JAKKS Pacific Inc (JAKK) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the JAKKS Pacific Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [OPERATOR INSTRUCTIONS].

I would now like to introduce your host for today's conference, Mr. Jack Friedman. Sir, you may begin.

Thank you, operator. Good morning, ladies and gentlemen. This is Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the third quarter and nine months ended September 30, '06. We are in New York this week for the International Toy Show, the last of them; and with me on the call today are Stephan Berman, President and COO; and Joel Bennett, Executive VP and CFO. I will provide an overview of the quarter, 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 call up for your questions. Before I begin, I would like to point out that any comments made about future performance, events or circumstances, including the estimates of sales and earnings per share for 2006, and forward-looking statements are subject to Safe Harbor protection under Federal Security laws. These 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 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 that we have achieved record third quarter sales of 295.8 million and net income of 40.5 million, or $1.26 per share. The 27% increase in year-over-year sales and strong earnings were due in part to a robust contribution from our recently acquired Creative Designs International division, as well as steady sales from several core products in our portfolio, including Cabbage Patch Kids, WWE action figures, our Doodle Bear and Care Bears plush line, plug and play TV games, and on Nickelodeon, Dora the Explorer, and Go, Diego, Go! activities. Initial holiday orders for us was strong in the third quarter. We shipped a number of new items, including several new large play sets, such as Disney's Ariel Magical Talking Salon and Black & Decker Junior Tool Kits, as well as our Fly Wheels XPV, Xtreme Performance Vehicle, and our Vmigo virtual pet system and we have good momentum heading into the fourth quarter, with booked orders so far in line with our expectations and excellent retail placement.

Throughout the year we worked to increase the exposure of our key products, often by submitting them for toy awards that help us gain additional recognition with parents and the media. Two of our products, Fly Wheels XPV and Speed Stacks Pack, both made it on the Toy Wishes Holiday 2006 Hot Dozen List earlier this month. And Speed Stacks was also the only product to also top the Family Fun top 10 Hot Toy List for 2006.

The Ariel Magical Talking Salon and the Vmigo virtual pet system were also recognized by Toy Wishes magazine as all stars. In addition, Wal-Mart, Toys "R" Us, KB, eToys, AOL for Kids, Dr. Toy, The Toy Insider, iParenting have their own hot lists and have named JAKKS Pacific, including our Fly Wheels XPV, Speed Stacks, Care Bears, TV games, and Doodle Bears to their list.

The Little Mermaid is a big push for Disney this year, and our award winning CDI Ariel Line was launched this quarter to coincide with the Disney's re-release of the digitally remastered The Little Mermaid movie on DVD, which sold 4 million copies in the first week.

We continuously focus on our strategy of growing both our organic and acquired businesses. We have achieved longevity with many of the classic licensed products throughout our portfolio such as Care Bears, SpongeBob SquarePants, Dora the Explorer, WWE, and Disney.

JAKKS Pacific's success has been and will continue to be about our ability to consistently create quality products, many of them with featured top licenses and traditional play patterns with innovative features that make them relevant for today's consumers of all ages. We are energized and excited by our rich portfolio and always strive to add innovation and invigorate play patterns to classic toys wherever we can.

Our resources increase with each acquisition and we are actively working to utilize synergies in meaningful ways throughout our organization. JAKKS' management team is committed to investing in product development and maximizing our licensing relationships to benefit each of our teams.

We channel product opportunities throughout our seasons divisions based on each area's expertise. This has been a key benefit of our acquired portfolio of brands and personnel over the last 11 years. The strategy has been working well for us too, with past successes including Doodle Bear, which JAKKS' management brought to our Play Along team to nurture and maximize through its excellent execution.

The extensions of our TV games line was developed by JAKKS' team under the Toymax brand after the acquisition of Toymax. Snugglers, our new line of giant plush pals, with a standard pillow inside, has been an aggressive licensing initiative spearheaded by JAKK Licensing Department, and executed by Play Along. For several of our new introductions such as Pokemon, Bratz, and multiple Disney initiatives, we have numerous JAKKS divisions working together to create full multi-category merchandized lines at retail including CDI Play Along, JPI Pets, Flying Colors, JAKKS Electronics and Go Fly A Kite.

For example, for two new Disney initiatives in development, we have CDI executing on the dress-up and role-play piece of the business and Play Along developing the doll line -- fashion doll line, that is. We also have a line of retro Disney apparel and toys for pets. Similarly JAKKS' licensing team secured rights from fellow toymaker MGM for our new JPI pet division to produce Bratz pet toys apparel and small pet habitat line.

We are showing our 2007 line to the trade this week at the International Toy Fair here in New York. We will be unveiling a number of new product offerings based on classic and top licenses that we signed in 2006, and which we will be able to ship to retailers in 2007 from each of our divisions, including a fun new TV games unit based on the hugely popular television show Deal or No Deal. We accelerated the development and ramped up production to catch the wave of Deal or No Deal, and this new game is expected to launch in December of this year.

I'll go more into detail about these and other new initiatives later in the call, but now I'll turn the call over to Joel Bennett for a review of our financials for the third quarter and first nine months. Joel?

Thank you, Jack. Third quarter 2006 net sales increased 27% from last year to $295.8 million compared to $233.5 million in the third quarter of 2005. Reported net income for the third quarter of 2006 was $40.5 million, or $1.26 per diluted share. This compares to $32.8 million, or $1.05 per diluted share, for the same period last year. Included in the results were non-cash charges for stock-based compensation of $1.1 million and acquisition-related amortization of $3.3 million in the third quarter of 2006, compared to a credit of $600,000 and a charge of $1.8 million respectively in the third quarter of 2005.

Pro forma net income, excluding these non-cash charges, was $43.6 million, or $1.35 per diluted share, in 2006 and $33.5 million, or $1.07 per diluted share, in 2005.

Our record third quarter sales were from a combination of traditional toys and contemporary classics rather than individual breakout hits, as well as the contribution from CDI. Role Play products continued to be strong sellers, as well as our Cabbage Patch and Doodle Bear plush lines, WWE action figures, kid-driven TV Games titles, Creepy Crawlers and Vehicles.

Net sales for the nine months ended September 30, 2006, were $527.1 million, compared to $495.3 million during the same period in 2005. Net income for the first nine months of 2006 was $49.2 million, or $1.57 per diluted share, compared to the first nine months of 2005 with earnings of $54.5 million, or $1.77 per diluted share. Included in the results were non-cash charges for stock-based compensation of $4.8 million and acquisition-related amortization of $10.4 million in the first nine months of 2006, compared to a credit of $800,000 and a charge of $5.3 million respectively, in the first nine months of 2005.

Pro forma net income excluding these non-cash charges was $59.8 million, or $1.90 per diluted share, in 2006, and $57.7 million, or $1.87 per diluted share, in 2005.

Sales of traditional toys, which include Wheels, action figures, Plug It In & Play TV games, plush, dolls, promotional products and Role Play were $229.9 million for the third quarter and $381.5 million for the first nine months of 2006. This compares to $178.2 million for the third quarter and $350.4 million for the first nine months of 2005. This represents approximately 78% of overall sales for the 2006 third quarter.

CDI contributed sales of $80.8 million in the third quarter and $106.8 million for the first nine months of the year, which with increasing contributions from the Play Along plush lines and Boys Action figures offset declines in some segments of our TV games area and our Fly Wheels lines.

Our art activities and writing instruments category, which consists primarily of our Pentech and Flying Colors divisions had sales of $12.2 million for the third quarter and $37.6 million for the first nine months of 2006. This compares to $15.3 million for the quarter and $43 million for the first nine months of 2005. Some of the year-over-year declines are due to the discontinuing of Hello Kitty activities and sales of our compound business in 2006, although these declines were partially offset by the strong performance of our Creepy Crawlers and Nickelodeon lines of activity products.

The aggregate of our other product lines, including seasonal products, including Funnoodle, Go Fly a Kite, and other outdoor products and Pet products, increased to $14.4 million for the third quarter and $33.8 million for the first nine months of 2006 as compared to $4.5 million for the third quarter and $19.2 million for the first nine months of 2005. This represents approximately 5 and 6% respectively of overall sales for 2006. Sales were largely driven by the initial sell-in of XPV and our American Kennel Club pet line.

Our international sales were $39.3 million for the quarter and $74.1 million for the first nine months of 2006, as compared with $35.1 million for the third quarter and $82.7 million for the first nine months of 2005. This represents approximately 13% of overall sales in both the third quarter and 14% for the first nine months of 2006. Year-over-year international sales for the nine months were lower due to decreases in Boys Action and Electronics, although had strong third quarter shipments, and fourth quarter international bookings are currently trending ahead of 2005.

Gross margins for the third quarter and nine months of 2006 were 38.2% and 39.1% respectively, below the 40% and 39.5% in the same period in 2005. Product costs increased as a percentage of net sales due to shift in the product mix.

SG&A expenses for the quarter were $54.7 million, or 18.5% of net sales. This compares to 19.8% of net sales in the third quarter of 2005. SG&A expenses for the nine months increased $16.7 million to $136.9 million or 26% of net sales, which compares to 24.3% for the same period last year.

Acquisition amortization increased $1.5 million for the quarter and $5.1 million for the first nine months of 2006 due to the Creative Designs acquisition, while stock-based compensation for the third quarter and first nine months of 2006 increased $1.7 million and $5.6 million respectively due in part to the increase in the stock price during the periods year-over-year.

Our operating margin for the first nine months in 2006 was 13.2% compared to 15.2% in 2005 due to the factors mentioned previously. However, we expect our operating margin to be approximately 13% for the full year, which is comparable to that of 2005.

For the quarter, we incurred a loss of $245,000 from our video game joint venture, compared to a profit of 238,000 in 2005. For the first nine months, our JV profit was 732,000 compared with $1.5 million for the same period last year. We expect to see the JV contribution to substantially increase in the fourth quarter with the November release of SmackDown vs. Raw 2007 for Microsoft Xbox 360, Sony PlayStation 2 and PSP systems.

Cash flow from operations in the third quarter of 2006 was $28 million and $7.5 million for the first nine months. This compares to cash flow provided by operations of 37.3 million for the third quarter and $55.8 million for the first nine months of 2005. Our financial position remains very strong and we ended the quarter with $133 million in cash and cash equivalents and $284 million in net working capital.

Accounts receivable increased to $128.8 million from 85.5 million at the end of the second quarter with DSOs of 56 days, down from 62 days, at the end of the second quarter. The increase is due to the significant increase in sales volume in the quarter. At the end of the third quarter, inventory was $86.7 million, up from $76.8 million on June 30, as we head into the holiday season. [DSIs] were 50 days down from 112 days at the end of the second quarter.

Capital expenditures for the quarter were $3.5 million and we expect capital expenditures for the full year to be in the range of $9 to $10 million. Given our financial position with cash on hand, cash flow from operations and debt capacity, we expect to be able to continue to execute on our acquisition strategy, as well as continue to invest for internal growth.

With that I'll return the call to Jack Friedman.

Thank you, Joel. Our latest acquisition of CDI is proving to be a gem, with its largest contribution yet in the third quarter and the sales coming from a number of strong lines within their portfolio. Fairies is a new Disney property for this year that focuses on the secretive and magical world of Tinker Bell and her friends. Our enchanting fairies line has outperformed our expectations and joins our original Disney Princess line, which is also performing quite well.

Our CDI division works closely with Mattel to develop beautiful role play items based on their Barbie brands, Barbie and friends in 12 Dancing Princesses. These lines are well placed at retail for the fourth quarter. Our newly introduced Black & Decker line which brings role play to boys three to six is already quite successful. We are currently working on several strategic partnerships outside the traditional channels of distributions for this line which has also won multiple industry awards.

CDI has boxed value sets for McDonald's, Pizza Hut, General Mills, Mr. Clean, M&M, Subway, and pretend appliances like our Dirt Devil vacuum and several major accounts domestically this year. Our non-licensed play food lines and dress-up lines are well placed at accounts nationwide as well. Our Play Along division continues to perform extremely well with our contemporary classics like Cabbage Patch, Care Bears and Doodle Bears, led by our Magic ColorSilk Cabbage Patch dolls that have fun and funky colored hair strands that magically change color when you touch the hair.

Also new and selling well are Cabbage Patch Kids Newborns, which are the newest, tiniest and youngest crop of kids from the Patch. New from Care Bears, which is in its fifth year at Play Along, is our Hide 'N Seek Bear and our Classic Bear with video, both of which are selling well this year. Our Doodle Bear line continues to grow with expanding categories of bears, dolls and monsters, and look for more next year.

Speed Stacks is another line with potential, which has won many major Toy of the Year awards and has been selected on more of the top toy surveys than almost any other product on the market this year. Speed Stacks hit the market in August in conjunction with the airing on ESPN of the World Sports Stacking Championships. Our Boys Action figure and outdoor toys were other drivers in the quarter with our Fly Wheels XPV, WWE and extreme sports toys on shelves nationwide.

During the fall, we shipped our Fly Wheels XPV, which soars up to over 40 -- 20 stories high at speeds of up to 20 miles per hour. XPV, Extreme Performance Vehicle, drives on land or flies in the air and is on many, many hot lists including Toy Whishes, Wal-Mart, AOL for Kids and more. We are optimistic about this item for the holiday season and to -- intend to expand this line rather dramatically for 2007 and beyond.

We will ship more than 20 WWE action figure assortments this year, and our WWE line is experiencing significant growth. Our biggest seller has been the Deluxe Aggression Figure Assortment, which has received excellent consumer response to its traditional points of articulation and additional feature accessories.

We shipped seven new TV game titles in the quarter, and Power Rangers and Scooby Doo are on the current top titles. We accelerated a deal for Deal or No Deal, and our simple TV games platform is perfect for these types of entertainment trivia games that have captured America's prime time networks and ratings.

Our Vmigo virtual pet gaming system under this brand just started shipping at the end of the quarter, and we have strong placement at retail for the fourth quarter. Early results are looking very good. Sales of our JPI Pet line continue to grow in the third quarter with more accounts picking up the White Bites, oral care treats for dogs, and sales of our AKC and CFA lines steadily increasing. We have now begun offering our pet products in Europe, Australia, Asia and the Middle East.

We have had Nickelodeon licensed activities in Flying Colors -- in our Flying Colors lines for the past eight years, and Dora continues to be very strong at retail with new play patterns and refreshing of our key items. We have also been developing new Flying Colors lines based on the hugely popular girls brands Bratz and The Littlest Pet Shop for spring 2007.

We look to resurrect brands that we may have in our arsenal from our past, utilizing valuable intellectual property that may be dormant or sluggish; Creepy Crawlers, an example of a proven boys' activity that we successfully reintroduced this year. In the same vein, our Blopens line of products, which has been a good contributor internationally, is being redesigned and reintroduced in the US to invigorate sales in the US.

We are well into development of our 2007 product lines, which we are showcasing this week at the Fall International Toy Show. We continue to build off our strong foundation and expertise and in past years we will feature comprehensive lines for many well known and established license brands such as Doodle Bear, Cabbage Patch Kids, Dora the Explorer and the American Kennel Club, and new licensed brands for JAKKS including Deal or No Deal, Barney and Jelly Belly. And 2007 should be another good year for our action figure business with our Pokemon line slated to launch in January 2007. We are optimistic about the potential of the line and are pleased that since the season opening in September, ratings have increased 37% for Pokemon Battle Frontier, which is now the number one show for boys six to eleven on Cartoon Network.

We have also expanded our WWE lines for 2007 with more feature-based kids play. Role play dress-ups and micro sized feature based figures and play sets are also in the work for 2007. We have many new programs coming out of every JAKKS' division for next year. We are confident in our established formula and that our new products will be well received by kids of today.

We are reiterating our previously announced 2006 guidance of net sales of approximately 775 million and diluted earnings per share of approximately $2.32, which represents an increase of net sales of approximately 17.2% and an increase in diluted earnings per share of approximately 12.7% for the current fiscal year versus 2005. The forecast reflects modest but healthy contributions from many items across the board rather than a few items driving the fourth quarter business.

With that I will open the call up for questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Mr. Arvind Bhatia. Go ahead, sir, your line is open.

Good morning, Arvind.

Good morning guys, how are you?

Good.

Good, thank you.

Good. I was wondering if you can comment real quick on this lawsuit press release that you put out, if you can talk a little bit about that. And then, I have a question on the sales reserves for the quarter. My back of the envelope shows that, that percentage was a little bit down versus what you've carried traditionally, maybe Joel you can speak to that a little bit.

On the first part of your question, Arvind, regarding the lawsuit, please call THQ for an update and any further information on that.

Okay.

Regarding the quarterly numbers, Joel will review that with you.

Yeah. Regarding the reserves, one of the big determinants is the rate at which the customers take the deductions during the year, and over the last few years they have been taking them more frequently as opposed to at the end of the year. But as far as in general, the percentage off of gross sales, it's consistent with past years and past quarters. So, what we show on the balance sheet is just the residual liability.

Okay. Maybe that's more of an offline question, but -- also, maybe you can speak to Pokemon and Barney licenses a little bit more. Jack, I know you touched on it just a few minutes ago. But, what kind of potential do those lines have? What may they -- what do you think they will represent as a percentage of your revenue next year? What kind of earnings do you expect from that line? I know, it's early days, but again I'd just like to get some color since you are showing some of that product out there right now.

Sure, let me take the second one first, Barney. Barney, we think we have a steady sales item of modest revenue, not big any kind of breakout revenue, and it hopefully will be a steady builder over the next few years. Regarding Pokemon, we are extremely excited about Pokemon. We don't have a number to give you or anybody else at this point. This is one of the first for JAKKS of having a master toy line for virtually all products, anything you can think of in toy and toy electronic license, and it goes into our pets or anything else. This is a far reaching license. The ratings on the new shows that have gone on air are huge. Some of the reports we've gotten back that since the new shows have aired that some retailers have seen increases from 60 to 90% on the trading card and trading card games that are out there. So that's very encouraging.

We have a broad line of it coming out, but we don't have a number at this point. We are going to start shipping it to hit shelves in January, February of next year. Retailers are giving us excellent space for the product line, almost as much as we are asking for. We have a broad line of new product that we are showing here in New York at the Toy Fair, and it will encompass electronics, toys, stationary, activities. I think I said pets before, but we don't have it for pets and it doesn't belong on pets, so if I said that, that was a mistake. But we have very, very high hopes for it. There is virtually no product out there remaining from Hasbro's license, and every retailer that I know of is planning on having a big and broad range of it. It looks very exciting bottom line Arvind.

Got it. Just to be clear, is there anything built into your Q4 projections from any of these new licenses, Pokemon or Barney?

Yes, a little bit on Pokemon that would I think just about be it.

Got it. Thank you, guys.

One other product line I would like to bring out that just came up very recently through our synergies, basically our CDI division got a license for Cheetah Girls that were showing this Toy Fair and it looks like it has terrific potential for us.

Great. Thank you, guys.

Thank you, Arvind.

Our next question comes from Mr. [Jerry] Johnson from BMO Capital. Go ahead, sir, you line is open.

Thanks.

Good morning.

Hi. Of the 81 million in CDI sales this quarter, how much of that was Little Mermaid?

We don't break that out, but I will tell you that their distribution is very crossed over many SKUs. There isn't anything close to one specific breakout, SKU or brand within their line.

Historically, they are -- generic of their house products represented about 45% of their sales, so that gives you an idea of what their license properties run.

Okay. And one more --

Not a hot item type division, it's steady, build, build, build.

Yes, but Little Mermaid is pretty hot right now. Now, I've seen good shipping on holiday resets on a new product; however, the retail sales of the 2006 product seems a little mixed. TeleStory, for example, is one being closed out at Target. Now are these products -- these 2006 products moving up to your expectations? And if not, what is stronger than you expected offsetting this performance and gives you confidence in your guidance?

Unquestionably, our TeleStory line has been a disappointment. Target was not happy with the sell-throughs in the 29.95 price range and they dropped the price down to 19.99, it's doing quite well at 19.95, but that doesn't serve us very well. So, we are working on, we don't know if we can accomplish it or not of reconfiguring it and doing it in another fashion that it could possibly be a 19.95 item in the future and some other changes to it as well. Some of the things that are performing particularly well would be, yes, the Disney Mermaid dress-ups or princess dress-ups and the fairies electronics in that division, our Black & Decker tool line is doing quite well. The McDonald's, Subway, Pizza Hut and all of those kind of role play items are doing quite well. Our WWE action figures are doing extremely well. Care Bears is doing more than we expected. The Cabbage Patch Newborns are selling extremely, extremely well. And our Doodle Bear and friends are doing extremely, extremely well. And last but not least, it seems like our XPV flying -- Xtreme Performance Vehicle is flying off the shelves and we are shipping as much as we can every day to meet our retailers' requirements and so far we haven't caught up-to-date, but we do expect to. Our Vmigo line has hit shelves in the last week or 10 days. Our TV does not start for another I think week -- week and a half. Early sales are looking very encouraging, it's too soon to call it a winner, but early sales without TV are looking very good. And our Dora activities are selling quite well in addition.

So all-in-all, we are having a wide spread of our products at retail. We are really very happy with our sales at retail; we think most of our retailers are. And just to reiterate, our sales of TeleStory have been a disappointment and our basic Fly Wheels have slowed down. Regarding TV games, our core product line, we got rid of the hardcore stuff that we have discussed many times that haven't sold well, it's pretty cleaned out at retail now, will certainly be cleaned out by the end of this Christmas season. Our basic business is stronger than ever. Our Power Rangers, etcetera, etcetera, etcetera, etcetera, are doing extremely well. We are delighted with it.

And lastly on the international side, while it was down in the first six months, it was up 15% in the third quarter and it's trending up for the fourth quarter, so both domestic and international are performing at a point that we are very comfortable with the forecast.

Okay. Let me just clarify, on XPV and Speed Stacks, they are selling according to plan or better than plan?

Well, we never have an exact plan, that's too difficult. XPV is selling extremely well and Speed Stacks is selling at a desired rate based on our internal plan, particularly where the price was reduced to 24.99 from 29.99, which is not a close out, that was an experiment. That was an experiment on Speed Stacks -- I am sorry, at 39.95 and people are selling it now at 29.95 and as well as 24.99.

Okay.

Right on Play Along's plan.

Thank you very much.

Thank you.

Our next question, just a second, comes from Mr. Tony Gikas, from Piper Jaffray.

Good morning, Tony.

Couple of questions for you. What was the -- I think you said it, but I missed it. What was the contribution from CDI year-to-date?

One moment, Tony.

Okay. Second question, what's your view of the growth in the plug and play category this year? It seems to be tracking a little ahead of our expectations thus far, and I have a couple of quick follow-ups.

On that one, Joel will give you the answer in a moment. Regarding the plug and play TV games, we did have a problem on our hands last year, which we've said many, many times and I hope this can be the end of that. We've worked through those problems with our retailers. I would say 85% to 95% of those products have disappeared. It is a little bit difficult when you have product selling at 8.99 or whatever price and your regular products are at 20. Putting that aside, our plug and -- our regular plug and play TV games are doing extremely well at retail, Tony. Our retailers are excited about the future of it and one of the other things that happened on it. Now, it's considered a basic product line from our retailers and they are making more margin on it than they were in the past. So, they're delighted and delighted to continue it, because most of our retailers are now making in the 30-40% margin on it, whereas in the past like Ms. Pac-Man and Pac-Man in many cases were sold at cost. So our retailers are happy with it, we are happy with it. We're introducing many new items for it. We are working on something that we are not ready to talk about, kind of evolutionary/revolutionary for the category. But, we are not showing that at the Toy Fair and the development on it is not completed and we can't say it's a done deal yet, but we've excitement about the potential of taking it in another direction in addition to where it is now.

And Tony on the CDI contribution, it was $81 million for the quarter, 107 million for the nine months.

Okay. And then, could you just give us a little bit of an update on pricing trends overall? Have you been able to push some slight price increases through this year? And specifically maybe just comment on Wal-Mart, who has been very public recently about lowering price on product a little early this year or is that just typical for Wal-Mart at this point in time?

This is Jack speaking, Tony. I would say that I saw the same announcement from Wal-Mart this morning that they're reducing prices on over a hundred toy items for the season. I would say, price increases have been difficult. I think what you need to do in some cases and we and other companies are working on is changing packaging, making certain packages smaller for the future to pick up a point or two. Price increases in itself on the present configuration exactly the same item is difficult. I think there is a trend to some smaller packages, which saves cost of packaging, cost of freight, and gives the retailer more dollars per square foot. So, I think you'll see that from us and other companies beginning in 2007, and we're always looking where we can to save margin, but just to raise the price on the same SKU is very difficult to beat.

Okay. And would you say that the price cuts at Wal-Mart are typical of previous years or are they being more aggressive this year?

I can only speak for our products, Tony. I don't really know. I don't even know what we have on that 100 list and what prices they would be reducing it to.

Okay. And then I noticed that you had a slight loss on the joint venture for the video game, joint venture with THQ. What are the annual expenses running there? It has been a while since you've had a loss on that line item.

Yes. More -- we are closer to the platform transition so the carry-over sales have been pretty low. We have about $200,000 a quarter. We are amortizing our investment in the JV, and in addition, we've got about 1.7 million in direct costs that are attributable to the JV for the things that we are involved in. So, between those two -- in a light quarter like this, historically it's more so the carry-over sale that drives the number, and it was much lower because of the place in the transition.

The 1.7 of direct cost, what sort of items are in there? That seems to me to be a little higher than I recall it was historically?

No. That's what it's pretty much been. We've got IT people involved in the development and approval process. We've got marketing people that are involved in promotional opportunities and such. But it's been much consistent, the same core group of people in there, benefit loads and things like that, so runs around $400,000 and change per quarter.

Okay. And then the contribution from CDI during the quarter was pretty significant. If you back that out, it looks like, sort of, the underlying or core growth rate was a negative number. Is that a fair way to look at it or is some of this product replacing other product or cannibalizing some of your other product lines?

I think -- this is Jack answering that one, Tony. We experienced outside of CDI certainly a down -- significant down of our Fly Wheels brand and the old games, the TV games, the hardcore stuff, which was in our business last year, was totally out as we've discussed many times. Those will be the big two issues on the downside and, yes, CDI was a big contributor and our revenue would have been negative for the quarter, if not for having CDI. But I would like to emphasize to you and everyone else that once we acquire a company, it's part of JAKKS and there is this definitive synergies that flow through. We said it once, I don't like to be repetitious, as example, it was here at JAKKS' headquarters that we came up with the notion to bring Doodle Bears back and we thought that our Play Along division was the right place for it. We certainly guessed that correctly. They've done a spectacular job with it, so it would be hard to say, would that revenue go in Play Along and that revenue would go in JAKKS, and the same thing is happening with our CDI division already. Things go back and forth here. Once we acquire a company, we acquire some of the brand's licenses, their product lines, and in many cases some wonderful new employees in the upper management areas, and it truly synergizes. But, being that said and that's the way it will be in the future, being that said, Tony, certainly the CDI contribution was significant in Q3 and if CDI had never have happened, I would expect that revenue would have been down in Q3.

Okay. Thanks guys.

Thank you, Tony.

Our final question comes from Mr. Sean McGowan from Wedbush Morgan. Go ahead, sir, your line is open.

Thank you; Wedbush. I have a couple of questions to clarify. Joel, on the 80.8 in CDI, was that all domestic or was that the total from CDI?

That was in traditional, that was in the --

Is the question domestic being, domestic sales against LC sales?

No. Was any of that 80.8 included in the international number? I just want to make sure numbers are adding the right way.

No, that was not. Well, I can break out from the 80 what it was, but I will have to get that offline.

Okay, that would be helpful. And just to clarify too the sort of aggregate the other line that you had now you are including pets in that line?

Yeah, basically we were giving the same level of detail and discussion to lines that in the aggregate are less than 5% of the business at this point.

Right.

So, while they aren't similar and would otherwise be combined together, it's just more because of their size and they didn't warrant the level of discussion that we have historically given them.

No, when you were talking about what's going on in that line, did I here you say, contributing factor to that was XPV, is that [technical difficulty]?

Yes, the XPV is an outdoor product, which would come under the seasonal.

Okay. So, that number being 14.4, that includes the initial shipments of XPV?

Correct.

And pets, okay. Couple of other things was -- were shipments of Cabbage Patch up year-over-year -- not what the dollar figure was, but were the shipments up year-over-year?

I can't -- this is Jack, Sean. I believe they were, I don't have the specifics in front of me. I believe they are up against last year.

Okay. Would the same be true of Care Bears?

The best answer I can give you again, I don't have the numbers in front of me. I would say that retail sales of Care Bears are up over last year. I can't be specific to you, I can't give you an accurate answer, I don't have --

I guess, what I am trying to figure is, when you say something contributed to the quarter, are you saying that it contributed in a positive year-over-year sense or just there was revenue in the quarter?

Regarding our -- what we've put out in this conversation, they contributed, doesn't necessarily mean that it was more than last year or less than last year.

Yes, it just means that they were of significant size that warrants mentioning separately, but it could be up or down.

Okay, thanks for clarifying that. And last thing just because I missed this number when you were going through it quickly, Joel. What was the third quarter '06 international number?

Third quarter '06, 39.3 million.

And that's compared to 74.1?

No, 35.1.

I am right, right? Last year was 74.1 in the nine months?

Yes.

Okay. Thank you very much.

Thank you.

Thank you everyone for your valuable time. We look forward to speaking once again when we announce fourth quarter and year end. And I hope we see some of you later this afternoon when we have our analyst walk-through. Thanks very much everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a wonderful day.