JAKKS Pacific Inc (JAKK) 2007 Q1 法說會逐字稿

Good afternoon, my name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the JAKKS Pacific First Quarter 2007 Results Conference Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]

Ms. Rosenberg, you may begin your conference.

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 teleconference with JAKKS' Management to review the results for our first quarter, which ended March 31st, 2007.

On the call today are Jack Friedman, our Chairman and CEO of JAKKS Pacific, Stephen Berman, President and COO, and Joel Bennett, our Executive Vice President and CFO.

Mr. Friedman will first 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 line, current business trends -- and current business trends, before we open up the call to your questions.

Before I begin, I would 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 10K and 10Q, filed with the SEC, as well as other reports the Company subsequently files with the SEC from time to time. With that, I will turn the call over to Mr. Friedman.

Good morning, ladies and gentlemen. This is Jack Friedman speaking. Thank you for joining us this morning as we announce our First Quarter 2007 results. Well, we are off to a good start for the year, with the first quarter performance in line with both our expectations and the guidance we issued in our 4th quarter call in February.

Net sales increased 15.7% to 124.1 million and we earned 3.2 million or $0.12 per diluted share, a 33% increase compared to net income of 2.3 million or $0.09 per diluted share in the first quarter of 06.

Our first quarter sales growth validates the strength and appeal of our diversified product portfolio and our increasing investments in product development. First quarter's results were led by a number of products and brands, including several new products and line extensions of existing products.

The largest percentage of sales continues to come from our traditional toy category, where areas of particular strength were our WWE and recently launched extensive collection of Pokemon action figures, plug-and-play TV games, including our TV game based on the hit game show Deal Or No Deal.

A highlight for the quarter was our performance in CDI, demonstrating the continued consumer demand for large-feature role-play sets and dress-up items. While CDI has historically offered timeless princess dress-ups and role-play for girls -- and this continues to be a focus -- we also have expanded into boys role-play with our highly differentiated offerings, including Black and Decker tool sets and appliances, Pirates of the Caribbean playsets and WWE role-play.

Additionally, our pet toys continue to gain momentum as we expand our product lines and more mass and specialty retail distribution channels expand their pet products offerings.

Our financial position remains stronger and getting stronger. As of March 31st, 2007, our working capital was approximately 289.2 million, including cash and cash equivalents of 192.2 million.

We have some very promising new products in development, some of which are scheduled to launch late in the second quarter, including fashion dolls, dress-up and role-play products for Disney -- two Tween Sensations, Hannah Montana, and also the Cheetah Girls -- new XPV extreme performance vehicles, and our innovative plug-and-play EyeClops Bionic Eye. In addition, we will be launching our TV game Spiderman III to coincide with the May release of the movie. And we are preparing for Care Bears 25th Anniversary and feature film coming out this August and the World's Sports Stack -- Speed Stack Champions, which will be televised on ESPN in August.

Before I get more into details about these products and other opportunities, I would like to turn the call over to Joel Bennett for review of our financial performance for the quarter.

Thank you, Jack, and good morning everybody. First quarter net sales were $124.1 million compared to $107.2 million in the same period last year. Net income for the first quarter of 2007 was $3.2 million, or $0.12 per diluted share, compared to net income of $2.3 million, or $0.09 per diluted share, the first quarter of 2006. These figures include pre-taxed non-cash charges for stock-based compensation of $2.1 million and acquisition-related amortization of $3 million in 2007, and charges of 2.4 million for stock-based comp, and $3.7 million for acquisition-related amortization in 2006.

Now for our sales by product category. During 2006, we reorganized our business segments to better align our areas of focus and review. Traditional toys, craft activity writing products, seasonal outdoor products and pet products are the new categories. Our international sales our now spread amongst these three product categories. We will provide adjusted numbers for the first quarter of 2006 for year-over-year comparison.

Sales of traditional toys, which include TV games, wheels, action figures, plush, role-play, dolls and promotional products, were $102.5 million for the first quarter of 2007, compared to 83.3 million in the first quarter of 2006.

Traditional toys represent approximately 82.6% of overall sales in the quarter compared to 77.7 % last year.

Our craft, activity, writing products division, which consists primarily of our Pentech and Flying Colors product lines, had sales of $9.2 million in the first quarter of 2007, as compared to 13.1 million in the first quarter of 2006. The volume was due in part to our newly launched travel activities, large coloring pads and new magnetic paper doll sets, though lower overall due to fewer licenses. This area represents approximately 7.4% of overall sales in the first quarter of 2007.

In our seasonal outdoor division, including Funnoodle, Go Fly a Kite, and other outdoor products, sales were $8.2 million in the first quarter of 2007, compared to 8.5 million in the first quarter of 2006. This represents approximately 6.6% of overall sales in the first quarter of 2007, up from 7. -- oh, we have a typo. Growth in the category is driven primarily by the XPV outdoor flying products.

For the quarter, our pet division generated $4.2 million in sales, up 76% from the same period last year. This represents approximately 3.4 % of overall sales in the first quarter. Our pet product line continues to see increased sales as we expand our American Kennel Club and Cat Fanciers' Association product lines, among others, and more mass and specialty retail distribution channels expand their pet products offerings. We see this as a real area of opportunity.

International sales, which are included in each of the previous sales by category, were $16.7 million for the first quarter compared to $14.4 million for the same period last year.

Gross margins for the first quarter of 2007 were 36.7% as compared to 41.2% in the first quarter last year. The decrease in gross margin is due to product mix as well as the write-off of advances and guarantees related to various expiring licenses, amounting to $1.7 million or 1.4% of net sales. We expect to see higher gross margins beginning in the second quarter and carrying out over the balance of the year.

SG&A expenses in the first quarter of 2007 were approximately $42.1 million, or 34% of net sales, as compared to $41.9 million, or 39.1% of net sales in the same period last year. This modest difference is due to the full quarter impact of operations of CDI, which was acquired mid-quarter in 2006, offset in part by lower direct selling expenses.

Depreciation and amortization was approximately $4 million in the first quarter of 2007, compared to $4.5 million in the same period last year.

Stock-based compensation for the first quarter of 2007 was $2.1 million, compared to 2.4 million in the same period last year.

And operating margins for the first quarter of 2007 was 2.7 %, compared to 2.1% in 2006, due to the decrease in SG&A offset, in part by lower gross margins.

During the quarter, we posted nearly $1.5 million in profits from the video game joint venture with THQ, compared to a profit of $757 thousand for this comparable period last year.

Cash flow from operations was $22.7 million for the quarter, as compared to having used cash of 7.6 million in the same period last year. Our financial position remains very strong and we ended the quarter with $192 million in cash and cash equivalents, and working capital of 284.1 million.

Accounts receivable, at the end of the first quarter, were $75.1 million, compared to 67.8 million at the end of the first quarter of 2006, due to higher sales in 2007.

DSO's were 55 days compared to 57 days for the same quarter last year.

At the end of the quarter, inventory was $69 million, up from $62.2 million at March 31, 2006.

DSI's decreased modestly to 96 days, from 106 days at the end of Q-1 2006.

And capital expenditures for the quarter were $3.3 million. We expect capital expenditures for the full year to be approximately $11 to $12 million.

Base on our current financial position and first quarter results, we're comfortable with reaffirming our prior 2007 earnings guidance of $800 million in revenue, and earnings per diluted share of $2.39, which Jack will go through in his concluding remarks. With that, I will return the call back to Jack Friedman.

Thank you, Joel. Well, we're six weeks into the second quarter and business is looking good. With WWE, we continue to see strong growth and currently range from the number one to number three top seller in the action figure category, depending on the retail outlet. WWE remains the strongest boys property in both the UK and Australia.

The new Pokemon series on the Cartoon Network is receiving excellent ratings. And, with over 100 new Pokemon characters, sales and kid reception is very promising for Pokemon to be a long-term brand for JAKKS.

Our play-along division's new line introduction -- Puppy In My Pocket -- this spring has been quite good so far. And we have the line position that retail this fall to maximize its potential. We are excited about Puppy In My Pocket and will be launching the boys line extension, Monster In My Pocket, in 2008. Another new line, Sweet Secrets, will ship this coming fall.

Our overall Care Bears category is showing increased retail sales, and our strategy of SKU reduction and focus on core plush items seems to be paying off. We expect sales for Care Bears to be up, driven by our planned promotions around the 25th Anniversary of Care Bears, the new look of Care Bears, being introduced by American Greeting Cards, and a Fox Entertainment animated feature film released this Summer, and the new animated series airing on the CBS Geek Kid Block this Fall. This should help Care Bears remain on the upswing and remain in evergreen in the plush category.

We have also introduced our Cabbage Patch Kids Glow-in-the-Dark dolls for this fall. Glow- in-the-dolls -- glow-in-the-dark, as a feature in our items, has always performed well for us, and we expect this line to be a strong seller in our Cabbage Patch Kids line. We are seeing some softening in our Cabbage Patch Kids and Doodle Bear lines, and have been reducing the SKU and specials counts to carefully manage the category.

As we go into late 2007 and '08, we will focus on the Classic Kids and the 25th Anniversary of Cabbage Patch Kids in 2008.

A few of our big stories for this year are the two Disney Tween properties, Hannah Montana, and The Cheetah Girls, which will be hitting retail shelves this summer.

Under these cross-category launches CDI -- our CDI division will be doing role-play, play-along, the dolls and playsets and new plug-and-play TV game products are in development for late fall.

So far, our Hannah Montana as well as the Cheetah Girl lines are predicted to be amongst the hottest toys this year. Products in this lineup include the interactive Hannah Montana Concert Stage playset that chants for Hannah to come through the entrance; the Cheetah Girls' Luxury Bus Tour with the jacuzzi on the roof; a Hannah Montana dance mat, keyboard, and beautiful line of fashion dolls that sing famous Hannah Montana songs and the same -- similar offerings for Cheetah Girls. We have excellent placement at retail for the back half of this year.

In child guidance, our Bonnie line will ship this summer and will be supported by a 20-city Bonnie Birthday Tour and Be A Star sweepstakes on all musical Bonnie Child Guidance Toys -- and an American Airlines promotion.

Creepy Crawlers, Flying Colors Travel Activity, jumbo floor pads and magnetic tins based on licenses including Bratz and Littlest Petshop, are selling well at mass, as well as travel shops, including airport and truck stops.

New Thomas The Tank activities and Our Dora Talking [role desk] are expected to begin shipping in the second quarter.

New phone playsets in child guidance lines Notwood and Guerilla Blocks are both shipping later this year.

In our CDI division, we're working on several new Disney initiatives, in addition to the Hannah Montana and the Cheetah Girls lines, including a full-range based on My Disney Nursery Babydolls and realistic doll accessories, as well as interactive large playsets based on Disney Princess Enchanted Tales and other licensed and non-licensed pretend play lines.

Our kite line has good placement for this spring and summer season as we do -- as well as our Pet Products based on AKC, Cat Fanciers' Association, Disney nostalgia characters and our White Bites Oral Care treats for dogs.

We begin shipping our new act -- interactive hand-held games called Bio Bites and our new XPV Rad Flying Robot in the second half of the year. Fly Wheels, unfortunately, have basically gone away. But the XPV line we showed at Toy Fair has been modified to now include both the items and battery, so users -- so users are ready to run right at their purchase. The XPV range includes Flying Planes for RC enthusiasts at any level.

In Electronics, our Deal or No Deal plug-and-play game and Spiderman III TV games, which is included in Spiderman III feature shops at several key retailers, are both performing well, along with our kid-driven titles. The category is basically flat from 2006, but we will begin shipping many new titles later this year, including Dora Around the World, Pac-Man Gold, the new SpongeBob SquarePants TV game, Number One Versus 100 TV games, and Pirates of the Caribbean.

We will begin to ship our new Plug It And Play Eyeclop Bionic Eye this summer with a special display that will showcase the products features at retailers nationwide. EyeClops is shopping up to be a potentially strong line extension for our TV games category.

As you can see, we have many licensed and non-licensed new lines from all of our divisions that should well position us for the remainder of the year, including the busy holiday season. With that, I will open the calls to questions.

Thank you.

[OPERATOR INSTRUCTIONS] Please hold for just a moment to compile the Q and A's roster. Your first question comes from John Taylor of Arcadia Investment Corporation.

Morning.

Morning, John.

Hi, I got a couple of questions. You mentioned Fly Wheels is sort of fading away. I wonder if you could give us a sense of how big that replacement revenue chunk is going to be. And what did Fly Wheels contribute in those [inaudible] that we're going to have to make up? So that's the first question.

The second question is, Joel, I wonder if you could -- I may have -- I may know this, but I forget -- why the share count went down in the quarter and kind of what you think it's going to be for the year?

And then the third thing is on stock-based comp. why did that go down given, you know, you're looking for a -- a pretty solid year? I wonder if there was something behind that thing.

This is Jack, John. Regarding Fly Wheels, in 2006 it was down considerably. Frankly, from 2000 -- from 2005 and it was -- new sales last year were nominal, and it's -- we just wanted to emphasize and be upfront with everybody, it's virtually gone.

Okay.

Joel will answer the other questions.

As for the -- the share count in lower volume quarters, the convert shares may be excluded if they're anti-dilutive, which it was in this case. But for the full year, it will include the 4.9 million from the convert.

As for stock-based compensation, it's basically driven by the share price at the time the restricted shares are granted, subject to acceleration. So the same number of shares are -- are still out there. So there are no changes to the program. It's more a function of -- as I said, the -- the vesting and also the price at the -- the time of the grant.

Okay. Great. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] Your next -- your next question comes from Sean McGowan of McGowan.

Okay. I had a couple questions, too, guys. Joel, can you remind us of what first quarter '06 revenue would have been if CDI had been included the entire quarter?

120 million.

120 million. Okay. Thank you. Back on the share count question, I guess the -- the thing that most of us noticed was that last year you had the -- the higher share count. So, was last year's, for some reason, the calculation allowed for the higher share count? I mean, it's right around the same level.

Yeah, what -- in -- in this case, it's basically a function of -- and, you know, it's just a mathematical calculation and -- and this should only occur in the first quarter.

Oh.

But, because they add back the interest income, the proportion of shares added into the count relative to the interest income. It -- as I said, it's just -- it's a calculation in -- in Q-1 '07, it just happened to be anti-dilutive.

Okay.

And this should only occur in the first quarter.

Okay. Well, a question I had is why the -- both in -- you know, both in dollars and as percentage of sales, the direct selling expense was as low as it was. Was there something extraordinary in there? Do you think this is a sustainable level? It's the lowest percentage for the first quarter in something like eight years -- or nine years, I think.

No, you know, it's a -- a function of, you know, advertising. We're getting more efficiencies out of the warehouse. So some things are sustainable. Other things, it's more cyclical.

Now, isn't that -- well, isn't that be where you would take sales commissions?

Pardon?

Would -- would that be where you would have sales commissions?

Yes. Basically, in direct selling, it's our -- our warehousing expense -- it's advertising, co-op [inaudible - background noise] and sales commission.

Okay. So, there wasn't anything, you know, like off-setting -- extraordinary that drove that down in the first quarter?

No.

Okay. Can you give us an update on where things stand with THQ and, you know, resolving that dispute?

We're still in the process of selecting selectors who will then select an arbitrator. And it -- it's probably gone on longer than we'd expected, but it's still in process.

Yeah, I'd -- I'd say. I mean, isn't that basically where you were at the beginning of the year, with selecting the arbitrators?

Yes.

Well, is -- are arbitrators hard to find? I mean, can you help us to understand why it's -- I mean, I'm not saying you guys aren't doing something you shouldn't -- shouldn't be doing. But, like, why is it taking so long?

Oh, well, you have a lot of different personalities and ideas of what makes a good selector, and it's just a process. And I think both sides are -- are, you know, very interested in getting it done. So that we can focus on --

Okay.

-- the business, but, you know, even having said that, it's not a -- a distraction necessarily. It's just a process that we --

Right. Right.

-- are continuing to deal with.

Okay. Last question, any comment on your expectations, specifically for the second quarter?

No. [inaudible]

I'm sorry. What -- did you say no?

I said, "No, Sean."

Okay.

All I'm saying is business is -- as we said in the statement -- business is looking good for all of the quarters for the balance of the year.

Interesting.

And [inaudible] numbers for Q2.

Okay. Thank you.

Thank you.

Your next question comes from DeForest Hinman of Paradigm Capital Management.

Hi, Jack, I had a couple of questions. Can you give us some color on Rocky in the first quarter and maybe our expectations? You know, was it better than expected -- well, when we launched that product? And, you know, how do we look at that product for the remainder of the year? That's my first question.

Well, the product -- the -- the product came out in conjunction with the movie. It's -- it's basically a -- a collector's item not a -- not a kid toy. Sales were -- have been about on expectation. It's not a significant part of -- of our business. And we don't expect it to be significant in the future.

All right. And -- and --

In -- in fact, it's reasonably insignificant enough that I don't even know actually how much we did in sales on it.

All right. Can you just give us a little more color on Pokemon? Is it performing to our expectations or better?

Yes, Poke -- Pokemon is performing probably better than our initial ex -- expectations. We have had a couple of minor glitches, one of which was the -- Pika -- Pikachoo characteristics not the same proportion in popularity as to the first time around on Pokemon. And it's probably due to all of the various new categories. So we had -- we've had to have done a clean up on -- on -- on Pikachoo and -- and put less per assortment in shipments over the last -- over the last couple of months.

The Diamonds and Pearls new launch in April by Nintendo, from what I've heard, I don't know if it's fact, the -- the initial launch of it has taken place and the numbers are incredible. I've heard as much as 700 thousand pieces in the first two days of -- of sales. I don't know if that is accurate. And one of our big retailers did a -- an ad on our Pokemon characters, and -- and kind of in conjunction with that. It was very successfully last weekend.

So we're very enthusiastic about Pokemon. And we're well positioned for the fall ewith space at our retailers -- both big and small retailers. Yeah, we think it's going -- actually, we think it's going to be a great long-term brand for us. Not a -- not a quick here-and-there brand. We're --

So -- so the retailers -- are they as excited as we are, I guess?

I'm sorry?

Are the retailers as excited as we are with the products?

I think so. I think so. You know, it's a bit more specific to us than the retailers, but yeah, I think they're -- I'm sure they're very pleased with it.

All right. Thanks, guys.

Your next question comes from John Taylor of Arcadia.

Yeah, a couple of follow-ups. Joel, can you give us a sense of the timing of when Hannah and Cheetah are going to ship? In other words, kind of what percentage of the full channel load-in you might get shipped by the end of the June quarter? That's first question.

And then, is there much international opportunity with Disney doing -- with those two properties abroad?

And then a question about, kind of, product momentum. So I think you mentioned that Doodle Bears was tracking down, but Care Bears was firming up a little bit. So I wonder, are there any other sort of significant brands that you've called out to us as being key contributors, maybe in the last year or two -- other than Doodle Bears -- that look like they're a -- a revenue replacement challenge?

This -- this is Jack, John. I would say, if there was something specific of -- of consequence up or down, we would say it in our conference calls. We --

Okay.

-- want to create as much clarity as -- as -- as we can with you guys. Outside of Doodle Bears -- no, Doodle Bears probably got a bit saturated last year. We probably -- probably shipped more SKUs in quantities than the marketplace could accept, unbeknownst to us, of course. And it's just backing off and we're dealing with it. We are professionals at that.

Anyways, the -- the fun part of your question, Hannah Montana, as well as the Cheetah Girls, will be launching over 40 different SKUs during late Spring and throughout early Fall, including fashion dolls and playsets, role-play, plug in -- plug in and play, etcetera, etcetera, etcetera.

The -- the -- the enthusiasm for it is near spectacular, but sometimes enthusiasm doesn't work out. So -- so we're not -- we're not throwing in any significantly -- any -- any significant increases on our forecast for it. Of course, it has not hit retail yet. We are beginning to ship it in small quantities out of the far East -- beginning of June. So we really won't have products on shelves until middle of the Summer and then it should roll out [inaudible - background noise] in big quantities. Both -- that applies to both Hannah and Cheetah Girls.

Okay. So --

We are very excited about them. Our EyeClops launches in late Spring. The other part of your question -- Hannah Montana and Cheetah Girls, so far, does not offer potential -- any true potential for '07. We're hoping, and we hear buzzing, that there will be opportunities in -- in '08 internationally.

Okay. Thanks. Let's see, so the bulk of the -- the load [inaudible] are going to take place, it sounds like, in the Third Quarter on those two properties, right? Can you hear me?

Yes.

Yeah. The -- the bulk of the ship-ins on those two properties will be in the -- in the September quarter?

Correct.

Okay. And then Joel, what was the Interest Add Back related to the convert -- the EPS calculations?

1.1 million.

Okay. Great.

Pre-tax.

Yeah.

[Inaudible].

At this time, there are no more questions. Mr. Friedman, do you have any closing remarks?

Just thank you all very much for your time. Pleasure speaking with all of you. And we're looking forward to a very good year at -- here at JAKKS. Thank you all very much.

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