JAKKS Pacific Inc (JAKK) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for joining the JAKKS Pacific earnings conference call with management. Just as a reminder, today's call is being recorded. The call will begin with prepared remarks, and will be followed by a question and answer period. (Operator Instructions)

With that, I will open the call to Genna Rosenberg from JAKKS Pacific.

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 today with management of JAKKS Pacific to review the results for the fourth quarter and the full year ended December 31, 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 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 2011, as well as any other forward-looking statements concerning 2011 and beyond, are subject to Safe Harbor protection under Federal security laws. These statements reflect our best judgement 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 with our other Company reports subsequently filed with the SEC from time to time.

And with that, I will turn the call over to Mr. Berman.

Good morning, everyone. And thank you for joining us today.

I am pleased to report that we ended 2010 ahead of our expectations, with revenues in the fourth quarter of $198 million, and $747.3 million for the full year. We also achieved the top end of our EPS guidance.

As we look back over the past year, a lot has happened. We started the year in the midst of a difficult, but necessary, Company-wide restructuring. As you may remember, in 2010 we were faced with a loss of two areas of business, WWE and Hannah Montana products, coupled with the continuing overall economic downturn and a few other lines in the portfolio just not meeting our expectations. There were challenges, seemingly at every turn. With our restructuring came deep layoffs which were painful and far reaching, but we knew they were necessary to right-size the business given the state of the business at that time, and with fears of shrinking retail shelf space for toys, container shortages, labor issues, capacity constraints and production delays. And not the least of which included the untimely passing of my long time business partner, close friend and our co-founder, Jack Friedman. As I sit here today, I'm incredibly proud of our worldwide JAKKS Pacific team and what we have accomplished together in the face of adversity, to return stockholder value back to this Company.

So here is what we did. We made difficult but necessary reductions in our worldwide work force and to our overhead. We consolidated our offices, managed our supply chain with tighter controls, challenged our worldwide employees to do more with less, and to be more cognizant of every dollar being spent. We made more cost effect tooling decisions, and focused on our strongest licences and our own proprietary brands. And we eliminated some lesser performing licenses and product lines. We put our efforts into areas that we believe would bring us the strongest returns and those which, going forward, will lead to increased market share, more consistent growth and more profitable future for JAKKS Pacific and our stockholders. And we believe that our results for 2010 are a great first step.

Contributions to our revenue in 2010 came from a broad range of toys and electronics from all of our JAKKS divisions, and we believe that will be the case in 2011 as well. We had a more focused line at retail for 2010, due to the elimination of lesser performing lines and focuses on top licenses. All in all managed to surpass our original earnings and revenue goals for the year. We believe that JAKKS Pacific is on track for a positive 2011. Now we are still mindful of the concerns in Asian manufacturing, with the most recent issues centering around expected labor shortages, increased pricing pressures and the appreciation of the RMB.

I will get into more product detail later, but first I will turn the call over to Joel Bennett to review our financial results for the fourth quarter and the full year of 2010. Joel.

Thank you, Stephen, and good morning, everyone.

We ended the year with comparable fourth quarter volume as last year, with net sales of $198 million, and $198.8 million in 2009. And net sales for the full year of 2010 were $747.3 million, compared to $803.7 million in 2009. Reported net income for the fourth quarter was $8.9 million, or $0.30 per diluted share, compared to a loss of $1.9 million, or $0.07 per share, in the fourth quarter of 2009. Reported net income for the full year of 2010 was $47 million, or $1.52 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 agreement, as well as one-time tax-related benefits of $10.8 million, or $0.31 per diluted share, compared to a loss of $385.5 million, or $14.02 per share, reported in 2009.

On a non-GAAP basis, which excludes certain charges in 2009, which are detailed in our 8-K containing our earnings release, net sales for the fourth quarter of 2010 were $198 million, compared to $198.8 million in 2009, and $747.3 million for the full year of 2010, compared to $804.6 million reported in 2009. On a non-GAAP basis, net income for the fourth quarter of 2010 was $8.9 million, or $0.30 per diluted share, compared to $6.4 million, or $0.22 per diluted share, in the fourth quarter of 2009. Non-GAAP earnings for the full year of 2010 were $47 million, or $1.52 per diluted share, including the charge in tax benefits noted previously, compared to $30.2 million, or $1.03 per diluted share, reported in 2009.

Turning to a more detailed discussion of our results, we recently realigned our product lines into two new categories to better reflect our business. They are Traditional Toys and Electronics, and Role-Play, Novelty and Seasonal. Worldwide sales of our Traditional Toys and Electronic products which includes dolls, action figures, vehicles, electronics, plush and pet products, were $107.3 million for the fourth quarter of 2010, compared to $119.6 million in 2009, and sales of $358.4 million for the full year of 2010, versus $439.4 million for the full year of 2009. 2010 fourth quarter sales were led by our Disney princess and fairies doll lines, dress-up and role-play toys, and Spy Net and TV games electronics. This was offset primarily by declines in WWE action figures and accessories, as well as vehicles.

Worldwide sales of Role-Play, Novelty and Seasonal products, which include role-play, novelty, Halloween costumes, indoor and outdoor kids furniture and pool toys, were $90.7 million in the fourth quarter of 2010, compared to $79.2 million in 2009, and sales of $388.9 million for the full year of 2010, versus $364.3 million for the full year of 2009. Included in the category numbers are sales outside of North America of $18.2 million for the fourth quarter of 2010, compared to $18.1 million for the fourth quarter of 2009, and for the full year of 2010 and 2009, international sales were $82.3 million and $80.5 million, respectively. Our expansion continues, with ventures in the UK, Spain and France getting into full swing, and JAKKS staff selling in our 2011 portfolio direct to retail in the local territories. This is as we seek to maximize international opportunities for licensed, and especially JAKKS-owned, contents.

Gross margin for fourth quarter 2010 was 33.1% of net sales, compared to 28.3% of net sales in the fourth quarter of last year on a non-GAAP basis. And gross margin for the full year of 2010 was 32.8% of net sales, compared to 32.4% of net sales for the full year last year. The increases in 2010 are due to changes in our product mix, which included sales of higher margin product and fewer close outs. We achieved overall modest margin expansion in 2010, as our new products continued to ship in quantity in the fourth quarter.

SG&A expenses in the fourth quarter of 2010 were $54.6 million, or 27.6% of net sales, as compared to $55.4 million on a non-GAAP basis, or 27.9% of net sales in 2009. For the full year of 2010, SG&A expenses were $194.8 million, or 26.1% of net sales, compared to $224.7 million on a non-GAAP basis, or 27.9% of net sales in the prior year. The full year dollar and percentage of net sales decreases in 2010 are attributable to the effectiveness of our cost saving initiatives which commenced in the third quarter of 2009, and the restructuring plan implemented in the fourth quarter of 2009.

Regarding the video game joint venture with THQ which was dissolved as of December 31, 2009, in the second quarter of 2010 we received our settlement payment from THQ in the amount of $6 million, which is being accounted for on a cash basis. In 2009, excluding the cumulative adjustment to our preferred return, we reported income in the fourth quarter of 2009 of $5.8 million, and $7.4 million for the full year of 2009. Cash flow from operations provided cash of $67.5 million for the full year of 2010, and as of December 31, 2010, the Company's working capital was $389.8 million, including cash and equivalents and marketable securities of $278.6 million. Our cash flow and balance sheet remain very strong. We continue to actively evaluate potential acquisition targets and apply our disciplined approach to ensure that we secure the best deal for JAKKS Pacific and our shareholders.

We announced in the third quarter of 2010 that our Board of Directors authorized a stock buyback program, under which we can opportunistically repurchase up to $30 million of the Company's common stock from time to time. In the fourth quarter, we purchased approximately 291,000 shares, at an aggregate cost of $5.6 million.

Depreciation and amortization was approximately $5 million in the fourth quarter of 2010, down from $8.4 million in the fourth quarter of 2009. And for the full year, depreciation and amortization was approximately $25.2 million in 2010, down from $34.9 million in 2009. Capital expenditures were $2 million for the fourth quarter of 2010, down from $4.9 million in the fourth quarter of 2009, and for the full year of 2010 and 2009, capital expenditures were $11.6 million and $16.3 million, respectively. This was in line with our expectations of a meaningful reduction, achieved through our SKU rationalization and refined production planning efforts.

As for our tax rate, our effective tax rate decreased to 25.8% before any FIN 48 or other adjustments. This is a result of a shift in sales from the US to FOB Hong Kong. Going forward, we anticipate an effective tax rate of 28.5%.

Consistent with the seasonality of our business and the comparable fourth quarter sales volume, accounts receivable as of December 31, 2010, were $122.5 million, compared to $129.9 million at the end of the fourth quarter of 2009. DSOs were 56 days compared to the 59 days in the same period in 2009. Inventory was $43.2 million as of December 31, 2010, up from $34.5 million at the end of the comparable period in 2009. The increase is due primarily to seasonal demand planning due to the timing of factory closures for the Chinese New Year holiday, and the placement of our product lines. DSIs remained at historical lows, but increased modestly to 36 days from 27 days at the end of fourth quarter 2009, due primarily to comparable sales and the higher inventory levels in 2010.

Concerning our guidance for 2011, barring any extreme unforeseen challenges, for our initial 2011 guidance, we are anticipating an increase in net sales of 3% to 4% to approximately $770 million to $775 million, with diluted earnings per share in the range of $1.32 to $1.35. This is an increase of 4% to 6% from our 2010 adjusted EPS of $1.27, which excludes the one-time tax-related benefits and benefit payment in 2010. This guidance also anticipates first quarter 2011 net sales in the range of $60 million to $65 million, with a loss in the range of $0.39 to $0.45 per share, versus net sales of $77.3 million and a loss of $0.19 per share in the first quarter of 2009, which included a one-time tax benefit of $4.9 million, or $0.18 per share, which when adjusted for the benefit, nets to a loss of $0.37 per share for 2010.

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

So, as previously mentioned, when we reported our year-end numbers last year, we knew we would have to overcome some serious challenges. We made a commitment to our stockholders and ourselves that we'd work hard to regain their confidence and make the right changes in our business. We successfully executed our action plan to right-size the business, do more with less, focus our efforts on the strongest SKUs and our A and B licensing opportunities and grow our organic brands, all in all to give us a stronger product portfolio which was less reliant on any one product line than we had ever been in the past. And we knew we would need it to create efficiencies, share resources Company-wide and manage our supply chain with new commitment for being more cost effective at every turn. I believe we have been achieving what we set out to do, and our future prospects look quite promising.

In the fourth quarter we had nice momentum at retail with our Disney Princess and Disney Fairies dress-up and role-play products, My First Disney Princess Baby Dolls, and Princess & Me large dolls, and Fairy Mini and fashion dolls. Our Spy Net electronic products have been topping the US and international hot toy lists, and we just received Toy of the Year award at the Nuremburg Toy Fair earlier this month. These products resonated with retailers and consumers over the holiday and had nice sell throughs. Our kid furniture sold nicely during the fourth quarter, and we also had solid contributions from across our diverse portfolio of products.

For the full year sales, we were extremely pleased with the successes coming from many of our divisions. We had robust sales of our Halloween costumes based on many of the top and beloved characters of our time. Our dress-up and role-play business continued to thrive. We expanded our baby doll portfolio with the introduction of my First Disney Princess dolls. We increased sales year-over-year with the continued innovation in our kids furniture and seasonal products, with the addition of our new licensed kiddie pools and other unique licensed seasonal products, and also had nice momentum at retail with our JAKKS-owned brands, like Spy Net, Creepy Crawlers and Real Construction, paving the way for expansion of these lines and others in 2011.

Now I would like to walk you through just some of the products and opportunities that give us confidence about 2011 and beyond. For 2011, we again anticipate that contributions will come from a wide range of quality products, based on both popular well-known licenses and JAKKS brands, which we believe are both exciting and right on trend. Also, from continued expansion internationally. There are many things that give us cause to be excited, but there is no one single product that we are counting on to make our year.

In Traditional Toys and Electronics, we have a number of very promising initiatives in the pipeline for 2011. First of all, Pokemon, led by the US release of Pokemon Black and White version video games for the Nintendo DS on March 6, a new JAKKS Pacific toy line will launch and coincide with a national mall tour, new animated series, called Pokemon Black and White, a feature length film, trading card game expansion, competitive gaming tournament and a comprehensive multi-million dollar marketing campaign from Pokemon USA. The video games and new animated series will introduce players to a brand-new world with more than 150 never before seen Pokemon characters featured in an all new adventure. The game's release in Japan last September shattered all existing sales records in that country, making them the fastest selling Nintendo DS game in history, with 5 million units sold as of late January, 2011. Both the licensed store and retailers believe this will be a landmark year for the Pokemon entertainment franchise, and we are looking forward to our new Pokemon products hitting retail shelves in late May.

Another classic we are relaunching in a big way in 2011 is Cabbage Patch Kids. We are bringing back the original kids, with the full retail support and a connecting generations campaign that will teach kids about genealogy, adoption and the rich history of Cabbage Patch Kids. We think this campaign will really resonate and connect parents, and grandparents, with young kids who are enjoying the brand today.

The Disney Princess Doll and Fairies Doll team are continuing to develop beautiful and magical new line extensions for these key brands. And we are especially looking forward to a great year, too, with our larger size Princess & Me Friends dolls in the retail boutique at Toys 'R' Us retailers nationwide.

There are many other top entertainment brands featured in our portfolio for this year that look to be promising as well. Pirates of the Caribbean - on Stranger Tides is expected to be another blockbuster from Disney for this year, with a total of three Pirates of the Caribbean movies, starring Johnny Depp and Penelope Cruz, to be released over the next seven years. JAKKS has the master toy rights and plans for a killer line up of action figures, play sets and an original strategy-based board game. Disguise will also be doing the Halloween costumes based on the franchise, which is always a favorite in that category.

The Smurfs movie is coming out this summer, and looks like it's going to be great. The film is 3-D, and brings the Smurfs to New York City in a live-action adventure with an incredible cast, including starring Neil Patrick Harris, Hank Azaria, George Lopez, Paul Reubens, Sophia Vergara, and even Katie Perry, as the lovable character Smurfette. Our toy figures reflect the updated look of the Smurfs, and this is an opportunity to relaunch one of the best classic toy lands in our time.

Real Steel, a feature film due out next fall, is an action-packed Steven Spielberg production from Dreamworks and marketed by Disney, starring Hugh Jackman and Evangeline Lilly from Lost. It combines a giant human-controlled robot with the world of boxing in a very compelling, toyetic way. We have the worldwide master toy rights and we are excited about the potential.

JAKKS specific award winning Spy Net electronic spy line keeps garnering international acclaim, and just last week we won Toy of the Year at Nuremburg Toy Fair. For 2011, we will combine our top-selling Spy Net Video Spy Watch with our top-selling Night Vision Goggles for a great spy experience, and introduce many other complementary products for Spies fans and alike.

In TV games, in addition to the Cars 2 title and Big Buck Hunter, we are releasing a Plug It & Play TV game version of Golden Tee Golf. A very successful arcade game, currently with over 100,000 units in bars and arcades nationwide, Golden Tee Plug In & Play TV games will feature 18 holes for each of the three different top golf courses and has received nice placement at our key retailers.

Real Construction finished last year with nice momentum, and we expect expanded placement for 2011. We will be adding new features and also a girl focused line, since we believe girls love to create things with Real Construction as well.

And our excitement continues with the potential of our first television entertainment venture, Monsuno. We aligned with the leading Japanese advertising and production company, Dentsu, and also a global television distribution giant, Freemantle. Our trading card partner is TOPPS, and earlier this month we announced a comprehensive agreement with Giochi Preziosi to be our PanEuropean toy distribution partner. JAKKS Pacific will distribute the toys in North America and other international territories, which on their own show great promise, but coupled with 52 animated episodes based on Monsuno's story line, we believe we have greater potential. Production is well underway and we anticipate Monsuno will likely to be a spring 2012 launch.

We have been showing retailers our 2011 Halloween line up at recent Halloween trade shows and it is shaping up to be a very nice year, as well. The excitement keeps going. Our vast line includes all favorites from Disney, Sesame Street, Hasbro and more, with a newly and really innovative line up, fashion-forward designs and extensions. And an exciting new area we call H2Go, or Halloween 2 Go, a brand-new line of instant Halloween costumes geared toward teens and adults. This is an alternative way to dress up that's quick, easy for people on the go.

We made tremendous headway with the expansion of our baby doll lines with introduction of My First Disney Princess line, and expect to see more growth as we introduce what we believe will be a meaningful expansion for that line, as well as for our Graco and Fisher-Price baby dolls and accessories. We are securing additional complementary new licenses, such as Baby Genius and others that are in the works, to expand that division for 2012 and beyond.

The indoor and outdoor furniture, and other seasonal product and toys is doing great and had some terrific new innovative lines for 2011, including several key products based on what is expected to be one of the kids top pick movies for this year, Cars 2. Outdoor swings, indoor and outdoor kids furniture, like our stack attires that actually transform into a cool table and chair set for kids' rooms and more. And speaking of Cars 2, we have also a deluxe two Cars TV game, Cars 2 Halloween costumes and a full range of Cars 2 role play and novelty products.

We have some terrific new Disney Princess and Fairy products, including a giant Disney Princess kitchen, a whole new range of musical instrument role-play toys, and redesigned dress-up outfits that complement our Disney Princess dolls. We will be launching some brand-new exciting items from our role-play team, including the new I Am T-Pain microphone, based on the Grammy Award winning hip-hop artist.

This year, 2011, is shaping up nicely. We again anticipate that our diverse portfolio will resonate with kids, and that the fruits of our labor are taking us in a positive direction. We will continue to maintain our tight reins on managing our business. We are watching issues in China, such as labor shortages, rising prices and more, but believe at this time that we will be able to mitigate risks by sticking to our strategic plan and adapting, where necessary, in order to achieve our guidance.

In closing, we remain committed to growing our business for a profitable and successful JAKKS Pacific for our stockholders and employees.

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

Thank you, sir. (Operator Instructions)

Ladies and gentlemen, this is Stephen Berman, JAKKS President and CEO. We have had an exciting 2010, and we are looking forward to another exciting 2011. We are in the midst of the New York Toy Fair with analyst meetings and meetings throughout the period with retailers and so on. As today is a busy day, we appreciate everyone's time, and if there is any further comments or questions, we will open the line one more time for any comments or questions.

And we do actually have a question from [David Payne] of Stifel Nicolaus.

Good morning, guys. I had a question about your retail inventory levels, ending on the fourth quarter of 2010.

At retail, inventory levels for JAKKS Pacific products and across each of our divisions, we are extremely lean, and we have really no issues from fourth quarter going into 2011. We do know that other people -- or other manufacturers have previously stated that they have inventory levels at retail. The only issue of that will be a slower buying pattern for retailers in the first half of the year, which does affect all manufacturers. But for JAKKS itself, we ended the year quite clean throughout all of our divisions, from Halloween to our interactive division and so on. We are pretty happy with where we're left at retail, as well as where inventory levels we currently have in our distribution facility.

Sorry if I missed this, but on the tax for the fourth quarter, was that more of a geographic mix or -- why was the tax rate so low?

The forecast contemplated certain proportion of sales generated out of the US, which are taxed at a higher rate.

Right.

The final distribution between FOB China and the US changed, so that was reflected in the fourth quarter --

I see

-- effective tax rate. But going forward, we have planned for a lower effective tax rate. Historically, we were at approximately 31.5%, and for 2011, we are expecting a 28.5% rate, excluding any FIN 48 or other tax adjustments.

Okay, and are you guys expecting any pricing increases to preserve your margins?

We have gone through, early in the second half of last year where the pricing adjustments and negotiation with manufacturers, so for 2011 I believe all of the pricing initiatives have been put to bed. There are still some nominal items that still need costing, but that happens throughout the year. We believe we're set today. We will not see any further pricing pressure, and we are consistent with our pricing and margins going forward.

The 2011 guidance contemplates gross margin expansion of about 90 basis points. And we expect to leverage our infrastructure on the 3% to 4% sales growth, to generate an operating margin increase of about 130 basis points. So, we are doing what we can, in terms of how we design the products, introducing new products that tend to have higher margins over some of the legacy product lines, such as our novelty and Halloween costume items.

Okay. And two last questions. On the Pokemon, Stephen, you said that that's anticipated to hit the shelves in the May timeframe?

In the second quarter. It's just starting to ship now, but it will hit the shelves during second quarter. And the launch of the Nintendo Black and White game launches March 6 in the US.

Okay. And regarding the Monsuno products, is that still anticipated for a fall shipping?

It will be shipping in spring 2012. There may be a nominal amount that may ship, call it November, December time. It just truly depends on when the actual series goes on air. But it would be nominal for this part of the year, for 2011.

Okay. Thank you, guys.

Thank you very much.

And at this time, there are no further questions in queue. (Operator Instructions)

Okay, ladies and gentlemen, we appreciate the time, and look forward to speaking with you after our first quarter. And thank you very much for being supportive of JAKKS Pacific. Thank you.

And ladies and gentlemen, that does conclude today's conference call. We would like to thank you for your participation.