JAKKS Pacific Inc (JAKK) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the JAKKS Pacific 2010 first quarter earnings call with management. As a reminder today's call is being recorded. A question and answer session will be held at the end of today's presentation. (Operator Instructions).

I would now like to introduce Ms. Genna Rosenberg, Senior Vice President of Investor Relations. Please go ahead, Ms. Rosenberg.

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 at JAKKS, to review results for our first quarter ended March 31st, 2010. Also on the call today are Stephen Berman, President and Chief Executive Officer, and Joel Bennett, Executive Vice President and our Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, and our operational results, and then Mr. Bennett will review detailed comments regarding our financial results. Mr. Berman 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 your questions.

Before we begin I would like to point out that any comments made about our future performance, events, or circumstances, including estimates of sales and earnings per share for 2010, as well as any other forward-looking statements are subject to 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 other Company reports subsequently filed with the SEC from time to time. And with that I will turn the call over to Mr. Berman.

Thank you, Genna. And good morning, everyone. 2010 is off to a good start. The first quarter ended slightly ahead of our expectations. We continue to tightly control our operations, and at this point we remain confident with the guidance for the year. We have gone back to our original approach to product, and we are counting on singles and doubles to put JAKKS Pacific back into an industry-leading position.

We expect to achieve our top line guidance for the year, with contributions coming from a wide range of product lines. Our portfolio includes dolls, role-play, action figures, electronics, kids furniture, Halloween costumes, and much, much more. We will continue to put our quality product based on top licenses that kids love, as well as our own internally developed brands, that we believe are both exciting and right on trend. At the same time, we are actively seeking complimentary acquisitions to capitalize on.

Operationally we are focused on carrying our cost saving initiatives and company-wide restructuring plans that were put into place last year. These include the consolidation of offices, headcount reductions, lowering spending, and a more strategic approach to product to increase our SKU efficiencies and reduce our development costs. As a result, we realize a significant reduction in SG&A expenses. Inventories are at historic lows due to improved oversight and timing of orders. We do, however, expect inventories to rise, as we approach the seasonal sales peak in third quarter. Our infrastructure is now in line with our current business levels, and we believe the benefits from the deep cuts are evident in our financial performance.

The early responses to our product portfolio is quite promising. Despite a soft retail environment, increased labor and production costs, and foreign currency issues, we are expecting full year sales to be in the range of guidance of $660 million to $670 million.

I will get more into product after Joel Bennett reviews our financial results for the first quarter. Joel.

Thank you, Stephen and good morning everyone. Net sales for first quarter 2010 were $77.3 million, compared to $108.7 million in the first quarter of 2009, with a loss for 2010 of $5.2 million, or $0.19 per share, which included a tax benefit of $4.9 million, related to the reversal of prior tax accruals pursuant to FIN 48. This compares to a loss of $10.8 million, or $0.40 per share reported in the first quarter of 2009.

Now for our sales by product category. Worldwide sales of our traditional toy products which include dolls, action figures, vehicles, electronics, plush, role-play, including Halloween costumes, indoor and outdoor kids furniture, pool toys and pet products were $68.3 million for the first quarter of 2010, compared to $101.1 million for the first quarter of 2009.

The lower year-over-year sales in the quarter reflects declines in products based primarily on WWE, Hannah Montana, Pokemon, and Neopets, and worldwide sales of craft, activity and writing products were $9.1 million in the first quarter of 2010, compared to $7.6 million in 2009. Sales of our Girl Gourmet line and activity items drove sales in this category, and we have discontinued our Pentech writing instrument line in 2010. Included in the category numbers are International sales of $9 million for the first quarter of 2010, compared to $18.6 million for 2009. We are expanding our European operations to maximize International opportunities for both licensed products and JAKKS content.

Gross margin for first quarter 2010 was 32.6% of net sales, compared to 34% of net sales in the first quarter of last year. The 140 basis point decrease is due to our product mix which included more lower margin sales as we experienced lower sales of our higher margin products. SG&A expenses in first quarter 2010 were $38.8 million, or 50.2% of net sales, as compared to $54.6 million which is also 50.2% of net sales in the same period last year.

We have been successfully executing on our restructuring plan and cost saving initiatives set in motion to improve profitability for this year and beyond as evidenced by our results this quarter. These cost savings efforts are intended to reduce spending to levels commensurate with our current sales forecast. Depreciation and amortization was approximately $2.1 million in 2010, compared to $2.5 million for the first quarter of 2009. Stock-based compensation for the first quarter of 2010 was $1.2 million, and in 2009 was $2 million.

Regarding the video game joint venture with THQ, the joint venture was dissolved as of December 31st, 2009, and effective January 1st 2010 we no longer are entitled to receive a preferred return on sales of WWE video games. Accordingly profit from the joint venture was nil in 2010, down from $2.9 million in 2009. However, we are expecting income of $6 million to be realized in the second quarter on a cash basis with additional income and payments of $6 million, $4 million, and $4 million in each of the three subsequent second quarters through 2013, totaling $20 million in payments from THQ, as a result of our settlement agreement and dissolution of the joint venture. All WWE matters have also been settled, and so litigation-related legal costs are down significantly.

Operations provided cash in first quarter 2010 of $24.1 million, compared to using cash of $6.9 million in the first quarter of 2009, and our financial position remains very strong. As of March 31, 2010 our working capital was $356.1 million, including cash and equivalents and marketable securities of $278.2 million.

We continue to evaluate potential acquisition opportunities, and expect to continue to grow our business by actively pursuing 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. In addition, we expect to use cash on hand to handle the remaining $20.3 million of our 2023 convertible notes, which the Company may be required to redeem in June 2010, or may elect to repurchase on or after June 15th, 2010.

Accounts Receivable as of March 31st, 2010 were $59.2 million, compared to $71.2 million at the end of the first quarter of 2009. DSOs were 69 days compared to 59 days in the same period in 2009. Inventory was $30.8 million as of March 31st, 2010, down from $79.2 million at the end of the comparable period in 2009. The decrease is due primarily to the sell off of older and impaired inventory in 2009, and tighter supply chain and inventory management. DSIs decreased to 65 days from 122 days at the end of the first quarter of 2009, due primarily to significantly lower inventory levels in 2010.

And finally capital expenditures were $1.2 million for the first quarter of 2010, down from $4.2 million for the first quarter of 2009. Capital expenditures for the full year of 2010 are expected to be approximately $12 million, compared to $16.3 million for the full year of 2009. This reduction is being achieved through SKU rationalization and refined production planning.

With that, I will return to the call to Stephen Berman.

Thank you, Joel. So as I mentioned this year is certainly falling into place, our restructuring plan is on track, and we ended the quarter slightly above our expectations. We will continue to focus our efforts on improving our profitability, and have taken a back-to-basic approach to our products lines.

That said, our Disney business is looking very strong. We are excited about the Disney Princess and Fairy product lines, and we are seeing some nice, nice momentum for our Phineas and Ferb, and Club Penguin, and Toy Story products. Our role-play lines continue to be a classic staple, and have great placement at all major retailers for the spring and Fall. We are excited about our new SpyNet line of spy products and real construction lines, and they are both looking good and have some notable pre-launch buzz, with nice retail placements for this fall. Like many of our other new items these lines will ship into retail this summer.

We will introduce a Nintendo Wii version of Big Buck Hunter, in addition to our Big Buck Hunter TV games, and expect to have good placement for this fall. On the UFC toy front, our UFC action figures continue to do very well at retail, and starting in May we will aggressively expand the UFC range with seven new line extensions, including a new feature item like our TV-advertised UFC electronic-action octagon. It comes with lights and sound and real announcer voices calling all of the action.

Our new TNA toy line is shipping to retailers in May, and features top superstars, like Hulk Hogan, Sting, AJ Styles, and Kurt Angle, to name a few. TNA continues to expand its TV audience by going live Monday nights on SpikeTV and with encore airings on Thursday nights. In addition TNA has signed up an incredible new cast of superstars, including Mick Foley, Ric Flair, Jeff Hardy, and Rob Van Dam. While Halloween is approaching us very quickly, we are already gearing up for the Halloween season and expect new introductions based on IronMan 2, Marvel, Sesame Street, and Toy Story, and we expect to have a great year. As we mentioned last quarter, we also have Toy Story in our Kids Only furniture line, new preschool role-play, novelties, and a new Toy Story mania motion TV game, as we get behind what is sure to be a big movie, a big toy event for this year with the release of Toy Story 3 this June.

At this point we are reiterating our initial 2010 guidance of net sales in the range of $660 million to $670 million for the full year, with earnings in the range of $1.10 to $1.20 per diluted share, an increase of 7% to 17% over 2009. We are focused and absolutely committed to growing sales, while running a lean and increasingly profitable business for 2010 and beyond. We will maximize opportunities by leveraging our extremely strong balance sheet, excellent relationships, and seasoned management team. We are running JAKKS Pacific for our shareholders, and we believe we will show you in the coming quarters that we can get JAKKS back on the growth track. Actions speak louder than words, and we are inspired by the challenge.

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

Thank you, operator.

Good morning. (Operator Instructions). And we will pause for a moment to assemble the queue. And our first question comes from Gerrick Johnson with BMO Capital Markets.

Hey. Good morning. On the gross margin I was hoping maybe you could explain a little bit more what is going on in the components of the gross margin? What are you seeing in input costs, are you getting retail price increases, are there any additional promotional allowances perhaps, to clear out old merchandise in there? So just a little bit more on gross margin, please.

Yes. Basically on first quarter because Q1 last year had a higher proportion of call it JAKKS core products, WWE, Hannah, et cetera. The gross margins were down this quarter, but we do expect 240 basis point expansion in 2010, so that will take us to just under 35% for the year. It is just because of lower overall sales level for Q1 that the product lines had a bigger impact.

Okay. So are you fully reserved for the clearances items that are out there? Are there any more promotions or allowances to be factored in there?

They are built into the 35% number for the year and as things have come up on a regular basis we look for opportunities to do more business with the retailers. Sometimes it includes doing some promotions, but we are not expecting anything out of the ordinary in terms of our historical percentage rate of promotions.

Okay. Great. And then on the THQ payments, are you realizing the benefit through your P&L as they are received, or are you prorating those across the quarters through the year?

The original expectation was that it would flow with the sales, or at least proportionally over the quarters, but it will all be recognized in the quarter that it is received, and the current terms are that they are due on June 30th of each of those four years.

Okay.

Unless we get it late it will be in Q2.

Okay. So that is change. Previously we were expecting say $1.5 million in each quarter. Now we are expecting $6 million in the third quarter?

Correct.

Okay. Great. Thank you very much.

And now from Sterne Agee, we will go to Arvind Bhatia.

It is Arvind Bhatia, Sterne Agee. Just quickly on the tax rate for the year, Joel, can you tell us normalized for the reversal this quarter, kind of what we should be expecting going forward, and then on the Halloween sales this year you have got a great product line. Halloween does fall on a Sunday this year. How should we think about the impact this year Sunday versus Saturday last year? And then on the cost cut side can you refresh us as of this point, how much total cost has been taken out of the system in different parts of the Company?

This is Stephen. On the Halloween side that is a very good question. When Halloween lands on a Saturday or Sunday, primarily sales increase in the Halloween industry, as it allows people to enjoy going out more than one evening during the week, so they have the weekend to enjoy parties at home, as well as trick or treating. So it does have a positive impact. We just couldn't give you the range of what that impact will be on a percentage basis for an increase, but with the Halloween falling on a Sunday, and with a terrific lineup of licenses in addition to our expansion into the adult Halloween business, we believe we will have a very successful year in Halloween.

Okay.

As far as the tax rate, we are expecting it 31.5%, which is consistent with prior years, less the $5 million FIN 48 adjustment.

So this reversal in the first quarter, Joel, was that planned already, or was that something new?

No. That was in the plan, yes.

It was in the plan?

Yes.

Okay. And then the last question on the cost cuts?

Oh, on the cost cuts, as we mentioned before it is hitting on various line items within the P&L. I mentioned the significant reduction in capital expenditures, which is going to reduce depreciation of tools and molds by $5 million, product development we have significantly limited our outside use of service providers. We are expecting that to be down about $7 million. SG&A other than the product development is cut in the range of $25 million, which is substantially, a big part of it is the payroll and related costs, legal, and other assorted items.

Now this is just to be clear, Joel, this is the actual impact we expect in 2010, not just the run rate?

Correct.

Great.

And in addition--, okay. Thank you, Arvind.

And we will go next with Tony Gikas with Piper Jaffray.

Good morning, guys. I have a few questions as well. Just one clarification on the JV, you said that hits June 30, so it will hit the June quarter, or could it hit the third quarter?

Yes, if we don't get the money until July, then it would hit third quarter, but they are contractually obligated to remit it on the 30th, and historically when the dates have fallen on a weekend, they have paid us prior, so we have no reason to think that it would fall outside of the quarter, but one never knows.

Okay. Maybe just a quick update on acquisitions. Are you guys actively looking, is this is a target rich environment today? And then International sales were down quite a bit. If you could just sort of explain the changes there, and what could that be for the year in a little bit longer term? And then I have one follow-up.

On the acquisition front as I believe Joel mentioned previously, our balance sheet is extremely strong, and we have been aggressively going down the path of looking and reviewing potential candidates for acquisitions. And as you mentioned, the pipeline is very open for that now, so since inception we have always had the growth pattern of growing through licenses organically and acquisition, and that still stays the same. We are very aggressive in that acquisition mode currently. We now have our infrastructure structured correctly, that will allow us to get back to the basics of us doing acquisitions.

The second question on International primarily the reason International was down the first quarter was WWE, and going forward International we have a very strong growth initiative for International. We have opened up a great operation in the UK, we are structuring joint ventures in specific territories as France and Spain, and we are really ready to capitalize because we have many more organic brands this year, such as Girl Gourmet, SpyNet, Creepy Crawlers, Real Construction, in addition to other licenses such as Smurfs, some Hello Kitty. So now we have a breadth of product, that really, really works well, and applies well in specific European territories.

Okay. Then on the acquisitions are you first looking at more toy opportunities, or out of bounds and looking more at consumer products in general?

We are looking more in bounds of consumer products in addition to what we have always done since inception is toys, but we are I would say we are branching out much more in consumer products as well.

There are a couple of things that we try to lever off is our expertise in sourcing out of China. Our distribution is primarily to the mass, it is about 55% of our business. To the extent it is something that we can make, and not to oversimplify things but if it is something that we can make in China, and sell to the mass, it is something that would definitely be of interest, given certain margin criteria.

And lastly Tony, on the acquisition front in 2009 because of the year that we had, and the reorganization restructuring that we undertook, we weren't ready to do an acquisition last year. Our structure wasn't correct. Now we are extremely ready. The efficiencies, the organization, the people we have on board now are ready, and aggressively going down that.

Okay. And then last question maybe just an update on how TV ratings are for UFC and TNA for us?

That is a question that I could not answer myself. I do know that UFC is at the top of their game in their pay per views, but I really don't have that information at our hand of the ratings.

Okay. Fair enough. Thanks, guys. Good luck.

Thank you.

And we will go next from Imperial Capital to Lee Giordano.

Thanks, good morning, everybody.

Good morning.

I guess when you look at your product assortment as it stands right now, do you see any further need to rationalize the SKU base, or are you happy with the current product line?

It is not so much the product lines that we are in, but within each product line rather than developing 30 items within, you have a multiplicity of packages, concepts, et cetera, we are just reducing the number of items within each line. Typically the bigger retailers don't take everything in the line. So we are still going to be doing as many categories and such, but we will limit the number of licenses, and then within each license the number of total products. We will basically be ferreting through them more so, rather than try to be all things to all customers.

On that end, call it the SKU based area, we call it the first licensed base area, and you take our girls segment we have a plethora of Disney licenses, Princess and Me and Fairies, we have Hello Kitty, Fancy Nancy, Cabbage Patch, even Barbie, and a lot of different girls area, and our role-play. So we just have a focused SKU base, and focused on what is more appropriate for each license. We cut out the inefficient SKUs, that we saw through last year, and we have done that throughout each of the categories, our electronics, our preschool area, our Halloween area, our boys area. So we have just gotten more focused lines going forward.

Great. And is that still ongoing, or are you pretty much completed with that process?

We are completed with that process, but it will be ongoing throughout the years of JAKKS. We are going to get back to the basics, and have a real more efficient line that is appropriate for retailers. Since the last two years retailers buying patterns have changed dramatically as well, so we had to adapt ourself to a kind of a two-tier market approach, which is the mass market, the WalMarts, the Targets, the Toys-R-Us', big box store, like Costco and Sam's, in addition to the dollar stores, the drug trade, which has become a very important part of our business. So we have really just done a two-tier approach and focused in on the products in those areas.

Great. And then secondly, where do you see the biggest opportunities for shelf space gains at some of your retailers?

That is a very good question. A good example we have opened up distribution, on our Big Buck Hunter TV game, and will be with our distribution of the Wii Big Buck Hunter game, we are in the Bass fishing stores, Cabela's, Dick's Sporting Goods, so we are really looking at so many new areas of businesses, Best Buy, we actually in our real construction we have opened up Lowe's, we have gone down the path of hopefully opening up the Home Depots, Ace Hardware, so because we are in so many different segments, our opening of distribution has really widened, and we are really excited about that, we are at the Big Lots, we are at the dollar stores, we are at the mom and pop stores, we are at the Petsmart. So we really have a wide range of distribution.

Great, thanks a lot.

And our next question comes from Sean McGowan with Needham and Company.

I have a couple of questions, too. Just want to circle back to the question of taxes in this quarter. So is it correct to say that the benefits contributed $0.18 a share in the quarter?

Approximately. Hold on.

Is it anything more complicated than just taking the 4.9 over the shares?

Correct. Except for the year, when we, since we are expecting $1.10 to the $1.20 for the year, the shares used for full year will be about 34 million.

Right.

So it drops the benefit for the year because we are using 30% more shares.

Okay. One thing I am having a hard time with, is in this quarter if I look at the tax that was shown, the benefit that was shown, and I add, assume that without the benefits of this reversal, taxes would have been $4.9 million higher I get a very high rate. So what is going on there, and is there anything that we need to know for the balance of the year on that?

Yes. The rate should be in that 31% range. Hold on one second. Let me just pull it up. Why don't you go ahead and ask the next question. I will just start looking at that.

Okay. Well, to clarify also then does the guidance of $1.10 to $1.20 assume the benefit whatever it is on a full year basis of this reversal?

Correct. Actually if you take the 31.5% of the $14.8 million pre-tax loss, you get $4.6 million, layer in the $5 million benefit you are at $9.6 million. So it is all in there at the effective rate, plus the FIN 48 benefit.

Okay. Was there any currency impact on sales in the quarter?

No. Substantially all of our sales are US dollars. All of the International sales are currently FOB. It is the expansion of the International operations that will expose us to foreign currency, but at this point we don't have that risk at this point.

Okay. And how much last year in the first quarter was closeout business, what kind of impact did that have on the gross margin a year ago? I assume that this year there wasn't much?

This year there wasn't much because of the big sell-off, and then seasonally we didn't have that much in Q1 of last year. The big closeouts started in the second quarter and into the third quarter.

Okay. A couple of others. The JV income $6 million, would that all be taken at the pre-tax line, and is that taxed at a normal rate?

That is actually taxed, since that is derived from the US, it will actually hit the tax return at the US rate, so US plus the various states that we have to take.

Like 38% or 39%, or something?

Based on all the transfer prices that we have, we still expect the overall effective rate to be 31.5%.

Okay. And then last question whoever wants to take it, any comment on your expectations for what the guidance would imply for the second quarter?

We gave Q1 guidance basically because we knew that it would be well off from Q1 of the prior year, but we are just expecting the, or we are expecting the variance from '09 to roll out similarly across the next three quarters.

Okay. I thought maybe you were going to a pattern like some companies do, of providing guidance one quarter out.

No. The only reason we did that is because we knew that sales would be off by about $30 million, so if it is dramatically off, we would telegraph and really that is the precedence that we have set.

Okay. All right. Thank you.

Thank you, Sean.

And from KeyBanc Capital Markets we will go next to Scott Hamann.

Yes. Good morning. Just one question here. Can you kind of talk about some of the 2011 initiatives, and I am primarily looking for a little update on Monsuno, and kind of what the expectations and timing are around that?

Yes. On the 2010 let's call it first license, one of our internal properties is Monsuno, and we are extremely excited about it. We started about a year and a half ago with the creator of Bakugan has jumped on board with a company called Dentsu, that is creating 52 episodes, and we are currently working with distributors throughout the US, as well as call it Western European territories for distribution.

We also have an extremely strong interest from many other companies in different categories, that would like to either invest into our joint venture and/or participate, so we have been in negotiations on that. That will be happening in the second half of 2011. We also have the Smurfs license, which the movie launches in 2011. It is a very strong property overseas, as well as we expect retailers from what we have gone through to really stand behind the Smurfs. We have been working on a few other licenses for next year, that would, if we get those would be a new initiative for us. In addition, the Disney business, the Princess and Me, the Princess Fairies, and the Rapunzel are ongoing for us.

And we have a very strong license that we launched this year called Phineas and Ferb, it is Disney's #1 animated show that is truly exciting for us, and we think we will have much more expansion going into 2011. For 2010 we have taken a very cautious approach to the year, and in that we have everything that is in our business is quite stable, and nothing is considered to be a necessity for us to make our year dramatic. So we have nothing that is a homerun to grand slam, that we are required to do all year.

So anything positive that we are able to jump onto will be of benefit to us this year, assuming economic conditions stay the same, costing throughout Asia with the labor increases don't get out of control. We are expecting a very strong year for JAKKS this year. We are being cautiously optimistic, and yesterday and last week we have had a full line review for 2011. Never in the history of JAKKS have we been that far ahead in our 2011 line approach throughout the Company. So we are really on track. We have learned from our mistakes in the past and we are excited for 2010 and 2011.

Okay. But just a follow-up on Monsuno. So you don't expect to be doing, shipping out toy products in 2011. Is that more like a 2012?

We are lunching it both, we believe we will be launching it on-air, and on retail shelves in 2011.

Okay, and through that alliance, do you realize a benefit from anything else around the TV shows?

If this all comes to fruition, we will get a producer fee, and we will participate in licensed merchandise, assuming that it all achieves the goal that we set forth. Lastly, to go into one other license which is very important for us for 2011, is the relaunch of Pokemon. Every four years Pokemon comes out with new shows, and Nintendo comes out with a new Wii or Nintendo game, which becomes a very strong category for licensed products, and we as the licensee of Pokemon expect a very strong launch of Pokemon, relaunch, in 2011.

Great. Thank you very much.

Thank you.

And we will go next to Todd Schwartzman with Sidoti and Company.

Hi. Good mornings, guys. Can you discuss what you are seeing with respect to individual raw materials, as well as your outlook for the full year?

At this point we are not seeing much movement there, but other input costs that are a challenge, is labor and also currency. Typically if the increases are not significant and sustained, the factories, we will push back on the factories. Right now what we would characterize it as an operational risk for the year, but certainly some of those things are built into our forecast.

What are you seeing in metals for example?

That is up in the range of 15% to 20%. Plastics, probably at the higher end of that range. Again part of the value proposition is the cost of the materials is a small part of it. I think labor is a big part, but what we try to do when we design the product is create significant play value and perceived value. So while the costs are going up we are achieving higher margins by creating compelling products. So it is not effecting us, I mean there are modest effects over the course of the year, but not expected to be dramatic.

Okay. And in this first quarter given all of the puts and takes, stemming from a product line-up that has shifted, that is in transition, how do you think about market share, would you say both on the girls side and on the boys, did you gain, did you lose, or are you kind of flat year-over-year?

Because we are in so many different categories, and if you take some things that are no longer in existence, WWE was not in for this year first quarter, and Hannah Montana, which was a big part of the last couple of years, I would say we are down in those segments, but if you take our Disney Princess, Disney Fairies, in the both girl category and role-play category we are up, but on a basic level, I think we are flat but strong. It is a very small quarter for us, so it is relatively I would say we have held our own in the areas that we are in.

Great. And finally, on your expectations for the income from THQ beyond the $6 million number for Q2 this year, can you run through the numbers out through '13 again, for the second quarter expectation?

Yes. Basically it is $20 million is a fixed amount, and the flow is $6 million in the second quarter, it is basically June 30th of 2010, $6 million in 2011, $4 million in each of the 2012 and 2013.

Got it. Thanks a lot.

You are very welcome.

And we will go next to Jeff Blaeser with Morgan Joseph.

Good morning. Is there any way to quantify the impact in Q1, and within your guidance for the discontinued lines, and some of the rationalized SKUs?

Of course. Let's see. Basically what we eliminated was Pentech. Q1 last year it was about $2 million, but as far as the others it is a number of items so it is really difficult to detail specifically, but the other lines that we eliminated were the kites. Part of it was they weren't significant lines, and the profit was pretty low on them.

Okay. And I guess looking forward and this may fall under guidance, but Q3 is getting a little stronger with Disguise. Can you give us kind of a ballpark, or a way it look at gross margins with the Halloween sales in Q3, versus the holiday sales in Q4?

Margins are expected to be higher in the outquarters, as I mentioned it was primarily mix with the decrease in the WWE and Hannah Montana in Q1, but we are expecting in the range of 36% in Q2, and 35% in third and fourth. And overall for the year we are expecting about 34.8%, which is a 240 basis point expansion from '09 on a non-GAAP basis.

Okay. Great. Thank you very much.

Okay. Thank you.

And we will go next to Drew Crum with Stifel Nicolaus.

All right. Good morning everyone.

Good morning Drew.

First the changes in the mix how that is going to impact royalties as a percentage of revenue where you see that going? Secondly, are you anticipating any one-time items absent the JV payment on your cash flow? Are there any one-time working capital items, and then finally just to follow up on your comment on Pokemon, noted that there were two titles ranked in the Top20 per NPD in the month of March. I think you noted that Pokemon was weak in the first quarter. Are you seeing any uptick into the second quarter given the performance of those video games?

I will answer the last question first, while Joel is gathering information. On the Pokemon front we will see it build throughout the year. Second quarter is not a strong quarter for the action figure market because it goes into the summer season, but we will be seeing Pokemon grow throughout the year, primarily fourth quarter, and going into the launch of the video game, and the shows, it will just get momentum throughout third, fourth, but become much more impactful in 2011 than 2010.

Okay.

And then as far as for 2010 we are not expecting any one-time benefits or uses. Last year we had significant sell-off of the inventory, which is a one-time, call it cash flow benefit, of about $30 million. So at this point it is pretty much normalized.

Joel, are you anticipating any more tax benefits like we saw in the first quarter?

No. At least not to that magnitude. That was the result of a favorable resolution of an IRS audit, and so we had a couple of tax years whose statutes have run, and again a favorable result from the IRS audit.

Okay. Just real quickly on the royalties as a percent of revenue?

That was the third one. Actually a proportion of our own content is the same, so the royalties percentage is still expected to be around 10%.

Okay. Got it, thanks, guys.

Thank you.

And we will go next to Ed Woo with Wedbush Securities.

Good morning.

Good morning, Ed.

I was wondering if you saw any change in sentiment with retailers, either in the US or International?

Actually we have seen a little bit more positive feeling throughout the retailer on the buying patterns, the buyers themselves, they left last year with low inventories. So I think they have a much more focused approach, and there will be from what we were last year, or what the industry was, they are going to be conservative, but at the same time I think they are going to take a more aggressive approach to initiatives that could have an impact to them.

So they are going to be focusing on the stable parts of the business that they need for the everyday consumer, and they are going to focus on some highlighted items throughout the year, not just for JAKKS but in general. So it is a much better feeling than last year, and I would say the open to buys are much more open, but it is still a very conservative atmosphere right now.

Is that the same in the US as it is International?

It is pretty much the same overall on the International territories. I would say it is pretty close. Europe I would say, call it the Western Europe, put eastern Europe aside, is similar. I would say they are a little bit more conservative than the US buyers right now. Slightly, but not much.

Okay. You did a very good job with managing inventory to these low levels. I know you said that inventory will be increasing as you build up for the holiday, but do you anticipate inventory levels to come back to these levels on a year-over-year basis?

No. The sell-off last year was very significant, and we are managing as I said, the supply chain much more closely, and we don't expect, unless we double the business, but at these levels, we believe that we will work within inventory levels of this range.

Great. Thank you and good luck.

Thank you.

Thank you, Edward. With that our call is completed. There is no more Q&A. As we said earlier in our conference call, we are here for our shareholders, and we plan to achieve our goals that we set forth from the start, and we appreciate everyone's time on this call. So thank you very much.

Ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.