JAKKS Pacific Inc (JAKK) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the JAKKS Pacific 2010 second quarter 2010 earnings conference call. Today's call is being recorded. 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 this morning with management of JAKKS to review the results for the second quarter and first six months ended June 30th 2010, which we released earlier this morning. Also on the call today are Stephen Berman, President and Chief Executive Officer, and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter and our operational results, and then Mr. Bennett will provide information 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 the 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 and10-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. Berman.

Good morning everyone. Thank you for joining us today. Both the second quarter and first six months of this year ended ahead of our expectations, and we are extremely pleased with our results. We now have in place a lean and very focused team, and we are working hard to bring high quality and compelling play things to market, while tightly managing our business and increasing profitability. In the second quarter we began shipping some of our new products, which will hit retail shelves throughout the second half of the year, with the bulk of our fall drivers expected to ship in third quarter. We are just over three weeks into the third quarter, and already have more than 85% of our orders booked for the quarter, which is ahead of last year at this point.

We are cognizant of the myriad of concerns that could affect production and shipments in the second half of the year, including labor issues, costing capacity constraints, and possible container shortages, both of which may cause shipping delays and increased costs for many manufacturers doing business in Asia, at somewhat unprecedented levels. That said, as a result we are managing our supply train extremely closely. We have significantly increased the numbers of freight carriers we use to bring in domestic inventory, and we are working aggressively to ship during the first two months of the quarter, to minimize our exposure to potential shipping delays, and keep our third and fourth quarters on track. In addition, we are implementing earlier lead times to compensate for capacity constraints. And as a part of our new JAKKS development strategy, we have the vast majority of our 2011 product line already developed, which is expected to give us more visibility into our future, as well as the ability to balance our manufacturing.

Our US management teams are working extremely closely hand in hand with our counterparts in China, and with our third party manufacturer, to stay on top of they challenges, and keep everything heading in the right direction. Bearing any extreme adverse circumstances related to these obstacles, we believe we will achieve our earnings guidance for this year of $1.10 to $1.20 per diluted share, on net sales of approximately $660 million to $670 million. We expect to achieve our top line guidance for the year, with contributions coming from a wide range of quality dolls, role play toys, action figures, electronics, kids' furniture, Halloween costumes, construction toys and more, based on both popular well-known licenses and new JAKKS brands, which we believe are both exciting and on the right trend. Inventories will increase as we head into our peak shipping season for both toys and Halloween costumes, but levels are still significantly lower on a year-over-year basis, due in part to the improved oversight and timing of orders.

I will get into more product details after Joel Bennett reviews our financial results for the second quarter and first six months of the year. In addition, never before have we had such an incredible pool of talent here running this business. We appreciate the confidence Wall Street has shown in our management team. We are also certain that with the strong team we are on the right path to achieve our goals, and build a successful future for JAKKS Pacific and our shareholders. With that, I will turn the call over to Joel Bennett.

Thank you, Stephen and good morning everyone. Net sales for the second quarter of 2010 were $123.3 million, compared to $144.8 million reported in the comparable period last year. And net sales for the six months were $200.6 million, compared to $253.5 million in 2009. Net income for the second quarter was $3 million, or $0.11 per diluted share, which includes a one-time pre-tax charge relating to the benefit payment of $2.8 million, or $0.06 per diluted share, to the estate of Jack Friedman pursuant to his employment contract. This compares to a loss of $406.5 million, or $14.96 per diluted share, reported in the second quarter of 2009. The net loss for the six-month period was $2.2 million, or $0.08 per diluted share, which also includes the benefit payment to Jack Friedman's estate. And this compares to a loss for the first six months of 2009 of $417.3 million, or $15.35 per diluted share.

On a nonGAAP basis, net sales for the second quarter 2010 were $123.3 million, compared to $145.4 million, and $200.6 million for the six-month period, compared to $254.1 million reported in the comparable period last year. On a nonGAAP basis, Jack's reported net income for the second quarter of $3 million, or $0.11 per diluted share, compared to a loss of $900,000, or $0.03 per diluted share in the second quarter of 2009. NonGAAP results for the first six months of 2010 was a loss of $2.2 million, or $0.08 per diluted share, compared to a loss of $11.7 million, or $0.43 per diluted share, for the first six months of 2009.

There were no adjustments to the 2010 GAAP results, however the 2009 second quarter and six-month GAAP results included the following adjustments which were excluded in the nonGAAP results above. Pre tax noncash goodwill and other intangible asset impairment charges of $415.3 million, Pre-tax charges to royalty expense of $33.2 million related to the write-down of abandoned or underperforming licenses, Pre-tax charge to cost to goods of $23.3 million related to the impairment of inventory, Pre-tax noncash charge of $2.3 million related to the write-off of obsolete tools and molds, Pre-tax charge of $1.3 million related to a product recall, Pre-tax noncash charge of $22.5 million related to the reduction of our preferred return from our video game joint venture with THQ as a result of the arbitration decision.

Turning to a more detailed P&L discussion, worldwide sales of 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, which includes toys, bedding, apparel and accessories were $120.4 million for the second quarter of 2010, compared to $130 million in the second quarter of 2009. Sales for traditional toys were $196.6 million for the first six months of 2010, versus $231.1 million for the first six months of 2009.

2010 sales were generated by products from across our diverse portfolio, but the overall declines on a year-over-year basis were primarily from WWE action figures and accessories, and Hannah Montana products, and to a lesser extent to our exit from the low margin kite business. Worldwide sales of craft activity and writing products were $2.8 million in the second quarter of 2010, compared to $14.8 million in 2009. Sales of craft activity and writing products were $4 million for the first six months of 2010, versus $22.4 million for the first six months of 2009. We exited the low margin writing instrument business in 2010, as we did with our kite business, in order to focus our efforts on more profitable areas of our business that represent greater growth potential and profit potential. Included in the category numbers are international sales of $13 million for the second quarter of 2010, compared to $24.3 million for the second quarter of 2009. International sales for the first six months of 2010 and 2009 were $22.8 million and $43 million respectively.

We have been expanding our European operations to maximize international opportunities for both licensed products and JAKKS' own content and are pleased with the progress so far. Growth margin for second quarter of 2010 was 35.1% of net sales, compared to 35.6% of net sales in the second quarter of last year on a nonGAAP basis. And gross margin for the first half of 2010 was 34.1% of net sales, compared to 34.9% of net sales in the first half of last year. The 50 and 80 basis point decreases in 2010 are due to changes in our product mix, which included more sales of lower margin products, but we are on track to achieve our anticipated margin expansion in 2010, as our new products begin shipping in quantity beginning in the third quarter.

SG&A expenses in the second quarter of 2010 were $42 million, or 34% of net sales, as compared to $51.4 million on a nonGAAP basis, or 35.4% of net sales in the same period last year. For the first six months of 2010, SG&A expenses were $80.8 million, or 40.3% of net sales, compared to $106 million on a nonGAAP basis, or 41.7% of net sales in the prior year. The dollar and percentage of net sales decreases in 2010 are the result of our cost savings initiatives, which commenced in the third quarter of 2009, and the restructuring plan implemented in the latter part of 2009.

In the quarter we received income of $6 million on a cash basis from THQ as a result of our settlement agreement and dissolution of the joint venture. All WWE and THQ litigation matters were settled in December 2009, and so litigation-related legal costs are down significantly in 2010. Operations provided cash in the first six months of 2010 of $24 million, compared to using cash of $24.5 million for the same period of 2009. And our financial position continues to be very strong. As of June 30th, 2010, our working capital was $358.1 million, including cash and equivalents and marketable securities of $249 million. Depreciation and amortization was approximately $3.1 million in the quarter, compared to $3 million for the second quarter of 2009. For the first six months, depreciation and amortization was approximately $5.2 million, compared to $5.5 million for the same period in 2009.

As for our tax rate, it remains at a blended 31.5% before any other FIN-48 or other adjustments. Capital expenditures were $5.3 million for the second quarter of 2010, down from $6.7 million for the second quarter of 2009. Capital expenditures for the first six months of 2010 and 2009 were $6.6 million and $10.9 million respectively. Capital expenditures for the full year 2010 are expected to be in the range of $12 million to $13 million, compared to $16.3 million for the full year of 2009. This reduction is being achieved through SKU rationalization and refined production planning.

During the quarter we used cash on hand to redeem the remaining $20.3 million of our 2023 convertible notes put to the Company in June. We continue to evaluate potential acquisition opportunities and expect to continue to grow our business by actively pursuing a creative and complimentary acquisitions, creating new products and securing new licenses, in order to provide growth opportunities for JAKKS Pacific. Accounts Receivable as of June 30th, 2010 were $102.9 million, compared to $115.8 million at the end of the second quarter of 2009.

DSOs were 75 days comparable to the72 days in the same period in 2009. Inventory was $47.4 million as of June 30th, 2010, down from $76.6 million at the end of the comparable period in 2009. The decrease is due primarily to tighter supply chain and inventory management. DSIs decreased to 64 days from 90 days at the end of the second quarter of 2009, due primarily to significantly lower inventory levels in 2010. And once again, we are reiterating our earnings guidance of $1.10 to $1.20 per diluted share, which does include the impact of the unexpected $2.8 million charge related to the benefit payment made to the estate of Jack Freedman. With that, I will return the call to Stephen Berman.

Thank you, Joel. So as I mentioned, we have begun shipping our fall drivers, and should start seeing many of our new lines hitting shelves in the coming months. Halloween is just around the corner and with an increased number of seasonal stores starting to pop up already, we are seeing lots of interest in our Ironman 2, Toy Story 3, Tim Burton's Alice in Wonderland, Sesame Street, Hasbro brands, and others. Orders are on track for our Halloween division disguise, and we are pleased that Halloween falls on a Sunday this year, which is generally a good thing, encouraging festivities for kids and adults for a long weekend. In our boys entertainment we are seeing continued improvement in our Pokeman action figure sales at retail, as we lead up to next year's big, big launch of the next generation black and white. We have new UFC and TNA action figures hitting shelves at a number of our retailers this fall, and are cautiously optimistic about the potential of these two lines.

Something very exciting for JAKKS Pacific is our new Phineas and Ferb line of products. Phineas and Ferb is the number one show on TV for Disney boys 6 to 11. We have this product placed at all of our major retailer accounts. We launched our Phineas and Ferb line this spring, and secured great placement at retail for this holiday season and 2011. In addition to Phineas and Ferb another exciting line of products which confirm our Disney Club partnership is Club Penguin, which is placed at most major retailers, and we are seeing an exciting new uptick for this line. From our electronics team, our Spy Net line is well-supported at our top customers, as well as others such as QVC, Radio Shack and Sam's Club to name a few. We believe our Video Spy Watch innovates the spy category, and we had a great article on our Video Spy Watch from the New York Times tech writer just last week. The real working video camera works very well, and we will ship the bulk of this line to retailers in Q3. For our TV games, Big Buck Hunter and Toy Story Mania are the major launches for this year, with all major accounts taking Big Buck Hunter, as well as some alternative channels, like hunting stores such as Cabela's and Bass Pro Shops to name a few.

In our infant-preschool division we had a strong spring with our kids-only patio sets, kiddie pools and other outdoor furniture, and will have our Toy Story 3, Crayola and Princess Puzzle furniture at retail this fall. Our Funnoodle pool toys also did well in the second quarter, with a robust sell-through at retailers nationwide this summer. Tollytots is bringing new baby dolls and accessories to market, based on My First Disney Princess, as well as Graco and Fischer Price lines of products. These are highlights and high quality value-driven lines, with broad placement for the second half of this year from our Tollytots division.

We have a number of other new Disney initiatives from both our JAKKS toy division and our CDI division launching this fall. We believe toddlers aged boys will enjoy our Black and Decker and Marvel role play and novelty toys, and we have a vast assortment of girls dress up outfits, aged for toddlers on up at retail this fall, as well as our Princess Magic Rise oven, Rapunzel Fairies, and an array of both licensed and nonlicensed pretend role play products.

We at JAKKS Pacific are extremely excited about the launch of our new Princess & Me large dolls and apparel. Princess & Me is a lifestyle line launching at Toys-R-Us and on QVC, as well as the new Disney stores starting this fall. More in the girls' area, we are very excited about other properties and product lines which we have under the licenses of Hello Kitty, Fancy Nancy, Sugar Bunnies and Pinkalicious.

Now on an international front. Our international plan is meeting our expectations, and we believe the proprietary homegrown brands, such as Creepy Crawlers, Real Construction, and others, as well as expanded licensing rights in certain territories will drive this business now and in the future. We have received our first Toy of the Year Award in France at the 2010 Grand Prix du Jouet for Real Construction earlier this month. Our expanded UK office is up and running smoothly, and we have already seen increased orders as a result of our growing operations in that territory. TV advertising and PR initiatives in the UK began earlier this month, and domestic warehouses in Spain and Belgium are expected to begin shipping orders in August.

Over the last 18 months, we have taken a strategic initiative to build our international business, and in 2010 our business looks extremely strong overseas, and in 2011 we see great expectations for JAKKS Pacific and all of its divisions. On the horizon for 2011 we have our new television entertainment venture Monsuno. We aligned with a leading Japanese advertising and production company called Dentsu, and also a global distribution giant called Fremantle. Monsuno will start with 52 animated episodes, and our JAKKS Entertainment Group along with our joint venture partners, will begin meeting with TV networks later this summer to shop the show. We believe Monsuno could be on air as early as fall 2011 or spring 2012. We have also developed a very exciting Monsuno toy line, which we believe is fantastic even as a standalone product line, but we think is really compelling and exciting coupled with programming.

Also for next year we look forward to the released of Cars 2 and The Smurfs Movie, and several other major entertainment releases we are aligned with, which we expect to announce in the coming months. On the operational side of things, much like most businesses manufacturing in Asia, we are seeing input cost increases, and we are preparing next year's line with this in mind. We have been addressing costing issues throughout the organization on a division by division basis, to ensure that we have constant and consistent margins going forward. We are working closely with each area of our business units to combat their specific challenges, and at this point we are comfortable with holding prices for this year, but do anticipate adjusting pricing as needed, by division, by category, next year if necessary.

We continue to focus our efforts on improving profitability, and again do believe things are looking very positive for JAKKS. We at JAKKS remain absolutely committed to returning earnings growth, while running a lean and increasingly profitable business for 2010 and beyond. With that, I will open up the call to questions. Thank you.

Thank you. The question and answer session will be conducted electronically. (Operator Instructions). We will take our first question from Ed Woo with Wedbush.

Good quarter, everybody. The question I had is, why was direct selling expense much lower for this quarter?

A couple of points. We are a bit more careful on our advertising expenses, plus lower volume than last year. Outbound freight, warehousing costs and such.

Okay. And then going back to the shipping container dilemma, that seems to be a common theme among all the toy companies. Has it already affected shipment into the holiday, particularly for some of your costumes for Halloween, or is this something that you think will be more of an impact in the current quarter?

Edward, hi, this is Stephen. We have been planning on this since the start of the year, so it has been affecting us, I would say from the first quarter onward. We are planning well far ahead with the container companies and the various shipping companies. So we have had the foresight to plan. I think we are well ahead of the program, but we still see potential difficulties. We are just always being very conservative, but optimistic at the same time. It has been happening throughout the year, and we plan on it occurring for us and other manufacturers throughout the year.

Great. I wish you guys the best of luck and congratulations.

Thank you, Edward.

Next we move to Scott Hamann with KeyBanc Capital Markets.

Good morning everyone. Can you comment on some of the POS trends you are seeing at retail thus far? And then maybe talk about your comfort level with the current retail inventory of some of the key product lines you have?

Hi, Scott, Stephen Berman. So far retail due to I would say the breadth of the products that we are in, and the categories that we are in, our sell-throughs have been quite consistent. We are extremely comfortable with the divisional breakout of sell-through. So for instance Kids Only, which is outdoor furniture and play environments, our CDI area, business novelties, our action figure business, the sell-in of Halloween, which we don't have sell-throughs yet until the October period, we are seeing for us, because there is not one segment that we are relying on for the year, quite a good sell-through amongst the various divisions of JAKKS Pacific.

In addition I would say the retail environment in general for North America and then Europe, I would say they are cautious and optimistic throughout the year. We have seen a robust sell-through on our Funnoodle business, we have seen a robust sell-through on our Kids Only, which is spring and summer business. So in the areas that are current for its time which is summer, and we saw it during the Easter period first quarter, and slightly in the second quarter, it has been a very nice sell-through for us. And in addition the international business on a sell-in basis, it is more of a third and fourth quarter basis for us, because our Kids Only division and Tolly are just starting to pick up overseas. We have had a very decent sell-through. So for JAKKS Pacific, and I am only speaking on behalf of JAKKS, we have had a very decent sell-through, and for the bookings so far for third quarter, we are well ahead of where we have ever been as a company since inception, of I think well over 85% in bookings, which are actual bookings for the quarter.

Okay. And just a couple on operating expenses. Is there any way you can quantify what the benefit is that you have seen kind of year over year as it relates to your legal expense? And then more broadly as we look into the future, you have taken a lot of costs out of the operating expense line items. Is there any reason that we would see that as a percentage of sales differ materially in future periods? It seems like you are making a lot of investments in the international business. Is that kind of contemplated in what we are seeing now, or should that ramp up going forward?

The international initiatives are reflected in the guidance, and also the current results specifically related to the litigation legal. It was about $4 million for the six months of 2009, and it was about $1 million for the current six-month period. And the current six-month period includes an assortment of ongoing litigation matters, and what drove the dollars last year was the THQ and WWE litigation.

Do you expect the second half of the year in terms of legal expense to continue to improve?

Actually we had pretty significant reimbursements from the insurance company in the second half. So net/net, the litigation-related expenses weren't that significant. In the quarter the $2 million aside, total SG&A excluding direct selling was down $7 million before the benefit payment to Jack Friedman's estate. So the run rate on SG&A efficiencies is still well on track.

Okay. And then just one final question, Stephen. Kind of looking at what I thought was a pretty good quarter here on a top line relative to expectations, guidance being unchanged, it sounds like you have a lot of your orders already kind of lined up at this point. The back half implies your sales down 15% off of what I thought was a pretty weak back half last year. Is there anything we should be thinking about, or are we just being conservative, or are there other factors that we need to consider?

I would say, Scott, because of the past year, 18 months that we haven't achieved the corporate goals, we are being truly optimistic, but as well as just being extremely cautious just because of the environment, and what we have seen other manufacturers and competitors go through. We just are being, we want to ensure we achieve what we say and say what we mean, and that is probably the best way to put it. We will see what sell-throughs are during the September, October, November period and review it, and we will see what the manufacturing capacities, what we achieve happen during the quarter, and we will see what the container issues, what really happens with the container issues. Once we see that, we will be able to review the quarterly numbers and the annual numbers. We just want to be cautiously optimistic.

And to remind everyone that the year-over-year comps are a tough comp, because we had both wrestling in the back half which was in excess of $50 million for the second half, plus Hannah Montana and several other lines, plus also closeouts drove top line. So one thing to remain cognizant of is the current year forecast and the flow of orders is a bit different, that it shouldn't be construed as a weak quarter. But overall the guidance is conservative, but there are big numbers that related to WWE and Hannah in particular, that are not in the 2010 business.

Okay, fair enough. Thanks a lot.

Thank you, Scott.

Moving on we will hear from BMO Capital Markets Gerrick Johnson.

Hi, good morning.

Good morning, Gerrick.

Because of the limited supply of containers, can you give us an estimate of how much that should increase your distribution expense for the remainder of the year?

Well, it is not so much the shortage, actual freight rates have increased. What the container, the quantities would affect the capacity to get goods here. So there are two different exposures. One is an input cost which we are mitigating by development exercises, increasing margins, and so forth, but the other would be straight capacity and the timing of the shipment of the orders. So we have built in lead time in our supply chain management to compensate for the shortages that might limit ongoing or weekly shipping capacities.

Okay. Well, if we look at the distribution expense say and input costs, can we say that particular input cost is up about 10% year-over-year, 15%, or do we have an order of magnitude?

If you take a straight container rate, yes they were $1700, and now they are $2400. So you are looking at 40%.

Okay.

Again, less than 50% of our business is done on a domestic basis. So that only affects the inventory that we bring in for domestic shipments. Otherwise the burden falls on the customers who pick up the goods in China or Hong Kong's port.

Right, okay. And then on the allowances on the balance sheet, it looked like those were up about 30% year-over-year. Shouldn't those reserves be going down as you clear out old 2009 product? Why is that balance higher?

It is basically the timing that the customers take their deductions. Typically the deals are percentage based on sales to those customers. That increases it over the year, and as they take the deductions, it reduces it, so it is more timing of the deductions by the customers. What we don't show is the expense. But the returns and allowances are consistent with the historical levels, and the balance sheet liability doesn't really reflect what is going on with the actual deductions. It is only the time, it only reflects the timing.

That would explain why that particular item is up 30% on a year-over-year basis in the second quarter?

Correct. But the actual expense is consistent with prior years. It runs 2% to 4% depending on the seasonality.

Right. Okay. Thank you.

Thank you, Gerrick.

Next we will hear from Lee Giordano with Imperial Capital.

Thanks. Good morning, everybody.

Good morning, Lee.

Stephen, can you talk about the marketing strategy going forward with all of the new products coming out? What should we look for advertising expenses?

In general it is down. We are more focused on media spends with each key item. One of the things that we have done over the years has done more maintenance advertising. It is not driven, our strategy is less of a pull strategy. We supplement modest media buys with a tremendous PR and marketing effort outside. In general, it is down about 25%. It historically has run 5% to 6% of net sales, although on individual items, the advertising spend could run anywhere from 10% to 15%.

And Lee also with regards to the product, categories we are focusing on, we have some strong initiatives with regard to Spy Net. We have in our CDI division, our Disney Princess Rise Oven. We have certain other areas, Princess & Me, Real Construction. We are focusing on our organic brands such as Spy Net and our Creepy Crawlers, in addition to our licensed brands. So it is really focused to be, driven not to an item, but to a category of business.

On order of magnitude, the six-month number sales are down about 20% in round numbers, $250 million to $200 million. And advertising for the front half is roughly cut in half, from about $3 million to $1.5 million. What we strive for is prime placement at retail, power panels, end caps, and special placements. And it is a lot more efficient for us to work that way, since we don't have a great number of drivers, but the broad base of contributions across the product space.

Great. And with the success of Toy Story 3 so far, can you just remind me what your exposure is to Toy Story 3 and the potential upside from that?

Toy Story 3, we have it in a few different segments of our business. One is in Halloween. We have that as one of our main Halloween launches for this year. We have it for both kid and adults. We also have it in our CDI division for our toddler costumes, role play outfits. We have a Toy Story Mania electronics motion game that is in our Electronics division, and we have various novelty items in our CDI division that have novelty products, and in addition we have our Kids Only outdoor furniture and play environment. So a lot of our product excluding the Kids Only which has already shipped, is just shipping into the market. So we don't have real sell-through on our Toy Story product. It is really for the third and fourth quarter. We are excited about the initial sell-ins, and we believe what we have heard from retail the sell-throughs on the various competitor products, not in the same categories, but people that have product in that genre is doing quite well, and we are excited that the DVD release is in November.

Great. And I guess my last question is on the container shortage issue. Do you have any insight as to timing of when this issue may be alleviated? Is any more capacity coming onboard for early next year?

I would say getting through what we have seen, we have had a group of people in Asia from our US logistics department, and they are still out there. A majority of our competitors and people in our industry as well as others, are getting through the container issues now, but I would say the light at the end of the tunnel, where we would have pretty much a normal shipping pattern with a container companies will be in the first half of next year.

Thanks a lot.

Thank you, Lee.

(Operator Instructions). Next we will move to Sean McGowan with Needham.

Hi, guys. A couple of questions. Just tagging onto your commentary a moment ago on Toy Story. When you have a Toy Story license for kids' costumes and kids buy Toy Story costumes, is that just a replacement with something else, or do you actually wind up with an incremental increase in costumes sales?

That is a very good question, Sean. If you take in the Halloween division, last year we had a tremendous sell-in and sell-through of Transformers and GI Joe with the movie launch. This year those two properties we are still selling, but it doesn't have the same impact, because there is no movie launch. But then it is replaced by the Toy Story 3, in addition to Ironman, as well as other Hasbro brands. So it may be an offset, but there may be a slight increase depending on the sell-throughs. Usually throughout the year with the disguise, there is a replacement with new licenses that drop off and then new licenses that pick up. From what we gather on our sell-in, it could be a slight pick up in our disguise division because of the strength of Toy Story 3.

What is the exclusivity that you have on Toy Story 3 costumes?

We have in our area of business disguise, a majority of the licenses that people have, us, our competitors, they are not exclusive licenses, but the licensors pretty much just have you focused on the area you are licensed, and then agreement-wise they are nonexclusive. We believe there is no one, or I believe there is no one new in Halloween costumes for kids and adults who are the sole manufacturer for Disney, for kids and adults for Toy Story 3, and in boys role play we also have done it through our CDI division in the toddler area of business of Toy Story 3.

Okay. Shifting gears, can you comment on the extent to which the fall-off of WWE which was significant this year, how much is that being offset so far by UFC, or anything else in the boys action area?

I said it in our conference call earlier. I think I said we are cautiously optimistic. Because we have started shipping UFC more and more. The way that we have done it in the past with the series, the methodology that we did with WWE, when we first wanted to stir up the collector, of the ability of them purchasing the product first, build up the demand, and then we really just got the TNA out on the shelf. So we see sell-throughs that are promising, but it is not large enough to say how much of an offset it would be to WWE, but we do see it extremely promising.

And a similar type of question then on something like a Taylor Swift. Is that anywhere near what Hannah could be, or anywhere near what Hannah was?

No, Hannah was the phenomenon. Taylor Swift is a decent business, but it is nominal to the business.

The fans are too old. And I need to ask a question about the employment. Does your employment agreement have any provisions like the one Jack had regarding lifetime payments, or I am not wishing anything on anybody, but I am just curious about the terms of your employment agreement?

My employment agreement is on file and it is a public agreement, and I don't believe it has the same parameter as Jack. Jack was obviously at a different age than I was, so the retirement benefit and the death benefit was slightly different, because he had a provision for retirement at a specific age. I think it was 67 originally. So it is not the same understanding and the parameters of being deceased.

Okay. Thank you.

Tony Gikas with Piper Jaffray.

Good morning, guys, good job on the quarter.

Thank you, Tony.

A couple of questions, and then a couple housekeeping questions for Joel. Maybe just update us on acquisitions and terms. You brought it up again, and I know you guys do a fair amount of acquisitions over the years. What are you looking for right now? What could be some potential timing, and what evaluations look like. Second question, Steve you touched on international sales. It sounds like you are a little more excited about the next couple of years and ramping that business. What could the growth be in the international side of the business in 2011, and over the next couple years what do you think that could be as a percentage of total sales? And then the third question, Steve, you indicated that orders are tracking ahead of, I guess, previous years. How much are they tracking ahead? Or what percent of second half sales do you have in hand? And then I have a couple of small follow-ups.

I will discuss the initiatives, and then the multiples both Joel and I can go through. What we are looking for more than we have in the past, are brands that would complement areas of business that JAKKS is currently in, or new areas and new initiatives. A good example is when we acquired disguise. It is, per se, a branch retail, not a brand to the consumer, but it is a segment of the business that disguises dominated with a couple of other competitors. I think it was about 17 years they have been in business. So we are looking to areas such as disguise, such as it could be preschool, it could be infant, it could be further acquisitions in the pet industry. It could be more in the action figure business. But a lot of it will be brand specific more than license. We will also look for companies that have a strong segment if it is in the license genre. Multiples, and Joel correct me if I am wrong, are anywhere from about the 4 to 6 times currently we are seeing?

They haven't changed much. There isn't a whole lot of competition unless you have cash. The financial buyers have, while they nose around, there haven't been many transactions by them, but we basically look for things that we can lever our strengths on. Manufacturing in China, and distribution to the mass, unless they specialize in, or are adept at handling other channels of distribution. We would try to focus on the things that we are good at.

And also, Tony, the pipeline is becoming more, I would say available to buyers. We have seen a lot more activity probably in the last four months than we have seen in the last year. But last year for JAKKS we also weren't looking to do acquisitions. We needed to focus on restructuring our organization, and getting a solid footprint as a company. Now that that is completed and we are off to an amazing new beginning, we are ready for very large acquisitions or minimal-sized acquisitions, but we are really ready now, and we have been very much aggressive in that genre.

International and then orders?

International has been running 11% to 14% depending on the timing of promotions in the international market. With the increase in our own content like Spy Net, Girl Gourmet, and things like that, we expect it to increase to over 20%. Some of our bigger competitors have many of their own brands, and their businesses internationally account for up to one-third or more of their business. So we are headed in that direction with the increasing development in what we will call our owned content.

How quickly do you get to that 20%?

It is probably two to three year timeframe.

But that also would vary based on an acquisition and the specific size of an acquisition.

Sure. And then you talked about orders you already have in hand. How has that grown year-over-year? And what percentage of second half sales do you have in hand?

I can talk third quarter because I don't have fourth quarter information. Third quarter we are over 85% booked, and we would be in the 50% bookings in past years. And the orders and placement across the board because we are in so many segments that we are not relying on one specific category, one specific license, or one specific item, that the breadth of the orders are across the board. There is nothing we are relying on to really make the quarter or make the year. It is a plethora of different products. So we are real excited where we are at, and we believe we are ahead of shipping, and our focus as I said in our conference call, we are focused to try to get a good portion as best as we can shipped within the July-August period, and take the pressure off the September month.

Why do you think those bookings are running ahead of schedule?

One, we are more well planned than ever before. Two, our forecasting that we have done internally is much better, and as well as externally with our customers. The difference is for JAKKS now versus the past, we also cut down R&D costs and tooling. So we need to ensure that we have the orders in house to manufacture because of the capabilities of the capacities that we have with each manufacturer. So I think we have done a better job, and we have been very aggressive in that. I think the retailers have worked with us even closer this year than ever before. And normally we would be able to, with the amount of tools that we have built in the past, call not call literally call, but place orders with factories, and they would be able to make them within a couple of weeks. Now the lead times with the shortages of labor, you have to be well in advance in each of the segment that we are in, in order to get the placement and labor set up for each of our areas. So we have planned this seeing the constraints that started the first half of the year.

The retailers understand that. They want their orders placed early so that they don't miss out as well.

Sure. And then a few housekeeping questions for Joel. With the perhaps acceleration with some of the orders, Joel, how do you see breaking down in Q3 and Q4? And what was the share count at the end of the quarter? I know we have the average, but there were some redemptions of the convert. And what should we be using in share count in Q3 and Q4 and the year? Any change to the annual tax rate?

No change to the tax rate, it is 31.5%. We did have a FIN48 adjustment in Q1, but aren't expecting any significance in the remainder of the year. So that is consistent. What was the first question?

Share count at the end of the quarter, and what should we be using for Q3 and Q4?

Yes. The redemption eliminated about 1 million shares from the share count, so third and fourth quarter on a fully diluted basis will be lower, or at least, actually what we are presenting in Q1 and Q2 for the diluted share count was about 27 million or 28 million, basically any option, warrant or convertible security that is anti-dilutive is excluded, but specifically, let's see, those are weighted it wouldn't be the end of the quarter. I guess the best way to put it for Q3 and Q4, use 34 million shares.

Okay. And then that is about the total for the year as well, pretty close to 34 million?

Yes, well, it is 33 and change if you weight, the front half is weighted a little bit more, so it is a little bit less.

Okay.

The 34 is right in there for the fully diluted. In a loss quarter or in a lower net income quarter the convert is actually excluded. That is why the share count on the diluted basis is the 27 million or 28 million for this quarter and year-to-date.

Thanks a lot, guys. Great job.

Thank you.

Quinton Maynard with Morehead Capital.

Good morning, Quinton.

Hi, guys, congratulations on the quarter. Most of my questions have been answered. I actually just wanted to turn to the balance sheet for a second, and ask you what your thoughts were around share repurchase, the amount of cash you are holding seems to warrant at the price of your stock is today, it might be a pretty attractive opportunity and kind of hear what your thoughts were?

Actually appreciate the call. JAKKS, as we have our Board meetings periodically these are one of the topics that we bring up during the meetings. And we will be shortly having an additional meeting with the Board of Directors, and it will be brought up at that time. But we reviewed the use of capital for acquisitions as well as buy backs, and we figure out what we believe is the best use of capital, because the capital markets have been quite tight over the last year. Having the cash on hand has been very useful to not have to look at banking for an acquisition, so we review it often, and it is something that we bring up at each of our Board meetings, or a majority of our Board meetings.

Got you. Thank you so much and best luck next quarter.

Thank you, Quinton.

Jeff Blaeser with Morgan Joseph.

Good morning. Thanks for taking my question. On your cost side, as you anniversary the cost cutting initiatives in Q3 that we are in right now, how much of a tailwind do you think you have left? I don't think you got it all in in the back half of last year, so how much incremental savings should we expect in the back half of 2010?

Yes, most of the head counts were affected mid-October. Next round early December, and then the last piece was mid-February. So as it relates to head count and related costs, those won't be anniversaried until the fourth quarter. I think the annual savings were in the, I think $16 million range. So we are looking at $4 million to $5 million. Bonuses tended to be loaded in the back half. Actually we didn't have it last year. So probably about $4 million or $5 million in A3, and another million or two in Q4.

And those are added savings year over year?

Correct.

Okay, thanks. And it sounds like the cost pressures that you are looking at are more of 2011 versus 2010 story, is that accurate?

Yes. Well we will make the adjustments more in 2011. We have had the issues in 2010, but we have addressed them with manufacturers, and/or readdressing it internally with product or packaging. So it won't have an impact to us in 2010, and I think we are well ahead of the curve for 2011, and addressing it by division, by brand, by category. As you know, we are in various divisions. So if you take our disguise division, which is primarily cut and sew, it is more of a labor versus cost of commodities, versus injection molding like our action figures. So we will address it by area and by business unit.

Okay, great. Can you compare disguise today versus last year, in terms of I am sure you have been able to create efficiencies under that line?

That is part of our alignment of overhead restructuring and reorganization. So disguise last year in 2009 had its own office in Hong, its own merchandising, shipping department, et cetera. Now that office has been consolidated into JAKKS Hong Kong office, the San Diego or Poway business unit that does all of the R&D call it Sales and Marketing, significantly dropped by 50% I would say in the reduction of overhead, and much smaller. We used to have 210 approximately, approximately a 210,000 square foot office and distribution center. The offices have gone down to I believe about 25,000 square feet, and the distribution center was absorbed by JAKKS City of Industry distribution center. So we have many efficiencies, but that is inclusive in our complete overhead reduction.

Okay, great. Thank you very much.

Thank you.

We have time for one more question from David [Tang] with Stifel Nicolaus.

[Drew Crum] here. Three questions for you guys. First a follow-up on Jeff's question on the restructuring and the cost reductions, what was the benefit you saw in the second quarter, is there any way to quantify that or pull that out? Second question is on Puppy on my Pocket, just an update on that license? And my third question, is what is the tax rate on the payment from THQ of $6 million in the quarter? Thanks.

Okay, in SG&A the benefits from the restructuring come from three different areas, one is in cost of goods through lower capital expenditures and the reduction was about $1 million in the quarter. And SG&A excluding direct selling costs which would include marketing, we saved about $7 million of which $2 million would be from litigation legal, so it saved about $5 million. In terms of other direct selling, we reduced marketing buys by about $1.5 million in the quarter, and for commission and Coop, that is based on the percentage of sales, so that was down about $0.5 million because of the decrease in sales year-over year.

Okay. And on the next question, I think it was the Puppy in my Pocket?

That is correct.

The Puppy has been a nominal business for us the last two years. So in 2011 we will not be doing Puppy and Baby in my Pocket. We are looking at it for 2012, but it has been a nominal portion of any revenue of Pocket for us.

Okay. And the tax rate on the--?

Oh, 39%, it is domestic income.

Got it. Okay, thanks guys.

At this time I will turn it over to our presenters for any additional or closing remarks.

Ladies and gentlemen, I would like to thank you on behalf of JAKKS Pacific for having the confidence in our Company. We look forward to our third quarter conference call. Thank you very much.

And that does conclude today's teleconference. Thank you all for participating.