JAKKS Pacific Inc (JAKK) 2005 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the JAKKS Pacific Fourth Quarter and Year-End Results for 2005 Conference Call. [OPERATOR INSTRUCTIONS] I will now turn the call over to Mr. Jack Friedman, Chief Executive Officer. Mr. Friedman you may begin.

Good morning ladies and gentlemen and Happy Valentine’s Day. I am Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the fourth quarter and fiscal year ended 12/31/05. With us today on the call are Stephen Berman, President and COO and Joel Bennett our CFO.

I will provide a brief 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 before we open the calls 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 for ’06 and forward-looking statements are subject to Safe Harbor protection under the Federal Securities Laws. Such statements reflect our best judgment today based on our current market rends and conditions and are subject to certain risks and uncertainties which would 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 the 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 very pleased with our financial performance in the fourth quarter and for the full year 2005. We achieved strong revenue growth for 2005, expanded gross margins and continued to increase profitability for JAKKS Pacific. Let’s pause for a moment and take a look at where JAKKS Pacific was even four years ago.

In 2002, we generated $310 million in revenue and today we are forecasting to achieve revenue of $825 million and earnings per share of $2.63 for 2006. We are a very different Company today from only a few short years ago. We are now one of the leaders in male action figures, feature plush, wheels, and through our recently announced CDI acquisition, role-playing toys as well. Boy, we’ve been busy.

In addition, our deliberate efforts to diversify our portfolio with products like our stationery lines, our professional office supplies, our pet lines, seasonal products and three distinct product lines in JAKKS Electronics portfolio, we are a much more diversified consumer products company today. With a very strong balance sheet and focused agenda, we are very excited about our future.

Our sales in 2005 increased 15.2% to $661.5 million and our pro forma earnings per share increased 54% to $2.30 per fully diluted share. This strong performance was primarily attributable to JAKKS unique brand management model and proven ability to diversify our portfolio of licensed and unlicensed products through our constant innovation and strategic acquisition; a great example of our brand management and innovation in our industry leading plug and play T.V. games category.

In 2005, we introduced more kid-friendly games and positioned ourselves for category expansion in 2006 with the development of two new electronic products, our new Tele-Story interactive reading system for preschoolers and our new, exciting iPets Virtual Pets game line. Many of the products in our portfolio including our Fly-Wheel vehicles, Doodle Bears Plush, Sky Dancers, small-action doll WWE wrestling performed extremely well in 2005 and in the fourth quarter as they enjoyed a strong holiday season.

We also continued to identify opportunities for improvement in our craft and activities as well as seasonal lines as we are committed to maximizing their growth potential. Additionally, our international business has strengthened significantly. It grew 46% in 2005 and accounted for 15% of our overall sales for the year as we continued to expand distribution of our lines in countries where we previously had not done business, as well as many new countries around the world.

Turning to our acquisition activities, in the second quarter of 2005 we purchased a line of pet products called Pet Pal. The Pet Pal line included an assortment of pet treats, clothing, toys and beds based on American Kennel Club brand as well as other licensed products. Since the completion of the acquisition, we created the JPI Pet Division and assigned additional licensing agreements with known brands including Cat Fanciers’ Association, Meow Mix, Marvel and [Brat]. We see licensed pet goods as a very complimentary expansion to our licensed consumer products portfolio and we believe that pet products will further expand their opportunities for diversification in our distribution channels. We began seeing contributions from our JPI Pet Products in the fourth quarter and we believe we are creating a strong platform for continued growth in this area for years to come.

Also, last week we closed on our acquisition of Created Design International, a leading manufacturer of girls’ dress-up and role-play toys. Creative Design licenses well-known brands including Disney for its classic characters, princesses and fairies, [subway] as example and many more. We should benefit from operating efficiencies through this acquisition and believe we can expand the CDI product line reach through JAKKS extensive distribution base.

We’re also excited about the management team at CDI similar to the Play Along and Pet Pal acquisitions. The seasoned management team at CDI will continue to manage their product lines while enjoying the benefits of JAKKS infrastructure and operations which we believe will help grow that area of business for us.

We believe we have a lot of reasons to be optimistic about the Company’s growth opportunities as we enter 2006. We have exceptional financial strength, the most diversified product line in our 10-year history and a response from our retailers at this week’s International Toy Fair as well as at last month’s Hong Kong Toy Show has been extremely exciting and positive. We have many new offerings in the works for 2006 including new additions to our popular Fly-Wheel’s line, new plush toys and new electronics slated to launch in the spring and fall of this year.

Before I get more into details about our products and exciting growth opportunities, I would like to turn the call over to Joel Bennett, the Company’s Chief Executive Officer for review of our financial performance during the fourth quarter and fiscal 2005. Excuse me, Chief Financial Officer.

I was going to thank you for the promotion, Jack. Thank you anyway!

Good morning, ladies and gentlemen. Our fourth quarter net sales were $166.3 million compared to $184.8 million in the same period last year. Pro forma net income for the fourth quarter of 2005 was $16.7 million or $0.53 per diluted share which excludes the tax impact on the repatriation of $175 million of undistributed earnings from the Company’s international subsidiaries under the 2004 American Jobs Creation Act. This tax act created a one-time incentive for U.S. corporations to repatriate undistributed earnings by providing an 85% dividends received deduction for certain international earnings. This was a use it or lose it scenario and we determined that it would be in our best interests to take advantage of this opportunity.

Reported net income for the fourth quarter of 2005 which includes the tax impact on the repatriation was $9 million or $0.30 per diluted share. This compares to net income of $10.5 million or $0.35 per diluted share for the fourth quarter of 2004. Net sales for the year ended December 31, 2005, increased 15.2% to $661.5 million from $574.3 million in 2004. Pro forma net income for 2005 was $71.2 million or $2.30 per diluted share which excludes the repatriation taxes. Reported net income for the year ended December 31, 2005, including the repatriation taxes, was $63.5 million or $2.07 per diluted share. This compares to $43.6 million or $1.49 per diluted share for the year ended December 31, 2004.

Turning to our sales by product categories, traditional toys which includes T.V. Games, wheel, action figures, plush, dolls and promotional products were $477.9 million for 2005 compared to $406 million in 2004. These represent approximately 72.2% of overall sales in ’05 and 70.7% of overall sales in ’04. In 2005, we had many revenue drivers in this category including T.V. Games, Fly-Wheels, Cabbage Patch Kids, WWE Action Figures, Sky Dancers and Doodle Bears Plush which leads to the increase year-over-year.

As we mentioned in our press release, we expect a large sell-in in the first quarter of 2005 will impact the year-over-year comps in the first quarter. In our seasonal product category which includes Go Fly A Kite, Funnoodle, Storm Water Toys and Junior Sports Items, sales were $19.2 million for the year of 2005 as compared to $24.8 million for 2004. This represents approximately 2.7% of overall sales in 2005 as compared to 4.3% of overall sales in 2004.

Art activities and writing instruments which consist primarily of our Pentech and Flying Colors division had sales of $56 million for the year ended December 31, 2005 as compared to $75 million for 2004. These represent approximately 8.5% of overall sales in 2005 and 13.1% of overall sales in 2004.

Although there were several items from both areas that gained promising traction in ’05, including our Dora the Explorer activities and Ultra Sharp and Pentech writing instruments, we are still looking for ways to improve this area of business. In 2006, we will continue focusing on the strongest drivers, the play patterns that are age appropriate, and we expect to ship a new line of Nickelodeon branded stationery items.

In the second quarter of 2005 we moved into the pet arena with our acquisition of Pet Pals. Pet products contributed $9.3 million to the total sales during 2005. This line will have many new product introductions in 2006 and we believe the pet area will be a strong growth area for our business moving forward with these new offerings and expanded distribution.

Finally, international sales were $99.1 million for the year 2005 as compared to 68.5% -- I’m sorry -- $68.5 million for 2004. This represents approximately 15% of overall sales in 2005 versus 11.9% of overall sales in 2004. A year or so ago we completed the restructuring of our international division. We’ve been working hard to cultivate strong relationships with our international customers while leveraging our key drivers and we’re very pleased with the results we are experiencing.

Gross margins for the fourth quarter expanded 350 basis points to 42.7% and 90 basis points to 43.3% for the year, when compared to the same period last year. The improvement is due to lower product costs with comparable royalty and amortization costs.

SG&A expenses for the fourth quarter decreased $3.4 million to $58.5 million. This decrease is primarily attributable to a decrease in acquisition-related amortization expenses during the quarter offset, in part, by increases in advertising costs and other direct selling expenses. As a percentage of sales, SG&A expenses increased to 35.2% compared to 33.5% in the same period last year.

For the full year 2005, SG&A expenses increased $6.4 million to $178.7 million or 27% of net sales, down from 30% for 2004. This is due to increases in advertising and other direct selling expenses offset in part by decreases in acquisition-related amortization and stock-based compensation.

During the quarter, we posted $7.9 million in profits from the WWE Video Game joint venture with THQ, compared to a profit of $6.6 million for the comparable period last year. For the year of 2005, our JV profit was approximately $9.4 million up from $7.9 million for the same period last year. Cash flow from operations for the year were $66.9 million. Our financial position remained very strong and we ended the year with $240.2 million in cash and equivalents and $300.7 in networking capital. Adjusted for the recent CDI acquisition, our cash and equivalents are $135.7 million with working capital $209 million.

Accounts receivable at the end of 2005 decreased to $87.2 million from $144.3 million at the end of the third quarter and down from $102.3 million at the end of 2004. The DSO’s of 47 days down from 55 days in the previous quarter.

Inventory at the end of the fourth quarter was $66.7 million which is down from $73.9 million at the end of the third quarter. DSI’s were 78 days compared to 57 days at the end of the third quarter.

Capital expenditures were $2.2 million for the quarter and $7.7 million for the year of 2005. We expect capital expenditures in 2006 to be approximately $10 million. Now I will turn the call back to Jack Friedman.

2006 is shaping up to be a particularly exciting year for JAKKS Pacific with our most diversified product line in the Company’s 10-year history; we are well-poised for some serious growth.

We speak to you today from our New York Showrooms at the International Toy Fair where we have our entire line on display for the trade, the financial community and our licensing partners and the press. I am happy to convey to you that the energy is high and the feedback from our partners worldwide from this show as well as the Hong Kong Toy Fair last month, that the line is looking extremely strong.

As we approach each year, our number one job is to come up with compelling products. Product is king. There are many factors that contribute to making JAKKS Pacific or any company successful; but in our business if you don’t have a strong product line you’re really not doing your job. I think the line-up for 2006 is excellent. As the year unfolds, we’ll see if the kids, the adults, their pets and the rest of our varied consumer base agrees.

Here are some highlights from each of our areas of business. We’ll begin with our latest acquisition, CDI. This line is comprised of play kitchen, Disney princess dress-ups, pretend vacuums and an array of other wonderful role-play items for young kids.

Some new products for 2006 include a line based on Disney’s Ariel and Dirt Devil role-play items. We already have plans for some exciting new licenses and line extensions and we expect to be able to infuse this into the line in the coming months and years.

In our boys division, we have seen excellent growth from our Fly-Wheels line of extreme performance toys and accessories. We believe our award-winning Fly-Wheels was the number one new vehicle brand for 2005. With the introduction of our Fly-Wheels Light products and the expansion of our Fly-Wheels Automotive and Skate Lines for 2006, we continue to garnish more and more retailer shelf space and new customers worldwide have created a formidable and innovative vehicle business for JAKKS Pacific.

Initial strong sales, especially in our new flight segment, are helping to secure even more space for full 2006 and we expect the momentum to continue worldwide.

Fly-Wheel success is helping drive our overall Road Champs business with our MX extreme sports line also performing extremely well. Across the board, Play-Along has had another great year. We expended our presence at retail with Doodle Bear and Sky-Dancers and had a great year with Cabbage Patch Kids which grew at a more than healthy enough pace to offset pre-anticipated declines in Care Bears which is now in its seventh season at retail and is transitioning from a hot retro-line to an [evergreen] brand. Based on our past success and future expectations, we recently renewed this license and look forward to offering new Care Bears for many years to come.

Our Doodle Bear line introduced in the spring of 2005 was a breakout item for us and we quickly expanded the line based on its robust sell-throughs at retail. In particular, our Glow Doodle Bear and Doodle [INAUDIBLE]. We have several new items for both spring and fall of ‘06 and the line positions JAKKS as the biggest selling plush toy company in the industry.

Cabbage Patch Kids completed their first full year of distribution and sold very well over the holidays led by Cornsilk Hair Cabbage Patch Kids and Cabbage Patch Kids Babies. For 2006, we will introduce new Color Change, Corn Silk Hair Kids and other new introductions that we believe will lead to millions more and kids being adopted as the years go on. The property is a great legacy brand in the toy industry and we expect it to hold its place among the great toy brands that sell this year and year out.

Dragonflies, the boys’ version of our beautiful Sky Dancers line of flying fashion dolls is a new line for 2006. Sky Dancers was introduced in the spring of 2005 and has been selling well. The boys’ version offers the same great feature of flight for boys by introducing them to a new world where action figures fly.

Building upon our legacy of success for retro brand reintroductions, we are in the midst of bringing back to the market a beloved favorite - the classic Troll from Denmark. These small figures with brightly colored hair were first introduced in North American in the 60’s and by the early 70’s became a cultural and merchandising phenomenon. The brand made a huge comeback and was very popular at retail in the late 80’s and early 90’s. In the spirit of our multi-generation approach to marketing, we look forward to kids sharing Trolls with parents and grandparents.

Another potentially exciting introduction from Play Along is our Speed Stack line which made its official debut to the public and buyers on Monday at Toy Fair highlighted by the exciting competition of speed and skill between NFL football stars. This spring, Play Along will introduce Speed Stacks the official equipment for sports stacking, one of the fastest growing new sports in the country by stacking a set of special cups at rapid speeds players race against the clock and each other to claim the fastest time. The fast-paced Sports Stacking is quickly spreading across the country and is already practiced in over 10,000 schools across North American and several international markets. Speed stacks will be supported by a multi-tiered grassroots marketing campaign. You really need to see this great new concept to believe it.

On WWE action figures did well in 2005 with Toys R Us and K-B reporting that JAKKS’ WW line is their number two action-figure brand; second only to Star Wars. For 2006, we have several line extensions including the [Lux] Aggression figures which are already off to a great start. Our Dragon Ball Z line had mixed results in 2005 with two major customers pulling out of the brand precipitated by the show coming off strips in late spring of ’05; while another small major retailer is reporting increases in sales for 2005 versus 2004.

For 2006, we expect a return to sales levels near 2004 based on renewed interest in the line for multiple, major retail customers due to several factors JAKKS put into place, including a value pricing program which allows for higher retail margins while simultaneously offering lower retail prices to the end consumer and totally redesigned packaging which brings a new energy to the Plan-O-Gram coupled with the fact that the programming is going back on T.V.

Turning to our plug and play games, our 2006 line-up features virtually all of today’s top kids’ characters out there. We’ve worked very hard to create and nurture our T.V. games line. JAKKS created the plug and play category and a multi-hundred million dollar brand for the industry. In the process, we’ve learned a lot along the way.

We have always viewed the T.V. games business as one that is here for the long-term. People were surprised when we quietly locked in dozens of licenses to ensure we will always have premier content. We have been very careful to manage the shipping flow and inventory; but we’re not without flaws. We believe as did our retail partners, that the hard core gamer titles would do very well. Beginning in Q4 2004, with the majority of it shipping during the first quarter of 2005, we shipped a very large quantity of hard core gaming titles to our customers including EA Sports, Mortal Combat and World Poker Tour. Well, we have since learned the hard way that we were wrong and have worked with the retailers to clean up that hard core game inventory.

Due to this large sell-in of the hard core titles in the fourth quarter of 2004 and first quarter of 2005, we had lower sales year-over-year for fourth quarter 2005 and we expect the same for first quarter 2006 in comparison. However, we are highly confident that we will still grow JAKKS Pacific in 2006 and we will speak more about our guidance in just a bit.

The kid driven titles sold very well during the fourth quarter 2005 highlighted by our Dora the Explorer, Disney Princess mix-ins and our original [LAMCO] Pac Man and new Pac Man units which continued to sell. Young kids are our main consumer for T.V. games and they want our many wonderful licensed characters. To that end, we have what they’re asking for as evidence to our commitment to this category. We expect to ship at least 20 titles for the year including Sesame Street, Bob the Builder, Scooby-Doo, Power Rangers and Super Pac Man along with a host of additional ones.

We’ve stayed true to our vision for the line and each new T.V. games unit features a terrific toy-like controller. They are easy to use and have a low price point which is now $17.99 to $19.99. We have commitments from all our major retail partners to carry this line.

We have been innovators in the plug and play area and we are pleased with the extension of the technology to two new electronic lines - Tele-Story and iPets. Tele-Story targets preschoolers and will help them learn to read with our interactive books that connect into a standard T.V. and serve as a fun introductory reading guide for children. Tele-Story which will be launched simultaneously in North American and internationally feature plug and read technology and is the newest installment in JAKKS electronic portfolio.

We have licensing rights for Care Bears, Scholastic, Simon and Schuster, Clifford the Big Red Dog, I Spy and Curious George to name just a few of our many licensed titles. We expect to secure new retail customers to carry the product which will first hit retail in the second half of this year. We are pleased with the response this far and are also quite optimistic about the response to our iPets game line which infuses virtual pets with plug and play game technology for a completely new play pattern. For the first time, kids will be able to make the virtual pets they take care of and put them inside a video gaming system allowing them to play with their pets in unique video game environments on their T.V. It’s a unique concept and could potentially turn into a substantive contributor to our electronics category this year.

Our extensive and newly developed pet products line, the one for real pets and their owners, is growing and multi-faceted. We have a full line of premium dog and cat products based on AKC and Cat Fanciers’ Association, names known for representing quality; and our team has worked to develop many other exciting lines as well. Our White Bite Treats, our oral hygiene products for dogs capitalizing on the teeth whitening craze in the U.S. There is one major competitor called [Green-Ease] and our initial feedback shows our White Bites are a very promising alternative. Our rip-and-fetch and bark-and-bake ovens utilize synergies from popular JAKKS toys line to create toys that engage children with their pets. We look to our child guidance line for inspiration and we created our preschool puppy’s line of toys and accessories created to address the special needs of developing dogs in an innovating hands to habitat by applying popular license and new simple technology that we think will really enrich the category at retailers. The current line, coupled with the acquired line positions us with a broad yet focused pet portfolio to offer our retail partners.

We sell JAKKS products from all our categories in over 50 countries outside North America. Our product lines are T.V. advertised in more than 40 countries worldwide. Our product is full of many exciting and diverse new products and line extensions we expect to roll out during the year in the United States and around the globe. And while we do have many drivers that we expect will be popular throughout the year, a key component of our strategy is also to always have core products that sell year-in and year-out.

At JAKKS, an equally diverse, stable of products fall under this category including our Kites Funnoodle pool floats, our writing instruments, AKC Pet Treats and more. In 2005, we introduced the Ultra Sharp, Liquid Graphite, Number Two Yellow Pencil from our Pentech brand and in 2006 we’ll follow with our new mechanical version, liquid graphite. We are focused on brand management and growing each of our businesses to ensure that JAKKS Pacific remains profitable all year-round.

Concerning our outlook for 2006, including our recent CDI acquisition, we expect to increase net sales to $825 million with net income of $82 million or $2.63 fully diluted. This guidance reflects non-cash charges of $8.7 million for stock-based compensations including the expensing of stock options pursuant to statement of financial accounting standards, FAFS 123R.

This forecast anticipates first quarter sales volumes to be in the range of $102 million to $110 million and profitable with diluted earnings per share in the range of $0.13 to $0.18 which is less than the first quarter 2005 sales of $134.7 million and $0.34 per diluted share. We anticipate more than making it up in the balance of the year with initiatives we have in place; like, as example, the continuation of our kid-focused T.V. games that we expect will be up year-over-year in 2006 and based on the response from the trade of all of our product lines. This shift in sales reflects varying seasonality and sell-in flows for several of the businesses in which we operate.

As our product mix is ever-changing, we are fortunate to have the positioning of our people in the industry -- in our industry experience and control over our business in addition to having continuous development across our diverse product lines providing many new products and profitability throughout the year to see that the future is bright and 2006 represents more growth for JAKKS Pacific. We believe JAKKS Pacific has grown to become a major consumer products company and we thank you, our shareholders, for believing in our vision; and with that, I would like to open this conference call open to calls for any questions. Thank you for your time.

Thank you. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS] The first question comes from Tony Gikas from Piper Jaffray. Please go ahead.

Good morning, Tony.

Good morning, guys. This is Steph for Tony. Couple of questions -- both balance sheet related. First of all could you talk to the composition of the inventory on the balance sheet just given that the day sales inventory were up significantly on the year-over-year and a sequential basis; and then second, on the AR, the receivables, can you break out the reserve in the period or that balance as it was in the sequential quarter and the prior-year quarter as well?

Okay. Regarding the inventory, we’re down from Q3 2005 up year-over-year because of the expanded domestic programs. The biggest fluctuation came in the difference in sales from third quarter to the fourth quarter. So we expect the inventory balances to remain approximately the same and the DSO’s and DSI’s will fluctuate just based on the seasonality of the sales.

I don’t have the specific reserve information. We did receive the final settlement from Kmart bankruptcies from several years ago; but there were no significant changes and I can get you the specific numbers.

Okay. Just back on that inventory -- expanded domestic programs were the major source of the increase. Can you maybe break down what is in process versus what is finished product?

Substantially all of the inventory is finished goods. We do maintain some components for the T.V. games and lesser amounts of packaging items. Easter -- or I should say the Chinese New Year fell a little bit earlier so we loaded up more inventory earlier than we otherwise would have for Easter and springtime.

The next question comes from Derrick Wenger from Jefferies & Company. Please go ahead.

Yes. I believe you said it but I just want to clarify it. The capital expenditures in the fourth quarter, what were they? And I think you said the outlook for calendar year ’06 is $10 million. Is that right?

Correct. Fourth quarter was $2.2 million, $7.7 for the year and next year we expect around $10 million.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS] The next question comes from Sean McGowan from Harris Nesbitt. Please go ahead.

Hi guys, a couple of questions if I can. One, do you have any sense here for the outlook in 2006 for the joint venture with THQ?

We’re heading into a transition but based on that we’re forecasting a little bit down - about $7 million.

Do you know what the timing of products releases will look like compared to last year?

No. They’re still working on the plan for the year.

Can you give us an idea on how CDI did in 2005?

They’re in the process -- as a private company, they don’t report timely the way we do and they are currently working on their ’05 numbers; so we don’t have anything up to date. We will be filing an 8-K with their ’05 numbers within the next 60 days or so.

Can you share with us what you were able to look at when you were considering buying the company?

They did increase during ’05.

Do you mean net sales?

Net sales and maintained their margins.

Finally, when do you expect positive comparisons to begin on the quarters if it’s not the first quarter?

Beginning in the second quarter.

Thank you.

The next question comes from Edward Woo from Wedbush Morgan Securities. Please go ahead.

Good morning. The $2.63 earnings per share number, that includes $8 million of stock option expense?

$8.7 million -- actually it’s option, comps and restrictive stock comps.

And what was the amount for this year?

$3.4 million.

And that number is not in the reported number. Right? It’s just a pro forma?

No. Those numbers are both in the reported number. The only pro forma adjustment was related to the tax on the repatriated foreign income.

All right. That sounds good. And then the last question I have is, is there any update on the WWE litigation?

No. There isn’t. The status of it is it’s oral arguments in the Court and through the advice of our counsel they’re suggesting that we don’t make any comments regarding the WWE in this period.

All right. Thanks a lot.

Thank you very much. And thank you all very much for your time. It was a pleasure speaking with you all today. We look forward to having a great year and look forward to speaking with all of you on our next conference call. Thank you.

Thank you for participating in the JAKKS Fourth Quarter and Year-End Results for 2005 Conference Call. This concludes the conference today. You may all disconnect at this time.