JAKKS Pacific Inc (JAKK) 2007 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the JAKKS Pacific fourth quarter and year end results for 2007 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks will there 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 Communications and Investor Relations for JAKKS Pacific. Thanks for joining our teleconference this morning with JAKKS' management to review the results for our fourth quarter and fiscal year ended December 31, 2007. On the call today are Jack Friedman, our Chairman and Chief Executive Officer; Stephen Berman, our President and Chief Operating Officer; and Joel Bennett, our Executive Vice President and Chief Financial Officer. 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 with a prepared portion of the call with the highlights of our product line and planned business trends prior to opening the call for your one-on-one 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 as well as any forward-looking statements are subject to the Safe Harbor protection under Federal Security laws. These statements reflect our best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in our forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult our recent 10-K and 10-Q filings with the SEC as well as our Company's other reports subsequently filed 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. Thank you for joining us this morning to discuss our results for the fourth quarter and 2007 year fiscal. Fourth quarter 2007 sales for JAKKS Pacific increased 19.6% to a record $285.1 million with net sales for the full year increasing 12% to a record $857.1 million. We are extremely proud to report that net income also increased 48.3% for the quarter and 24.3% for the year overall.

2007 ended with an even more robust fourth quarter than expected, driven by strong sales of our Disney toys action figures and EyeClops bionic eye and a sizable contribution from our WWE video joint venture and we are very pleased with our results. To continue, we see strong sell through into the first quarter of 2008, likely due to a combination of gift card purchases and the popularity of tween pop star Hannah Montana who has continued to take the world by storm. America loves Miley Cyrus and Hannah Montana. With three recent kids choice awards nominations, a sellout major motion picture and recent appearances everywhere, from ringing in the New Year with Dick Clark in Time Square to being a presenter at the Grammy's earlier this year. And just this past weekend, the toy industry celebrated Hannah Montana as Property of the Year. We couldn't be happier.

We're reporting these earnings from the New York Toy Fair where so far the response to our 2008 line has mimicked the excitement we heard from our retailers at the two recent major toy shows in Dallas and Hong Kong with new items such as our kids gourmet cup cake maker, EyeClops night vision goggles and of course, more Hannah Montana. Resonating as favorites once again amongst just about everyone who tours through our lines. And there are many other JAKKS lines that are wowing buyers and garnering shelf space at our retail partners which we expect will be terrific contributors to our 2008 bottom line.

These lines include NeoPets, NASCAR, Pokemon, 25th anniversary Cabbage Patch Kids and our new ultra motion wireless motion gaming system, our new star factory line and many more. Based on our responses and despite some uncertainties related to price increases and production issues that are affecting both our interest -- industry and others who manufacture in China, we believe 2008 will be another record year for JAKKS Pacific. We have been working hard and long on our 2008 and 2009 lines and have been laying serious groundwork for 2010 and beyond. I will get into more details about some of these initiatives in a few minutes but first I would like to address our WWE toy line which has been a meaningful yet challenging part of our business.

Both JAKKS Pacific and I personally have had a very long history with wrestling toys, starting with my first previously public toy Company LJN have done the first wrestling toys back more than 20 years ago. It has been an extremely successful and profitable venture for both companies. The video games also continue to be highly profitable with JAKKS profits from the JV topping a record high of $18.1 million for the quarter and $21.2 million for the 12 months. The joint venture shipped more than 12 million units of WWE Smackdown versus Raw 2008 for every gaming platform during the fourth quarter and we look forward to many more successful years with WWE video games. We announced last week that JAKKS has signed a new five-year exclusive worldwide master toy license with TNA, Total Nonstop Action wrestling to commence in 2010 but we will continue diligently to execute on our WWE toy line for the next two years until then.

As we transition through normal lifestyles of toys, it's a normal part of our business to reinvent our product lines on a regular business. Years ago we were defined by our wrestling business but throughout the years time and again we have identified emerging trends, developed innovative lines have often been first to market with exciting lines, including our extreme sports line, our plug-and-play TV game product lines, which today have generated more than $1 billion in retail sales and several others. Our classic brands that we've worked to invigorate, like Cabbage Patch Kids, Care Bears, Pokemon and others have contributed greatly to sales along the way and we expect to continue to focus on more of those as well.

Of course we are delighted to have a contribution from tremendous hits of today like Hannah Montana and other Disney properties as we expand our relationship with them. And while we expect to strengthen these lines in our value licensing relationships, the bottom line is we are in this ever-changing game of the toy industry and we know what we are doing in it. Our business ebbs and flows and it's a normal part of our product life cycle. JAKKS Pacific today is bigger than any one of our product lines.

We are determined to make 2008 the best year yet for JAKKS. Our financial position remains extremely strong with working capital of $356.7 million, including cash and equivalents of $241.3 million, as of December 31, of last year. Leaving us with tremendous ability to execute on our execution strategy. It's been more than two years since our CDI acquisition but we're actively seeking out the next gem to help grow JAKKS burgeoning consumer products portfolio with the cash we have on hand. An investment into the future -- into our future that we believe will be a fruitful one. Before I get more into details about our products' performance in the past year and our outlook for the future, I would like to turn the call over to Joel Bennett our CFO, for a review of our financial performance for the fourth quarter and 2007.

Thank you, Jack, and good morning everyone. As Jack says, we're very pleased with the results of our fourth quarter and the full year of 2007 which positions us well to achieve our 2008 forecast. Fourth quarter net sales for 2007 were $285.1 million, compared to $238.3 million in the same period last year. An increase of 19.6%. Net income for the fourth quarter was $34.4 million, or $1.06 per diluted share, representing an increase of 48.3% over the fourth quarter of 2006 when we had net income of $23.2 million or $0.73 per diluted share. Net sales for 2007 full year were $857.1 million, compared to $765.4 million in 2006, representing an increase of 12%. Net income in 2007 increased 24.3% to $90 million, or $2.80 per diluted share, this compares to net income of $72.4 million or $2.30 per diluted share in 2006.

Now for our sales by product categories. Sales of traditional toys which include action figures, vehicles, electronics, plush, role play, dolls, kites, pool toys and outdoor and promotional projects were $269 million for the fourth quarter of 2007 compared to $221.3 million in the fourth quarter of 2006. For the full year of 2007, sales of traditional toys represented $793 million versus $692.5 million in the comparable period last year. Traditional toys represented approximately 94.3% and 92.5% respectively of JAKKS overall sales in the fourth quarter and 12 months of 2007. Versus approximately 92.8% and 90.5% of JAKKS overall sales in the fourth quarter and 12 months of 2006.

Sales in the quarter were driven by our action figures, dolls, electronic toys, and pretend play products based on WWE Wrestling, Hannah Montana, Pokemon, Disney characters, and other popular licenses. Our craft activity writing products category which consist primarily of our Pentech and Flying Colors product lines had sales of $6.7 million in the fourth quarter of 2007 and $39.6 million for the full year. This compares to $10.1 million and $52.8 million respectively in the comparable periods of 2006. This represents 2.4% of total sales for the quarter and 4.6% of sales for the full year versus 4.2% and 6.9% for the three and 12 months comparable period last year. For 2008 we have several new activities and riding products including our spa factory line, gourmet cupcake maker and more which we expect will increase sales in this category.

Sales of our JAKKS pets were $9.4 million in the fourth quarter of 2007 and $24.5 million for the full year. This compares to $6.9 million for the fourth quarter 2006, and $20.1 million for the full year of 2006. This represents approximately 3.3% and 2.9% of the overall sales in the fourth quarter and full year respectively in 2007, as compared to 2.9% and 2.6% respectively for the comparable periods in 2006. Sales in this category were led by AKC licensed products. International sales which include sales of all of our product lines were $30.6 million for the fourth quarter of 2007 and $126.1 million for the full year. This compares to $24.7 million for the fourth quarter of 2006, and $98.8 million for the full 12 months of 2006.

Gross margins for the fourth quarter of 2007, was 38.2% as compared to 37.1% in the fourth quarter last year. For the full year gross margins were 37.8% in 2007, as compared to 38.5% in 2006. The increase in gross margin for the quarter is due to our product mix which included more higher margin licensed products offset in part by higher writeoffs of TV game developments and license advances in 2007 and for the year lower product costs were offset by higher write-offs of TV game developments and license advances in 2007.

SG&A in the fourth quarter of 2007 was $75.7 million or 26.5% of net sales, compared to $65.6 million or 27.5% of net sales in the same period last year. For the year, SG&A expenses were $215.7 million or 25.2% of net sales as compared to $202.5 million or 26.5% of net sales in the same period last year. The decrease as a percentage of the 12-month period is due to lower marketing costs and acquisition amortization in 2007 offset in part by higher stock-based compensation expense. Depreciation and amortization for 2007 was $26.7 million, and stock-based compensation for the fourth quarter and 12 months of 2007 were $3.8 million and $9.1 million respectively as compared to $1.7 million and $6.5 million respectively in the same periods last year. Based on these overall variances, operating margins for the fourth quarter and 12 months of 2007 improved to 11.6% and 12.6% respectively compared to 9.6% and 12.1% in 2006.

During the quarter we posted $18.1 million in profit from the JV for video games with THQ bringing the JV contribution to $21.2 million for the year. This compares to profit for the fourth quarter of 2006 of $12.5 million and for the full 12 months of 2006, $13.2 million. The joint venture shipped more than 5 million units of WWE Smackdown versus Raw 2008 for the Sony Playstation 3 and 2, the PSP handheld as well as the Nintendo Wii console, VF handheld and XBox 360 console. The wireless version of the game also launched on various mobile carriers worldwide throughout the fourth quarter.

Cash flow from operations in 2007 was approximately $87.7 million and our financial position remains very strong. As of December 31, 2007 our working capital was approximately $356.7 million, including cash and equivalents of $241.3 million. We continued to evaluate potential acquisition opportunities and expect to continue to grow our business by actively pursuing accretive and complementary acquisitions and executing on internal growth initiatives including creating new products and securing new licenses to provide continued growth for JAKKS Pacific. We also look for other ways of enhancing shareholder value and to that end, earlier this week our Board of Directors authorized a stock buyback program of up to $30 million worth of the Company's common stock.

Accounts receivable at the end of the fourth quarter were $174.5 million compared to $153.1 million at the end of the fourth quarter of 2006 which is consistent with the higher sales in 2007. DSOs were 55 days down from the 58 days in the same period in 2006. Inventory was $75.5 million at the end of the quarter, down from $76.8 million at the end of the comparable period in 2006. VSIs decreased to 49 days from 56 days at the end of the fourth quarter of 2006. Capital expenditures for the quarter and 12 months were $4.3 million and $18.1 million respectively. With that I'll return the call to Jack Friedman.

As we mentioned, we are feeling great about our line-up for 2008. There are a number of new products stemming from organic nonlicensed product innovation as well as strong initiatives based on stellar licensing portfolio. Now I will fill you in on a number of lines from each of JAKKS divisions.

Six years ago, JAKKS created a category that has generated more than $1 billion in sales at retail with our plug it in and play TV games line. Today TV games are still going strong and has been a catalyst for growth into several terrific line extensions from our core TV game lines, we have placement on our new and classic titles including 1 vs. 100 and you are smarter than a fifth grader TV games as well as the new kid driven titles based on Disney movies Wally and Sleeping Beauty. Nickelodeon favorites, Dora the Explorer and SpongeBob SquarePants, Star Wars and this year we will also bring back our top selling classic Atari TV games as well as our new G-2 Game Girl titles have more advanced graphics and game play and are based on Disney's High School Musical and Hannah Montana.

Our Hannah Montana TV games in the fourth quarter tapped into a new tween buyer for our TV games. With our two previous Hannah Montana titles doing well at retail at the end of the year. Our EyeClops bionic eye further extended the plug-and-play category for JAKKS and with Media last year touting EyeClops as their favorite educational toy, the toy industry agreed with two nominations for EyeClops at this past weekend's toy of the year award for the most innovative and best educational toy of the year for 2007. At the consumer electronics show in January, we debuted our new EyeClops BioniCam which features a multi zoom lens, a color LCD screen for portability and a built in camera and flash so kids can now use the EyeClops to see things on the go. Additionally we are extremely excited about our EyeClops night vision goggles. These are real night vision goggles that retailer have been going crazy over. They are real working night vision goggles at a price point of about $80. Wow. Any other night vision goggles that have worked other than toy ones that do not really work have been in the price range of $250 to $2,500. With our innovation technology, we expect this line to perform excellently for us.

We also featured our new ultra motion wireless motion video game line at CES and here at Toy Fair, which combines plug-and-play gaming with the role play and one of the most popular trends in video gaming today, motion games. We have an unlicensed title based on popular sports and several other titles co-developed with Disney slated for later this year.

Our Speed Sacks line did not perform to plan in the second half of last year. And while product will remain in the market for 2008 we don't expect this line to be material going forward. Sales of our Disney Cheetah Girls were overshadowed last year by Hannah Montana, but we plan to reintroduce the program late this summer in conjunction with the Cheetah Girls 3 movie release. In 2008 we will help celebrate the 25th anniversary of the world famous Cabbage Patch Kids by relaunching the original Coleco style kids design that originally took the world by storm back in 1983.

We will employ many of the same successful strategies we initiated in 2007 to support the 25th anniversary of Care Bears which produced on the industry's hottest plush toy of 2007. Our silver collectible edition Care Bears. After five years we have clearly reestablished Cabbage Patch Kids as an evergreen brand at retail and in the minds of consumers. In addition, we will continue to build and expand our Puppy In My Pocket line by continuing to add new character extensions such as ponies and jungle animal which will be supported by an all new TV campaign. As we go into our final year with our Care Bear brand, we expect to fully exploit the potential of this product line while not compromising the integrity of the product or brand positioning.

We have a full line of action figures, play sets and role play toys based on the next installment of Disney's movie franchise The Chronicles of Narnia, Prince Caspian. The movie is touted to be one of the biggest family films of this summer, opening in mid May. We will also be producing toys for the third installment of the franchise Voyage of the Dawn Treader which hits theaters in 2010 on a worldwide basis. In 2008 we will roll out an exciting line of NASCAR toy vehicles and play sets designed for fans of all ages and in particular kids 3 to 8. The line will include a wide range of drivers and teams, including Jeff Gordon, Jimmy Johnson and team Dale Earnhardt, Jr., as well as drivers from Joe Gibbs racing like Tony Stewart. NASCAR is hotter than ever in all markets around the U.S. with 75 million fans. It is the number one spectator sport with a 10 month season and we believe that our NASCAR range will be a great contributor in 2008.

Our Hannah Montana line performed phenomenally well last year and in 2008 we have dynamic new items, including Hannah Montana beach house play set, Hannah Montana dolls that sing and dance, new wigs with hair styles featured on the TV show, dance master to teach kids to dance like the touring pop star, new musical instruments, new electronic products and more. Every key retailer looks at Hannah as a hot growth category with Wal-Mart even going so far as to recently announce they wish to position themselves as a Hannah Montana destination.

Also from our CBI division, we have a new line of beautiful pretend products based on Disney Faeries in anticipation of the new platinum DVD Tinkerbelle coming out in the fall and also a beautiful line of Sleeping Beauty pretend products, including an enchanting styling vanity and line of dresses and role plays. Our Black and Decker role play products are still doing terrific for boys and will continue in the line as well as novelty toys and many private label brand that's consistently perform and are strong contributors to our overall business. Our action figures also continue to be a very strong category for JAKKS driven by our WWE and Pokemon figures which position JAKKS Pacific with two of the top five action figures lines at retail. Internationally WWE also remained one of, if not the strongest boys' property in both the U.K. and Australia and we have many new assortments from both of these lines rolling out in 2008. New Pokemon diamond and pearl figures play sets accessories will feature our new battle link systems allowing kids to connect all of their pieces to the large scale playset making it massive in size. We continue to roll out new Pokemon characters that kids seem to be clamoring for. In 2008 new WWE four-inch figures and the largest scale ring ever join the line up with new classic superstars and superstars currently in programming.

While XPV Rad did not perform to our expectations we have new extreme sports based on our MXS brand that are well placed at retail for 2008. Our laser challenge proline features an innovative laser scene inside the scope making this popular scope of laser tag more realistic. We have two new master toy agreements with Nickelodeon and Viacom. NeoPets, which is off to a great start at retail and SpongeBob Squarepants. Neopets is the original youth focused virtual world with more than 45 million registered users. We launched our collective Neopets plush at a major retailer during the first quarter and are very pleased with the results so far. We expect to roll out more of the line to other retailers this fall and will utilize our collector strategy which closely ties into game play on line. Our fun and irreverent SpongeBob plush toys also ship to retailers later in '08. We have been working hard on our new discovery kids line and expect to ship the line of interactive toys that make learning fun to retail for fall 2008. We have smart animals and other products based on nature as well as learning toys and several other genres.

Spinning off popular trends, we have extensive new innovations for our girls' activity and stationary areas for this year that are both licensed and unlicensed. Fancy Nancy, new Nickelodeon and Pokemon stationary and activity products as well as products based on spa treatments, gourmet food and a fashion doll line inspired by trendsetters in Harajuku, Japan along with new craze from Asia, Pen Spinning. Cupcakes are a huge trend in the U.S., often even replacing the traditional birthday cake. The feature item in our new kids' gourmet food line is our cupcake maker and response from our retail partners have been spectacular. Kids can microwave a gourmet cupcake in 30 seconds. Frost it with gourmet froster and they are delicious. This item will roll out this summer and we expect it will be formidable competitor to items like Easy Bake Oven and other play food items on the market.

Our new Spy Kids Spa Factory line gives girls all the tools to pamper themselves for at home spa parties, starting with robes and slippers to making their own aromatherapy potions with essential oils. Whether alone or with friends, we think girls will really love Spa Factory and retailers have been very supportive with commitments from all of the major retailers so far.

American Kennel Club pet products continue to do very well in our pet area. At the Global Pet Expo last week we introduced an expansion to our AKC Club branded product line with AKC Agility. AKC Agility products feature premium quality toys and accessories specifically designed for agility dog training while providing kids and adult pet owners with healthy outdoor activities. Getting pets up and moving also helps combat pet obesity rampant among household pets in the U.S.

We are pleased with the line of products that we have developed under the Humane Society of the United States license. The HSUS pet line is expected to be available in spring '08 to mass and pet specialty retailers nationwide and will not be sold at retailers that also sell dogs and/or cats. 2008 is shaping up to be a great year for JAKKS Pacific and these are just a few of the things we believe will drive our sales. The portfolio of products we have developed and nurtured along with our relationships with retailers, licensors and consumers has positioned us well for this year. We are working hard to execute on our strategy on behalf of our shareholders and are excited by the opportunities that lie ahead. With that, I will open the call to questions. Any questions, please?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Tony Gikas.

Good morning, Tony.

Congratulations on a terrific year. Couple questions for you. The joint venture income was a big change in the fourth quarter. Maybe you could just address that. Was it purely increased units of THQ or is there any type of a change in the split there? Maybe you could address that. Also maybe you could just talk a little bit about the exclusive business looking forward, what percent of sales might be coming from that business and the margin differences. And then in 2008, do you expect a change in legal expense on a year-over-year basis?

I'll start with the last one and work backwards, Tony. This is Jack. We do not expect any significant difference in legal. We still have things to go through with our WWE lawsuit. We look at it as the year to clean it up. There is a lot to go through until we get there. The next part of your question was, I think, was the joint venture. It was the same margins that we've been working on for the past seven years. It was an increase in the WWE video game sales.

Okay. Then just a little bit on the exclusives business, looking forward/

The exclusive business is a business that we [drive] on, in terms of -- I can't give you [enough] percentage number on it, it's a healthy percentage, but I don't know the number and margins are usually in line.

But it's becoming a greater percentage of overall sales or relatively flat?

Yes. Our retailers look more and more for us to do those products for them. Most of the retailers think it's to their advantage to have exclusive products which make people come to their stores for those specific products. And since we're a Company that is quite nimble and can do things quite quickly and are always looking to increase our business, we're a great aggregate of it.

Okay. Last question. Maybe you could just address price increases and timing of those increases and then related cost pressure. I know input costs continue to move higher for the industry. What do you expect gross margins to do over the course of the next year?

We hope and that's an area of business that is still a little muddled, not totally clear, but we expect, with our price increases and changing around some of our products and working with our major factors, that our margins will be in line with (technical difficulties).

And price increases?

Price increases, it's an item by item basis and some items we changed around. Some of them we did late last year. I couldn't really give you a percentage but certainly there are price increases overall.

Okay. Thank you, guys.

You're welcome.

Your next question comes from the line of [Todd Quartzerman].

Hi. Good morning, folks. Can you give us a brief update please on the arbitration with THQ.

Yes. This is Jack Friedman speaking. It's a very slow process. It's continuing. We have not been to arbitration yet. We will advise when we have any other updates on it. It has been a slow process for a host of reasons. And from JAKKS Pacific point of view, we're not very -- not at all nervous about it. We think we're in a wonderful position and all of the economics are lined up in line that we should continue to get at least if not more of the same rates than we've been getting in the past.

Okay. And looking at cost for a moment, could you talk a little bit about some of the challenges that are being posed by China and how you're essentially overcoming them?

We're in a new territory with the toy industry. Lots of things have been going on in China. Increase in their currency, inflation, et cetera. The best I can answer it, we think we run our business well. We've been changing some things around, some price increases and if things do not -- do not get crazier, we think we'll be fine for 2008. But part of our conservative forecast for 2008 comes from certain things still could happen that we have no idea what those things are. So we're taking -- we're very positive about our business in 2008 but we're taking a conservative stance.

And in percentage terms, what kind of increase year-over-year did you see in labor for example?

I don't think we can break that down.

Is that an inflation rate that you expect to remain stable or maybe creep up a little bit as the year progresses.

We don't really know. We're actually -- what I neglected to say, we're forecasting at this time, we think our line is great, but because of the variables that are still going on in China, which could possibly slow down production and more inflation, we're going to start out with a forecast of both net income and sales of a minimum of 4% over 2008. Now if all of those variables weren't there, we would probably be coming out with a higher guidance, but we need to run our business conservatively and prudently, particularly in forecasting.

Got it. Just a couple of housekeeping items. What was the actual share count either at December 31, or some later date?

We're going to give you that answer.

Your next question is from--.

Wait a moment. The weighted shares were 33,251,000, which includes 4.9 million from the convert.

Okay. Lastly, the buyback plan, is that open-ended?

Yes, it is.

Thanks.

Thank you.

The next question comes from the line of Sean McGowan.

Hi. A couple of questions.

Hi.

Hi, how are you? Question regarding direct selling expenses. How is that -- how is that flat or is it slightly down given the sales increase. Could you just give us some detail on that? And second can you give us a ballpark sense of either Hannah in full year 2007. I got to think it's pretty close to 10% or more of sales and do you expect that to be the case in '08?

The components of direct selling are pretty significant. In terms of the biggest chunk was in the marketing plan, when you have a product like a Hannah or wrestling where there is a lot of built-in awareness we do not need to advertise quite as much in dollars or as a percentage. So that pretty much drove it. It's something that we evaluate. We look at marketing plans each quarter. So things are taking off on its own. We do not need to spend quite as much.

And Sean, we only began to ship Hannah in the back half of last year so really only had less than six months of product on shelf for 2007 and 2008 of course we're shipping on a full year basis plus we have many more SKUs and a full year of shipping and more customers. We were limited to what we could ship last year in addition to the short spacing on it and she continues to be a phenom and our sales currently at retail are nothing short of sensational for this time of year.

It certainly is hot. So are you confirming then that Hannah was not 10% of sales last year, of the total full year sales.

We're not commenting on that.

Okay. Thank you.

Thank you.

Our next question comes from the line of Edward Loh.

Congratulations.

Thank you very much.

The question I had was on the WWE license that is going to Mattel, is that only for toys and there is no news yet on the video game piece?

There shouldn't be any news on the video game piece. We don't know of any news that could [grow]. We have a license on that for quite sometime. But yes, what they gave to Mattel was the toys beginning in 2010.

Great. And then the next question I had is it seem that valuations in the toy industry, although the [overall] market has firmed up a little bit. Is there any change on your views on M&A valuations right now as far as potential acquisition?

Yes. We have seen. We have been negotiating with some companies in the past two years and until about six months ago we thought that people had valuations for the businesses way too high for our taste. I think that came from all of the private equity money around and things of that nature. And I think valuations have come down in people's minds considerably and we are looking seriously at a few deals right now. Nothing to speak of.

Great. Thanks a lot.

Thank you.

Your next question comes from the line of [Robert Morrison].

Hey guys. Good morning. Congratulations on a stunning quarter and an amazing year.

Thank you.

If I'm correct you guided to 4 or 5%, at least 4 or 5% growth in 2007, is that correct?

Correct.

Correct.

Last year, 4%.

4%. And you did double digits top and bottom line.

Correct.

I was at your show. I saw the toys. I saw the night vision goggles that Amazon thinks are going to be their top seller. I saw the Guitar Hero thing for Hannah Montana, the dolls, the plush, the action figures, and it seems to me as if your existing toy line is infinitely better positioned than it was last year.

We have--.

I would be, as one of your top three shareholders, very disappointed if there weren't double digit top and bottom line gain this is year as well. And I guess the question I have is how do you choose 4%? Clearly if you were on a budget, are you literally running a budget at 4% in order to avoid any kind of major issues should the economy slow or with all of the product momentum, the product awards, the press that the toy line is receiving at all of the major global toy fairs, couldn't there easily be a double digit revenue in earnings growth year this year like there was last year?

Absolutely, that could happen. And we look forward to that happening. The reason for our ultra conservative forecast is two-fold. We're -- number one, we're better off forecasting conservative, but there are uncertainties in the far east in terms of production and pricing. So we're just building that in to a conservative forecast. We are building our overhead, yes, against that conservative forecast, but we do hope there aren't any crazy issues or crazy recession in this country, that we would expect to, with all of the things you said, without me being repetitious, we have what we think and our retailers think is some sensational products and we're looking forward to a great year. But once again I want to say we're doing it ultra conservative because there are still uncertainties like there have never existed before in the last year or so out of China. And potential big recession here. Other than that, we would be forecasting a higher gain for 2008.

Okay. Have you ever forecasted anything higher than mid single-digits in the few years you've been giving guidance?

No.

No. And yet you keep delivering those kinds of top and bottom line growth. Guys, listen you can guide to 4% and do 14 or 15 or 16 until the cows come home and eventually Wall Street analysts will figure it out and put it into their numbers. Thanks a lot, congratulations on a great year.

Thanks.

Your next question comes from the line of Jeff Blaeser.

Good morning. Jeff. Are you there?

Jeff, your line is open.

I'm here. Thanks. Congratulations on a great quarter. On the new product lines you mentioned earlier, can you handicap which ones you think have the highest upside and do any have the potential to match a Pokemon, I wouldn't even Hannah Montana, but anything that could come to that kind of size?

Yes. Yes, I think -- I think a few of them, if we use Pokemon as a comparable or night vision in terms of retail reaction is probably the single best we've ever gotten as a reaction to a product line. So that's there. Not to just say Hannah Montana, but our Hannah Montana similar to Guitar Hero for a younger age kid, retailers kind of numbers they're throwing at us, not committed to yet, are tremendous. Neopets, we have shipped to one retailer, they've had it on the shelf for two weeks, but the numbers so far are amazing and we expect to have excellent international growth this year with our business. I might have left out something. I can't think of quickly for the moment. But there are some -- oh, yes, yes. I knew I was thinking of one. We have an item called a cupcake maker and a Spa Factory in our new kids activity line that are being viewed as excellent, excellent. And between the two, I think they will exceed Pokemon revenue. I think individually they'll fall short of Pokemon revenue. And last but not least, we have a new discovery kids line that reaction has been excellent, that came on late. We probably will be later than we'd like to in shipping it but long term it has excellent potential. I don't think it will come anywhere close to surpassing Pokemon this year.

Great. And on the international side, which products perform -- are performing best on the international and what other opportunities do you see to grow that as a percentage of sales?

Personally we've certainly growth at the Company. Here in the U.S., we believe we are clearly the number three toy Company. Internationally, we are getting more and more of our licenses and we have our own internal product like EyeClops, et cetera. But if I try to be kind of specific, I'll throw out a few to you. Our TV games are doing well, WWE particularly in the U.K. does wonderfully. Our EyeClops was a blowout last year where we shipped it. Our various electronic products are being picked up in big quantities and last but not least our Blow Pen line is a line that plays 80% of our revenue of that line is in Europe as opposed to 20% here.

Thank you very much.

Thank you.

Your next question comes from the line of Gerrick Johnson.

Hi. Good morning.

Good morning.

Several questions here. First can you discuss channel inventory, how that would look at the end of the year?

I would say pretty clean. There is always a few pockets. I don't want to get specific on any of them. But not an issue.

Okay. And maybe touching on what Sean was trying to get at earlier, perhaps you can tell us what was larger in sales? WWE or Hannah Montana in 2007.

We do not want to break that down.

Okay. Can you give us an update on the--?

We prefer that our retailers don't know those break downs in various product lines. One retailer takes a much bigger position than the other and for that reason more than any other we prefer not to elaborate on that .

Okay. Maybe we can discuss that at the analyst walk through later on. Can you tell us what the latest is on the Connecticut state court action with WWE?

No further update on it. Hopefully by May it will be totally clarified and hopefully disappear.

Okay. And finally, you mentioned uncertainties related to cost increases which you discussed already and also related to production issues. I was wondering what those production issues might be and what the uncertainties are surrounding the production issues?

We do not have any specific issues right now, none whatsoever. But every day you read about problems and labor shortages. During Chinese New Year, they had a huge snowstorm. Some of those employees still want to go back home when they should be back at work. I don't blame them. There are low electricities with all of the growth going on there. There is just a host of maybes out there that could possibly affect our and other people's businesses and we prefer to take a personal look at it very diligently and plan the best that we can, but we prefer to take a conservative position with those uncertainties.

Okay. And last one, the seasonal category, is that no longer a category. Is that in traditional toys now.

Yes.

Okay. Thank you.

Your next question comes from the line of Arvind Bhatia.

Good morning.

Good morning, guys. And I would like to add my congratulations as well.

Thank you.

So I got on the call a little bit late but I'm wondering if you addressed the forecast or if you could, talk about the joint venture for 2008, what you're assuming in your growth forecast, second trying to get an idea of numbers without that. And then also if you could talk about the potential for TNA wrestling? And then Joel I have a modeling question. What are you assuming for your amortization, the accounting adjustment that I know that's going to be going down in terms of how we're modeling in 2008, what sort of reductions you're thinking there and then operating margins against within that, what sort of leverage, SG&A leverage and what sort of improvement we should be looking at going forward?

Okay. Regarding the JV, we did have a bang-up fourth quarter but we are forecasting lower sales in units, not to front-run or contradict anything that TXQ might have indicated but we're actually forecasting about 20% lower in 2008. Regarding operating leverage, we're expecting a 40 to 60 basis point increase in operating income based on overhead leverage and just managing our controllable expenses. Depreciation on the acquisition related assets is expected to drop by $2 million in 2008 and it drops more appreciably in 2009 and 2010.

And back to your question, product question, TNA and WWE, for the next two years it will be business as usual with WWE toys and they're continuing to sell very well for us, regarding TNA, that's a wrestling association that has been making terrific progress over the last couple of years and we hope that they continue to build their business and brand more of their characters. Not to sound conceited, I think JAKKS Pacific is by far the best Company in the world at making wrestling toys. We've proven it with WWE. We took it from nothing to a leading brand of toys. We think we can do the same with TNA. It will not happen in one year. We're taking other initiatives in similar categories through that that we can't talk about today. We do not have signed deals. But we're quite confident that in not too long that we can comfortably replace if not all, a good portion of what we will lose in 2010 on WWE Toys. And we wish Mattel good luck with the venture from their part. Lastly on the modeling. We're modeling with a 32.5% effective tax rate in 2008. This is a little bit higher than 2007 because of the FIN 48 benefits were higher, expected to be higher in '07 versus '08.

And then wanted to follow-up on the acquisition multiple question. I think you mentioned, Jack, that multiples had come down. Can you maybe give more color?

I said valuations up. I think I said valuations. It's slightly different. There's a slight difference to the two.

Got it. But can you give us some more color, how that has changed, just for us to get a sense of the magnitude of the change?

Yes.

Maybe a few examples?

I think people had very lofty ideas. I can talk to numbers on that. Some people were valuing their Company say at 10 times EBITDA, 9 times EBITDA and I do not think JAKKS would find a Company glamorous enough for us to pay that kind of a multiple. And they have to fit in as well. I will say, and I don't want to give anybody any hints of something to come, but we have been negotiating for sometime with a few Companies that are looking like they very well might happen at prices that we think are fair to JAKKS.

And then last question was on the retail side. If you could -- when you look at your retail partners, are you seeing any meaningful change in who is gaining market share versus another?

From what we hear Toys "R" Us has gained market share in 2007. I don't know if it's correct.

Great. Thanks guys. And again, great quarter.

Thank you. And we thank you all very much for your being on this call today. We hope we can continue to perform as well as we did in 2007 for our shareholders and look forward to a great year. Thank you all very much.

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