JAKKS Pacific Inc (JAKK) 2007 Q2 法說會逐字稿

Good morning. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the JAKKS Pacific Second 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.)

Thank you. Ms. Rosenberg, you may begin your conference.

Thank you. Good morning, ladies and gentlemen. This is Genna Rosenberg, Senior Vice President of Corporate Communications and Investor Relations for JAKKS Pacific. Thank you for joining our teleconference with JAKKS' Management to review the results for our second quarter and first six months of 2007, which ended on June 30.

On the call today are Jack Friedman, our Chairman and CEO; 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 and current business trends before we open up the call for your questions.

Before we 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 the Safe Harbor Protection under the federal security laws. The 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 the 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.

And with that, I will turn over the call to Mr. Friedman.

Good morning, ladies and gentlemen. This is Jack Friedman. Thank you for joining us this morning as we announce our results for the second quarter and first six months of 2007.

Well, with five months to go until the holidays, we are very comfortable with our previously issued guidance of $800 million in sales and earnings of $75.8 million, or $2.39 per diluted share. Our second quarter performance was well in line with our expectations. With net sales increasing to $129.5 million, we earned $5 million, or $0.17 per diluted share for the quarter compared to net income of $6.4 million, or $0.22 per diluted share in the second quarter of 2006.

The traditional toy category drove sales in the quarter, with several lines exceeding our expectations. The most significant contributions came from our Disney role-play and dress-up toys, WWE and Pokemon action figures, and our Plug It In & Play TV games. In addition, our pet products business continues to grow as we further expand our product lines at retail. Our financial position remains very, very strong, and as of June 30, 2007, our working capital was approximately $292.1 million, including cash and equivalents of $180.9 million.

We constantly strive to develop and maximize opportunities for our Company, and we have very promising new product campaigns planned for our product categories, including boys' action, pretend-play products, dolls, vehicles, preschool, plush, crafts and writing instruments, electronics, pets and outdoor products for the second half of 2007 and, of course, beyond.

Our marquee introduction for the second half of 2007 centers around our Disney tweens sensation, Hannah Montana. Tween pop star Miley Cyrus, a remarkable and likable young woman, plays Hannah Montana, and she has certainly stolen the hearts of America. Hannah Montana was nominated last week for an Emmy in the category of Outstanding Children's Programming. Its star, Miley Cyrus, was recently featured in a People Magazine cover story and just about every other teen magazine in America. She recently made highly viewed appearances on the Good Morning, America concert series and on the Tonight Show with Jay Leno. And her new CD, "Hannah Montana 2: Meet Miley Cyrus," launched at number on the Billboard Top 200 chart last week, making Cyrus the youngest recording artist to have two number-one albums in less than a year.

We are extremely proud to be the master pro licensee for Hannah Montana, just one of the comprehensive programs we have in full swing with Disney, and we are excited about the many opportunities to develop product lines for this and other properties. We value the meaningful alliances we have cultivated throughout the years with our partners, many of which own or represent the most popular and well-known brands and characters of our time.

Hannah is just one line we're excited about for this season, but before I get more into details about the rest of our products and other growth opportunities, I would like to turn the call over to Joel Bennett for review of our financial performance for the second quarter and six months.

Thank you, Jack. Good morning, everyone. Second quarter net sales were $129.5 million, compared to $124 million in the same period last year. Net income for the second quarter of 2007 was $5 million, or $0.17 per diluted share, compared to net income of $6.4 million, or $0.22 per diluted share in the first quarter of 2006. Net sales for the first six months of 2007 were $253,600,000, compared $231.3 million in the first six months of last year. Net income for the first six months of 2007 was $8.2 million, or $0.29 per diluted share, compared to net income of $8.7 million, or $0.31 per diluted share in the first half of 2006.

Now we'll give you our sales by product categories, and as a reminder, our international sales are now spread amongst the categories and no longer broken out separately. Sales of traditional toys, which include action figures, vehicles, electronics, plush, role-play, dolls and promotional products, were $108.6 million for the second quarter compared to $99.3 million in the second quarter of 2006. For the first six months of 2007, sales of traditional toys were $211.1 million versus $182.6 million in the comparable period last year. Traditional toys represented approximately 83.9% and 83.2% of our overall sales in the last three months and first six months of 2007, respectively.

Sales in the quarter were driven by our action figures and pretend-play products, including WWE, Pokemon, and Disney role-play items. We did see lower-than-expected sales in a couple of our lines, including Doodle Bear, and some shipping delays in a few of our new Hannah Montana and XPV items have pushed some sales into the third quarter. However, we don't anticipate any lost shelf space.

Our craft activity and writing products category, which consists primarily of our Pentech and Flying Colors product lines, had sales of $11.5 million in the second quarter of 2007 and $20.7 million in the first six months. This compares to $15.1 million and $28.2 million, respectively, in the comparable periods of 2006. This represents 8.9% of total sales for the quarter and 8.2% of sales year to date. Next year we will have activity and writing products featuring Pokemon and Thomas the Tank as well as several other new introductions, all of which we expect will increase sales in this category.

Sales of our other products, including seasonal outdoor products and pet products, items such as Funnoodle, Go Fly a Kite, XPV flying products, and JAKKS Pets, sales were $9.4 million in the second quarter of 2007 and $21.8 million for the first six months. This compares to $9.6 million for the second quarter of 2006 and $20.5 million for the first half of 2006. This represents approximately 7.3% and 8.6% of overall sales in the second quarter and year to date, respectively, in 2007. Sales in these categories were led by AKC pet toys and treats, kites and Funnoodle pool toys.

Gross margin for the second quarter of 2007 was 35% as compared to 39.7% in the second quarter of last year. For the first six months, gross margins were 35.8% as compared to 40.4% in the first six months of 2006. The decrease in gross margin is due to product mix, which included lower-margin seasonal products and some closeout sales. In addition, we reported write-offs with advance and guarantees related to expiring or abandoned licenses in the amount of $1.7 million, or 1.3% of net sales for the quarter and $3 million or 1.2% of net sales for the six months.

In addition, we had some new products for which we didn't have much revenue. However, we did have to start amortizing the tools and molds. This resulted in an impact of 40 basis points to the gross margin. We do expect to see higher gross margins approaching historical levels over the remainder of the year.

SG&A expenses in the second quarter of 2007 were approximately $38.8 million, or 30% of net sales as compared to $40.3 million, or 32.5% of net sales in the same period last year. For the first six-month period, SG&A expenses were approximately $81 million, or 31.9% of net sales as compared to $82.2 million or 35.6% of net sales in the same period last year. This increase is due to lower direct selling expenses, including advertising, and offset in part by the full quarter impact in Q1 '06 by the addition of the CDI operations, which was acquired mid-quarter, first quarter '06.

Depreciation and amortization was approximately $4 million in the second quarter and $7.9 million for the first six months of 2007, compared to $4.2 million and $8.7 million for comparable periods in 2006. Stock-based compensation for the second quarter and first half were $2.1 million and $3.7 million, respectively, as compared to $1.4 million and $3.7 million in the same periods last year.

Operating margins for the second quarter and first six months of 2007 were 5% and 3.9%, compared to 7.2% and 4.8% in 2006, respectively, primarily due to lower gross margins, offset in part by the decrease in direct selling expenses.

During the quarter, we posted $700,000 in profits from the video game joint venture with THQ, bringing the JV contribution to $2.2 million for the first half of the year. This compares to $200,000 and $1 million for the comparable periods last year. We will be releasing Smackdown vs. Raw 2008 in November of this year for all video game consoles, so we're excited about that release.

Cash used by operations for the second quarter was $6.1 million, compared to $12.8 million in the same period last year. For the first six months of the year, operations provided cash flow of $16.3 million, compared to having used $20.4 million in the same period in 2006. Our financial position remains very strong, and as of June 30, our working capital was approximately $292.1 million, including cash and equivalents of $180.9 million. Accounts receivable at the end of the second quarter were $89.8 million compared to $85.5 million at the end of the second quarter of 2006, consistent with the higher sales in 2007. DSOs were 62 days, comparable to the same period in 2006.

At the end of the half, inventory was $78.6 million, up modestly from $76.8 million at the end of the first half of 2006. DSIs decreased, however, to 102 days from 112 days at the end of the second quarter 2006. Capital expenditures for the quarter and first six months were $7.1 million and $9.4 million, respectively, and we expect expenditures for the full year to be approximately $14 million.

Based on our financial position and first and second quarter results, we're very comfortable in reaffirming our prior guidance of $800 million in revenue and earnings per diluted share of $2.39.

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

Thank you very much, Joel. We have a full portfolio of promising products slated for the upcoming holiday season, many products for the two Disney tween sensations, Hannah Montana and also the Cheetah Girls. Our new line of XPV Extreme Performance vehicles--we're particularly excited about our Diamond and Pearl Pokemon toys and our innovative Plug It In & Play Eyeclops Bionic Eye--along with a special twenty-fifth anniversary silver Care Bear, new Bio-Bytes hand-held electronics, Sweet Secrets, and many more Puppy in My Pocket items highlight our drivers at retail nationwide this holiday season.

We enter the second half of the year extremely optimistic about our positioning in the marketplace. Business is looking really good. With WWE, we continue to see strong sales and currently remain a top-five seller in the action figure category at retail. WWE also remains one of, if not the strongest boy's property in both the U.K. and Australia.

Our new Pokemon toys are selling through cleanly at retail, and our new Diamond and Pearl figures, play sets, and accessories are doing extremely well. We will begin shifting our new interactive handheld games called Bio-Bytes and a full range of our XPV Extreme Performance Vehicles in the second half of the year, including our Rad, Mini-Rad, Mini-XPV, and Super Terranator. The line is placed at many of the retailers and should extend the brand into a strong year two for our XPV category. The XPV line we showed at Toy Fair has been modified to now include both the item and battery so users are ready to run right after they're purchased.

Our Puppy in My Pocket line performed well in the first half of the year, and we have new Puppy in My Pocket and Kitty in My Pocket items for this fall. Another new line, Sweet Secrets, is also hitting retailers this coming fall and is very well placed.

We expect sales for our Care Bears to be up in the second half of the year, driven by our planned promotions around the twenty-fifth anniversary of Care Bears, launching with lots of hoopla in New York City on September 25. The Fox Entertainment Care Bears animated feature film being released this summer and the new Care Bears animated series airing on CBS Geek Kid Block this fall should also help this category. These beloved characters remain popular and continue to contribute to our revenue and profitability. They have truly become an evergreen in the plush category.

New Cabbage Patch Kids Glow in the Dark and Little Sprouts dolls for this fall will be the highlights of our Cabbage Patch Kids line, which will celebrate its twenty-fifth anniversary in 2008 with its own very funny and memorable Geico Insurance television commercial.

As we mentioned before, one of our big stories for the year is our Hannah Montana line, and another is Disney's top girl pop band, the Cheetah Girls. The Cheetah Girls sold out in an 80-city concert tour, and their line of fashion dolls, electronics, and pretend-play products begin hitting shelves this summer.

Under these cross-category launches, our CDI division will be doing role-play products. Our Play-Along division, the dolls and play sets, and our Plug It In & Play TV Games team has been developing a product line for late fall. So far, our Hannah Montana and Cheetah Girls lines are predicted to be amongst the hottest toys this year. My Disney Nursery Baby Dolls and realistic doll accessories, as well as interactive large sets based on Disney Princess Enchanted Tales and Disney, Barbie, and Dora the Explorer and Go, Diego, Go dress-up outfits are well placed for the second half of the year.

In child guidance, our Barney line will hit Toys 'R' Us and KayBee stores late this summer, supported by a Barney Bus Tour, a Barney Be A Star sweepstakes on all musical Barney child guidance toys, and a promotion with American Airlines and TV magazine. New foam play sets within the Child Guidance line, Not Wood and Gorilla blocks, are both hitting Toys 'R' Us and KayBee stores in the second half of this year as well. Next year we will add the Wiggles and other popular preschool properties to the lineup.

Our kites and Funnoodles were well placed this summer, with our new kite line featuring Spiderman, SpongeBob, and Dora. Pokemon kites are also well placed and are features ad Toys 'R' Us Times Square stores in their Pokemon feature shop.

In our pet area, our new White Bites oral treats for dogs powered with Arm and Hammer baking soda are being cycled into retailers now, and we're working on a new pet food under the AKC and CFA brands that we are quite excited about. We have our pet toys at mass and pet specialty sellers, and we are pleased with the growth we have been able to achieve in the pet category. We expect 2008 to be even stronger as we execute on a number of these and other initiatives that we expect to further expand that business for us.

We have more than a dozen new TV game titles in retail shelves for the second half of the year and receive real opportunity with several of them, including Spiderman, PacMan Gold, the game show titles Deal or No Deal and Wheel of Fortune. We also have many very promising titles based on two Disney properties, Hannah Montana and the Cheetah Girls. We expect to ship in October.

We will begin to ship our new Plug It In & Play Eyeclops Bionic Eye this summer with a special display that will showcase the product's features at retailers nationwide and have already begun to see lots of buzz around The New York Times feature on the product. Eyeclops is shaping up to be a strong line extension for our TV games category.

Some of the highlights I would like to bring out regarding these categories are, number one, margins are expected to be up for the second half of the year, back into the approximate 40% range. We have shipped in Pokemon, our battle frontier during the first half of the year. We just commenced shipping of our Pokemon Diamonds and Pearls sales, and they are exceeding our initial expectations by far. Pokemon Diamonds and Pearls is the number-one selling Nintendo game in both the U.S. and in Japan, and the number-one game card. We have approximately doubled our shelf space, getting into the fall at most of the major retailers on the Pokemon Diamonds and Pearls.

Hannah Montana looks like it could be a monster. We are launching late in the fall our Hannah Montana Deluxe plug-and-play game, our Hannah Montana TV game, our Cheetah Girls TV game, all in late Q3, and we and our retailers are very excited about it. As a reminder, we--JAKKS Pacific--are the master toys licensees for all Hannah Montana and Cheetah Girls product lines.

In our CDI division, there are many expansions in our role-play area--Disney Enchanted Princess, Hannah Montana role-play, Hannah dance mat, wireless microphones. Disney Princess continues to be extremely strong, and our Black & Decker Looks Like-Works Like sets are doing very well and we have excellent distribution for the fall. Our plug-and-play business, our basic TV plug-and-play games continue to be evergreen and a good part of our business. Our new, exciting Eyeclops looks very, very promising. And once again, the expansion of our TV games and some new, exciting electronic toys for our Hannah Montana and Cheetah Girls looks great as well.

In XPV, we basically had one item last fall. This fall we have five items that we expect to be at all of our major retailers. In our Play-Along division, it will be led by Hannah Montana doll play sets and accessories. The same with Cheetah Girls. Our Puppy in My Pocket is doing very, very well. Once again, the Care Bears twenty-fifth anniversary, our speed stacks are doing well with a bit less fanfare than last year. In our pet toys, we have approximately, as best we can ascertain, about doubled the shelf space we had a year ago.

As you can see, we have many new licensed and unlicensed lines from all of our divisions. We haven't been sitting still. We've been moving along very aggressively, and we're well positioned for potentially record sales in the back half of 2007 and beyond.

And with that, I will open the call to any questions that you all have. Thank you very much.

(Operator Instructions.) Your first question comes from Tony Gikas.

Hi, good morning, guys.

Good morning, Tony.

A couple of questions for you. Maybe, could you just give us a little update on the growth of the WWE product line? Also for the plug-and-play, what type of growth you're looking for in those product lines this year. The second question, could you just talk a little bit about the acquisitions pipeline? I think a few months back you were saying it was a little soft at this point. Any update on the acquisition pipeline and what types of acquisitions you'd be looking at at this point?

I'll answer this. This is Jack, Tony. I'll answer the second part first. We are always looking at acquisitions. They truly never happen until they happen. We've been involved in a couple that didn't work out down the end. We're actively involved in a couple of deals right now, and I can't speak about the size or what type they are. They are always in the toy or closely related to the industry that we're in. As we've said in our talk, we have lots of cash on hand. We have good borrowing power, so the sizes of the deals could be anywheres from $20 million to $500 million for the right deal. We're not going to do a deal just for the sake of doing a deal. It has to be right for us.

The first part of your question, we are expecting growth in our plug-and-plays, mostly through new licensed properties such as Hannah Montana and definitely the excitement of our Eyeclops Plug It In & Play game and our e, electronic learning aids, preschool shops specialty line of Plug and Play TV games. And regarding WWE sales, sales are doing steady well. The death of that wrestler a couple of weeks ago did not affect our weekly sales at retail that we constantly monitor, so that's good for us, and it's alive and well. One of the questions that looks us up regarding WWE on every conference call is, "What's going on with the lawsuit?" The answer is, "Nothing." We haven't heard anything from the courts. We did anticipate, or our attorneys anticipated, hearing approximately the end of last October or November, but we haven't heard anything back from the courts.

And just a quick follow-up, then. How about any update on the JV agreement with THQ? Has there been any progress there?

As you may know, THQ filed to have an arbitrator mandated, and we're actually in that process and would expect to have an arbitrator appointed imminently, and then the process would probably take 60 to 90 days.

Okay. And any comment on the Pokemon trends? Is that, I don't know if you could give us a revenue number for the first six months, or at least is it meeting or exceeding expectations?

We can't give you a revenue number. In the first part of the first half, the products that we shipped did nicely, about expectation. And the new Diamonds and Pearls series that Nintendo came out with and the trading cards, under our license agreement, we were not permitted to ship at the same time. We had to trail them. Those products are just hitting shelves. Where the Diamonds and Pearls are hitting shelves, they're selling out just about as quickly as they hit shelves. And if you have some Target stores near you, they have a very good array of our Pokemon Diamonds and Pearls, but they seem to disappear within a day or two after putting them out. And once again, it is the number-one Nintendo game of all time.

Okay. Thanks, guys.

You're welcome.

Your next question comes from Jeff Blaeser.

Good morning. Thanks for taking my call. Just a couple of quick questions, one on the gross margin side. If you could possibly give us a little bit more color in terms of the first six months. It sounds a little bit from a product mix and reasons, you're very confident to getting it back to the 40% level in the second half?

Well, in particular, I think the bigger impacts were not extraordinary in nature, but more so in terms of magnitude. There was about $1.7 million in royalties and advances that we had written off during the quarter, which equated to about 130 basis points. We had close-out sales of about $6 million, which impacted the margin by 160 basis points. And lastly, regarding the amortization, we have to start amortizing the tools and molds once we begin shipping, and there were a number of product lines that we had launched at the tail end of the quarter and didn't get much revenue, but we took the full hit of the amort, and those lines were XPV, Bio-Bytes, Eyeclops, Hannah Montana, and also Cheetah Girls. In addition, that's sort of the sweet spot of the seasonal business, the Funnoodles are kind of low margin. In terms of the backout, we'll have the full quarter of all the new products which have margins in excess of 40%, so we expect to be, like I said, at historical levels in the back half of the year.

That's okay. Great. So it sounds like it's--.

There were basically no glitches on that. Things happen in business, closeouts come when they close. The abandonment of, particularly, our Trolls license, which we've abandoned as well as Dragon Ball Z. They come when they come. If that would have been in the third or fourth quarter, much higher volume quarters, it would have had less impact. But if you back out those things from the numbers Joel gave you, traditionally first half is a bit lower because of seasonal products, et cetera. Margins would have been right on target, and we do anticipate being in the 40% range in the back half of the year.

Okay, great. And one final one. In terms of the CDI acquisition, is that completely integrated, or do you expect any additional cost savings synergies to develop over the next few quarters?

Frankly, the CDI was always a, kind of a low overhead operation and it's running beautifully, and we're delighted with the acquisition. They're doing a wonderful job, and they're wonderful people.

Thank you very much.

Your next question comes from Nicole Jacoby.

Hi. How are you?

Hi.

Good. I was wondering about your visibility into the holiday season, if you could speak to what percentage of your orders are in, or just give us a little color on that?

This is Jack Friedman speaking. Frankly, I don't know the exact percentage, but I would say the orders on hand and the--it's more of the planagrams that you get with the retailers, the shelf space that you get, particularly with the majors, and the commitments that you get in terms of what products. Some of the alternative retailers, like the Costco, et cetera, are going to do business with us on, and plus add that to the initial sales of some of the new products, again, like the Pokemon Diamonds and Pearls and the initial very small survey on Hannah Montana looking extremely well. So the best I could answer your question is we're very enthusiastic about the back half of the year. We're very comfortable with our numbers for the year, and we think that we truly have the products, the product lines and the right price points to hit our numbers and possibly beyond. Now it comes down to execution without missing any glitches. There's always issues with--nothing between the lines to it, I'm telling you. There's always issues with factories, and our people are going back and forth to make sure that we continue to get proper deliveries and, based on that and the initial sell-through of our products and our new products, we're very, very comfortable with the back half of the year.

When do you actually get, typically get the orders in for Christmas?

Every day.

Okay.

That is a process.

Okay. Great. Thank you very much.

Okay, your next question comes from John Taylor.

Hi. I've got a couple of questions. I know you're including international in your segments. Could you give us what domestic was versus international, and maybe was there any effects, impacts on any of the major line items?

Yes, we have no effects or impacts. The FOB sales, international territories, are in U.S. dollars, and I apologize. I would have--we pushed down the international to the categories, but we usually do, at least give that breakout. I am flipping through the pages looking for that number now.

Okay. I'll ask Jack something while you're looking for that, maybe. So advert sales was down in the second quarter. What's your feeling about the kind of promotional support you expect to provide for the product line the second half with all the new things coming? Are we likely to see that advert sales line migrate back up to about what it was last year, or do you think you've got some savings on that line?

Possibly some savings. Certainly no more than last year.

Okay.

Okay. International sales for the quarter were $22.4 million, and $39.1 million for the six months. And that's compared to $14.7 million for--I'm sorry--$20.1 million for Q2 '06 and then $34.8 million for the first six months of last year.

Okay, great. Okay, good. And then, Jack, are there any major carry-forward properties? I'm thinking, you know, things like Care Bears or, you know, Doodle or your plug-and-play lines that are kind of tracking behind what you would have expected? What I'm getting at here, I guess, is if there were any larger gaps you're going to have to fill with the new products during, on the old stuff carrying forward into this year?

Certainly, our Doodle Bears are off from last year--considerably off--very much alive, but considerably off. That would probably be the biggest on the negative side.

Okay. Okay, good. And then, so, it's anticipate something that, I guess, follows up on the previous question. So if, when Diamond and Pearl get out there on shelves in size and Hannah and Cheetah both get out there, how much flexibility might you have in terms of potential up side shipments if those two properties were to blow out?

That's an ongoing, we certainly ask ourselves and look into that question--it's a very good question, John--on a daily basis, and we are in the process on upping production as much as possible on those product categories.

Are there any, is there any--?

I'd say, John, in that, when you're dealing with a very good company like Disney, the approval process isn't quickly, so we had to get through that process before we could begin to make any process, and I would say similarly with the Pokemon piece, Pokemon people, they're very careful about their products and how they come out. And we've gotten past those points, so there is up side, and also at the same time, the nuances of our business, you don't want to overshift. You want to just-about shift the right amount, maybe even slightly short to keep it going down the road.

Yes. Okay. So to follow up on that, you've got the master toy licenses for those three properties. Are there any segments within each of those properties that look particularly promising based on early reads?

Yes. The Hannah Montana singing doll from early reads looks, is--my own expression--looks like a monster. She looks beautiful but looks like a monster, and our Pokemon Diamonds and Pearls, particularly at Target, which had the first big setup on it, just about as soon as it hits shelves, it's out of stock.

Okay. And is the doll something you can get a quicker turnaround time on a reorder than, say, a costume or something like that?

No. It's pretty similar.

Yes.

There's no big issues there. There's hair--I mean, we are professionals at what we do, and you get through those things.

Okay.

Am I answering your question? I hope I am.

Yes, I think you are. Thank you, Jack.

Your next question comes from Gerrick Johnson.

Hi. Good morning. I think you mentioned you have the license for Hannah Montana. Can you put some numbers behind that, what kind of expectation in terms of sales are you looking for that?

Don't have a number yet, but still an hoping issue. No, I can't give you any better head's up on it, other than it looks like a breakout, but we--just don't know. The readings are too early. Can't say that the kids that we polled, et cetera, some of them have told us they're throwing-- an exaggerating expression--they're going to throw their Brats and Barbie dolls in the garbage because they love Hannah so much. That's an exaggerated statement from kids, not a reality that Brats or Barbie are over. But it looks very exciting.

Okay. And sticking on Hannah for a minute, I was wondering, what was the typical age of the Hannah Montana viewer, and also, are most of these Hannah products fashion dolls? And if so, can you give some idea of the state of the fashion doll market right now in retail?

Okay. One of the luxuries that we have with the Hannah Montana range is it's really two dolls we're shipping. We're shipping the Miley Cyrus doll, and we're also shipping the Hannah Montana doll and a Hannah Montana singing doll. The Miley Cyrus doll, from what we could see, is aiming the younger kids--say, five, six, or seven-year-old is buying--and the singing Hannah Montana doll is an older kid, as old as 14 years old. So it seems to be a very wide range. The Cheetah Girls, which I don't want to discount--the Cheetah Girls are going to be very nice for us as well--is a younger age group. In terms of the state of the fashion doll business, I don't have a good enough input to know if it's off two or three points or plus two or three points. I think that if Hannah and Cheetah Girls is anywhere where we think it is, the whole category will increase for the year. Also on that, in the role-play area, the kids want to emulate Hannah Montana very much, and we're shipping kind of a role-play wig and things of that nature that the demand looks tremendous for.

Okay. Okay, and finally, I missed it. What was the license write-off you had mentioned?

The license to the two major write-off license was--?

$1.7 million.

Right. So what license?

The balance of Trolls and Dragon Ball Z, primarily.

Okay. All right. Thank you very much.

Thank you, Gerrick.

Take care.

Your next question comes from Sean McGowan.

Hi, Sean.

Hi. Thanks. I also have a couple of questions. Number one, could you give us something about what the closeout items were that were that line in the gross profit?

Yes, we'd rather not say that for reasons that the retailers that we work with.

That makes sense. Number two, I think, Joel, when you were commenting on the gross profit expectations for the second half, I think you said--I'm asking you to clarify the sales approaching historical levels, or do you think you'll actually be at 40%?

Approaching. Right now we're looking at between 39% and 40%. It depends on if we achieve up size in, like, Hannah Montana and some of the newer product areas.

Okay. Third question--why, for the second quarter in a row, now, why would direct selling expense be down?

It's primarily in advertising. We, when we advertise, we don't drive retail. We do very modest amounts, and a lot of our new products weren't shipping until later in the quarter, so that it will be more in the back half.

And so we should expect, then, that dollars, that those will be up in the second half?

Certainly the biggest quarter will be the fourth quarter, so that will, that will be a year over year, and it all depends on what programs we have in place at any given time. You know, since we're not big in TV promotional items, it's not a huge number. But again, just like the impact of the royalties, in a light-volume quarter, these things have a bigger impact.

Right. Okay. Last question. Why are you thinking--this might be more for Jack why do you think the craft and arts and the writing instrument line, why does that just continue to go down, and what specifically do you have lined up to reverse that?

You'd think--I would say it's a combination of some innovative products attached with the right licenses. It's kind of, if I had to say it from years of experience, it's kind of low--for the most part, kind of low-priced products that takes a reasonable amount of space, and unless the products are selling particularly well, the retailers don't give it too much space because they have to get a certain amount of sales and margin per square foot, not just margin. So I think it's somewhat impacted in there. Putting that aside, if you have the right license with the right product, you can sell a lot of goods. And something like, as we mentioned earlier, we're going to do a line of Pokemon Diamonds and Pearls in that category, and hopefully, expectedly, that will give it a huge turnaround.

Okay. Thank you.

Your next question comes from Greg Fontana.

Good morning. Thanks for taking the call. I'm really excited about the Hannah Montana doll, and I'm wondering if you could put it in perspective with some of the other live character dolls that have come out, debuted as fashion dolls. You weren't really open to quantifying it, but could you put it in perspective from that dimension?

I think the last big one was probably, in terms of stars, was Britney Spears. And that probably did $100-some odd million. Is that right?

Great.

Frankly, we think that Hannah has more potential--much more potential--than Britney Spears. And I don't want to be repetitive, but the fact that we're selling a Miley Cyrus doll as well as a Hannah Montana doll, we're kind of getting a two-for-one sale.

Also, with the play-along division, although it was before we fired them, but they're the ones that did the Britney Spears one and the Spice Girls.

How did the Spice Girls do?

We don't know--they did--it was fast and furious. I don't the number on what it did in dollars. Hannah Montana is a little bit different, though. She's not a flash in the pan. The show is going to be on for a long time. She has a very good image to mothers and kids. We expect it to be very, very long-term, and it's just a wonderful opportunity for us. And we share your enthusiasm. We think it's going to be great. But I don't think we can give you any more clarity. It's too early on. Last (inaudible) could it affect our numbers towards the end of the year if it continues on the road it's at? Yes, it could.

Great. Thanks.

You're very welcome. Okay, thank you. I'd like to thank you all very much for your time and efforts, and thank you, and we look forward to speaking with you all once again on our next conference call. Thank you.

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