gentlemen. I’m Jack Friedman, Chairman and CEO of Jakks Pacific. Thank you for joining us to review our results for our first quarter ending March 31, ‘04. With us today on the call are Stephen Berman, President and COO, and Joel Bennett, EVP and CFO. I will provide an overview of our operational results for the first quarter ending March 31, 2004. Joel will then provide detailed comments regarding the financial results of the first quarter and I will then conclude that section of the call with comments concerning current business trends and discuss some of the product lines in more detail and discuss the expected acquisition announced earlier today of Play Along. Then we will open the call up for questions,

Before I begin, I would like to point out that any comments made about future performance, events or circumstances, including estimates of sales and earnings per share intimation for 2004 and forward-looking statements subject to Safe Harbor protection under the federal securities laws. Such statements reflect our best judgment today based on current market trends and conditions and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other risks and uncertainties, you should consult our most recent Form 10K and 10Q filed with the SEC as well as the company’s other reports subsequently filed with the SEC from time to time. With that, I will begin.

We are very pleased with our first quarter. Our revenue increased 9.2% to $74.40 million which is our highest first quarter revenue ever. At the beginning of this year, we said we would increase our investment in advertising and marketing during the quarter. We began seeing positive effects from a number of the initiatives we implemented during the fourth quarter of last year and that are still underway across multiple Jakks brands. These efforts, combined with the strength of our diversified offerings are insuring the desired results.

Our shelf space with key retail partners is expanding and we are seeing results that indicate consumers are becoming increasingly aware of our new and existing product lines. As we expected, this investment has had a temporary effect on our net margins. However, we believe that during the second quarter and moving forward, this targeted marketing strategy will lead to higher sales and increased profits.

Even with our increases in advertising, marketing and product development, we continued to strengthen our balance sheet. Our positive operating cash flow for the quarter contributed $21.1 million to our increasing cash position and we ended the first quarter with over $156.6 million in cash and equivalents. We will continue to use our financial strength to make investment in our core business, key long term licensing partners and acquisition opportunities that we believe will increase shareholder value.

We saw positive signs in our traditional toys and stationary categories during the first quarter. In our traditional category, we experienced increased sales and shelf space for many of our product lines including our TV products, our TV game products, WWE Dragon Ball Z , Lucia Luca, Van Helsing and classic monster action figures. Our line of TV game products which feature top licenses including Atari, Namco’s PacMan, Marvel’s Spiderman, Midway, Activision, and more, has grown rapidly. We have already quickly become the industry leader in plug and play games, and the originator by the way. In addition to these licenses, we have aligned with some of the industries top talent to develop our games and expect to announce a number of new significant licenses for our TV games product line as we look strategically to grow this brand.

March marked 20 years of Wrestlemania from WWE and Jakks has had a comprehensive program with WWE entertainment, Toys R Us, and our JV partner, THQ. We create an exclusive Wrestlemania 20 product line for Toys R Us stores and participated in several high profile events revolving around Wrestlemania in New York City. Same week year over year sales of WWE voice toys are considerably up. Sales of our core new Lucia Luca action figures have begun to meet expectations as have our Dragon Ball Z figures.

Before I get into more details about opportunities for Jakks Pacific in 2004, both domestically and internationally, I will turn the call over to Joel for a review of our financials for the first quarter.

First quarter net sales increased 9.2% to $74 million in 2004 from $67.8 million in the comparable period last year. Excluding the impact of non cash stock based compensation, and of additional bad debt related to the prior bankruptcy filing of a major customer in 2004, net income for the period was $6 million or 23 cents per diluted share. This compares to 5.2 million or 21 cents per diluted share for the first quarter of last year. Reported net income for these periods was $4.3 million or 17 cents per diluted share in 2004 compared to $6 million or 24 cents per diluted share in 2003.

Sales highlights include with our Jakks TV games, WWE, Dragon Ball and NASCAR lines, this gave us a boost in the traditional toys category. In our seasonal product category, there was decrease due to the temporary repositioning of the storm water guns and junior sports product lines during the first quarter which will be re-launched in spring of 2005. Inner Creations, which is our mass market kite, sales experienced double digit growth for the quarter largely due to stronger listings at numerous retailers including Wal-Mart.

In the craft activities and writing instrument category, decreases in sales of our Tongue Tape Candy and compounds were offset in part by sales of our vivid velvet lines, chalk pens and our new scrap booking line, My Overstuffed Life, all of which were strong contributors in this category this quarter. And lastly, we expect international sales to continue to increase with; the rollout of Jakks TV games and other new products.

Gross margins for the first quarter of 2004 increased 70 basis points from 2003. Lower product costs were offset in part by higher royalty expense, including TV games developer royalties, due in part to a shift in product mix to more licensed products. As a result, royalty expense increased in dollars and as a percentage of net seals. SG&A expenses for the first quarter were up as a percentage of net sales. This is due primarily to our planned increase in advertising, marketing and product development spending which we expect to normalize as a percent of sales during the year.

The impact of non-cash stock based compensation, where in 2004 we had a total charge of $1.7 million, and in 2003 we had a benefit of $1 million. This, in addition to bad debt expense of $400,000, related to a customer’s prior bankruptcy. Our operating margins for the first quarter of 2004 increased 50 basis points compared to the period in last year excluding the non cash charges but we do expect these margins to continue to improve over the course of the year.

For the quarter, profits from the joint venture increased to $360,000 in 2004 from $176,000 in 2003 with strong carryover sales of existing titles in 2004 and two new lower priced vehicle combat games plus lower carryover sales in 2003. We do not expect much profit from the joint venture in the second quarter, but expect it to accelerate in the second half of the year with the release of new titles at regular price points.

Cash flow from operations for the quarter was $21.1 million compared to $6.7 million in the year ago period. Our financial position remains very strong at $156.6 million in cash and $248.9 million in net working capital. Accounts receivable increased sequentially to $76.5 million from $86.1 million with comparable DSOs of 92 days. This is due to the increase in domestic sales which carried longer term, longer payment terms than FOB sales which were $46.6 million or 53% of total net sales for the quarter. We expect a modest increase in the second quarter due to extended terms given on back to school sales, but then expect a continual decrease through the end of the year.

Inventory increased nominally to $44.8 million from the December 31st balance with an increase in DSIs of 14 days to 108 days. These inventory levels are necessary to support the increasing proportion of domestic sales in general and for the back to school season in particular which we are currently in. Aside from the seasonal highs, we expect to continue to improve cash flow and reduce working capital needs which will have a favorable impact on our return on equity over the forthcoming years. Now I’ll return the call back to Jack.

Just before the call, we issued a press release announcing a proposed asset acquisition of the Play Along companies. Play Along is a privately held toy company based in Florida with a diverse portfolio of exciting and diverse licenses that are very attractive to Jakks Pacific and which we feel will compliment our portfolio quite well. Some of these licensed and categories include Cabbage Patch Kids for dolls, Care Bears for plush and preschool learning, TeleTubbies for preschool and play sets and DC comics, Batman and Justice League, for figures and vehicle construction toys.

The transaction is subject to the execution of a definitive agreement and regulatory approvals. We expect this acquisition will add significantly to our sales and will be materially accretive to our earnings beginning in 2004. We will provide updated guidance taking into account Play Along shortly after the consummation of this deal which; is expected to close in the second quarter.

We believe that Play Along’s product lines are a wonderful fit with Jakks with the potential to extend Play Along’s licenses to additional categories. Preliminary unaudited sales for Play Along for calendar 2003 were approximately $161 million with EBITDA of approximately $30 million. This would make Play Along surely our largest deal since Jakks Pacific’ inception and we are extremely excited about this new partnership

Concerning our core business, we are very enthusiastic about the upcoming summer and back to school season and to the sell in we are experiencing with our retail partners and the responses we are receiving from our customers about multiple Jakks product lines. These responses reinforce our expectation for continued growth in both revenue and earnings throughout 2004. Our boys action figure lines include WWE, Dragon Ball, Lucia Luca continue to gain shelf space and WWE in particular is doing very well. Again this quarter, WWE’s pay per view numbers are up. Attendance at house shows are up. Television ratings are up and we are seeing the increased marketing initiatives by WWE coupled with the Wrestlemania initiatives re producing higher sales for our WWE toys.

Products for the universal major motion picture Van Helsing are enjoying nice placement at retailers and the movie is slated to launch in May. We expect sales to continue through the movie’s DVD release with the classic monsters continuing as an evergreen line. I would like to highlight the Jakks TV games line which has quickly become the industry leader in plug and play. Last month in March, it was ranked number one amongst all non-TV promoted toys quoted by the toy book April 2004 edition. We have secured top licenses with companies such as Atari, Namco for PacMan, Ms. PacMan, Midway, Papcom, Activision, Nickelodeon, Disney and Marvel Super Heroes. We expect to announce a number of new significant TV game licenses in the second and third quarters. In addition, we utilize the talents of some of the top video game developers in the creation of our games and they are wonderful playing games. They are a wonderful value.

Additionally, we have four new activity items in the Jakks TV games line geared towards preschoolers and all four SKUs have already been picked up by our major retailers. We expect other accounts to follow throughout the year. For those of you that have not had a chance to play one of these games, each TV game item is a joystick with 5 to 10 games built right in it. Just plug it in your TV. It is incredibly simple to play with the retail between $18 and $25. This has become an amazingly excellent value for gaming enthusiasts of all ages. Or road champs business was up in the quarter year over year fueled by continued strength of MFX bikes and the addition of our NASCAR line.

In activities, we relaunched Vivid Velvet line under Flying Colors with our top licenses and accessories in sales are surpassing sales of our competitors velvet items at both mass and craft channels. In the seasonal area, we have consistent sales in our Kites and Toy Noodles and we expect to see an increase in this category next quarter as this is typically the peak quarter for Fun Noodles and Kite sales.

The diversity of our back to school products placed in retailers including stationary, writing instruments and lunch boxes, amongst others, should enable us to have a strong back to school season especially with the addition of the Color Workshop line including the revamped GloPen. On the international front we are continuing to expand our efforts and our new team working to increase our exposure in more companies throughout the world is progressing quite nicely

As we look at guidance for the remainder of 2004, we are pleased with our revenue growth in the first quarter and believe we are in a solid position to achieve the upper end of our initial revenue target before the Play Along or other acquisitions f $340 million for the year and the upper end of our earnings target of $1.30 per share before the non-cash stock based compensation charges which we set out to do at the beginning of the year.

Our increased advertising and marketing and product development efforts are producing the desired results as our shelf space with key retail partners continues to grow and consumers become increasingly aware of our new and existing products as evidenced by accelerating sell through at retail. During the second quarter and moving forward, we believe that this targeted marketing strategy will lead to not only higher sales, but also higher operating margins and earnings compared to last year and going forward.

Our results during the first quarter highlighted a number of key strengths which we continue to build on. Our advertising and marketing and product development plans are working as expected and we continue to expand our distribution channels and we lay the groundwork for continued growth in revenue and earnings in 2004 and beyond. In closing, we remain focused on creating innovative products and working with top licensors as we increase shelf space with our existing retailers as well as expand our distribution channels with solid operating cash flow. We are well positioned for internal growth initiatives, new licenses as well as additional acquisition, We will continue to reinvest in Jakks by undertaking initiatives prudently to make Jakks Pacific more profitable across the board. With that, I would like to open the call to questions,

Thank you, Sir. At this time, I would like to remind everyone if you would like to ask a question, please press the star then the number one on your telephone keypad And we will pause for just a moment to compile the Q and A roster. Your first question, Sir, comes from Arvind Bhatia with Southwest Securities.

Good afternoon, guys. Terrific acquisition it looks like.

Thank you very much.

I want to talk about some of the numbers here. You’re saying $160 million was the run rate and $30 million was the pretax. Can you give some indication where those numbers might fall once they’re a part of Jakks? For example, what sort of tax rate? Again, that’s going to depend on how much of their business is FOB versus domestic. Are you going to be able to utilize their manufacturers? I mean, give us some more color on how this acquisition is going to look like under Jakks.

The answer that we can give you now is we will have a conference call after we - - and assuming that we close the deal - - and go into greater detail. We only have preliminary unaudited numbers, etc. and we don’t want to go into details now. We are very, very excited about it and we have been working on it for a long time. The principals of the company have been known to us for many, many years and we think they are wonderfully ethical and talented people and we’re very excited to have their product line and the management team on board.

What would be the trend though, Jack, for this company? Are they trending upward in terms of sales? Are they - - I know your typical acquisition tends to be where maybe the sales trend are somewhat negative and you can then take them under Jakks and cut come of the product lines that are not profitable.

Actually, Arvind, again, we’re very excited about the deal. It’s an extremely well run company, a growing company. This is not a hurt situation where we have bought companies in the past that are hurting. This is a prosperous company that feels that it was a good deal for them to be part of the Jakks team.

Well, maybe you can provide some color on sort of the motivation here for the sellers. Are they capital constrained for growth? I mean, just sort of help us understand what the motivation might be here.

Well, I’d say the motivation is to continue to grow and be an extremely important company within certainly a tough industry dealing with major retailers and we will be a very significant company to the trade in both Jakks and Play Along offer good profitability to the retailers.

Is there sort of the same channels for these guys?

Very similar channels and we will - - the last comment I’d like to make on it, Arvind, is that it will take a period of time for some of the things like accounting and doing some sourcing. We will integrate and let these guys further loosen on their wonderful creative talent to further build the lines.

So there are, I assume part of the management is staying with the company?

All of the management.

Okay. Then switching from the acquisition, I’ll let other people ask questions there. But just quickly on the international side, and I see along the different categories, last time, Joel, you provided a breakdown and you also provided some growth rates on traditional toys, seasonal crafts, etc. Can you get into that maybe a little bit this afternoon?

Sure. We typically did not provide growth rates for the categories. Rather what we have done were the current and prior quarters. IN traditional toys, which again includes the TV games, action figures, vehicles and other electronic products, the sales were $40.9 million versus $12.2 last year. And then seasonal products were $9.3 million versus $22.8 million last year. Again, what we’ve done is rather than - - we were not able to raise the prices on certain products, but we’re introducing the line with all new items which should have margins that are more typical to what we’re sued to. And so for that, we have foregone sales of the storm water gun line and the foam junior sports products and we’re going to reliance those in 2005.

Got it.

International was up to $9.2 million from $8.2 million last year and again, as we have more output to sell including Jakks’ TV games and other new products and also just the increased effort in that area, we expect international to continue to grow and at least keep pace with our overall growth.

And then was craft the balance or was there anything else? You’ve given us traditional, seasonal and international.

Craft activities and writing instruments were 15.1 million in the first quarter compared to 24.5 million last year. Again, that was due primarily to Tongue Tape and compounds being down, but we did have some bright spots in the category with growth in the Vivid Velvets line which is like fuzzy posters, our charm pens and also our scrap booking line went (inaudible)

Got it. Okay, just one more question on sort of the gross margin trends here. You showed - - we saw some gross margin improvement in this quarter. How should we expect the second and third quarters to be from here on? You had fourth quarter, I think, gross margins came down. Talk to us about the trends here going forward on gross margins.

Fourth quarter was 41.5 but typically the earlier part of the year with some of the seasonal, including the water guns, has tended to bring the margins down a little bit. We saw a little benefit it from that with lower overall product costs. Bu with more licensed products, the higher royalties offset that somewhat. But again, we have very stringent margin criteria when we’re developing products, so we do expect to stay above 40, 41% growth and the margins are expected to stay that way through the balance of the year. Second quarter, as the stationary kicks in, with less royalties it will probably go up a little bit. But overall we’re looking at 40 to 41% for the year.

Are you providing guidance on the second quarter EPS? Are you comfortable that consensus, I think, is 28 cents for the second quarter. Are you providing any guidance?

We had provided guidance in the first call where we indicated that for the 6 months, sales and profitability would both be up year over year and as we indicated at that time, sales were up in the first quarter, though not as profitable as it will be in the second quarter on account of the advertising and promotion that was higher as a percentage in Q1. We did say that we were shooting for or were expecting to be at the higher end of the range. Though from that standpoint, we’re more comfortable with the overall guidance that we had provided.

Got it. All right, thanks guys. And congratulations.

Your next question, Sir, comes from Bill Dezellum of Davidson Investment Advisors.

Thank you. We had two questions First of all, relative to the storm water gun, walk us through what is behind pulling that off the market and relaunching it. And secondarily, why is it that Tongue Tape does not seem to be gaining traction and growing from her?

This is Jack Friedman answering the question. The second part of the question I’ll answer first. First Tongue Tape is just running down. We think that the category outside of our toy confectionery price points are coming down for the Listerine and the other brands and it’s starting to become a commodity issue rather than a profitable novelty. Frankly, it’s come down in prices more quickly than we had anticipated. Regarding the storm water guns line, and our foam ball lines, we have to revamp that line, do some new designs, etc. They were not meeting our profit margin criteria and we try not to be in the business of shipping unprofitable products just to create revenue. We’re certainly in the business of making profit. We’re working diligently in creating the line for next spring which I guess we’ll start presenting in about August or September of this year for delivery next year.

Thank you.

Your next question, Sir, comes from the line of John Taylor of Arcadia.

Hi. I’ve got a couple of questions as well. What do you think the impact of pulling the seasonal toys that you just mentioned in going to have on full year revenues? Can you give us a sense of how much we’re going to have to make up for the rest of the year on those lines/

We did give guidance in our announcement that we are now comfortable anticipating $340 million in revenue for the year which includes the greatly lowered sales of those product lines. Most of that business was lost in Q1 and a little bit of it in Q2 and it’s pretty well traditionally zero in Q3 and Q4. So we don’t look at it as a problem going forward for the rest of the year.

Okay, great. Thank you. And then, on the TV games, I think at Toy Fair you mentioned that there were some maybe chip supply constraints or manufacturing constraints of some kind or another. Can you give us an update on kind of what that looks like and what the capacity side of the equation might be?

Well, we might have been misleading or, not misleading, but misstating it, but what we were trying to say is we have an exclusive chip for our games which we don’t have any problem in getting supply of. We’re a well capitalized company and pay in advance for these chips. I think the point that we were making is they are exclusive to us and it would be hard for anybody else to get a similar chip for their products at anywhere near the prices that we’re paying.

Okay. I thought at Toy Fair you were talking about just overall chip supply in the first quarter being a little bit light.

Maybe what we were saying is there is lead time on chips for new titles and it takes time to pass them and develop them. We also mentioned there was an issue during Chinese New Yea, a basic shut down for anywhere from 10 days to 2 weeks.

Okay, but those things are behind us now?

Yes, we do not have a chip problem.

Okay. And then, the asset purchase of Play Along, I assume that does not include Art Asylum?

It does not.

Okay. The schedule for rolling out TV Games internationally -- can you give us a sense of kind of when you’re going to hit our stride in shipping the bulk of the portfolio?

I would say the bulk of it would come in Q3 and early Q4. We have begun to ship but the probably expected largest title for Europe is our VA Sports Beeper title which we are anticipating working out any kicks and licensing issues in the near future.

Okay. Then of the inventory increase, can you give us - - is there any particular concentration of that inventory in any particular segment or product line?

Well right now, just because of the seasonality of back to school, that’s higher than it is because it’s in season. Also with domestic sales to Wal-Mart, they’ve pretty much gone domestic and we’ve got TV games and other products domestically for them.

John Taylor; All right. And did you tell us what the percentage - -

I’d like to say that there are no lumps in our inventory if anybody is trying to get at that. Our inventory is very clean and fresh.

Frankly what I’m trying to get at is how much of the inventory might be in TV games.

Of current inventory? Minimum.

Okay, so that’s turning pretty quickly. And then - -

Pretty well as fast as we receive it, we ship it.

Yeah, okay. All right and then, let me see, the last question I had was did you give us the percentage of revenues that were FOB in the first quarter?

It was 46.5 domestic.

Is that percent or million?

Percent. No, I’m sorry, it was 46.6 million which was 63% of the total.

Okay. Thank you.

Again, if you would like to ask a question at this time, please press star then the number one on your telephone keypad.

if there are no further questions, thank you all very, very much and it was a joyous conference call frankly. Thank you.

thank you, Sir. Ladies and gentlemen, we appreciate your participation today. This does conclude Jakks Pacific 2004 First Quarter Financial Results conference call. You may now disconnect.