JAKKS Pacific Inc (JAKK) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for joining the JAKKS Pacific first quarter 2011 call with management. Today JAKKS will review the results for the first quarter ended March 31, 2011, which the Company released earlier this morning. 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 over view of the quarter and operational results and then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial results. Mr. Berman will then conclude the prepared portion of the call with highlights of the product lines and current business trends prior to opening up the call for your questions. Your line will be placed on mute for the first portion of the call. (Operator Instructions). Before we begin, the Company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales and earnings per share for 2011, as well as any other forward-looking statements considering 2011 and beyond, are subject to Safe Harbor protection under federal security laws.

These statements reflect the Company's best judgement based on current market trends and conditions today, and are subject to risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS most recent 10-K and 10-Q filings with the SEC, as well as the Company's other reports subsequently filed from the SEC from time-to-time. With that, I will turn the call over to Mr. Berman. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today. 2011 started off favorably with our top line exceeding the high-end of our guidance range for the first quarter. The first quarter is our lightest volume quarter with the bulk of the shipment hitting retail in the second half of the year. We have some really terrific products in our portfolio, and have both new, and evergreen contributions coming across all of JAKKS Pacific divisions this year.

Inventory levels are consistent with the seasonality of our business, and we are seeing some nice pick up on sell-throughs of our Spring items at retail, including our outdoor furniture, seasonal products, and baby dolls, as well as toys from some of the upcoming movie properties in our line, including Pirates of the Caribbean - On Stranger Tides, Cars Two, and the Tangled DVD and more. We are mindful of the continuing cost pressures we are seeing from factories in Asia, centered around labor availability and costs, increased cost of the raw materials and appreciated R&B, but so far margins have improved over last year and we expect to achieve margin expansion for the full year, as a result of our commitment to closely managing our supply chain.

With our diversity, no one product will drive our year. We expect the top contributors to be some licensed toys, including dolls, and dress up, and pretend products based on Disney Princess and Disney Fairies, as well as the I Am T-Pain Microphone, Cabbage Patch Kids dolls and a wide-array of Pokemon toys. In addition we have nice contributions from our SpyNet electronics, our Halloween costumes and others, and simultaneously we are also working on a number of exciting new initiatives for our future. The most noteworthy of which, is our new boys animated television show, MONSUNO, which is on track for airing in Spring of 2012 with a major network.

I would like to turn the call over to Joel Bennett to review our financial results for the first quarter of 2011, then I will come back and give more of an update of the 2011 product portfolio. Joel?

Thank you, Stephen, and good morning everyone. Ahead of expectations, net sales for the first quarter of 2011 were $72.3 million compared to $77.3 million reported in the first quarter of 2010. The Company reported a lost loss for the first quarter of 2011 of $10.6 million or $0.39 per diluted share, compared to a loss of $5.2 million or $0.19 per diluted share, which included a one-time tax benefit of $4.9 million or $0.18 per diluted share. Excluding the tax benefit, the 2010 first quarter loss would have been $10 million or $0.37 per diluted share.

Turning to a more detailed discussion of our results, at the end of 2010, we realigned our product lines into two new categories to better reflect the makeup of our business. They are traditional toys and electronics, and role playing novelty and seasonal toys. Worldwide sales of products in our traditional toys and electronics segment, which includes dolls, action figures, vehicles, electronics, plush and pet products, were $38.2 million for the first quarter of 2011, compared to $38.6 million for the first quarter in 2010.

2011 first quarter's sales in this segment were lead by our boy's action figures including Pirates of the Caribbean and Pokemon, though offset by a decline in UFC. Girls products, though they contributed less this year with declines in Fairies and In My Pocket among others, and preschool, which increased with higher Disney Princess doll sales in our Tollytots division. World wide sales from our role play novelty and seasonal toy segment, which includes role play products, novelty toys, Halloween costumes, indoor and outdoor kids furniture and pool toys, were $34.1 million in the first quarter of 2011.

Compared to $38.7 million for the first quarter in 2010. Role play toys continue to dominate sales in this category, although they were down overall versus last year. Included in the category numbers are international sales of $14.9 million for the first quarter of 2011, compared to $12.9 million for the first quarter of 2010. Our international sales were enhanced by our JAKKS staff selling direct to retail in the local territories. We are pleased with the progress we've been making as we seek to maximize International opportunities for licensed and especially JAKKS owned content.

Gross margin for the first quarter of 2011 increased to 33.6% of net sales, compared to 32.6% of net sales in the first quarter of 2010. The 100 basis point increase in 2011 is due to changes in our product mix, which included sales of higher-margin products and fewer closeouts, offset in part by increased royalty. SG&A expenses in the first quarter of 2011 were $39.1 million or 54% of net sales, as compared to $38.9 million or 50.2% of net sales in 2010. The increase as percentage of net sales in 2011 is attributable to moderately lower sales in 2011. Cash flow from operations was $7.9 million for the first quarter of 2011, compared to $24.1 million in the first quarter of 2010.

The year-over-year decline is due primarily to the increase in inventory in 2011, on account of the timing of the Chinese New Year and Easter holiday, as well as demand planning for the placements of our products. As of March 31, 2011, the Company's working capital was $370.7 million, including cash and equivalents in marketable securities of approximately $275 million, and our balance sheet remains very strong.

We have been closely watching the increase in the robust acquisition pipeline in search of quality additions to our portfolio. Using our disciplined approach, we continue to look for creative acquisitions to compliment the growth of our business and effectively deploy our capital. In the meantime, we purchased 270,000 additional shares of our common stock for a total of $5 million during the quarter, and have approximately $19.3 million remaining under our previously announced, $30 million stock repurchase program. Depreciation and amortization was approximately $3 million in the first quarter of 2011, compared to $3.7 million for the first quarter of 2010.

As for our tax rates, our effective rate for 2011 is expected to be 28.5% before any FIN 48 or other adjustments. This may change if there's a shift in sales between the US and Hong Kong. Capital expenditures were $3.2 million for the first quarter of 2011, up from $1.2 million for the first quarter of 2010. This was in-line with our expectations as we continue to reach sufficient production levels with the reduced number of tools and molds achieved through our SKU rationalization and refined production planning efforts.

Consistent with the seasonality of our business, Accounts Receivable as of March 31, 2011, were $57.4 million, compared to $59.2 million at the end of the first quarter of 2010. DSO's were 71 days compared to the 69 days in the same period in 2010. Inventory, as of March 31, 2011, was $45.2 million, up slightly from the December 31, 2010 level of $43.2 million and up from $30.8 million at the end of the comparable period in 2010. The increase is due primarily to seasonal demand planning, due to the placement of our product.

Inventory levels remain near historical lows, but DSI has increased to 102 days from 65 days at the end of the first quarter of 2010, due primarily to comparable sales and higher inventory levels in 2011 in support of new product launches. Concerning our guidance for 2011, we are still anticipating an increase in net sales in 2011 of 3% to 4% from 2010 to approximately $770 million to $775 million, with diluted earnings per share in the range of $1.32 to $1.35, an increase of 4% to 6% from our 2010 adjusted EPS of $1.27, which excludes the one-time tax benefit and benefit payment in 2010. We continue to have strong confidence in the future prospects for JAKKS Pacific and its shareholders. With that, I'll return the call back over to Stephen Berman.

As I mentioned, the bulk of our sales are from products hitting retail in the second half of the year, and we will start shipping the fall drivers at the end of the second quarter. Our portfolio is a mix of both popular well-known licenses and JAKKS own brands, which we believe are both exciting and right on trend. And there are few gems hitting the shelves in the second quarter that look promising as well.

First of all, Pokemon. We have been saying that we expect 2011 to be a great year for this brand, and things are falling into place. Nintendo released the Pokemon Black Version and Pokemon White Version video games, and on their first day of availability in the United States alone, Pokemon Black and White sold more than 1 million units, shattering previous one-day sales record for this franchise. New JAKKS Pacific toys based on the Pokemon Black and White generation featured many of the new 150 never before seen Pokemon characters, and they are hitting our customer shelves in early May. We're extremely excited about this property and product. We have a killer lineup of action figures, play sets and original strategy-based board game, based on the Pirates of the Caribbean - On Stranger Tides, which are just now hitting shelves in time for the new Pirates of the Caribbean movie, coming out this Spring.

Our outdoor furniture, kiddie pools, swings, Funnoodles and other seasonal products are doing great, and we've seen some terrific new innovative lines for this spring, including several products based on what is expected to be one of the top kids movies of the year, Cars Two. From our Disguise division, Halloween costumes based on many of the top and beloved popular characters of our time are on track to have another good year, along with our year-round dress-up outfits for toddlers and girls. This fall we will also be launching some brand new items from our role play team, including the new, I Am T-Pain Microphone, based on the Grammy Award winning Hip-Hop Artist, famous for his voice changing technology, called the T-Pain effect. In the second half of the year, we are relaunching Cabbage Patch Kids with full retail support and a connecting generations campaign.

We believe this line will really resonate and connect parents and grandparents, with young kids who are enjoying the brand today. Our Disney Princess and Disney Fairies business continues to do extremely well, with the beautiful and magical new line extensions that are planned for fall, and our Disney Princess baby dolls and accessories are doing extremely well at retail. The Smurf movie is coming out this September, and it looks like it's going to be great. Our toy figures reflect the updated look of the Smurfs and this is an opportunity to relaunch one of the best classic toy lines of our time both in the US, and internationally. Real Steel also present an amazing opportunity, and we are excited by the potential of this line of action figures based on the film from DreamWorks and Disney.

Our award winning, SpyNet electronics line, keeps getting better and better, and our customers are excited about the new versions of our Spy Watch and Night Vision SKU's hitting retail this fall. Continuing with our electronics division, our TV games, in addition to the Cars Two title and a Safari version of The Big Buck Hunter, we are rereleasing a Plug It and Play TV games version of the arcade hit Golden Tee Golf. The arcade version, of which is currently installed in more than 100,000 bars and arcades nationwide.

In Real Construction, we'll be adding new features, and also a girl-focused line called Artsy Girl, since we believe girls love to create things with Real Construction, as well. The momentum and our excitement continues with the potential of our first television entertainment venture, MONSUNO, which is coupled with a very exciting toy line. As you may know, we align with the leading Japanese advertising and animation company, Dentsu, and also global television distribution giant, Free Mantle.

Our trading card partner is Tops, and we have a comprehensive agreement with (inaudible) to be our pan-European toy distribution partner. JAKKS will distribute the toys in North America and other international territories. Production is well underway, and we believe we are very close to announcing a major network television partner in the coming months, which should keep us on track for a Spring, 2012 launch. We are also securing several new licenses, about which, we will be sharing details in the comings months, which we believe will be great and complimentary editions to our Portfolio for 2012 and beyond. Overall this year 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 continue to maintain tight reigns 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'll be able to mitigate the risks by sticking to our strategic plan and adapting where necessary in order to achieve our guidance, and grow our business for our profitable and successful, JAKKS Pacific for our stockholders and employees.

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

Thank you, sir. (Operator Instructions). We'll take our first question from Sean McGowan at Needham & Company.

Good morning, guys, how are you?

Good, yourself?

Good. I have a couple of questions here. Whether it is Joel or Stephen, can you give us a little bit more detail in what areas in role play were down?

It was just in general the dresses and such, the novelties because of the lower price-point stride the quarter.

Was it licensed stuff or more basic stuff that was down?

Pretty much across the board.

And UFC, is that decline one of timing, or is there something bigger going on there?

Well, we had the soft launch in the fall proceeding Q1 2010, and it has a different appeal to both collectors and kids, and it's just a nice property, it's just that it's not, well it's okay. I think we had some promotions towards the end of the fourth quarter. We look forward to a nice year from it. It's just more of a cyclical play.

In addition, Shawn, they also had Wrestle Mania in the first quarter, which takes away from any wrestling genre. It's not the sign of UFC, it's just the sign of the period.

Okay. Then my last question is, just trying to gauge generally the mood among retailers, not just for your product, but generally going into this year with inventories a little heavy. How do you feel they managed that through the first quarter? Are they still reluctant to kind of return to historical levels?

First, I'll speak for JAKKS, I'll speak just in general. As we said fourth quarter and year-end, we ended up being very light, both inventory in the warehouse and inventory at retail, which behooved us extremely well going into 2011, and our sell-throughs because I think we're so broadly diverse in all these different categories of businesses and a lower price-point of products through the first half often year, it boded very well for JAKKS. On the reverse side, the retailers did have a tremendous amount of inventory going into the first half of 2011. It's been known that some of the competitors had a tremendous amount at retail of inventory, as well as in the warehouse. They are working through it. Sell-throughs have been terrific. There were some really wonderful promotions that brought traffic in. So for the second half of the year I would say for the industry, looks really good, I know our placement has grown dramatically amongst certain areas of our business, so they're not being shy in purchasing and forward-looking and currently on just day-to-day normal reorders, so the orders are coming in. I just think in certain segments that they over bought, they're just working through. It looks really well, at least for us we're excited for 2011 and beyond. The sell-throughs are really, really encouraging. In fact, we just got some initial reads of Pokemon and the initial reads are off the chart. They're again gangbusters, so people are in the stores and we're seeing that.

Thank you. thank you, Shawn.

(Operator Instructions). We'll take our next question from Jeff Blaeser at Morgan Joseph.

Good morning. Thanks for taking my question. It looks like royalties were down a bit year-over-year, and that was the primary growth margin driver. Do you expect that trend to continue or to level off to past levels, if you will, going forward?

That has to do with product mix and one of our big initiatives over the last 18 months has been to drive JAKKS own content, which will continue to keep overall effective royalty rates lower, but it was more of a seasonal thing. We did have the full quarter of Real Construction this year and SpyNet among other JAKKS own content, but that will fluctuate somewhat, and when the royalties go up, typically you'll see the cost of goods goes down because it drives a higher price point, so there's a lot of moving parts within that.

Any expectation for what your internally driven product will be as a percent this year versus last?

We may get it up to 25%. Historically we've been running around 20%.

Jeff, one of the tremendous things that's occurring for JAKKS, because we're going direct in many various countries where our own proprietary products really perform better for us, because some specific licenses are territory driven, but for example, Creepy Crawlers, SpyNet, just in general Real Construction, those items are really, they're very apropos for almost all territories. In addition, we're expending those lines here. A good example is Creepy Crawlers was launched exclusively last year for Toys R Us. This year it is launched both in the US, Canada, North America, in total across all retailers, so our expansion of our own proprietary products are really driving some new initial growth for JAKKS.

And will that internal projected growth also keep the international momentum you had in the first quarter, and any other key lines that you expect to do better internationally?

Yes. A lot of the initial internal home-grown products, the Girl Gourmet, the Creepy Crawlers, the Incredible Edibles, SpyNet, even MONSUNO, which we signed a very large with (inaudible), as well as we announced I believe yesterday with Hunter Limited in Australia, because these are own propriety products, the initial call it strength , in the distribution to retail in our marketing efforts, are expanding our, I'd say, growth internationally. That we also do a very nice line of private label products internationally, so it's really all coming together for our initial, not our initial, our internal growth plans for International. We see tremendous growth going

Okay, finally, the Q1 Pokemon strength, that was not tied to the Black and White?

Pokemon Q1, the sales that we had in Q1 were I would say nominal. The actual sell-throughs were nominal, because it was our original Pokemon products that were out at retail. The new Pokemon Black and the new Pokemon White have just recently, within the last week, started hitting shelves and they are just tremendous numbers, so that's really going to start moving forward starting second quarter.

Okay, great, thank you very much.

Thank you.

Next we'll take a question from Ed Woo at Wedbush. Operator: Good morning, guys.

Good morning, Ed.

Do you notice any change in input costs, or maybe cost of sales or maybe labor cost out of China in the quarter?

Not specifically in the quarter. We've been having some headwinds there probably for the better part of the year. The recent releases will have been negotiated in the last three to six months, so we're still monitoring the different markets. We're looking to, we've done some R&B hedging and some other things, so we've been keeping a pretty close watch and continue to cost reduce legacy products, design products to drive the margin criteria that we expect for the business going forward, but the headwinds have been around and it's just part of our daily life at this point.

Did you have to do any across the board price increases ?

What we did last year, last fall for 2011, we went through the various segments of our business, because we're really in so many different areas, from our cut and sew business, which is primarily in our disguise division, 30% of our CDI division, to some of the steel products in the Kids Only and injection molding which is throughout the Company, we took it where the cost increases were happening by division. Labor shortages was a dramatic increase last year going into this year, so labor is a very big part of disguise, so we increase prices where appropriate by division, by segment. So we didn't just take it across the board price increase. We did what was appropriate for the product line and the continued JAKKS profitability, but also to make sure that our consumers didn't have products that were priced out of their range, as well as giving our retailers the appropriate margin criteria that they look for, so we really looked at each division, cost reduced where appropriate, and we increase where it was appropriate as well.

Great. I noticed the other comment you guys had in your press release was about you guys are still looking at M&A opportunities. One of the bigger toy companies, RCQ, got taken out in the quarter. Has there been any significant changes in the M&A environment?

I would say we're still as aggressive as we have been since inception. There's I'd say, an ample amount of opportunity out there, not just in your segment of business but similar segments. Nothing has changed in our initiatives of acquisitions or looking for acquisitions, or completing acquisitions, it's still on the same forefront. It's still an aggressive part of our Company. Since inception, it's been growing through internal products, licensed products, international and acquisitions, so our same strategic format has always stayed forward and we're looking aggressively.

Great. Well, good luck. Thank you.

Thank you, Edward.

(Operator Instructions). We'll take our next question from Gerrick Johnson at BMO Capital Markets.

Good morning.

good morning.

You guys are making good progress in SG&A over the last year, year and a half or so. First quarter looks like you took a step backwards both absolute dollar's a little bit higher and percent of sales. Can you explain a little bit more what's going on there, why that increase.

Sure. In terms of the backdrop, we anniversaried the restructuring mid quarter, so there won't be as dramatic decreases going forward. Direct selling was down along with the sales, but as far as SG&A, the biggest chunk of the increase in the quarter was in the area of product development, and we have some pretty big initiatives. Pirates of the Caribbean was launched. We have the Pokemon relaunch, which includes a lot of new figures, and also expansion to the both the Disney Fairies and Disney Princess lines, so these are period costs so the revenue for Pirates will hit the sweet spot of it next quarter. Pokemon, second quarter and into third quarter, so primarily it's product development for some of the new lines.

Okay, makes sense. Last year in the first quarter, did you have any WWE sales, from sell offs, that weren't repeated in the first quarter of this year?

No, we opted to sell off our inventory by the end of '09.

Okay. Point-of-sale change year-over-year for the quarter. Can you give us an update on that?

Year-over-year, you know, there's different things going on in the industry, you know, Q4 '09 versus Q4 2010. For us, specifically, we had exceeded our guidance in Q4 so we had what I'll call ample inventory at retail, I wouldn't call it excessive inventory, especially with the gift card, it sort of extends the holiday season into late January, late February. As Stephen mentioned, we monitor the point-of-sale on a regular basis, and we're seeing some very nice pickup and nice launch numbers for some of the new products. It's really hard to gauge that on a year-over-year. I think that in 2009 we had the lower level of sales so we were actually heading into Q1 very clean, so in terms of the volume of sales, it was probably lower in Q1 because we had less inventory, but as far as the inventory that we have, we think it's ample and our POS is supporting the levels that we have out there.

Ok. My last question and I'll get back in the que. I've heard alot of words like tremendous, gangbusters, off the charts, so why no increase in guidance?

Right now we're looking at the year conservatively and cautiously. You don't know how the retail will end up at the second half of the year. We don't know exactly how manufacturing issues can change the dynamic of manufacturing products. You do hear specific, I'll call them superlatives, in specific areas. One of our tremendous parts of our business is the bounce of singles and doubles, which is a very big part of our business, the novelty business, the role play, the Tolly line of products, the Kids Only line of products, the disguise line, we do have some things that are looking exciting. One thing we are seeing that looks tremendous is the Pokemon sell-throughs and that's probably the initial big sell-throughs we've seen to-date really happening, but on the spy line and other areas we do believe from the retail shelf space that we have going into fall, things do look really wonderful for us, but until we get the actual sell-throughs and we don't know what's going to happen from having other competitive inventory issued out there if that changes the buying patterns for the retailers in fall, but based on the sell-throughs that we see happen at retailers, not just for JAKKS, we feel comfortable with our guidance to-date, and if we feel that guidance should be raised or lowered, we'll probably look at that later in the year, but it's really too early in the year to even make any future changes. We just want to make sure that things happen the way they believe, but as you have been in this business so long Gerrick, you know things can change. I think there's some tremendous drivers not just for JAKKS, but for the toy industry. The Cars Two movie I think will drive a wonderful new amount of people in the stores. There's really some toyriffic things happening this year with the Transformer Movie. You have Smurfs, Pirates, and Real Steal. There's some good, exciting things, but we want to make sure that we're cautious through the year and we think it's appropriate to stay where we're at until we see the later part of the year.

Ok, did you say toyriffic?

Yes.

Okay, great, thanks alot.

The next question is from Drew Crumb at stifle Nick Nicklaus.

Thank you, good morning, everyone. A question 0n Disney Princess and Fairies, is there any media support planned from Disney any time during 2011?

They're launching the Tangled DVD, which they'll be doing an amazing promotion through this year. They usually do anything Disney does, they do such a wonderful job at. That's going on, Fairies DVD happens later on this year. The normal promotions and things that have gone on for years on Princess will continue at retail, and those are probably the two initiatives that we know about right now that are occurring for 2011 on Fairies and on Princess, which would be Fairies Entangled.

Ok, and Stephen, you mentioned you expected to make an announcement around distribution for MONSUNO. Is the plan to get carriage both domestically and internationally for that property.

I believe we're in close negotiations of finishing the broadcast rights worldwide, with a major broadcast partner. We have our distribution in North America through JAKKS Pacific. We do have it in specific international territories, but the major international territories we made a strong distribution deal with I believe it's, it is the largest Italian toy company and I think the third largest international toy company, which is called (inaudible), they are a powerhouse overseas, so we made a deal with them earlier this year. We just finalized the deal yesterday with Australia. We're finishing off many different distribution deals for the Middle East, so we're completing the international distribution on the toy line and we are getting close to getting the TV rights signed up and negotiated with a strong and powerful distribution network partner. In addition, we also carry the rights with the joint venture to license out the video game rights, the other merchandiser rights, the clothing, a lot of different ancillary licensing abilities for this strong property. There's a lot of exciting things. That is really a 2012 big initiative, but these deals are really getting into place early on. The toy line looks just wonderful, even without the TV show, the toy line looks amazing and we believe will do extremely well. With the TV behind it, we just think there's tremendous upside and we're excited for 2012 on it, and we're not the only ones excited. We have very large partners, Dentsu which is a very large partner that we have. Free Mantle, strong distribution partner. Tops. The (inaudible), they've put money behind it, The Hunter in Australia. We're not just saying it and speaking with excitement ourselves, all of our partners have backed us on it, and they have put money behind it, so the belief in it and the excitement is real.

Guys, I have two follow-ups, and thanks, Stephen. The royalty rate you expect to pay on that property, is it comparable to other royalties you're paying for various licenses? Then I also notice the investment and joint venture kicked up sequentially on the balance sheet, what is the level of investment that you're anticipating there and how does that hit the statement of cash flow and/or the income statement?

The increase in the quarter, JAKKS is responsible for 25% of the production costs. We've green lit the first 52 episodes, are in production on the first 26, so the amount on the balance sheet, our share of the first 26 episodes.

Okay.

For the balance of the 52 episodes, is another $1.7 million, it will hit the cash flow through the investment line, so in effect our commitment is $3.4 million, of which we've all ready paid $1.7 million.

Can you capitalize it and amortize it and run it through the income statement?

Actually we are accounting for the joint venture on the equity method, so you'll see some operational losses through the joint venture, which are basically the legal fees for doing all of these different license agreements with these third parties. It doesn't really have overhead per se. Right now we're just in active production and the partners are utilizing their own employees for the joint venture, but there's moderate legal fees that we're incurring on a regular basis.

Okay. And the royalty rate you expect to pay on that property, again, is it comparable to --

yes. The benefit though, is we'll pick up our share of the income off of what we're paying, so in effect we'll pay the royalty, it will hit cost to goods, but then will actually be generating income through other income profit from the joint venture.

Got it. Ok, last question for me. I want to jump back to 2011. You indicated you expected to see some improvement in gross margin the second half. Can you comment on the magnitude of improvement and also on the second quarter, what are your expectations for gross margins in the second quarter? Thanks.

Second quarter, some of the new products will not be shipping in quantity, so it will probably be flat in Q2. As we ship in a lot of the new initiatives in volume in third and fourth quarter, we'll see 70 to 90 basis point improvements on a year-over-year basis.

Okay. Thanks, guys.

Thank you. And there are no further questions at this time. Mr. Berman, I would like to turn the call back over to you for any additional or closing remark. Thank you very much. We thank everyone for participating on our first quarter conference call and look forward to speaking with you during our next conference call for second quarter. Thank you very much.

And that does conclude today's conference. We thank everyone for their participation.