JAKKS Pacific Inc (JAKK) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the JAKKS Pacific First Quarter earnings conference call. [OPERATOR INSTRUCTIONS] I will now send the call over to Mr. Jack Friedman, Chairman and CEO of JAKKS Pacific. Mr. Friedman you may begin.

Good morning ladies and gentlemen. I am Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the First Quarter ended March 31, 2005. With us today on the call are Stephen Berman, President and COO, and Joel Bennett, Executive Vice President and CFO. I will provide an overview of the quarter and our operational results and then Joel will provide detailed comments regarding the financial results. I will then conclude the prepared portion of the call with highlights of our product lines and current business trends and update guidance for 2005 before we open the call up to 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 for 2005 and forward-looking statements are subject to safe harbor protection under the federal security law. 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 and forward-looking statements. For details concerning these and other risks and uncertainties, you should consult our most recent form 10-K and 10-Q 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 pleased with our First Quarter performance and are off to a strong start in 2005. Our revenue increased 82% year over year to $134.7 million and our net margin more than doubled from the First Quarter of 2004 to $10.1 million or $0.34 per diluted share. We continue to make progress on our strategic and financial goals and this quarter’s results are further evidence of our commitment to increase shareholder value by leveraging our brands and licenses. First Quarter’s top line was driven by a number of products and brands, including our Plug-It-In and Play TV games line, which continues to be one of the industry’s leading sellers. We also improved operating efficiencies in the first quarter and increased shelf space at many of the leading retailers, which contributed to better margins and higher earning.

Our financial position remains strong. As of March 31, 2005, our working capital was approximately $251.9 million, including cash and marketable securities of $194 million. We also announced today that JAKKS Pacific was named Walmart’s Toy Vendor of the Year on Friday at an awards ceremony held in Bentonville, Arkansas. This is an incredibly meaningful accomplishment to JAKKS and we believe that our dedication to product innovation, our commitment to on-time shipping and a tight rein on inventory were all contributing factors to receiving this most prestigious honor.

The First Quarter of 2005 was marked by a number of new, exciting product launches, including our internally developed Fly Wheels toy line from our Road Champs team as well as the reintroduction of the Sky Dancers action doll line and the Doodle Bear plush line; both from our Play Along division. Fly Wheels, in particular, is a great example of how JAKKS capitalizes on market trends to extend current brands with exciting new products. We believe that consumer interest in aftermarket auto products will translate well into interest in a toy line if it met certain criteria that we identified as key to this demographic. We believe the product line needs to be authentic and fashioned after all the top auto licenses out there and needs to perform, and needs to have a collectibility factor. It looks like we were right on our Fly Wheels vehicle line, which launched and was on the shelves at all our major accounts during the First Quarter. This product line, which also has placement internationally, is exceeding initial expectations and in the coming quarters we will provide updates on placement and sales of this promising line.

Another strategy to leverage our existing portfolio of brands and licenses is to reach into the archives and re-launch well-loved brands from prior years. We have seen that products young parents and grandparents can identify with not only bring generations together with play patterns that transcend time, but these products could mean solid sales for JAKKS Pacific. Our Play Along division has proven to be a tremendous resource for these re-introductions with Care Bears plush, Cabbage Patch dolls and now the additions of Sky Dancers action dolls and Doodle Bear plush. Sky Dancers were well loved in the 1990s and the initial market reception of our Sky Dancers has been extremely positive.

2005 is off to a strong start and we continue to drive innovative product development, diversify and expand our product portfolio, increase shelf space with our existing retailers and secure shelf space in new distribution channels.

In addition to the Fly Wheels and Sky Dancer products, we have more than 20 new titles in the pipeline for out TV Plug-It-In and Play line, including Star Wars, Mortal Kombat and Batman the animated series, while we have simultaneously made some significant technological advancements with the recent introduction of wireless TV games and the planned-for launch of our GameKey expansion pack. These present very exciting opportunities for JAKKS and our retail partners. But before I get into more details about these opportunities, I will turn the call over to Joel for a review of our financial results for the First Quarter.

Thank you, Jack. For the First Quarter of 2005, net sales were $134.7 million, which is an 82% increase from the $74 million recorded in the comparable period last year. Net income for the First Quarter was $10.1 million or $0.34 per diluted share. This compares to 3.8 million or 15 cents per diluted share reported in the First Quarter of 2004. Earnings for 2004 and 2005 both reflect the company’s $98 million convertible senior notes on an as converted basis which increased the share of outstanding by 4.9 million shares. Sales of traditional toys which include TV games, wheels, action figures, plush dolls and promotional products were $97.6 million for the First Quarter of 2005, compared to $41 million for the First Quarter of 2004. This represents approximately 72.5% of sales for the First Quarter, compared to approximately 54.9% in 2004. The First Quarter figure for 2005 includes $30.8 million from Play Along. During the First Quarter, our TV games line continued to be a market leader in Plug-It-In and Play Video Games, our Sky Dancers, Cabbage Patch Kids, and Care Bears all performed well. In addition, our WWE line of action figures improved over last year and our new internally developed Fly Wheels Line had strong, traditional and non-traditional placement with retailers in the quarter and we’re expecting a strong performance from this line throughout 2005 and beyond. In our seasonal product category which includes Go Fly a Kite, Funnoodle, Strong water toys and junior sports items, sales were $9.2 million for the First Quarter of 2005, as compared with $9.3 million for the First Quarter of 2004. This represents approximately 6.8% of overall sales as compared to 12.8% of sales for the First Quarter of 2004. Sales of seasonal products for the First Quarter of 2005 was consistent with 2004 with the majority of sales coming from our Go Fly a Kite and Funnoodle lines. Sales of Strong Water Guns increased world-wide and we expect this increase to continue in the coming Quarter and future seasons. Hard activities and running instruments which consists primarily of our Pentech and Flying Colors Divisions has sales of $10.3 million for the First Quarter compared with $15.1 million for the First Quarter of 2004. These represent approximately 7.6% for 2005 and 20.2% for the First Quarter of sales in 2004. The decrease in this area is due to smaller shelf space allocations for activities at our major customers. In addition, we’ve seen decreases in licensed lunchbox category and also lower sales in several craft lines including My Overstuffed Life, GloPens, and Creepy Crawlers. Later Jack will discuss some steps we are taking to address this situation.

Finally, International sales were $17.6 million for the quarter including approximately $2.6 million from Playalong. This compares to $9.2 million for the comparable period last year. This represents approximately 13.1% of overall sales in 2005 and 12.4% for 2004. We continue to experience stronger results in our international division due to an increasing number of product lines that translate well internationally, including our TV Games lines, Fly Wheels, some of our Playalong products and WWE action figures, which have been particularly strong in the UK.

Gross margins for the First Quarter decreased to 40.3% of net sales in 2005 from 41.2%. Lower product costs and tooling amortization were off-set by higher royalty expense. We do expect our gross margins to average in the range of 40%-42% for the remainder of 2005. SG&A expenses for the quarter increased to $40.5 million from $25.6 million representing 30.1% of 2005 net sales, compared to 34.6% in the same period last year. This was a 350 basis points improvement. The dollar increase is due primarily to our increase in advertising and marketing in addition to product development spending and overhead and operating costs associated with the added operations of Playalong. Based on that, our operating margin for the First Quarter of 2005 improved to 10.2% and increased to 360 basis points compared to the same period last year. During the quarter, we posted $150,000 in profit from the WWE video game joint venture with PHQ which compares to a profit of $360,000 for the comparable period last year. We expect to release at least 3 new titles under the joint venture later this year.

Cash flow from Operations for the First Quarter of 2005 was $6.9 million, compared to $21.2 million in 2004. Our financial position remains very strong and we ended the quarter with $194 million in cash and marketable securities and $251.9 in networking capital. Accounts receivable at the end of the quarter decreased to $77.4 million from $102.3 million at December 31. The DSOs increasing modestly to 52-days from 50 days in the previous quarter remaining at historic lows. Inventory at the end of the First Quarter was $62.8 million which is up from $50 million at the end of the Fourth Quarter and in anticipation of the seasonal and back-to-school domestic demands, as we head into Spring and Summer. DSIs were 89 days compared to 49 days at the end of the Fourth Quarter, however, they were 20 days lower than the comparable period 2004 and we are expecting the decrease to continue over the year to more normal levels. And last, the capital expenditures were $900,000 in the quarter compared to $1.1 million in 2004. Now I will return the call back to Jack.

Thank you Joel. During the quarter, we were able to achieve growth across several of our categories. As our revenue growth suggests, we are experiencing strong sell through with our brand and product offerings that are currently at retailers, and when you combine these current products with our expected product introductions during the later part of the year, we believe we are in a very good position to achieve our growth objectives for 2005. As I briefly touched in my opening remarks, our new internally developed Fly Wheels toy line from our Road Chance Team hit retail during the First Quarter and is off to a phenomenal start. We have selling at all of the major accounts and the multiple SKUs from this product line are selling briskly in several different retail channels including mass merchants, drug travel, auto supply chains. In addition, we have total placement of our Fly Wheel line internationally with major TV and commercials behind the launches in many countries throughout the world. Fly Wheels are mini replicas of wheels from all types of vehicles ranging from street race and off-road cars and in coming months, motorcycles, bikes, skateboards and more. The wheels are 1/10 scale and authentically licensed replicas of the tires, rims and brakes that come with the launcher and rip cord that send the wheels flying through the air. Ramps, collector cases, and other ancillary products are also part of the line and we have a number of new line extensions already being developed for the coming quarters.

From Playalong division, we have a fantastic line of new products from all the drivers in 2004, Cabbage Patch Kids, Care Bears and Teletubbies. For 2005, we have increased our Cabbage Patch Kids line to four SKUs for the Spring and we have over eight new Cabbage Patch Kids products planned for the Fall. Our retail presence is continually growing and we feel this line is very well positioned for a strong Fall and business selling season. New lines from Playalong this year include Sky Dancers and Doodlebears; a small action doll line and plush activities line, both of which were big hits in the 90’s and which we believe will be loved by a new generation of young kids today.

Our TV games line continues to be a leader in the market. As we introduce new technology such as our new wireless TV game and the planned for launch of regained Key expansion packs will help us maintain our leading position in this growing market. In addition to our diverse customer base in the US market, TV games continued to grow internationally, with new countries and territories receiving shipments and launching promotional campaigns weekly. In addition to technology in our TV games, we have more than 20 games in the pipeline to be released this year including Star Wars, Episode III, Revenge of the Sith TV games, which launched at retailers this month. Pacman, game shows; titles such as Wheel of Fortune and more.

In activities and stationary, we continue to look to ways to revitalize sales in this area. We introduced our new reusable compound Nickelodeon Splish Splat, and sales are promising. The new team we put in place in both activities and stationary are executing our strategic plans and we will be able to report more on their new patented and proprietary product introductions next quarter. For competitive reasons, we cannot go into too much detail at this time, but we already have received commitments from major retailers, such as Office Max and Office Depot, Walgreen’s and others. We truly expect to revolutionize another additional product introduction and innovation that will improve functionality and may quite possibly reshape the category within the writing instrument industry.

In Seasonal, we are in the process of re-launching the Storm brand of water guns into the specialty market with a very positive reception from our customers. On example is Dick’s Sporting Goods, which now carries Storm in all 250 of their stores. In other seasonal areas, our Go Fly A Kite brand has increased year-over-year sales, as we strategically leveraged the strength's of JAXXS license portfolio to expand our placement in Walmart and other key mass customers. In addition, we further diversified and expanded our kite customers to include chain stores such as TJ Maxx and Marshall’s, and BMG Music, which is now offering kites in their millions of reply mailers every month. We benefitted from expanded distribution in mass both domestically and in Canada. These are just a few examples of the additional products and brands we will be introducing during the upcoming summer and fall season.

Turning to guidance, we are reaffirming our prior guidance for 2005 of approximately $660 million in revenue, which excludes potential acquisitions, and net income of 70 million or $2.28 a share, fully diluted per share. The diluted earnings per share guidance reflects the companies $98 million convertible senior notes, payable due in 2023, on an as-converted basis, which increases the shares outstanding by 4.9 million shares. During the first quarter of this year, we expanded our core lines increased shelf space at all the leading retailers, and improved our operating margins, while continuing to increase our investment in marketing and product development. As we look at the remainder of 2005, we plan to expand our long-term growth prospects with the introduction of several new leading license and non-license products throughout the year.

Overall, we are quite excited about our near and long-term opportunities at JAXXS Pacific, and look forward to continued growth through 2005. With that, I would like to open this conference call to the questions and answer session.

I will begin the question and answer session. [OPERATOR INSTURCTIONS]. Our first question comes from Arvind Bhatia with Southwest Securities. Please state your question.

Good morning guys. Congratulations on a good quarter. My first question is on TV games, I know you talked about Play Along and you gave the numbers there, but could you at least talk about the growth in the TV games business in the first quarter versus last year, so I can get some idea at what rate that business is growing? Maybe you can color on the ultimate potential for Fly Wheels, because you really seem excited about that, and I know you did well on the first quarter, but how big can that be, or is it too early to call on that one?

On TV games at retail we were approximately 40% ahead of last year, year-over-year sales at retail. Regarding Fly Wheels, many of our retailers are telling us that in units it is their best selling new entry so far this year. The sales potential on it are very very strong. We don't know the number Arvind, that it can grow to, but we certainly have the finances and innovation and creative people here to expand the line and dramatically, which we are doing. We are very very pleased with the line. We don't know what the upside is at this point. We were on TV with it; we are off TV now, and we are going back on TV with it strongly in the fall.

Got it. I know you have heard this question before on TV games, or on the competition that you foresee, especially against this Christmas, any color on competition?

Well, I think there is competition in anything that you enter. I think we are clearly the leader in the category. We believe we will continue to be the leader. We have great products. We have created a great aura to the consumer on it. We have great licenses, new product introductions. I really don't know exactly what our market share is, but it is certainly in the 80+ percentage of market share.

So you feel like this Christmas, even though there is going to be competition, the products you are launching and have launched, you will be able to maintain and raise your market share?

I think we will at least maintain it. As example, we have coming Batman, Game Keys, Nicktoons, Disney, Spiderman, Dora, Dora Jr., Jeopardy, Wheel of Fortune, Sponge Bob 2, CapCon , Star Wars 2, Fantastic Four, Snow White, Winnie the Pooh, and on and on. We just continue to roll out new and better stuff. I think that every time we launch titles, they are better than titles we have done in the past. We have used some new technologies in chips and we are getting better and better at it, and using the leading developers around the world to help us develop our products.

One more question. On legal expenses, were there any meaningful expenses this quarter?

Legal is up over the same quarter last year by $900,000.00.

Got it. And Joel, the cash flow from operations; is it down versus last year?

Inventory was up and we had a number of accrued expenses through the quarter at the end of the year that was paid off in the year. We do expect that to increase over the course of the year, but the biggest was the inventory increase.

You feel pretty comfortable that the inventory that you've got is that TV games or just changing the mix of your business; what's the composition?

It's across the board, you know, we've got the Back to School, we've got the spring business, the Noodle and Kites, and so forth, but we are comfortable with the level as we go into the season. You know, it's 20 days; I think some of the overriding metrics that you should look at, for example AR, you know we are at 52 days, instead of 50 days, which was a historic low at the end of December. Inventory while up, sequentially year-to-year we are down 20 days, so we think our working capital is in the right place, and cash flow is just a function of those changes.

Our next question comes from Tony Gikas with Piper Jaffray. Please state your question.

Good morning guys. First question, in the quarter here, it looks like there were some sales and earnings out-performance to you know, straight expectations, although you didn't change your annual guidance. Could you just give us a little bit of color on what Q2 and Q3 look like in terms of sales and earnings? A little bit of help there would go along way. Second, just a question regarding retail inventories where it seems I am hearing there is a little bit of product out there in the Cabbage Patch and Care Bears area, and maybe you could just let us know overall how are your retail inventories standing today? And then, on the Plug and Play TV, just how is pricing holding up in that category?

This is Jack speaking. I will answer the second one first. The pricing is holding up quite well in our TV games. I am not exactly sure what you mean by retail or our wholesale prices? I would answer them both; I think the prices have leveled nicely. The price has gone up a little bit at retail, which we think is very healthy, and our wholesale selling prices are holding firm to our price list. Regarding Cabbage Patch and Care Bears, I think there was, for a $29.99 item, there was a little too much Cabbage Patch product out there. Our Play Along division is holding back shipments a bit, that is nothing of any sort of serious nature. Care Bears is just a very very broad line now. You have items within SKUs, within the category that do better than others, and it goes back and forth. It is impossible to be right on top of it 100% when you have so many SKUs running in it.

And on the guidance, I mean, can you give us a little visibility on sales and earnings for the next couple of quarters?

Well, right now we are comfortable as we stated Tony, for the year of 2/28 and 6/60 revenue. At this time we don't feel it warrants us changing that guidance.

And so nothing on a quarterly basis?

No.

Our next question comes from Derek Wenger with Jeffries and Company. Please state your question.

Yes thank you very much. Capitol expenditure alloyed for the Accounting Year 05 , can you give me that?

We are looking at approximately $9 million dollars.

Our next question comes from Garrett Edson with Monarch Research. Please state your question.

Hi guys, congratulations on a good quarter. Just a couple of questions. Most of them have already been answered. In terms of SB&A, what was the options compensation breakup for the non-cash stock breakup?

About $ 400,000.00. It was, on the restricted stock, it was around $ 700,000.00 and on the variable accounting on the reset options, was a credit of $300,000.00, so it was a net of $400,000.00.

Okay, thanks for that. And just one question on as to fix up on the gross margins set 40% to 42% for the remainder of 2005. Does that not include first quarter?

Including.

Including first quarter. Okay, great, thank you very much.

Our next question comes from John Taylor with Acardia. Please state your question.

Hi, I've got a couple of questions. It sounds like you might have something new to ship this year that you didn't show at Toy Fair. You were hinting at that, related to this thing that might revolutionize the writing sort of product line. Are there any other sort of major things you have that you didn't show us at Toy Fair? Am I right on that first one, and do you have anything else?

Correct on the first one, and nothing else yet, but we never stop developing products, and if we feel it is warranted, we would introduce in certain markets, or in small quantities on some hot potential new things in the fall.

Right. Okay, so the thing that is going into Office Max or whatever, is that likely to get distribution in the mass channels as well?

Yes.

It will. Okay. All right, and then I wonder Joel, if you could talk about the Play Along impact on the major line items on the P&L. What it did to gross margin? What it did to operating cost, etc.?

The total sales were about $ 33 million, it was 30.8 domestic, 2.6 million internationally. Their gross margins are comparable. They do have lower operating expenses as a percentage, so we got some leverage there. They contributed around $ 5 million dollars operating income.

And then, Jack, I wonder if you could give us the key shipping dates. You've got a whole bunch of really good Plug It-In and Play games this year, and I assume some of them are coming out with the movies, but ones which don't have movies, can you give us a sense of when they are going to hit the U.S. market? You know, like the top 5 say, not all of them.

Give me one second. We have coming out, we shipped Batman and Mortal Kombat and Star Wars . We are shipping Dragon Bullseye, NickToons , Fantastic Four, Disney Princess, Bass Fishing, Dora, and Care Bears early fall. Later on in the year we are going to ship a Star Wars wireless, Capcom, Wheel of Fortune , Jeopardy , Heckmo, Hunt Bob , Justice League, Dory Jr., and Disney Two.

Those are Fourth Quarter ships?

Either late third or early fourth.

Our next question comes from Sean McGowan with Harris Nesbitt. Please state your question.

Hi there, this is actually Garret Johnson actually for Sean. Question on TV games. You mentioned that TV games were up 40% at retail point-of-sale. Can you give us the shipment growth year-of-year?

It was north of that. We don't give specific product line, other than what is contained in the broad categories, but the actual sales growth was north of that.

Okay, and Care Bears, can you just let us know if Care Bears shipping and sales they were up or down year-of-year?

The overall contribution of Play Along was 15% plus over their Q1 sales of 04, and they did have some new lines, but the Care Bears and the Cabbage Patch was new, but the Care Bears was a big contributor and also the Cabbage Patch .

Okay, did you say 15% or $15 million?

15%.

Okay we would like to end the Q&A and just conclude with some highlights. We are continuing innovative organic growth initiatives. We are further expanding our licensing partnerships. We are creating new categories of growth like TV games, and Game Key expansion packs, Flywheels to name a few. Diversity of our product line categories and customer base were in the traditional toy business, stationary and back-to-school arts, craft and activities, infant and preschool, plush dolls and accessories, outdoor seasonal array of products, electronics. On the customer front of expansion from our mass retail partners, drug and grocery, specialty, automotive, electronics, office supply trade, and independents; all are growing in many categories that they were never involved with before, and are continuing to support and look forward to building a relationship with JAKKS on our Evergreen product lines and businesses. With that, we thank you all very, very much and we hope we can continue to build our business the way we have along the way so far this year. Thanks all very much.

This concludes today's teleconference. You may all disconnect.