JAKKS Pacific Inc (JAKK) 2009 Q4 法說會逐字稿

Welcome to the JAKKS Pacific fourth quarter and year-end results for 2009 teleconference. My name is Monica and I will be your operator for today's call. At this time all participants are in a listen only mode and will remain so for the duration of today's call.

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

Thank you, operator. Good afternoon, ladies and gentlemen. This is Genna Rosenberg, Senior Vice President of Communications and Investor Relations for JAKKS Pacific. Thank you for joining our call conferences management of JAKKS Pacific to review the results of our fourth quarter and full year ended December 31, 2009.

On the call today are Jack Friedman, Chairman and Co-Chief Executive Officer of JAKKS Pacific, Stephen Berman, our 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 conclude the call with highlights of our product lines and current business trends and we will have no Q&A for this call.

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 2010 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 most 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. And with that I will turn the call over to Mr. Friedman.

Good afternoon, ladies and gentlemen, this is Jack Friedman. Thank you for joining JAKKS Pacific today as we discuss our results for the fourth quarter and the full year of 2009. 2009 was extremely challenging, but we finished the year in line with our latest expectations with several lines in a role play action figures activities and electronics portfolio driving the core business.

On a non-GAAP basis, fourth quarter 2009 net sales were $198.9 million compared with sales of $269.3 million for the fourth quarter of 2008. For the full year of 2009 sales on a non-GAAP basis were $804.3 million compared to $903.4 million for the full year 2008. On a non-GAAP basis we had earnings for the fourth quarter of $6.4 million or $0.22 per diluted share and $30.2 million or $1.03 per diluted share for the full year of 2009.

We continue to navigate through difficult business environment and we expect year-over-year sales of JAKKS core products to be lower in 2010 as a result of a number of things. While we had a good response to our 2010 line of recent toy fairs, we have declines in several key product lines for 2010 including WWE, Hannah Montana, and Cabbage Patch Kids. There were several lines introduced in 2009 which did not meet our expectations and will not be in our line for 2010, such as our GX Racers, which we had high hopes for, EyeClops Mini Projector and others.

Next we have decided to focus on our core competencies and have existed less profitable areas of the business which include Pentech stationary products and our Go Fly A Kite products. We have also been reducing the number of SKUs in our ongoing lines. Plus we have experienced overall softness of retail from the weakness in the global economy. Thus, for our initial 2010 guidance we expect overall net sales in the range of $660 million to $670 million for the full year.

However, we do believe we will run a more profitable business on the lower sales base with earnings in the range of $1.10 to $1.20 for the year, an increase of 7% to 17%. This guidance anticipates first quarter 2010 net sales in the range of $70 million to $74 million with a range of $0.20 to $0.25 per share versus net sales of $108 million and a loss of $0.40 per share in the first quarter of 2009.

We are very focused on increasing the sales and profitability of the JAKKS core business for 2011 and beyond and for 2010 we do have good placement of JAKKS core products in the portfolio at retailers nationwide including Disney Fairies, Hello Kitty, UFC, TNA and Spy Net. In addition sales of our Disguise Halloween costumes, CDI Role Play products, Kids Only indoor and outdoor kids furniture, and TollyToys baby dolls and accessories internationally are on track with commitments from retailers looking very good for 2010.

In July 2009, we announced we would be implementing a company-wide restructuring plan and comprehensive core savings initiatives in light of the lower sales for 2009, and have been diligently working on the implementation process which is running on plan. This plan consists of headcount reductions, office space consolidations, SKU reductions, increased tooling efficiencies resulting in lower capital expenditures, reconfiguring our operations, streamlining processes and reducing overall spending. We expect these initiatives will result in an annualized savings well in excess of $30 million and they in part contribute to our earnings on a non-GAAP basis being in line with our guidance for 2009. We have -- we will have completed the reorganization by the end of this month. We are absolutely committed to running a lean and profitable business and will maximize opportunities by leveraging our strong balance sheet, excellent relationships and seasoned management team.

Our balance sheet remains extremely strong with working capital of approximately $349.4 million including cash and equivalence and marketable securities of $255 million as of December 31, 2009, enabling us to continue to execute on our acquisition strategy and material product development without interruption.

I would like to now turn the call over to Joel Bennett for a review of our financial performance for the fourth quarter and full year 2009.

Thank you, Jack and good afternoon, everyone. Net sales for the fourth quarter were $198.8 million compared to $269.3 million in the fourth quarter of 2008. Net sales for the full year of 2009 were $803.7 million compared to $903.4 million for the full year of 2008. The Company reported a loss for the fourth quarter of 2009 of $1.9 million or $0.07 per share compared to net income of $16.9 million or $0.55 per diluted share reported in the fourth quarter of 2008. For the full year of 2009, JAKKS reported a net loss of $385.5 million or $14.02 per share due primarily to the writeoff of goodwill and other intangibles in the second quarter. This compares to earnings for the full year of 2008 of $76.1 million or $2.42 per diluted share.

On a non-GAAP basis, 2009 net sales for the fourth quarter were $198.8 million and $804.3 million for the full year. This compares to non-GAAP net sales of $269.3 million and $903.4 million for the fourth quarter and full year of 2008 respectively. On a non-GAAP basis, JAKKS' net income for the fourth quarter was $6.4 million or $0.22 per diluted share compared to non-GAAP net income of $16.9 million or $0.55 per diluted share in the fourth quarter of 2008. Non-GAAP net income for the full year of 2009 was $30.2 million or $1.03 per diluted share compared to net income of $66.6 million or $2.13 per diluted share for the full year of 2008. These non-GAAP net sales figures exclude one-time charges related to the recall of one of our products.

2009 GAAP results include the following which were excluded from the non-GAAP results noted above. Pre-tax non-cash goodwill impairment charge of $407.1 million due to the sustained decline in the Company's market cap pursuant to the applicable accounting standard taken in the second quarter of 2009. Pre-tax non-cash impairment charge of $8.2 million related to certain of the Company's underutilized trademarks taken in the second quarter. Pre-tax charge to royalty expense of $32 -- $33.2 million was taken in the second quarter of 2009 related to abandoned underperforming licenses, $19.5 million of which is non-cash, $13.7 million is expected to be paid out to third parties through 2011. Pre-tax charge to cost of goods of $23 million was taken in the second quarter of 2009 related to the impairments of inventory of which $14.2 million is non-cash and $8.8 million is expected to be paid out to third parties during the remainder of the first quarter. Pre-tax non-cash charge of $2.3 million related to the writeoff of obsolete tools and molds was taken in the second quarter of 2009. Pre-tax charge of $1.6 million related to the recall of one of the company's products taken in the second quarter of 2009. And finally, pre-tax non-cash charge of $23.5 million related to the reduction to the receivable from the joint venture with THQ as a result of the recent arbitration decision which reduced JAKKS preferred return payment rate from 10% to 6% of the joint venture's net sales of which $22.5 million was taken in the second quarter of 2009 and $1 million was taken in the third quarter of 2009.

2008 GAAP results include the following which are excluded from the non-GAAP results previously noted. Pre-tax non-cash impairment charge of $9.1 million related to certain of the Company's underutilized trademarks in the third quarter of 2008, tax benefits related to the reversal of prior tax accruals of $13.3 million in the third quarter of 2008, FIN 48 tax credit in the third quarter of 2008 which consisted of $3.1 million credit to interest expense and a $2 million credit to penalty expense, and finally pre-tax non-cash charge to royalty expense of $1.8 million related to abandoned or underperforming licenses in the third quarter of 2008.

The goodwill impairment charge taken in the second quarter of this year does not affect the company's liquidity or business operations and is not expected to limit or change its ability to continue to generate positive future cash flows from these intangible assets.

Now for our sales by product categories. Worldwide sales of toy products which include action figures, vehicles, electronics, plush, role play including Halloween costumes, dolls, kites, pool toys, outdoor promotional and pet products were $170.7 million for the fourth quarter of 2009 compared to $240.7 million in the fourth quarter of 2008. Traditional toy sales for the full year of 2009 were $729.9 million compared to $837.5 million for the full year of 2008.

Sales in the quarter were driven by Halloween costumes, pretend play products, electronic toys and action figures. However, we did see year-over-year declines in some of those products based on WWE, Hannah Montana, Neopets and others. And worldwide sales of craft activity and writing instruments, which consist primarily of our Flying Colors and Pentech product lines, had worldwide sales of approximately $28 million in the fourth quarter of 2009 as compared to $28.6 million for the comparable period in 2008. For the full year of 2009, we had sales of $73.8 million as compared to $65.9 million for the comparable period in 2008. Sales of our Girls Gourmet line and activities items drove sales in this category. Included in those numbers are international sales of $52.6 million for the fourth quarter and $158 million for the full year of 2009 compared to $28.6 million and $161.9 million for the same period respectively for 2008.

On a non-GAAP basis, gross margin for the fourth quarter of 2009 was 28.3% as compared to 34.4% in the fourth quarter of last year. Gross margin for the full year of 2009 was 32.4% as compared to 35.6% for the full year of last year. The 610 basis point decrease in gross margin for the quarter is due to our product mix which included more lower margin sales including closeouts as we experienced lower than expected sales of our higher margin product and higher amortization of tools and molds as a percentage due to lower overall sales.

SG&A expenses in the fourth quarter of 2009 were $57.3 million or 28.8% of net sales as compared to $83.8 million or 31.1% of net sales in the same period last year. SG&A expenses for the full year of 2009 were $226.7 million or 28.2% of net sales as compared to $250.4 million or 27.7% of net sales for the full year of last year. This decrease is due primarily to the cost cutting measures implemented by the company and lower overall sales.

We have been executing on a restructuring plan and cost saving initiatives we set in motion to improve profitability for this year and beyond. These cost saving efforts are intended to reduce spending given the lower than expected sales forecasts and lower gross margins. And so our operations will be focused on fewer SKUs but a basic everyday, every season product.

Depreciation and amortization was approximately $4.9 million in the fourth quarter and $18.5 million for the full year of 2009 compared to $4.6 million and $15 million for the comparable periods in 2008. Stock based compensation for the fourth quarter of 2009 was $1 million and for 2008 was $1.3 million and was $4.3 million for the full year of 2009 compared to $7.3 million for the comparable period in 2008.

For the quarter we posted lower profit of $5.8 million from the video game joint venture with THQ as a result of increased legal fees and lowered preferred return rate compared to profit of $12.6 million for the comparable period last year. For the full year we posted a loss of $16.1 million after the adjustment to the cumulative receivable by $23.5 million compared to profit of $17.1 million in 2008.

Operations provided cash in 2009 of approximately $109.5 million compared to $59.5 million for 2008 and our financial position remains very strong. As of December 31, 2009, our working capital was approximately $349.4 million including cash and equivalents and marketable securities of $255 million. We continue to evaluate potential acquisition opportunities and do expect to continue to grow our business by actively pursuing additional accretive and complimentary acquisitions and executing on internal growth initiatives including creating new products and securing new licenses to provide opportunities for growth for JAKKS Pacific.

Accounts receivable at the end of the fourth quarter were $129.9 million compared to $147.6 million at the end of the fourth quarter of 2008. DSOs were 59 days compared to 49 days in the same period in 2008.

Inventory was $33.4 million at the end of the quarter, down from $87.9 million at the end of the comparable period in 2008. The 61% decrease is due primarily to the second quarter write-down and subsequent sell-off of inventory as well as tighter inventory management. DSI's decrease to 27 days from 54 days at the end of the fourth quarter of 2008 due to significantly lower inventories -- inventory levels in 2009.

Capital expenditures were $15.8 million for the full year of 2009, down from $22.3 million for the full year of 2008. Guidance for capital expenditures for 2010 will be $12 million.

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

Thank you, Joel, you're very long winded with all of that information.

We have been meeting with retailers about 2010 placement for the past couple of months and the commitments are falling into place for this year. We are focusing our efforts on our strongest SKUs from across -- from across our broad base to drive the business. Our Disney role play line is a classic staple and has great placement at all major retailers as do our Black and Decker, novelty toys and other pretend play items such as our new TollyToys Disney baby dolls, Preschool role play outfits and Fairies dolls and play sets which have been doing extremely well at retail so far this spring.

In electronics we have developed our new Spy Net line and will introduce a Nintendo Wii version of Big Buck Hunter in addition to our Big Buck Hunter TV games which did very well for us this past Christmas season.

TNA wrestling is slated to shift in April and hit retail this summer and the ratings have been looking promising as classic wrestling legends such as Hulk Hogan, Kurt Angle and Mike Foley join the roster of this growing competitive wrestling franchise. TNA will join UFC in our action figure lineup and our Club Penguin, Phineas and Ferb, Hello Kitty, Fancy Nancy, and Girl Gourmet all have good placement at retail for this year so far. We expect new introductions of our Halloween base -- of our Halloween products based on Iron Man 2, Sesame Street, Marvel, Toy Story and several others who do extremely well. We also have Toy Story in our Kids Only furniture line, new Preschool role play and a new Toy Story Mania motion TV game as we get behind which is sure to be a big toy event for this year with the release of Toy Story 3.

We expect to benefit from some strategic value pricing initiatives throughout the portfolio as consumers are increasingly cost conscious and with the restructuring and cost saving initiatives we are implementing we expect to continue seeing benefits as this year progresses. We remain committed to running a profitable JAKKS Pacific and are working hard to execute on our strategy on behalf of our shareholders for this year and beyond.

With that, I'd like to thank you all for joining with us today.

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