JAKKS Pacific Inc (JAKK) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for joining the JAKKS Pacific second-quarter 2011 earnings call with management. Just a reminder, today's call is being recorded. Today JAKKS will review the results for the second quarter as of June 30, 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 overview of the quarter and operational results, and then Mr. Bennett will provide detailed comments regarding JAKKS specific 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 the call for your questions. (Operator Instructions).

Before we begin the Company would like to point out that any comments made about JAKKS specific future performance, events or circumstances, including the 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 the Company's 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 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 for the SEC from time to time.

With that I will turn the call over to Mr. Berman. Please go ahead.

Good morning, everyone, and thank you for joining us today. Both the second quarter and first six months of this year ended on par with our expectations and we are pleased with our results. We have some really terrific products in our portfolio and have both new and evergreen contributions coming from across all JAKKS divisions this year. Inventory levels continue to be consistent with the seasonality of our business and we are seeing good sell through on our spring items at retail, including our outdoor furniture, seasonal products, baby dolls and Pokemon. 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 the third quarter.

We are actively managing the continuing cost pressures we are seeing from the factories in Asia centered around labor availability and costs, increased costs of the raw materials and the appreciating [R&B], but so far margins have approximated last years and we expect to have stable margins for the remainder of the year as a result of our commitment to closely managing our supply chain and introducing new higher-margin products. Because of our diverse product mix no one product or product line 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 Kid dolls and a wide array of Pokemon toys. In addition, we will have a nice contribution from our Spy Net electronics, Halloween costumes and others.

We are pleased that our board of directors has recently authorized the implementation of a cash dividend program that will initially pay an annual dividend of $0.40 per share, payable quarterly to the shareholders of record of the Company's common stock. The initial dividend has been declared for October 3, 2011 for holders of record as of September 15, 2011. The new dividend policy is intended to allow our generated cash flow to support our organic and acquisition growth strategies and maintain a strong balance sheet, as well as provide sustainable quarterly dividends to our shareholders. Additionally, we are extremely excited today that JAKKS Pacific, Dentsu Entertainment and FremantleMedia Enterprises announced a global content distribution deal with leading children's entertainment network, Nickelodeon, for the world broadcast rights to the new original, animated entertainment franchise Monsuno.

I would like to turn the call over to Joel Bennett and then I will give you more of an update on the 2011 product portfolio before opening the call to your questions. Joel?

Thank you, Stephen, and good morning, everyone. Net sales for the second quarter of 2011 increased to $131.9 million from $123.3 million reported in the comparable period last year, and net sales for the six months were $204.3 million, up from $200.6 million in 2010. Net income for the second quarter increased to $4.2 million, or $0.16 per diluted share, compared to $3 million, or $0.11 per diluted share reported in the second quarter of 2010. The net loss reported for the 2011 six-month period was $6.3 million, or $0.23 per diluted share, compared to a loss reported for the first six months of 2010 of $2.2 million, or $0.08 per diluted share, which included a tax benefit adjustment of $4.9 million, or $0.18 per diluted share. Excluding the tax benefit the 2010 six-month loss would have been $7.1 million, or $0.26 per diluted share.

Turning to a more detailed discussion of our results, our product lines are aligned into two categories, which reflect the make up of our business. They are traditional toys and electronics, and role play 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 $67.7 million for the second quarter of 2011 compared to $63.5 million for the second quarter of 2010. And sales for traditional toys were $105.9 million for the first six months of 2011 versus $102.2 million for the first six months of 2010. 2011 sales this quarter in this segment were led by our boys action figures, including Pokemon and Pirates of the Caribbean, [was offset by a decline in UFC]; girls products, though they contributed less this year with declines in Fairies in my Pocket, among others; and preschool, which increased with higher Disney princess doll sales in our Tollytots division.

Worldwide sales from our role play, novelty and seasonal toy segments, which includes role play products, novelty toys, Halloween costumes, indoor and outdoor kids furniture and pool toys, were $64.2 million in the second quarter of 2011 compared to $59.7 million for the second quarter of 2010, and six-month sales for this category for both 2011 and 2010 were $98.4 million. Halloween costumes dominated sales in the category this quarter followed by role play toys, although role play was down overall versus last year. Included in the category numbers are international sales of $22.2 million for the second quarter of 2011 compared to $18.8 million for the second quarter of 2010. International sales for the first six months of 2011 and 2010 were $37 million and $31.7 million respectively, a 16.7% increase.

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. Gross margin for the second quarter 2011 was 34.2% of net sales compared to 35.1% of net sales in the second quarter of 2010, and gross margin for the first half of 2011 was 34% of net sales compared to 34.1% of net sales in the first half of last year. The 90-basis point decrease in this quarter was due to changes in our product mix, which included sales of higher margin product offset in part by increased royalties.

SG&A expenses in the first quarter of 2011 were $43.1 million, or 32.7% of net sales, as compared to $42 million, or 34% of net sales in 2010. For the first six months of 2011 SG&A expenses were $82.2 million, or 40.2% of net sales, compared to $80.8 million, or 40.3% of net sales in the prior year. The decrease of the percentage of net sales in the quarter is attributable to lower incentive compensation and a higher sales base offset partially by increased legal and other professional fees and expenses. During the quarter we received the second installment in the amount of $6 million from THQ as part of the settlement of our joint venture. This was recorded as other income in the quarter as we did in Q2 of 2010. Operations used cash of $14.6 million for the first half of 2011 compared to providing cash of $24 million in 2010. The year-over-year decline is due primarily to the increases in inventory in 2011 on account of the demand planning for placements of our products.

Accounts receivable increased over prior year due to higher sales in the quarter. As of June 30, 2011, the Company's working capital was $372.8 million, including cash and equivalents in marketable securities of approximately $247 million, and our balance sheet remains very strong. We continue to evaluate various uses of our funds and untapped leverage. Using our disciplined approach we look for accretive acquisitions that complement the growth of our business and effectively deploy our capital, and to date we've purchased 565,000 shares of our common stock for a total of $10.7 million and have approximately $19.3 million remaining under our previously-announced $30 million stock repurchase program. We did not repurchase any shares during this quarter. Depreciation and amortization was approximately $5.9 million in the second quarter of 2011 compared to $6.2 million for the second quarter of 2010. And for the first half of 2011, D&A was approximately $9.8 million compared to $10.8 million in 2010.

As for our tax rate, our effective rate for 2011 is expected to be 23.7% before any FIN 48 or other adjustments. This may change if there is a shift in sales between the US entities and our Hong Kong entities. Capital expenditures were $5.4 million for the second quarter of 2011, up nominally from $5.3 million for the second quarter of 2010, and $8.6 million for the first half of 2011 compared to $6.6 million in 2010. This is in line with our expectations as we continue to reach sufficient production levels, with a 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 June 30, 2011 were $109.3 million compared to $102.9 million at the second quarter of 2010. DSOs were 75 days, comparable to the same period in 2010.

Inventory as of June 30, 2011 was $95.3 million, up from the December 31, 2010 level of $33.2 million, and up from $47.4 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 products. Inventory levels remain generally low but DSIs increased to 71 days from 64 days at the end of the second quarter of 2010, due primarily to moderately higher sales and a higher inventory level in 2011 in support of new product launches.

As for our guidance for 2011, we are still anticipating net sales of approximately $770 million to $775 million, with diluted earnings per share in a range of $1.32 to $1.35 per share, an increase of 4% to 6% of 2010 adjusted EPS of $1.27 per share, which excludes the one-time tax benefit and benefit payment in 2010. We expect earnings to be weighted heavier in Q4 than in the prior year due to the timing of shipments of new products. We continue to have strong confidence in the future prospects for JAKKS Pacific and its shareholders.

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

As I mentioned, we have begun shipping our fall drivers and should start to see many of the new lines hitting shelves in the coming weeks. The bulk of our sales are from products hitting retail in the second half of the year. 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 a few new gems hitting shelves in the third quarter that look promising. We are very pleased with the performance to date of our entire Pokemon line at retail and its momentum heading into the holiday season. Our comprehensive and innovative toy line includes an all new skill [and action] line of toys for older kids, creating an interactive and competitive toy-based experience that we have never done before with the Pokemon line. We are keeping assortments fresh with new waves of our Pokemon figures and Plush, which features the new black-and-white Pokemon characters driving kids to collect all their favorite characters.

Our movie-based product line, such as Pirates of the Caribbean and Cars 2, are performing to our expectations. We are well versed with the movie merchandise and are managing inventories accordingly and will be well positioned to chase any upside opportunities with these lines. We are looking forward to the premiers of both Smurfs 3-D at the end of July and Real Steel in October. The potential is there for both of them to do extremely well at retail, especially with the Smurfs for international business.

On the outdoor front our outdoor furniture, especially for our Disney Princess, Dora the Explorer license, kiddie pools and other seasonal products, are doing great. Our toddler swing sets are selling better than expected, as well as our fun noodles, which we are keeping fresh with retail with new assortments of colors of the popular pool float. Sales of our Halloween costumes are also on track. They are based on many of the popular characters of our time and past, this year's big movie blockbusters, with our properties being Transformers 3, Captain America movie, Cars 2, Pirates of the Caribbean-On Stranger Tides, [Thor], Real Steel, among many others.

In the second half of the year we are relaunching the evergreen Cabbage Patch kids with new kid toddlers with a contemporary new look and interactive play feature to appeal to a new generation of kids, but with the same one-of-a-kind adoptability that moms and grandmothers remember and love. We have terrific support at retail for the launch throughout the holiday period. Our Disney Princess and Disney Fairies business continues to do extremely well with our Disney Princess baby and toddler dolls continuing to be strong sellers at retail and Disney Princess dress up and role play performing above expectations. Both segments are led by continued popularity of Rapunzel from Tangled, who will become a member of the Disney Princess royal court at a star-studded Disney event at Kensington Palace in October. Disney's Fairies also continue to perform and we look forward to finishing the year strong with an early ship of our Flying Fairies dolls later in fall. We are also looking forward to the exciting release of Secret of the Wings in fall 2012.

Early reads on the I Am T-Pain microphone are positive and we are looking forward to a media and PR blitz this fall, and for the item to be a must have on the Christmas list this holiday season. Our award-winning Spy Net electronics spy line keeps getting better and better and we are excited about the new generation of our Spy Net video watch now with night vision technology, and the Spy Net stealth video glasses that are real sunglasses that can secretly record video through a hidden, built-in video camera, as well as our other Spy Net SKUs hitting retail this fall.

Golden Tee Golf, based on the popular arcade game Golden Tee, and Cars 2 TV games are shipping with wide distribution, including at sporting goods stores and game boutiques. Big Buck Hunter is an evergreen title with a safari version set for this fall release. JAKKS' Big Buck Hunter was nominated for the LIMA Best Character Toy Brand Licensee of the Year - Hard Goods at the Licensing International Expo in Las Vegas last month. We also received the Best Sports/Sports-Themed Entertainment Licensee of the Year, the Licensing Excellence Award for our UFC action figures and play sets.

We recently announced a number of exciting new licenses, including the Master Toy license for Nickelodeon's Winx Club, an innovative girls brand based on a popular animated television show that is all about self empowerment that will span multiple toy categories launching for 2012. Tollytots signed a worldwide Master Toy license for Safety First, a trusted brand of innovative baby products and accessories from the Dorel Juvenile group, the nation's largest juvenile products manufacturer. On the JAKKS Pet front, we secured the KONG brand, one of the most recognized brands in the pet industry, for a line of KONG-branded consumable treats. We believe all these new licenses will be great for JAKKS, complementing additions to our portfolio for 2012 and beyond.

We at JAKKS are thrilled today to announce the global content distribution deal with leading children's entertainment network Nickelodeon for the worldwide broadcast rights to Monsuno. This is huge news for JAKKS, our first television entertainment venture, and we believe Monsuno will be a game changer for JAKKS that will elevate our business to the next level. Production is well underway for the first 52 episodes, with a US premiere anticipated for spring 2012. Monsuno is built around powerful, action-based animation, dynamic, relatable characters and a deeply woven original story, supported by a terrific toy line by JAKKS, featuring highly innovative, kids-controlled action figures, accessories, play sets, collectables, electronics and integrated role play.

The opportunities are endless for the outbound licensing, as well. We already have Topps as our trading card partner and we are looking into licensing for retail, electronics, video games, back-to-school supplies, like backpacks, lunch boxes, clothing, confectionary products, the possibilities are endless. We are looking forward to working with all of our partners to develop Monsuno into a powerful force in the boys action arena for years to come. As you may know, we have aligned with leading Japanese advertising and animation production company, Dentsu, and also global television distribution giant, FremantleMedia. Our trading card partner is Topps and we have a comprehensive agreement with Giochi Preziosi to be our pan European toy distribution partner. We continue to execute on our international expansion plans for Monsuno by recently appointing Hunter Product Ltd as the exclusive marketing and distribution partner in Australia. JAKKS Pacific will distribute the toys in North America and other international territories.

So 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 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 and grow our business for a profitable and successful JAKKS Pacific for our shareholders and employees.

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

Thank you. (Operator instructions). And we'll take the first question from Gerrick Johnson with BMO Capital Market.

Good morning, Gerrick.

A question on CDI. You're moving that division from Philadelphia to Malibu -- or actually Santa Monica, I think. Any charges for that in the quarter, any expense to that in the quarter, and how do you expect that expense to flow through the --?

We don't believe it'll be any expense. If so, it'll be nominal, it won't be anything that will be called out. We're relocating the office due to this -- out in California -- or Santa Monica there's a dramatic pool of talent. There's only so much that we could gather in Philadelphia and to be closer to our licensor, which is Disney, which is one of big licensors for CDI, in addition that we've expand and have build upon both boy and girl role play focus and it was much easier for us to get a consistency with line looks of packaging, product expansion, and utilize JAKKS' core resources in allowing us to save additional money, in doing different products, and working together with all of our different units, and getting growth where we needed. So it was a perfect time and our lease was up in October and -- actually it was up in June of this year. We expanded it just for a short period of time in Philadelphia. So it's been a planned relocation.

Okay, thank you, and I just want to clarify your comments on margins. I think before we got cut off you said margins would expand for the year and then after we reconnected, I think you said they'd be stable, which sounds like flat to me. So can you just clarify the comments on margins going forward, please?

Yes, actually the first part of the call was a technical glitch from the conference call company. The margins, as we indicated in our first quarter -- or reaffirmed in our first-quarter call, on original guidance we are expecting gross margins to be up about 100-basis points for the year, so I apologize for the confusion on that. But we've had margin expansion in the first half and we see ourselves achieving the original guidance of about 100-basis point improvement over prior year.

All right, great. Thanks a lot. I'll get back in queue and let some others ask some questions. Thanks.

Okay, thank you, Gerrick.

And next we'll go to Ed Woo with Wedbush Securities.

Good morning.

Good morning, Edward.

I had a question on retailers. What are retailers outlook and inventory position?

We actually just have had a little bit of road shows with some retailers and we had one of our major ones here yesterday. At the start of the year of 2011 many big box retailers had inventory, a little bit more of excessive inventory than they planned. That being said, that we, as JAKKS, had very low inventory levels at retail, as well as moderate levels in our warehouse. So it did slow down some buying patterns while the retailers had to move out their current inventory levels from the past year, the prior year.

With that being said, the retailers that we have met with across the board from big box to other styles, specialty or other tier retailers, are all looking for a positive holiday season. I believe their inventory levels now are low, or actually average. And in fact, on some of our items we're having to chase a little bit of upside as we've just been very cautious with trying to keep to a level -- forecast a level -- inventory level at retail, as well as our warehouse. But all in all it seems -- the outlook for the second half of the year seems positive but it seems it's a concern, but positive.

All right, that sounds good. The other question I had is this year --

A concern -- I'm sorry, it's cautiously optimistic.

All right, that's good. It's always good to be just cautiously and optimistic. The other question I had is on the share count, I noticed that it was not using the fully-diluted amount, was that because the net income was below a certain level?

Yes. In a loss situation, which we had for the six months, the convert is not shown as converted. And below a certain level of net income the as converted would be antidilutive. I'm not sure what the level is, but that's correct.

Okay. Thank you and good luck.

Thank you, Edward.

Moving on to Scott Hammond with KeyBanc Capital Markets.

Good morning, guys. Just on the gross margin, Joel, could you -- the back half of the year is going to be up, is that really driven by price increases, or was there a product mix issue? I thought you indicated that this was supposed to be a flat quarter so I'm just -- I want to understand what the drivers are.

Yes, it's more a product mix. When we got into 2009 a lot of the higher-margin JAKKS products were what led the overall decline and that's -- we've got a the lot of new items that are at, what we'll call, normal margins that are overcoming the headwinds of some of the lower-margin businesses, the role play Halloween costumes, et cetera. So as the new products get released, many of which Stephen mentioned, those all have the higher margins so we're expecting the mix to have a favorable impact and we expect that to be able to get us to the 100-basis point improvement year over year.

So you didn't really take much in the way of price this year?

We take it opportunistically. With legacy products it's difficult to get increase in prices so what we've done strategically is we'll do cost reduction, we'll reduce packaging and so forth. But really, we gain the ground through the launch of new products.

Additionally, Scott, because of the breadth of the segments that we're in from Halloween, which is a lot of cut and so, to injection molding could be (inaudible) to steel, which will be our kids-only area, and really the price increases vary from each segment of our business, as labor costs have really gone up dramatically over the last, say, eight months. The prices on cut and sew, as it's very labor intensive, have gone up very dramatically versus, maybe, some of our injection-molded products, call it Pirates of the Caribbean or Pokemon have been affected with labor but also with the cost of raw materials. So it really will vary of where we take the price increases and if it's legacy product to new product.

Okay. Then just on -- you mentioned UFC being down year over year, is that more of a timing issue, or is there something else going on there?

I believe it's more of what's currently out in the market. There's been a lot of new call it action figure content over the last four months from Transformers to Cars to Thor, so we believe that's what's affecting that action figure business.

Okay, and then just one last one. On direct selling, Joel, it was up for the quarter. How should we think about the back half of the year as it relates to some of the operating expenses? Do you expect to see some leverage there?

Absolutely. Because of the timing of Easter and the inventory levels at retail we actually increased our media spend for the second quarter. Ordinarily, it's pretty light until the fourth quarter. We will have the usual uptick in media buys in fourth quarter to help sell through the Christmas sell in, but on the fixed cost or the overhead we'll certainly have leverage.

Okay, thank you.

Thank you, Scott.

We'll now go to Jeff Blaeser with Morgan Joseph.

Good morning Jeff.

Good morning, thank you for taking my question. Could you talk a little bit about your internally-driven product lines as a percentage of sales expectations going forward, as well as year-over-year comparisons?

Historically we've been running around 80% on license -- or one more time?

Either one, internally or license, I can do the reverse math.

Oh, okay. Specifically I was -- as I was answering the question I was thinking you were saying acquisition versus organic growth. Historically we've been about 80% licensed. This year we should be in the low 70s, with the expansion to the Spy Net line, Real Construction and Creepy, and also Max Force, which is our foray into the [ner file], for lack of a better term. The ultimate goal is to increase the organic properties to the neighborhood of 40%, and we're definitely well on track to achieve that in the next year or so.

So it sounds like you would expect that percentage to increase in the back half of the year?

Yes, we actually -- a lot of the new products -- well, we do have licensed based, but a lot of the new products are released in the second half of the year and shipped in quantity. Monsuno will be somewhat of a hybrid. Our marketing people actually created the concept but JAKKS Pacific is actually a licensee of the joint venture, so it's somewhat of a hybrid but we consider that organic property. We just engaged other partners to supplement our expertise.

Do you think that percentage will help drive back half international sales at higher growth rate?

Yes, absolutely. In fact, international, in some cases, we have actually more -- higher sales on certain items internationally, so our head of international looks at all the product lines and a lot of times creates programs specifically for international. So between the product flow from the US and what he's able to generate in terms of special programs that will definitely spur the enhancement of growth.

And, Jeff, on an international basis where you've seen so many primary licenses that we're involved with, many different countries, some of these licenses aren't really apropos for the actual country. So, for instance, Club Penguin in the US may bode well in the US or Canada and the UK, but may not mean as much in France or Germany. So when we have our own product lines, like Spy Net, Max Force, Creepy Crawlers, Incredible Edibles, Real Construction, Girl Gourmet, that really bodes well for all international territories and it's a proprietary product and it's easier for them to market and us to market to that actual consumer.

Okay, great. Thank you very much.

Thank you.

The following question comes from Sean McGowan with Needham & Company.

Good morning, Sean.

A couple of questions here. Deprecia -- or maybe this is for Joel. Depreciation and amortization for the balance of the year, should it approximate what we've seen in the second quarter?

No. A big chunk of the amortization is from tools and molds and it's on a units of production -- or percentage of production method so it'll actually increase. It'll be consistent with last year's flow, so third quarter, because it's the highest volume sales quarter and therefore production quarter, it'll be higher in the second quarter. It should approximate -- it should be somewhat similar from a percentage standpoint but the dollars will increase.

Okay. But the depreciation below the gross profit line is that more straight line?

That's generally fixed, yes.

Okay, so that should approximate the level? From the third and fourth quarter we should expect to see what we've seen in the first and second, around 2.8%?

Correct.

Okay. I'm sorry, I was looking at the wrong year. It's actually, yes, about 2.8%, 2.9%. Okay. You made a comment, Joel, in your opening comments about inventory levels and I didn't catch the full line. You recalled it was something to do with the order patterns and --?

Yes, we've got a lot of new products this year and based on the placements we have domestic inventory to support those programs. Typically initial shipments will go on an FOB basis for which we don't carry much inventory, but where we're advertising items, where we have higher expectations we bring in inventory. So with all of the new placement of all the new products we have inventory to support the sell in and also modest amounts of replenishments.

Okay. To circle back to tax rates, looks like the effective rate on a reported basis for the first half is 40%. I know the first half's very different from the second half. Does that imply that the rates that you're going to see in a quarterly basis in the second half will be a lot lower?

Yes, there are a few things that flow through the first half, especially -- actually the Q1 was, I think, 39% or thereabouts. What we do is each quarter we evaluate the flow and review the tax provision and what we've seen is more sales from -- on an FOB basis, which are based in Hong Kong. So it's something that ordinarily doesn't fluctuate that much but over the last few years it's been coming down. In 2009 it was like 31.5%, last year it was 28.5%, so we're seeing some tax efficiency in how the orders are flowing. And as the international -- just as a caveat, as the international business grows the tax jurisdictions in Europe are higher than in Hong Kong, but we think net-net we'll be gaining more margin going direct and that'll offset any increases. But as the business shifts, as we expect it will with growth in international and also just ordinary shifts between US distribution and FOB on the domestic side, it should move around a little bit.

So to repeat, the number you're looking for is 23.7% --

Correct.

-- at the current time? Okay. Stephen, I don't know if it was you who said it or Joel. You made a comment about earnings being a little bit more concentrated in the fourth quarter, is that a way of commenting on looking for a little less in the third quarter?

No, for clarification it's that Q4 2011 we'll have more between the two than they did last year. So it is not that Q4 is going to be bigger than Q3 it's that Q4 2011 will be higher than Q4 2010.

As a percentage of the full year?

Exactly. It's just the way we're seeing the flow of products, the advertising commitment, and the way retailers bringing in inventory it's what we see from sitting here today and from meeting with customers. It's just what we see.

Okay, but I thought you all just said you're expecting more FOB business this year, or did I not hear that right?

Yes, more FOB business, which is driving the tax rate down.

But doesn't that usually skew the sales more to the third quarter?

For Christmas sell in. Actually in Q4 a lot of those are spring sets, so it's -- our Christmas actually ends pretty early, so a lot of what you see in our fourth quarter and what drives that are actually programs for 2012.

And also -- it gauges also sometimes toward when Chinese New Year is, which is, I believe, in February. So it really gauges of what we need to do in shipping prior to Chinese New Year, as well.

Okay, that makes sense. Last question, what's your outlook for the balance of the year in terms of the investment in the Monsuno joint venture?

In terms of the production it's pretty well capped. Our contribution is a little over $3 million for the 52 episodes. I would say on the product rights, because we announced today with Nickelodeon and Dentsu and Fremantle Nickelodeon acquiring the actual broadcasting rights, we'll probably expedite some additional R&D to be able to achieve what's going to be necessary for the first US launch, as well as in the international launch through all the different partnerships.

So as we've been waiting to get this last catalyst to Monsuno, completed, which we were ecstatic when it was finished just previously, there will be some additional R&D. We don't know how much that will be, but it's going to depend on the amount of --when we're going to launch, both in the start of North America and then the overseas launch to be able to capitalize on what's required by each territory. But I think it's a little bit too early for us as this just occurred over the last week, the finalization of it, and now Nick committing to having this on in spring. It's an exciting prospect for JAKKS. We already knew the toy line was truly terrific -- and I don't want to use superlatives too often and we try not to -- but we know it's already a success as a toy vendor, we believe it being toy people. We just don't know how huge it's going to be.

We would go out -- if this was pitched to us by a licensor and spend millions of dollars to acquire the licensing rights. So we have this toy that we've created, we have partnerships that have really bought into this. The license -- the outbound licensing is tremendous, the -- from the video game companies to the clothing companies, confectionary companies, back to school, it really -- it's -- in a lighter sense this is our Transformers, it's our Pokemon, it's our Power Rangers. It is something that we believe is going to be an evergreen perennial and it has all the makings. We just don't know how big but we do know we're gearing up for it.

Okay, thank you.

Thank you, Sean.

We will now go to Arvind Bhatia with Sterne, Agee.

Good morning, Arvind.

Hey, morning, thank you. I'm actually following up on the Monsuno question. Wondered if you are able to at least quantify somewhat what we should be looking for in the next couple of years from that property? I know that you will probably not want to go and give us all your expectations, but just what sort of a minimum we should be expecting if this sort of hit a mid point of your expectations?

Arvind, on a forward-looking number as we're too early in the year and we never give a forecast for 2012, what I could express to you is from speaking with the partnerships, from the broadcasters, to see Nickelodeon's extreme interest in acquiring the rights, to meeting with retailers, to signing Giochi Preziosi, which has guarantees, to signing Hunter, we do know -- we do believe, we do not know -- we do believe that the makings are for a dramatic success. Whether it's a triple home run, grand slam, hat trick we don't know -- we already know it's going to be big, we believe it's going to be big. To quantify the numbers it's going to be quite difficult to give a forward number, but there's too many -- the involvement from the partnerships and abroad and even outbound licensing, when you feel it you know it. It's kind of when we were brought Pokemon to us or other things, it's there, we just can't quantify that yet.

Okay. Acquisitions you guys have mentioned as a potential growth vehicle for quite sometime now and of course you've done multiple acquisitions in your history. Can you talk about the market conditions? Are you finding that there are fewer, higher-quality companies out there that you're interested in, or is it a price issue? I can't imagine it's too much of a price issue, but just give us some color in what you're seeing out there.

Okay, we've -- first, our business has been very solid and growing appropriately and our international expansion plans and our internal growth of our own organic product with expanding into licens -- other licensed categories has been going extremely well. And what we are looking for to complement JAKKS are businesses that either have brands associated with them, or something that could actually add to an existing category. So we've looked, we have been negotiating for months and for years with many companies. As we've gone through over the past 17 years you could be negotiating up until the day before closing and things change. But the -- I would say the availability of companies have been much more than normal over the last six months, so we're seeing much more activities with even people calling us versus through the banking community. Many of the friends we have in the banking community have been bringing us deals within our industry or deals outside of the -- call it the normal traditional toy. As example, our Halloween business was outside traditional toy, so there's a lot more activity going on.

That being said, we are extremely aggressive in that facet. We're probably more aggressive now since we've gone through the last two years, because we went through a change in 2009. But with that we're aggressive with the acquisition strategy, as well as we just recently announced today, which we're ecstatic about, the board of directors approved a quarterly dividend policy, which really reflects the Company's history generating substantial cash flow, our strong balance sheet. So we're doing all the right things as a growing company. The dividend, we believe, is terrific for our shareholders. We're generating a very good amount of cash. The acquisition strategy is very open and we are aggressive in that pattern and building both our international business, as well as our domestic business. We're going all down the right patterns and more patterns and initiatives than what we've done in the past.

So the short answer would be basically you're finding acquisitions but something isn't working out, so is it a price issue then?

No, I would -- it's the actual appetite for the right company that fits for JAKKS. We don't -- we would like to prefer not to acquire a company that just is adding some toys into a segment for us, whether it's in a plush area. We'd like to have something that has a brand that owns a segment, that is really strong in their core competencies, or we can see a lot of efficiencies and we could grow the business. So because of the economy and how lending has been on and off for the last year-and-a-half there's quite a few companies out there that are available. It's just getting them at the fair price, and making sure it's the right fit for JAKKS.

Okay, final question from me. Halloween, you mentioned how that came to you through an acquisition. How is that business expected to do in your mind this year, just given the economy, and given everything else in the toy business? Are you expecting that business to be -- and the calendar, as well. Are you expecting that business to be up this year?

I think -- first, the Halloween business we love, it's such a nontraditional toy-related business in the sense it's not for the holiday season in the sense of November, December. You ship everything and you're done shipping it by August. We will see the -- we have some amazing licenses Tron, Cars 2, Transformers 3, so we have all the correct licenses and to continue we have Pirates of Caribbean. It really depends on how retailers react on how their Halloween season begins and we actually try to keep our inventories low in that area. So we believe it's going to be a very nice Halloween season, but until that period comes, we don't know the buying patterns yet. It's almost like back to school. We're not in back to school as a segment of business, but what you hear out there back to school seems decent, but you just don't know. But we have all the correct licenses, and everything feels really good is where we stand today.

Great, I appreciate all the answers. Thank you.

Thank you, Arvind.

Moving on to Drew Crum with Stifel Nicolaus.

Okay, thanks. Good morning, everyone.

Hi, Drew.

Joel, I wondered if you could give us guidance on the EBIT margin line. You gave us guidance for gross margins for the year. Ana along the same lines, any thoughts as to how overhead trends going forward? And the follow up on that was, I think you alluded to some increase in legal fees and wonder if you could just expound upon what that involves?

Actually we -- SG&A was pretty much on track. We had increased the dollars year over year. Legal, it's hard to forecast because we've got a lot of different activities going on from ordinary patent and trademark and things of that nature, so we are pretty well on track. The quarter was -- or I should say the six months to date was a loss quarter, which a lot of the compensation for people is geared toward Company performance, so that part of SG&A was down. But basically it's on track, and nothing is that out of the ordinary. In terms of SG&A, with the third quarter being the highest profit quarter SG&A will go up in large part to the compensation in the fourth quarter. Direct selling costs will increase because that is when we advertise all the products that we've sold in. So it's a consistent pattern that we see pretty much year in and year out.

Okay. And --

And the EBIT we're -- the operating margin we're shooting for is about 7%.

Okay, very helpful. Just switching gears, I think you guys mentioned that role play was down in the quarter and I wondered if you could give us a little detail behind that? And, Stephen, if you can remind us again, other than the Tangled initiative, what other media initiatives or entertainment Disney has planned for the balance of 2011 to support Princesses and Fairies?

Okay. Just so -- on the role play area, the -- really what's down in role play for us has been primarily our private label. It was an area of business that you deal with auctions with some of the retailers and some it gets to an area of too low of a margin impact to us and some will become loss leaders, it's when we just walk away, so that was pretty much the biggest impact of role play. There's some areas of -- where you would see like a Disney role play being down in Fairies or Princess and maybe on an item or so that may be discontinued. It could be one of our big vanity sets. But there's a new Fairies DVD coming out, which it was beautiful. I just saw it from Disney when we were out there, that is released in spring, which is the new fair -- it's actually Tink meets her sister, which is really -- it's really magical is all I could describe it. So it's really going to reinvigorate the from the marketing aspect what Disney does with fairies, which will be prior to the launch, which will be in spring, to the actual launch of the DVD, that's really mesmerizing in the sense of a [toyrific] push for us.

On the Disney Princess Rapunzel being put into the actual -- call it the official Disney Princess category, Disney has an evergreen push. They're always on Disney called fairies and princess. It's such strong content, they know how to keep it alive through their theme parks through trailers. So it's really an evergreen and really when it comes to us is the amount of shelf space that we get at retail, when comes to us, of the innovative products that we have had new versus consistent. So it's really their perennials so then there's peaks that occur based off of them pushing it a little bit more in certain promotional activities and us getting additional, call it footage at retail and doing some special promotions at retail. So a girl always wants to be a Disney princess. That happens whether there's promotional pushes by Disney or not. I have three children, they're engulfed with it. So it's really an evergreen and our building of the CDI area, and we have some really beautiful stuff that we'll be showing in October. We see a strong build in the role play segment.

Okay, thanks for that, Stephen, and my last question on Monsuno. Do you guys have a sense of what day parts you're going to get on Nicktoons? And on the international front, when does the programming begin to air?

Okay. So the air time with Nickelodeon has not been -- we have not gone through it, we're working on it together, but they've put substantial, I'd say, finances behind acquiring the rights and their Boys Block, which they are focusing on, this is the catalyst. Again, they have Power Rangers, they have Ninja Turtles, they have Monsuno. Monsuno for them is really a worldwide launch broadcasting so it'll be on the appropriate times. They acquired 52 episodes, so it will start in the US and maybe North America, as we -- Canada in spring and then there will be -- because international markets that are different when you want to ship in products the -- it will be launched in 2012. The timeframes have not put together as we just completed this days ago. So it all has not been put together, but the excitement from all of us is -- truly I think it's a game changer for us.

Okay, great. Thanks, guys.

Thank you.

We'll go to Sean McGowan with Needham & Company for a follow up.

A couple of follow ups.

Hi, Sean.

Hi, again. Joel, any impact on either the top line or the bottom line from currency that you can call out?

No, most of the -- virtually all the sales are in US dollars. As international increases on a local basis we might see it. And then the other would be Canada, but it's nominal at this point.

Okay. Also could -- you were commenting earlier on SG&A. Could you characterize whether or not the third and fourth quarters -- you said they'd be up but I assume you meant up versus the second quarter. Would you expect them to be up or flatter down versus last year for each quarter?

Up in dollars and with leverage the percentages will be flat to down.

Okay, percent. Versus last year, you mean?

Correct.

Okay. And then, Stephen, I'm not -- shifting on Monsuno, not trying to pin you down to a forecast per se but just trying to get a sense of what big means because it means different things to different companies. I presume if it was $1 million you wouldn't call it big. Is $5 million big, is $10 million big or is it considerably bigger than that?

I would say it's considerably bigger than that.

Okay, so we're not getting excited about something that you think is a $10 million line?

No, that would be -- it wouldn't be impactful for us to put the amount of money and energy. And the reason we believe it has -- as just a toy line -- and we've shown to retail, as a toy line it's really amazing. So just as a toy line we know it would be very nice if we advertised it and we can do extremely well on our own. But with that being said, when we have Dentsu, who's a $20 billion Japanese media conglomerate, you have Fremantle, who's holding the worldwide content, distributing it and consulting as the producer, as well as the outbound licensing. And then even call it Topps, which is a trading -- worldwide trading card partner and it's led by, obviously, Disney's ex -- the CEO, Mike Lisner, they wanted to invest. We didn't need the capital for the investment, we wanted to make sure we had the dream team and the dream team has just finished bringing Nickelodeon in with as the broadcaster.

So with that being said and seeing Preziosi, who bought into this very, very strongly early on, Hunter in Australia and many other companies that we just haven't completed the deals, the commitments behind it and the momentum is something that we haven't seen. You see it when Power Rangers was launched, Transformers. You are a toy guy, Sean, so when you see this in October when you're out here, you'll freely understand it. It has all the mixing for a tremendous success. With that being said, can things change? Yes, obviously we've seen things before that have had great backings, but there's too much behind this to make it to where it's not going to be a dramatic success for all these parties involved. We just don't know how big.

Got you. Thanks.

And this does conclude today's Q&A session, I will now turn the call back over to Mr. Berman for any additional or closing remarks.

We appreciate everybody being part of this call, we appreciate our employees for making this quarter what it was and we look forward to speaking with you on our next quarter and to further update on how JAKKS business is. So thank you very much for the call. Bye-bye.

This does conclude today's conference. We do thank you all for joining us.