JAKKS Pacific Inc (JAKK) 2006 Q4 法說會逐字稿

Gentlemen, you may proceed.

Thank you, operator. Good morning, ladies and gentlemen. This is Genna Rosenberg, Vice President of Corporate Communications for JAKKS Pacific. Thank you for joining our review of our preliminary results for our fourth quarter and fiscal year ended December 31, 2006.

With me on the call today are Jack Friedman, Chairman and CEO of JAKKS Pacific; Stephen Berman, President and COO; and Joel Bennett, our Executive Vice President and CFO. Mr. Friedman will provide an overview of the quarter and our operational results and then Mr. Bennett will provide detailed comments regarding our financial results. Mr. Friedman will then conclude the prepared portion of the call with highlights of our product lines and current business trends before we open up the call with your questions.

Before we begin, I would d like to point out that any comments made about our future performance, events or circumstances including the estimates of sales and earnings per share for 2007 and forward-looking statements are subject to Safe Harbor protection under the 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 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 return the call over to Mr. Friedman.

Good morning, ladies and gentlemen. This is Jack Friedman speaking. Our fourth-quarter and full-year 2006 results ended the year with positive momentum in many of our product categories. During the year we continued to lev our strong operating performance with product development and merchandising expertise by expanding product lines, adding new products and capitalizing on classic and well-known Evergreen license opportunities. We also continued to add new retail customers and improve our products' placement on retail shelves.

We strengthened our balance sheet with strong cash flow during the year and ended 2006 with $184.5 million in cash and equivalents and with $63 million in operating cash flow. Our sales in 2006 increased 15.7% to $765.4 million and our pro forma income increased 23% to $86.7 million or $2.74 per diluted share. The strong results were primarily due to robust sales in several of our traditional toy segments including dress up and role play items, action figures, soft dolls and plush.

We acquired our Creative Design International division, CDI, over a year ago now and the role play category continues to thrive at retail. CDI performed ahead of our expectations delivering sales of $181 million for the year driven in part by the continued popularity of classic Disney princesses and fairies as well as their overall execution of a vast product portfolio of pretend play items.

We had other wonderful contributors throughout the year as well. Our Evergreen Cabbage Patch Kids dolls and Care Bears plush lines sold very well in 2006 and we have some new line extensions for both brands in 2007 with Care Bears who is turning 25 this year and getting a whole new look and the Cabbage Patch Kids who are now toddlers are growing up.

In action figures, WWE was a strong seller in 2006 and we expect our new Pokemon toy line to also be a robust contributor for 2007 and beyond with shelf space secured at every major retailer. While our Basic Flywheels and Plug N Play TV games experienced lower sales year-over-year, XPV boosted our seasonal category and numerous Plug N Play TV game titles sold very well. In 2007 XPV is being extended into a comprehensive line of extreme performance vehicles and we have many new Plug N Play titles in our lineup for the fifth year going.

In a little over 11 years we have reached annual sales of over $760 million and established our Company as a leader in the toy industry. JAKKS' history is one of sound growth for a balanced combination of product development, licensing agreements and strategic acquisitions. I personally believe that one of the most inspiring aspects of this growth has been our ability to adapt to retail changes, age compression and constantly reinvent our products in a fickle consumer market.

Our business model and entrepreneurial atmosphere has allowed us to continuously bring our expansive areas of expertise to newly (technical difficulty) and create new products for all types of consumers. In 2007 we will continue to focus on adding new products that complement our portfolio, execute on meaningful line extensions of our current thriving lines; and we will work to expand on licensing relationships across our diverse product categories where it makes the most sense.

One example of this licensing strategy is our new line based on the hit Disney, tween properties, Hannah Montana and The Cheetah Girls. For these two properties we have our play along team executing on fashion dolls and play sets and our CDI team working on a role play and dress up items all of which we unveiled a few weeks ago to the trade and the press at the International Toy Fair in New York. Products for these two properties are expected to hit retail shelves later this summer.

Before I get into more details about our exciting new products and initiatives, I would like to turn the call over to Joel Bennett for a review of our financials for the fourth quarter and the full year '06.

Thank you, Jack. As we stated on our press release, the results for this quarter and year-end are preliminary pending the completion of the review of our annual goodwill valuation by our outside auditors. This should be completed within the next two weeks.

Fourth-quarter 2006 net sales increased approximately 43.4% from $238.3 million or (technical difficulty) from last year to $238.3 million compared to $166.3 million in the fourth quarter of 2005. Net income for the fourth quarter of 2006 was $23.2 million or $0.73 per diluted share. This compares to $9 million or $0.30 per diluted share for the same period last year. Included in the 2006 results were non-cash stock-based compensation charges of $1.7 million and acquisition-related amortization charges of $4.1 million compared to $4.2 million and $1.8 million respectively in the fourth quarter of 2005.

Pro forma net income excluding these charges was $26.9 million or $0.84 per diluted share in Q4 of 2006 and $12.7 million or $0.41 per diluted share in Q4 2005. Net income for the year ended December 31, 2006 was $72.4 million or $2.30 per diluted share on net sales of the $765,400,000 compared to 2005 earnings of $63.5 million or $2.06 per diluted share on net sales of $661.5 million in 2005. Included in these results were non-cash stock-based compensation charges of $6.5 million and acquisition-related amortization charges of $14.5 million compared to charges of $3.4 million and $7.0 million respectively in 2005.

Pro forma net income excluding these charges was $86.7 million or $2.74 per diluted share in 2006 and $70.4 million or $2.28 per diluted share in 2005.

Sales of traditional toys which include wheels, action figures, plug it in and play TV games, plush, dolls, promotional products and role play were $188.1 million for the fourth quarter and $569.6 million for 2006 or approximately 74% of overall sales for the year. This compares to $477.9 million and approximately 72% of overall sales last year.

CDI, our girls dress up and role play division acquired in the first quarter of 2006 contributed sales of $55.3 million for the quarter and $163.3 million for the year in this category. This strong performance along with increasing contributions from boy's action figures, vehicles, dolls and plush offset difficult year-over-year comps of our TV games and Flywheels productlines which both had strong sales in 2005. The decline in TV games was largely due to the discontinuation of our hard-core game retitles.

Our kid driven and adult lifestyle titles continue to sell well and we believe TV games will continue to be a core category for years to come.

Our art activities and writing instruments category which consists primarily of our Pentech and Flying Colors divisions had sales of $9.1 million for the fourth quarter and $46.7 million for the year in 2006 down from $56 million in 2005, approximately 6% of overall sales for the year. The year-over-year variance is due to several factors including lower sales of our compound business and lower-than-expected sales with some of our licensed items.

Other product divisions including seasonal lines, Funnoodle, Go Fly a Kite, other outdoor products and our pet productlines increased to $16.4 million for the fourth quarter and $50.2 million for the year in 2006 from $28.6 million in 2005. This area represented approximately 7% of our overall business for 2006. Sales were driven by a combination of demand of our XPV outdoor flying products and pet products.

2006 represented our first full year of pet products and momentum continues to build as we add new licenses and products. For the year, pet products generated $18.4 million in sales up from $9.3 million in the last nine months of 2005 due to strong product expansion including the American Kennel Club pet line and oral care dog treats White Bites.

Our international sales were up for the quarter with sales of $24.7 million versus $16.4 million for the period in 2005 and were relatively flat year-over-year at $98.8 million in 2006 and $99.1 million in 2005. This represents approximately 13% of overall sales in 2006. The increase in the quarter was primarily to CDI's contribution of $17.8 million and an increase in our customer base offset by lower-than-expected sales of some of our Plug N Play items, Tell-A-Story and TV games.

Gross margin for 2006 were 38.5% down from 40.3% last year due to a shift in the product mix and also to the previously announced recall of our rechargeable battery.

SG&A expenses for the year were $202.3 million or 26.4% of net sales. This compares to $178.7 million or 27% of net sales in 2005. The year-over-year dollar variance is primarily due to higher acquisition-related amortization and stock-based compensation as well as the addition of the CDI operation.

Depreciation and amortization increased $7.9 million to $18 million in 2006 primarily due to the CDI acquisition. Stock-based compensation for 2006 increased $3.1 million to $6.5 million due in part to the increase in the stock price over the course of the year. Our operating margins for 2006 was 12.1% compared to 13.3% in 2005 due to the increase in amortization and to a lesser degree SG&A.

In 2006 we recorded profit of $13.2 million from our WWE video game joint venture with THQ compared to $9.4 million in 2005. The increase was due to strong demand of our new Smack Down versus Raw 2007 for Microsoft Xbox 360, Sony PlayStation2 and PSP systems.

Cash flow from operations in 2006 was $63.9 million compared to $71.1 million in 2005. Our financial position remains very strong and we ended the year with $184.5 million in cash and cash equivalent and $291.4 million in net working capital.

Accounts receivable were $153.1 million at December 31, 2006 down from $182.8 million at the end of the third quarter and up from $87.2 million last year mainly due to the effect of higher sales volume.

For 2006, DSOs were at 58 days up from 56 days at the end of the third quarter and from 47 days at September 31, 2005.

At the end of 2006, inventory was $76.8 million down from $86.7 million at the end of the third quarter and up from $66.7 million at the end of 2005. [DSIs] increased slightly to 55 days at the end of 2006 from 50 days at the end of the third quarter and was down significantly from the 78 days at the end of 2005.

Capital expenditures for 2006 were $11.4 million and we expect capital expenditures in 2007 to be in the range of $11 million to $12 million. Based on our current financial position we're confident that we're able to continue to invest for internal growth by creating new products and securing new licenses and pursue complementary acquisitions.

With that, I will return the call to Jack Friedman.

Thank you, Joel. 2007 is off to a good start. At this point more than halfway through the first quarter we are expecting modest growth for the quarter and record sales for the year. We have an excellent mix of new products planned for 2007 based on entertainment content that is highly popular with young kids and consumers of all ages today. We are working hard to achieve growth from every area of JAKKS Pacific in 2007 and that is where our focus will remain.

In boys action, our Pokemon toys launched early in January based on hugely popular show which now airs ten times per week on Cartoon Network with 52 new episodes on programming and 100 new Pokemon characters available to us. The product mix will be aggressive and the sales have already exceeded our expectations so far.

Our XPV Xtreme Performance Vehicle was top hot list in 2006 and for 2007 we will offer an array of extreme radio control flying toys including a flying robot. In child guidance, we are enthusiastic about our new Barney line and new phone playsets for preschoolers and we expect to see upside in this category for 2007 with a Barney 40-city tour and on pack sweepstakes on our child guidance barney's toys at retail.

We're very upbeat about our upcoming Hannah Montana and The Cheetah Girls dolls dress up and role-play toys based on the two hit Disney tween sensations. We are working closely with Disney to maximize the opportunities for these tween loved shows how.

In 2006, introductions of boys role play brought a new area into the marketplace from our CDI division which we expanded for 2007 with items such as a large Pirates of the Caribbean playset, dress-up items based on Nickelodeon's Go Diego Go property and an expanded Black & Decker tool and appliance line with light sound and moving parts. We will be also introducing a kid friendly WWE role play line from our boy's action team as well.

Additionally we are offering new large interactive playsets that truly create a magical experience for young kids such as the Disney Enchanted Tales interactive Salon and Throne and much more princess dress-up and role play. Dora the Explorer dress-up sets featuring beautiful Princess Dora dresses, tiaras and shoes and a line of baby dolls based on My Disney Nursery also joined JAKKS products line for the year 2007.

Contemporary classics from our Play-Along division, Cabbage Patch, Doodle Bears and Care Bears all have performed well and we have continued line expansions in the works for 2007. Cabbage Patch Kids are growing up and this year we will introduce Little Sprouts, a small doll version of the kids to the line.

Care Bears have a feature film coming out this August and we have an extensive marketing program planned with American Greetings to showcase the brand as the Care Bears celebrate 25 years on the market with a new look. Our Doodle Bear line continues on with all types of Doodle Bears, pets, dolls and monsters featuring fun and diverse new features.

Speed Stacks StackPack's was the winner of virtually every toy award in 2006 and we have new Speed Stack sets to meet the demand from kids sport Stackers nationwide including a competition set and glow in the dark cups that add a new element of difficulty and challenge to the popular sport. We expect to be working again with ESPN this year to televise the World Sport Stack Stacking championships in August.

We shipped our new Deal or No Deal TV games in the first quarter as our simple TV games platform is perfect for these types of entertainment trivia games. Our Tell-A-Story line did not meet our expectation, however, we do have a number of other new initiatives planned that utilize the simple to use Plug N Play technology including a slew of new core TV game titles to add to the lineup such as our Dora Around the World unit, Star Wars Millennium, Falcon, Jeopardy and Spiderman 3, the movie edition, as well as our VMigo virtual pet gaming system.

Sales of our JPI pet line continue to grow as we expand our American Kennel Club and Cat Fancy Association licenses among others. While more accounts are picking up our White Bites oral care treats for dogs, we will be shipping a new Arm & Hammer baking soda infused version later this year.

License activities based on Thomas the Tank, Bob the Builder and top Nickelodeon properties from our Flying Colors line are expected to do well for us this year and Dora continues to be a driver at retail with new play patterns and refreshers on key items.

Travel activities, large coloring pads and new magnetic paper doll sets are all well placed this year at our major customers. We have many new products coming out of every JAKKS division for this year. We are confident in our formula and that our new products will be well received by kids of today.

For our initial 2007 guidance, we expect to achieve net sales of at least $800 million and net income of at least $75.8 million and diluted earnings per share of approximately $2.39 which represents increases of approximately 4% this year. Later in the year we will have better visibility of our sales at retail for the full year. The forecast reflects modest but healthy contributions from our diverse product offering across the board.

This forecast also anticipates a modest increase in first quarter with the sales volume in the range of $114 million to $120 million, and earnings per share in the range of $0.07 to $0.10 per diluted share.

With that I will open the call to questions.

(OPERATOR INSTRUCTIONS) Arvind Bhatia.

First question is on the JV for the quarter. Just curious how you guys are recording it? Is that being recorded on the old terms setting aside as reserve or just curious how that is being handled currently? And then for next year I guess along the same lines, are you going to for 2007 assume recording it I guess using the same formula or anything different there?

Yes. Basically it is business as usual recording it as usual. As far as next year the only thing that we are forecasting is a little lower than this year based on volume because those forecasts are preliminary at this point.

Got it. I guess if you can provide similar color on -- you mentioned on Pokemon -- sales are exceeding expectations. Maybe help us understand how large this can be? I know you don't want to get into specific numbers but give us some quantitative feel for what you heard at the toy show?

Basically so far they are meeting our internal expectations. I think they are exceeding our retailer's expectations and on most shelves most of the product is sold out and we're getting new product to shelf as soon as possible. We are facing right now Chinese New Year which puts a little crimp on our ability to feed the marketplace.

Okay. And then for CDI, is there an assumption in the model for growth next year? And if that's true, are you assuming similar growth as you are indicating for the overall company or CDI will be about that -- below that? Just want to get a feel.

I think we are viewing our entire line and all our divisions as a bunch of singles. We're forecasting conservatively. The last thing we want to do is not meet a forecast. And as the year rolls out, if things are looking as good as we hope they will we will increase or update our forecast.

Great. I will come back with more later. Thank you.

[John Taylor].

Good morning. I want to pursue this joint venture thing a little bit more too. My understanding is that the contract, the agreed to royalty rate that you guys get from the joint venture expired during the course of the summer. I'm just curious on what basis you are -- what rate you are accruing going forward? And in addition to that, is some of the accounts receivable increase related to the fact that whatever you've accrued is not being collected? I think you might want to talk about this a little bit more. Thanks.

This is Jack. I will take the first part of that question. Our preferred return agreement from our point of view continues as is unless there is dramatic changes in the marketplace or the potential profitability of the productline. Regarding the accounts receivable, Joel will answer that part.

Basically year-over-year the DSOs are up a little bit and a lot of that is more reflective of the timing within the quarter that the sales were made. Basically we have established reserves for accounts that may not be collectible but we are adequately provided in those areas and we're very comfortable with all of our inventory and the receivables.

So of the -- can you give me a sense of -- what was it -- $12 million, $13 million you guys accrued from the JV --?

That actually gets accrued to the investment in the joint venture. So it is not in accounts receivable and it's not reflected in AR balance or DSOs.

Okay, Great. Thank you.

Gerrick Johnson.

Two questions. One, I was wondering if you could quantify the total impact of the battery recall on gross margins? And two, if you could comment on a level of inventory in the channel and whether or not you are comfortable with what is out there? Thank you.

Is that whole question regarding inventory related to the battery or other --?

No, no, it's a separate question.

In terms of the battery, we see very little problem with it. We are probably anticipating less than 1000 pieces getting [packets]. It will have no impact on us and we are replacing batteries and the factory that made the batteries for us are responsible for the replacement. As far as other inventories out there as of the end of the year going into this year, I can't quantify that with an exact number but I would say from my point of view I don't think our inventories at the retail marketplace have ever been lower.

Okay, now on the batteries recall something you could quantify the basis point impact to gross margins?

It was about 40 basis points.

Okay, thank you.

That reflects the replacement batteries to the end consumer and also in the channel at retail.

Great. Thanks a lot.

Sean McGowan.

Thank you. I'm going to ask you to repeat two things from before and then something that Arvind was asking about before. Joel, could you repeat what the pets numbers were for the quarter and the year? And also repeat your CapEx expectations for the year?

CapEx, we're expecting between $11 million and $12 million. Pets were $18 million and change for the year -- hold on -- it was $6.3 million for the quarter and $18.4 million for the year.

Okay. And Arvind was asking before about CDI growth. I'm just interested in what Disney is doing to promote the whole princesses category now that the fairies movie has been puts off? And specifically up against Mermaid last year, are you are expecting the Disney Princess line to be up this year?

We're finding at retail and particularly from Geoffrey Greenberg who runs our CDI division -- they have the Enchanted Tales and all the princesses looking forward to having a great year with it.

So is Disney putting a lot of marketing behind the Enchanted Tales?

I would use the word a lot, yes.

Okay. All right, thank you.

At this time there are no further questions.

We thank you all very much for participating in our call and we look forward to giving you good news throughout the year. Thank you all very much.

This concludes today's conference. You may now disconnect.