JAKKS Pacific Inc (JAKK) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the JAKKS Pacific 2009 first-quarter results teleconference with management. At this time, all participants are in a listen-only mode. Later we will conduct a question-and answer-session. Please note that this conference is being recorded.

I will now turn the call over to Ms. Genna Rosenberg. Ms. Rosenberg, you may begin.

Thank you, operator. Good morning, ladies and gentlemen. This is Genna Rosenberg, Senior Vice President of Communications and Investor Relations for JAKKS Pacific. Thank you for joining our teleconference with management of JAKKS Pacific to review the results for the first quarter of 2009 ended March 31, 2009.

On the call today are Jack Friedman, Chairman and Co-Chief Executive Officer of JAKKS; Stephen Berman, President and Co-Chief Executive Officer; and Joel Bennett, 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 the prepared portion of the call with highlights of our product lines and current business trends, prior to opening up the call for any 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 2009, as well as any other forward-looking statements, are subject to the Safe Harbor protection under federal securities 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 most recent 10-K and 10-Q filings with the SEC as well as our Company's other reports subsequently filed from time to time.

And 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 the results for the first quarter of 2009 for JAKKS Pacific and our outlook.

Consistent with our guidance during our last conference call, first-quarter net sales were $108.5 million with the bulk of the contribution coming from traditional toy sales from our diverse product portfolio. The first quarter is typically our lowest sales volume quarter, with peak selling seasons for our divisions, including our newly acquired businesses, to kick in during the second and third quarters.

Traditional toys made up the bulk of our sales, with contributions coming from many items in our diverse portfolio. We did experience softness in some of our lines, including WWE and Pokemon Action Figures, Hannah Montana dolls, and some electronic products.

We showed a net loss for the quarter of $10.8 million or $0.40 per share, resulting from the lower year-over-year sales, closeout sales that affected gross margins, incremental overhead costs related to the addition of our newly acquired divisions, and higher advertising costs related to certain license commitments.

New items in our 2009 product portfolio have been well received by the trade, and we expect to maintain our foothold on retail shelf space with our value-driven line at all of our major customers going into the second half of the year.

Our financial position remained extremely strong, with working capital of approximately $313.5 million, including cash and cash equivalents of $146 million as of March 31, 2009, enabling us to continue to execute on our acquisition strategy and internal product development.

Before I go into more details about our products' performance in the quarter and our outlook for the future, I would like to turn the call over to Joel Bennett for a review of our financial performance for the first quarter of 2009.

Thank you, Jack, and good morning, everyone. First-quarter 2009 net sales were $108.5 million compared to $130.9 million in the same period last year. The net loss for the quarter was $10.8 million or $0.40 per share, compared to first-quarter 2008 net income of $900,000 or $0.03 per diluted share.

The quarter was impacted primarily by lower sales volume, closeout sales, and incremental overhead costs related to the addition of our newly acquired divisions.

For our sales by product categories, worldwide sales of traditional toys, which include action figures, vehicles, electronics, plush, role-play, dolls, kites, pool toys, and outdoor and promotional products, were $97.6 million for the first quarter of 2009 Compared to $118 million in the first quarter of 2008.

Sales in the quarter were driven by action figures, vehicles, outdoor furniture, electronic toys and pretend play products. However, we did see declines in some of those products based on WWE, Hannah Montana, and Pokemon, as Jack mentioned.

Our craft activity writing products, which consist primarily of our Pentech and Flying Colors product lines, as well as our new Girl Gourmet and Spa Factory lines, had worldwide sales of approximately $7.6 million in the first quarter of 2009 as compared to $6.1 million in the comparable period in 2008. Sales of our Girl Gourmet line activity items drove sales in this category.

Worldwide sales of our pet products were $3.5 million in the first quarter of 2009 compared to $5.3 million in the first quarter of 2008. Sales in this category were led by AKC and other licensed pet products.

Gross margin for the first quarter of 2009 was 34% as compared to 36.2% in the first quarter last year. The 220 basis point decrease in gross margin for the quarter is due to our product mix, which included more lower margin closeout sales and products with higher royalties.

SG&A expenses in the first quarter were $54.6 million or 50.2% of net sales, which compared to $48.3 million or 36.9% of net sales in the same period last year. This increase is due primarily to the addition of overhead related to our recent acquisitions and higher advertising costs related to license commitments.

Depreciation and amortization was approximately $4.7 million in the first quarter of 2009 compared to $5.7 million for the comparable period in 2008. Stock-based compensation for the first quarter was $2 million and $2.1 million in 2008.

During the quarter, we posted $2.9 million in profits from the videogame joint venture with THQ, compared to $2.4 million for the comparable period last year. As for the pending arbitration to resolve the preferred return dispute with THQ, we're awaiting the answer from the arbitrator, which should be any time now.

Operations used cash in the first quarter of 2009 of approximately $6.9 million compared to providing cash of $15.4 million in the first quarter of 2008. Our financial position remains very strong.

As of March 31, 2009, our working capital was approximately $313.5 million, including cash and equivalents and marketable securities of $146 million.

We continue to evaluate potential acquisition opportunities and do expect to continue to grow our business by actively pursuing additional 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.

Accounts receivables at the end of the first quarter were $71.2 million compared to $81.9 million at the end of the first quarter of 2008. DSOs were 59 days, comparable to the 56 days in the same period in 2008.

Inventory was $79.2 million at the end of the quarter, up from $66.9 million at the end of the comparable period in 2008. The increase is due to the seasonal demand for our products, with higher year-over-year sales expected in the second and third quarters.

DSIs increased to 122 days from 87 days at the end of the first quarter.

Capital expenditures for the first quarter were $4.2 million. And we expect capital expenditures to be approximately $18 million for the full year, down from $23 million in 2008. With that, I will return the call to Jack Friedman.

Thank you, Joel. 2009 started off slowly as expected, but we have many items in our huge portfolio and initiatives in place to keep us on track for the full year. We look forward to benefits from our newly acquired divisions, especially sales of our Disguise Halloween products.

We were in full swing getting into production on many of the new Fall items in our portfolio; and as typical, a majority of our key new items will ship in the third quarter.

There are new initiatives with great potential coming from every area of JAKKS. We expect to benefit from strategic value-pricing initiatives, as customers are increasingly cost-conscious. We are already trending higher on items like our line of novelty toys. In TV games, we are focusing on our $19.99 price point, which has historically done well for us.

While we have seen slowing in Hannah Montana, we do have a [manage] line of movie merchandise in the channel which we expect to sell through reasonably well. In addition, we have a huge amount of exciting successful Disney programs at retailers nationwide and are very pleased with their performance so far.

We have a number of new vehicle initiatives slated for this season later this year including new MXS vehicles and our new exciting -- extremely exciting -- GX Racers that have retail support across the board.

In seasonal we saw a modest improvement in kite sales in the quarter. We are launching new Star Wars kites and water toys for the summer.

We are continuing our Girl Gourmet line with a new Ace of Cakes cake bakery and a line of candy products called Sweet that expand on the brand that we created internally.

We have new EyeClops products including a hand-held projector, which people are in love with, and our new Night Vision Goggles that extend that brand, which have received really rave reviews by our media and retail customers.

As we have many new, extended licensed and unlicensed initiatives from every JAKKS division, that gives us reason to be optimistic about the potential for this year. As for 2009 guidance, we are still planning to grow full-year revenue above 2008 levels to $920 million.

Concerning earnings, however, taking into consideration the economic climate and continuing margin pressure, we are cautiously revising our earnings guidance to $1.70 to $2.00 per diluted share.

Despite the uncertainties related to the US recession, we remain committed to running a profitable JAKKS Pacific. We have commitments from our key retail partners. And along with JAKKS employees around the world, we are working hard to execute on our strategy on behalf of our shareholders for 2009 and beyond.

With that, I will open the call to questions. Thank you very much.

Todd Schwartzman, Sidoti & Company.

Hi. Good morning, folks. First on integration of the acquired companies, have there been any issues to speak of thus far?

No, not any negative issues if that's what you mean.

Right.

No, they are going along very smoothly. They are very good people. It's probably a three- to four-month process to integrate those divisions, and by the back half of the year we expect to be fully integrated.

Again probably some of the questions are going to lead to our reason for down-forecasting our earnings for the year is one of caution. We are feeling some margin pressure, particularly from the retailers fighting for every penny. And we did have in the first quarter and a little ways to go some closeout merchandise that we have to get rid of.

So I'm saying that in reference to -- our business is good and healthy.

And that closeout inventory, when do you work that off ultimately?

There's many nuances to that (technical difficulty) our sales department. Timing is of the essence of it. It's not just a matter of finding a home for it; it's a matter of the right timing, not to interfere with our regular merchandise and our regular sales.

Okay. Getting back to the acquisitions -- the completed acquisitions, that is. Do you expect the EPS contribution from each of these companies in the third quarter, let's say?

Yes, particularly our Disguise acquisition. We seem to be heading into a particularly good season with our Halloween line.

But that would not be offset by a minimal net loss from one of the other two companies?

No.

Okay. Regarding the relationship with Disney as it pertains to Hannah, is there any clause in your deal with them that allows you to adjust the level of royalties? If Miley will leave the show for some reason and new episodes are not being produced, let's say.

No.

Okay. That's all I've got. Thanks, guys.

Arvind Bhatia, Sterne, Agee.

Thank you. Good morning. My first question is on gross margins, Joe, if you can help us understand where gross margins are going from here for the rest of the year.

Then in terms of reserves, the reserves are up versus last year, which you explained why. But I guess quantitatively, pretty comfortable with where the reserves are given the closeout situation?

Yes. We review these things on a regular basis. And when we close out we usually get rid of everything, so the impact of certain items doesn't follow to (technical difficulty) inventory.

In particular in Q1, we had a number of items. Ordinarily we will sell closeouts above our cost, and that's typically the goal and we (technical difficulty) achieve that.

In this case, we had a number of pet food items with a short shelf life, and we wound up selling it for scrap basically. And there were some other items that we weren't able to get cost. So whereas it has an impact on margins, instead of generating gross profit these actually generated about a $1.2 million loss on the sale.

Going forward, we would expect margins to be in the 36% range. Our historical goal had been to be above 40%. But a couple of things that have happened with the new acquisitions, their average margin (technical difficulty) that is approximately 20% of the business as we see it now. With margin pressures from China, we would expect them to be in that 36%, 37% range instead of 39%.

Great. Then the top line you are projecting growth for the rest of the year. When you take into account the three acquisitions and the seasonal pattern, etc., can you give us some color on which quarter might be a higher growth quarter? I mean, should we expect the September quarter to be the highest growth quarter? Or if you can just kind of drill into it a little bit.

The biggest would be the second and third quarter. With Disguise, they start shipping in their season the end of second quarter. So the biggest layering would be second; and then third quarter would be the next highest growth.

Fourth quarter, we're starting to ship Spring and we wouldn't expect as much growth. But we are still on track for the $920 million top line.

Great. That's all I have. Thank you.

Sean McGowan, Needham & Company.

Thank you. I'm going to follow up on a couple of these subjects that have already been breached. Looking at your commentary, both Joel and Jack, on pressure from Chinese manufacturing, that suggests to me that -- not from Chinese; I meant from retailers. That suggests to me that maybe you're not able to get the price that you expected.

So how is it that you're able to hold your revenue forecast even if what you're getting is pushed back from retailers on price?

It's a combination. It's mostly on the cost side of the business. It's not from the sales price.

Okay. So I thought Jack said something about retailers trying to get whatever margin they can get.

And so -- which leads to my second question then, which is -- specifically what costs are you seeing higher now than you saw a few months ago when you talked about your outlook for the year? Are there particular costs that are coming in a lot higher than you thought?

I think one of the main areas is labor. It's more and more difficult for the factories in the South to ensure that the people are going to return after Chinese New York. That's probably one of the biggest components.

Are you not expecting to get some offset from that on lower material costs?

We've got a couple -- with some of the new acquisitions, we're not just looking at plastics anymore. We've got a number of items that have steel in it; and those prices, in addition to the related testing, have gone up.

Okay. A couple of other quick questions. In the first quarter, was there any significant amount of revenue from kind of brand-new products that you would have debuted at Toy Fair even late last year? Or is it mostly carryforward product from last year?

Mostly carryforward. The only incremental would be the acquisitions, which was not significant. Most of the new key items will be released at the end of second quarter.

Okay. Then last question. How have the shipments as well as the sellthrough of Hannah been impacted by the movie?

There's been a little bit of an upswing, probably not quite as much as we would have liked to have seen. But decent.

Probably not -- it sounds like maybe you're thinking not enough to get retailers more jazzed about the balance of the year. So no change in the forecast there? I mean everybody knew the movie was coming, so it's not like it changes their forecasts. Is that right?

As we sit now, our retailers are carrying it. They don't want to sit on any big inventories or make any big inventory commitments. As they need it, they will buy it.

Okay. Thank you very much.

Gerrick Johnson, BMO Capital Markets.

Hi, good morning. I was wondering if you could talk about the THQ arbitration for a second? What's the receivable that is on the balance sheet now?

Then can you kind of go through the impact on the financial statements, should you win this or should you lose, since were expecting something any day now?

Okay, the current receivable is about $56 million, and that is accrued at the rate that existed at the last distribution period.

In the event that the number is less than that, we would have a charge in the quarter that the decision is made. If for example there was a 10% reduction -- this is just a hypothetical example -- then we would reduce the accrual by $5.6 million in that quarter. And that would be offset by whatever the preferred return at the new rate for that quarter would be.

Okay. Now the way the arbitration works, was it a baseball-style arbitration, where you have one number and they have another number, and one of those numbers gets picked? Or does the judge or arbitrator have some leeway in what happens?

No. It was baseball method. All the presentations and submissions have already been made, and we are basically waiting to hear from the arbitrator.

Okay. Moving on to operating expenses. It's been a topic that's been on other conference calls. Basically a lot of other companies talking about cutting costs and what they are doing to get those operating expenses down. Didn't hear anything about that on your conference call.

I was wondering what kind of things you might be implementing to get those operating costs a little bit lower.

Rather than overall restructuring, we continually look at overhead. We did make some headcount adjustments in the fourth quarter as well as during the first quarter.

One of our philosophies is you've got to have good people around in order to generate good product and make sure that the customers are supported properly. We tend to operate fairly lean, use outside services where we can before we bring in additional overhead.

But it's something that won't be overreaching. We'll continue to look for efficiencies regarding the acquisitions, but we're not looking at major overhauls of how we do the business.

Okay. Lastly, I just want to ask you something on inventory. It's kind of a muddy picture with the acquisitions over the last year. Do you have any idea of what your same-store inventory was, excluding the acquisitions? How the inventory on existing product lines is at both your level as well as the retailer?

Retail, because of the broad channels that Disguise sells in -- and their season ends basically in November 1, so there wouldn't be much of anything left at retail for them.

As far as what we have, it's pretty much flat, and we are going into our busy season with Disguise. So on the JAKKS side it's relatively flat. So most of it is the incrementals to the acquisitions. And we are going in, like I said to their peak season this quarter.

Right. Okay. Thank you very much.

Ed Woo, Wedbush.

Yes, going back to the THQ arbitration, is there any clause that the arbitration can be appealed? Or would it be a final verdict?

And how quickly do you think you would be able to get the cash after a decision has been made?

This is Jack speaking. We can't play lawyers. As far as we know the arbitrator makes a decision and that's it and there is no appeal. Again, we don't want to play lawyer regarding that.

As far as one a decision is made, the money would be immediately due us.

Great. Then the last question I have is -- was there any big impact from foreign exchange this quarter?

No, our international sales are sold primarily, if not all, on an FOB basis where it's shipped directly from China or Hong Kong; and those are all denominated in US dollars.

We may have some going forward as we expand our reach into Europe. But at this point, the international sales are in US dollars.

Okay, thank you.

Jeff Blaeser, Morgan Joseph.

Good morning. Thanks for taking my question. Another quick question on the operating cost side. Based on your sales gross margin and EPS assumptions going forward, it would look like operating costs are probably going to go up a decent amount of money in dollars.

Is that primarily the acquisition-related costs? Or could it also be possible from the income from JV expected to be down on that area?

No, the JV wasn't expected to be lower than what we had previously forecast, as most of it will be from the margin, plus whatever we were not going to recover from Q1.

Okay.

This is Jack. We hope we can do better than our revised forecast. We're taking a -- the economic situation really hasn't changed. Is it possible it might get worse. We are just taking a precautionary outlook and we want to beat numbers, not miss numbers.

Okay. So prior to this guidance, you were expecting higher gross margins, not lower operating costs; is that fair?

Well (technical difficulty) a combination actually.

Okay. I'm sorry, go ahead.

The biggest component of the decrease is in the margin.

Okay. Then on the acquisition front, will the ongoing integration of the three most recent deals, will that impact your decision to act quickly? Can you handle both at the same time, or is there going to be a little lag? You want to get the three that you have (technical difficulty) running?

This is Jack speaking. Actually, we are continuing to look, and more so than ever, with pricing looking better on deals. A deal takes time. Even if we were to find something, it takes X amount of days, weeks, months to close a deal. By that time, our recently acquired acquisitions should be assimilated into our operations.

So no, we're looking definitely in the marketplace. We would love to find a good acquisition over the next few months.

Okay. Then finally on the share count, was that option related or did you buy back some shares?

No, because it was a loss, we are using basic shares which excludes any unvested restricted shares. So that will be spread over -- I think the diluted shares will be about 32.3 million, but those are basic shares because of the loss.

Okay, thank you.

Thank you. This concludes our question-and-answer session. I will now turn the call back to Mr. Friedman for closing remarks.

Thank you all for your time, and we look forward to further calls later on in the year. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating You may all disconnect.