JAKKS Pacific Inc (JAKK) 2011 Q3 法說會逐字稿

Good morning ladies and gentlemen and thank you for joining the JAKKS Pacific Third Quarter 2011 Call with Management. Today, JAKKS will review the results for the third quarter ended September 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 Pacific's financial results. Mr. Berman will conclude the prepared portion of the call with highlights of 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 Pacific's 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 the Safe Harbor protection under the federal securities laws. These statements reflect the Company's best judgment based on current market trends and conditions today and are subject to certain risk and uncertainties which cause actual results to differ materially from those projected in the 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 with the SEC from time to time. With that, I will now turn the call over to Mr. Berman.

Good morning, everyone, and thank you for joining us today. Before reviewing our earnings results for this quarter, I would like to briefly provide an update regarding Oaktree Capital Management's unsolicited indication of interest.

On September 13, we received an unsolicited letter from Oaktree expressing a non-binding indication of interest in acquiring JAKKS for $20.00 per share, subject to due diligence and Oaktree's ability to raise the necessary debt financing. After a thorough review with the advice and assistance of our independent financial advisers and special counsel, the Board of Directors unanimously determined that Oaktree's highly conditional and nonbinding $20.00 indication of interest is inadequate and not in the best interest of the Company and its stockholders.

Our Board believes that this is not the right time to sell the Company and that the execution of the Company's strategic plan, including potentially transformative products planned and already underway, will provide significantly greater value to the Company's stockholders.

On October 5, the JAKKS Pacific Board of Directors sent a letter to Oaktree conveying its determination. Consistent with its fiduciary duties, the JAKKS Board is committed to increasing the Company's value for all of our stockholders and we're confident that our actions will benefit all of our stockholders.

That concludes our remarks on this matter and I would now like to return the focus to today's call, our third quarter results.

I'm extremely happy to report that sales this year continueto meet our expectations and we're very excited to head into the busiest buying season of the year. Several toys from our portfolio are already getting great attention such as our Spy Net electronics, I Am T-Pain Mic, Cabbage Patch Kids, Singing and Storytelling Belle, Disney Princess Dress-Up and Role Play, and the Ultimate Fairytale Kitchen to name just a few, earning coveted positions on many retailers and media hotlist toy lists in the US and abroad.

We are well into the first month of our fourth quarter and so far we're pleased with the momentum we are seeing on a number of our items at retail. We have some really terrific products in our portfolio and we believe we will continue to do well as we close in on the holiday season, with contributions coming from a broad range of toys and electronics for the entire family.

We're in the middle of Fall 2012 Toy Fair and have received the most unbelievable feedback from the buyers, licensors and industry partners on our 2012 lineup. We're particularly excited about our new high-tech offerings that extend well beyond the toy aisle and into the consumer electronic aisles. We continue to expand further as a consumer products company and target people of all ages and demographic profiles. We specifically target distribution channels beyond just toy stores and the toy aisle.

We are now showcasing and have had great response on our beautiful dolls, dress-up and role-play for Disney Princess and Disney Fairies based on the upcoming Disney entertainment, new and expanded preschool and learning toys based on new licenses in our Tollytots division as well as our gorgeous line of the Winx Club fashion and action dolls in dress-up.

Our action-packed Monsuno line of figures, playsets, accessories and beyond has been the buzz of Toy Fair. And I will shed more light on the exciting new 2012 lineup later on this call.

Our international business continues to present new growth opportunities with new distribution agreements signed for Monsuno for New Zealand, and South Africa and the Winx Club for Australia. Product lines thriving abroad include our Spy Net electronics, Club Penguin, Smurfs for both the movie and classic line, Disney's Princess Dress Up and Role Play. And we're pleased to report that we have opened up Brazil for major distribution of JAKKS and CDI product lines.

We're also excited [at] the completion of the Moose Mountain toymakers, a leader in the foot to floor ride-ons, wagons, tents, safe soft play environments, arcade pinball machines and sports arcades products with well-known character and licensed brands including Disney, Fisher-Price, Kawasaki, Sesame Street, and Thomas the Tank and Friends. We believe that strategic acquisitions, such as Moose Mountain, combined with our continued focus on growing all of our JAKKS divisions, will result in the long-term growth of the Company. The Moose Mountain acquisition strengthens our product offerings and further expands our shelf space within all of our major customers and beyond.

We're actively managing continuing cost pressures we're seeing from the factories in Asia centered around labor, availability and cost, increase the cost of raw materials and the appreciation of the RMB. But so far, margins have approximated last year's and we expect that stable margins for the remainder of the year as a result of our commitment to closely managing our supply chain and introducing the higher margin products.

I would now like to turn the call over to Mr. Joel Bennett to review our financial results for the third quarter 2011. And then I will give 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 third quarter 2011 were $332.4 million compared to $348.7 million reported in the comparable period last year. Net sales for the nine months were $536.7 million, down from $549.3 million in 2010.

Net income for the third quarter was $34.8 million or $1.10 per diluted share. This includes $700,000 or $0.01 per diluted share relating to legal and financial advisory fees and expenses in conjunction with the unsolicited indication of interest in the Company. This compares to $40.4 million or $1.23 per share, which included a one-time tax benefit of $5.9 million or $0.17 per diluted share.

Excluding the legal and financial advising fees in 2011 and the tax benefit in 2010, earnings would have been $35.3 million or $1.11 per diluted share in 2011 compared to $34.5 million or $1.06 per diluted share in 2010.

Net income reported for 2011 nine-month period was $28.5 million or $0.97 per diluted share, which includes fees and expenses of $1.8 million or $0.04 per diluted share related to the unsolicited indication of interest in the Company. This compares to net income for the first nine months of 2010 of $38.2 million or $1.22 per diluted share, which includes a one-time pretax charge related 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, and one-time tax benefits of $10.8 million or $0.31 per diluted share.

Excluding the legal and financial advising fees in 2011 and the tax benefits and one-time charge in 2010, the nine-month earnings would have been $29.9 million or $1.01 per diluted share compared to $29.3 million or $0.97 per diluted share in 2010.

Turning to a more detailed discussion of our results, our product lines are aligned into two categories which reflect the makeup 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 [$163.2 million] for the third quarter of 2011. This compares to $148.9 million for the third quarter of 2010.

Sales in the first nine months of 2011 were $269.1 million versus $251.1 million for the first nine months of 2010. 2011 sales this quarter in this segment were led by our boys' action figures including Pokemon, Pirates of the Caribbean and Real Steel, though offset by a decline in UFC.

Interactive products were up, though they contributed less this year with declines in TV games among others, and preschool which increased with higher Disney Princess doll sales and our Tollytots division.

Worldwide sales from our role-play, and novelty and seasonal toy segment, which includes role-play products, novelty toys, Halloween costumes, indoor and outdoor kids furniture and pool toys, were $169.2 million in the third quarter of 2011 compared to $199.8 million for the third quarter of 2010. And sales for role-play novelty and seasonal toys were $267.6 million for the first nine months of 2011 versus $298.2 million for the first nine months of 2010. Role-play toys dominated sales in this category followed by Halloween costumes, although role-play was down overall versus last year.

Included in the category numbers are international sales of $55.5 million for the third quarter of 2011, compared to $59.9 million for the third quarter of 2010. International sales for the first nine months of 2011 and 2010 were $92.5 million and $91.6 million respectively.

Our international sales were enhanced by our JAKKS staff selling directly to retail in local territories. We're 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 third quarter 2011 and 2010 was 31.8% of net sales. And gross margins for the first nine months of 2011 was 32.6% of net sales compared to 32.7% of net sales in the first nine months of last year.

SG&A expenses in the third quarter of 2011 were $55.6 million or 16.7% of net sales as compared to $59.4 million or 17% of net sales in 2010. For the first nine months of 2011, SG&A expenses were $137.8 million or 25.7% of net sales compared to $140.2 million or 25.5% of net sales in the prior year. The decrease as a percentage of net sales in the quarter is attributable to lower incentive compensation, offset partially by the legal and financial advisory expenses incurred in connection with the unsolicited indication of interest in the Company.

Consistent with the seasonality of our business, operations used cash of $2.6 million for the first nine months of 2011 compared to using cash of $1.8 million in 2010. As of September 30, 2011 the Company's working capital was $401.4 million including cash and equivalents and marketable securities of approximately $232.5 million. Our balance sheet remains very strong.

We continue to evaluate various uses of our funds and untapped financing capacity. Using our disciplined approach, we look for accretive acquisitions to complement the growth of our business and effectively deploy our capital. We just completed our acquisition of Moose Mountain Toymakers. And also during the quarter, under our previously announced $30 million stock repurchase program, we completed the buyback during the quarter with the purchase of 1.2 million shares of our common stock for a total of $19.3 million.

And the Board of Directors has recently authorized the implementation of a cash dividend program that will pay an annual dividend of $0.40 per share payable quarterly to shareholders of record of the Company's common stock. The initial dividend was declared during the quarter and paid in October. The new dividend policy is intended to allow for internally generated cash flow to support our organic and acquisition growth strategy, maintain a strong balance sheet as well as provide sustainable quarterly dividends to our shareholders.

Depreciation and amortization was approximately $10.8 million in the third quarter of 2011 compared to $12 million for the third quarter of 2010. And for the first nine months of 2011, D&A was approximately $22.8 million compared to $20.6 million in 2010.

As for our tax rate, our effective rate for 2011 is expected to be 25% before any FIN 48 or other adjustments. This may change if there's a shift in sales between the US and Hong Kong companies.

Capital expenditures were $3 million for the third quarter of 2011, comparable to the $3 million for the third quarter of 2010. And $11.6 million for the first nine months of 2011 compared to $9.6 million in 2010. This was in line with our expectations.

Accounts receivable as of September 30, 2011 were $239.7 million compared to $287.4 million at the end of the third quarter of 2010. DSOs decreased to 65 days from the 74 days in 2010. Inventory as of September 30, 2011 was $55.8 million, up from the December 31, 2010 level of $43.2 million and down from $60.5 million at the end of the comparable period in 2010.

The increase from December 31, 2010 is due primarily to seasonal demand planning due to the placement of our products.

Inventory levels remain generally low with DSI's of 28 days comparable to the same period in 2010.

As for our guidance for 2011, we're still anticipating net sales of approximately $770 million to $775 million with diluted earnings per share in the range of $1.32 to $1.35, excluding costs in connection with the unsolicited indication of interest. This represents an increase of 4% to 6% above our 2010 adjusted EPS of $1.27, which excludes the one-time tax benefits and benefit payment in 2010. We continue to have strong confidence in the future prospects for JAKKS Pacific and its shareholders.

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

Thank you, Joel. As I mentioned, we're extremely excited with the momentum of many of our product lines as we head into the fourth quarter. Our portfolio mix is a mix of both popular, well-known licenses and JAKKS owned brands. While there are several bright spots, there's no one single product that we are counting on to make our year, but rather a number of exciting and on-trend items that are performing extremely well at retail.

Let's start off with Halloween. Shelves are all set and ready at all of our major brick-and-mortar customers. Online retailers experienced early activity and are continuing to see growth over last year.

Our Disguise line of budget-friendly, quality costumes and accessories feature on-trend designs, today's most popular characters and entertainment properties and are perfect for the everyday member of the family. Some of our key properties include Marvel, Sesame Street, Toy Story, Cars, Disney Princess, Power Rangers, Pirates of the Caribbean, Teenage Mutant Ninja Turtles and much, much more with our Marvel superhero assortment selling particularly well at Costco.

We're also seeing good sell-through's on our Kids Only patio furniture with a lot of new products shipped for the retail planograms and sets. We anticipate a terrific sell-through with our Kids Only products which provide parents with good quality, functional products featuring kids' favorite characters and brands. Top items include activity tables, activity trays, step stools to name a few, as well as fun play with block builders, Super Shopper shopping carts, puzzle furniture and kingpin bowling.

Disney, Nickelodeon and Hit entertainment properties continue to be very strong for our Kids Only products. For 2012 we are looking forward to our outdoor ride-ons, license storage containers, new activity tables and [beautifully made] puzzle furniture and much, much more.

Tollytots continues to have a robust business with a very strong Q3. We're pleased with the strong sales in the Disney licensed product such as My First Disney Princess toddler and baby dolls. And the key driver in the line, the Singing and Storytelling Belle is a gorgeous Belle doll that says over 100 phrases with lots of interactive features. It is hitting the shelves now with TV starting in mid-October.

Tollytots expects to see continued strong growth in 2012 with our core large dolls and accessory categories including My First Disney Princess, Graco and Fisher-Price lines. In Disney Princess we're planning to launch new items that follow the success of the Singing and Storytelling Belle.

We received a very positive response on our three new preschool lines starting with Safety First, Baby Genius and Rubik's. Specifically, we see the Safety First Cubicles line of products driving the Safety First business and giving us a firm long-term position in the preschool aisles.

Our Rubiks line has been very well received in Europe and we expect strong support there as well as in the US trade markets. Baby Genius items have had a great response in the trade due to innovation of the nature of the product, and it has a great combination of features, value and fun musical play.

We've had an amazing response to our new feature plush line currently called Crash, Bang and Wallop. It is a very unique plush line that has some really magical features.

Our Disney Princess and Disney Fairies role-play and dress-up line continues to perform extremely well. And it is a perfect gift for the holidays, giving every little girl the opportunity to become their favorite Disney Princess. Our Disney Princess Ultimate Fairy Tale Kitchen is larger than any Disney Princess kitchen on the market with lots of magical features [and we] are running a new TV ad in November which should give a nice lift to sales continuing into the gift giving season.

CDI will offer more innovation and new items for Disney Princess in 2012 than ever before. A few new key items for fall include dress-up and role-play based on Brave, the new Disney Princess film from Disney Pixar. A platinum re-release is slated for Cinderella in 2012and we will be launching a wide line of new and innovative product such as Beautiful Cinderella Deluxe line of dresses, and matching Cinderella light-up slippers which both feature motion light-up type technology that lights up when girls dance just like Cinderella in the movie.

In addition CDI will be releasing a new Cinderella Enchanted Vanity that is over 3 feet tall with tons of magical accessories and magical lights and sounds features.

Our Disney Fairy fashion doll segment remain strong with the Tink Pixie Cottage selling ahead of our plan, and our Sky High Flying Tink launching in late Q4.A new line of 4.5 inch dolls and dress-up and role-play is planned for 2012 based on a new Fairies film from Disney. It's called Secret of the Wings. The new Disney Fairies magical light-up wings is truly magical and feature a new fiber optic technology that is woven into the fabric of the wings for an amazing variety of light-up patterns and colors.

In September, CDI launched its first entry in the as-seen-on-TV space with Pawggles, the first plush animals that transform into comfortable, cozy, wearable slippers. The initial sales are very strong and promising, and it shows that we can enter into new and more profitable categories going forward. We will enter into this business in 2012 with new initiatives and innovative products being released through each quarter.

2012 is the year of the superhero with the release of two huge films -- The Avengers and The Amazing Spider-Man. CDI dress-up, role-play and novelty items based on these two films feature an unprecedented 50 new items for 2012 and include dress-up sets that allow a kid to become his favorite superhero. For example, our deluxe dress-up set feature built-in muscles and lights in the suits for the ultimate fan.

Our re-launch of the Cabbage Patch Kids have full chain support. Over 124 million Cabbage Patch Kids have been adopted to date since its early launch in the 1980s, which speaks to the strength of this iconic evergreen brand. And our Connecting Generations marketing campaign taps into the nostalgic factor of the Cabbage Patch Kids for parents and grandparents. Going into 2012, we're continuing with the ['Kids core] segment, and introducing an incremental baby segment to reach out to younger age consumers.

We have just recently signed Hello Kitty for another three years, and in 2012, we will see a completely refreshed brand with all new fashion looks. In addition we have added new toy categories, role-play and novelties. You also see collectible figures, fashion jewelry, and fashion plush. Overall a beautiful Hello Kitty brand like you've never seen before.

In our Girls' division, our most exciting news for 2012 is the Winx Club. It is a massive corporate initiative across JAKKS, CDI and Disguise. Thecore of the line are fashion dolls. We also offer dress-up, role-play, and Halloween costumes. And CDI will be launching several fashion-forward dress-up SKUs including dresses, tutus and a variety of musical instruments that allow girls to become their favorite Winx character from the show.

The Winx Club represents a very strong partnership between Rainbow, Nickelodeon and JAKKS Pacific. Nickelodeon owns a percentage of the company, Rainbow, and has invested in making this brand a success for Nick, developing over 100+ new episodes with new CGI animation. With the power of Nickelodeon behind this brand, we are poised for success.

In our boys' division, our Pokemon Region playset is hitting the shelves now, and is the most action packed playset we have done to date. Smurfs is an international box office hit and has been a phenomenal hit for us at retail.

Real Steel is a box office hit in its first weekend and our line will meet or beat our expectations, and we have real potential to continue this through 2012. We're also launching Men in Black 3 for the first half of next year and expecting nice incremental business for boys.

In the innovation and electronics division we could not be more pleased with the success of the I Am T-Pain Mic. It is the must-have item for the holiday 2011 and was included on the Toys "R" Us Hot Holiday list and Kmart's Fabulous 15 toy list. It is an example of a successful transition of an app into a toy product. We're looking at a line of broadened consumer products in this category for 2012.

We have some of the most innovative items this holiday season from our Spy Net line of products, in particular the Spy Net Video Glasses. It is a JAKKS-owned IP with worldwide distribution. Our Spy Net Video Glasses was named a most wanted toy by the Time to Play Group, a team of industry and consumer toy experts.

Going into 2012, we continue to take role-play to real play with even more technology in the Spy Net line of products, including a real working video surveillance system that can digitally stream live video and audio up to 250 feet. It is truly an amazing product.

Our overall objective for 2012 in our Innovation and Electronics line is to develop, market and manage the latest hottest consumer products beyond just toys for kids. We are a consumer products Company and target people of all ages and demographic profiles, and as a result, target distribution channels beyond just toy stores and the toy aisles.

Our TV Games line is expanding into a new gaming interface that targets exactly how kids today interact with smart phones and tablets. We're incorporating hot licenses like SpongeBob, Spider-Man and Star Wars. Our Big Buck Hunter Pro and Buck Hunter Safari continue to do extremely well. And next year we are introducing Zombie Shooter based on The Walking Dead, a top-rated cable show, which extends our proven peripheral platform of first-person shooters into another hot license and theme area.

Again, another exciting opportunity for JAKKS -- we're launching an Action Cam line, a new video recording system targeting a broad demographic from age 5 all the way up to teenagers and adults at affordable prices. This is a JAKKS IP and one that we are extremely excited about. The distribution opportunities worldwide extend beyond just toy and the toy aisles into sporting goods stores, electronics stores, Internet sites, wholesale clubs, QVC and more. Because it is a system, we can easily make meaningful exclusives that target our retailers' specific consumer.

Songify is a huge Internet sensation, over 300 million views on YouTube alone and we are taking the success of this app and making a tangible product with a key retail price point -- approximately $19.99.

We also have a line of Marvel electronics based on The Amazing Spider-Man and [applying] the most successful superhero franchise to our key electronic items.

[Something] we are extremely excited about that we developed internally is our new Baby Monitor line, which is a great example of JAKKS as a consumer products Company. Applying our proven technology to move beyond toys, and expanding our consumer targets to parents and grandparents while expanding our distribution channels. This is an amazing item from JAKKS.

[Digital Girls] adapts our Spy Net technology for girls, but focusing on social connecting and sharing. The line features electronic items that target exactly how girls interact with consumer electronics and each other.

Again, one of the main focuses JAKKS Pacific has been doing over the years is building its own IP. And with that, we have developed a line called Train World. We're introducing an evergreen play pattern targeting today's four to eight-year-old boys. Trains today only exist as preschool items such as Thomas the Tank and Chuggington, or Hobby. We're taking the look of hobby trains and bringing them to the masses at affordable price points. Again, this was another JAKKS organic IP and we feel it will have universal appeal and distribution worldwide.

And finally, the response to Monsuno, and the early animation and the product line at Toy Fair have been stellar. We're moving forward with the most aggressive international expansion yet and are getting close to worldwide launch throughout 2012. We have comprehensive agreements in place for pan-European, Australian, New Zealand and South African toy distribution partners with more in the works.

We're extremely excited for the premiere of the first episode on Nickelodeon which is expected to be in mid-February, with the launch of the toy line following in March. We have the most robust promotional plans in place and we can't wait to finally introduce Monsuno to the world next year. We believe Monsuno will be a game changer for JAKKS Pacific and will elevate our business to the next level.

Monsuno is built around powerful action-based animation, dynamic relatable characters and a deeply woven original story. As you may know, we have aligned with the leading Japanese advertising and animation production company Dentsu Global, television distribution giant FremantleMedia, Topps as an investor and a trading card partner and Nickelodeon as our partner for worldwide broadcast distribution. And with a terrific toy line by JAKKS Pacific, Monsuno is fast developing into a powerful force in the boy's action arena for the next years to come.

The opportunities are endless for the outbound licensing for Monsuno. We already have Topps as our trading card partner worldwide. We're looking into the licensing for retail electronics, video games, back-to-school supplies like backpacks, lunch boxes and the possibilities are endless. We believe Monsuno has all the right ingredients to become a hugely successful boys' entertainment property.

Overall we're extremely pleased with the progression into our fourth quarter, with our diverse portfolio expanding to be on the must-have wish list of kids this holiday season.

Before we begin taking questions I would like to remind you once more that the purpose of today's call is to discuss our third-quarter earnings and we ask you to please limit your questions to the topics involving our financial and operational results.

With that, we will now open the line up for any questions that you may have. Thank you very much.

(Operator Instructions) Drew Crum, Stifel Nicolaus.

Okay, thanks. Good morning everyone.

Good morning, Drew.

The revenue guidance you kept for 2011 would imply a pretty hefty increase in the fourth quarter, if my math is right -- high teens type growth. Was there anything timing related in the third quarter that shifted revenue into the fourth quarter? Or could you explain what you are seeing for the fourth quarter behind the guidance?

In general, we [can't time it]. And that's part of the reason why we don't give quarterly guidance, because there is a continuous flow. Sometimes it picks up, sometimes it slows down. But what we do is monitor our POS information, rate of sale at retail and basket configurations and such. So we're on track for the year. But as we can't time the quarters, we don't give the quarterly guidance.

Okay. Couple questions on the Winx Club, any comments on early commitments you have from retailers? Are you assuming any major uptick in royalties from that property? I guess the final question there is how do you intend to differentiate this property against Disney Fairies? My understanding is that Winx Club is a fairy-based property. I know it skews a little older, but any risk that there is cannibalization there?

First of all, it's a great question, Drew. The Winx Club, as I stated earlier in the call -- excuse me for my voice. I slightly have a cold.

It is the number one property fashion doll overseas in Western and Eastern Europe. And for JAKKS Pacific, Nickelodeon acquired a big portion of the company called Rainbow, and Rainbow is the creator of The Winx Club and it has been successful overseas for the last six to seven years. They have bought over 100 episodes and put it as their prime girl animated show starting next year.

With that, it is -- for us, and for a competitive line to the Fairies, they truly do not cannibalize one another. That is why we even spoke with Disney prior to let them know that we were looking at this, and they had rather have us work on the lines. So we know that it won't cannibalize and we will try not to cannibalize.

As The Winx Club is a much older girl than the Fairies, and Winx Club is much more fashion oriented than Fairies. Fairies are Fairies and they have a strategic look and feel that has been around for a decade. The Winx Club is much, much more of an older girl product and much, much more of a 9.5, 11.5-inch doll line.

We also have this for North America. In addition to -- we have it in specific international territories. And it is going to be, we believe, a significant contributor for us starting next year.

Nickelodeon has been put a lot of money behind it, not just in acquiring the series on their network, the marketing behind it and we've been working with them for months or almost -- or actually since June last year, a year ago on this property. So we're excited about it. Nickelodeon is excited about it.

We just finished a major roadshow with our retailers and we have complete placement from all the mass retailers to our secondary retailers. So we are truly excited about this as well as Nickelodeon.

Thanks. And just a follow-up was the anticipation or anticipated uptick in royalties?

You won't see any dramatic change in royalties with regards to the Winx Club. You will see it's going to be consistent with what our royalty payments have been over the past year, so you won't see anything significant in that.

Okay, great. And just one last question for me guys; you mentioned that you are starting distribution in Brazil with CDI. Can you give us a little more detail there and just what the timing looks like for that rollout?

What we've been able to do, which has been one of our big initiatives, is to go direct to retail throughout specific territories where we can. The best parts of where we can go usually is our own IP. So we have been able to build our distribution channels and retail relationships with our own IP versus licenses, because various licenses do not apply [in] specific territories.

So we've been able to build, over the two years, our direct relationships without popular licenses. Now we're actually obtaining worldwide rights such as the Smurfs and other areas such -- and the Winx Club, which we have specific territories. So we're just able now to really build specific territories stronger by going direct.

That being said, we are in various segments of businesses that when we know we're not strong in the specific territory or know we cannot be strong in a specific territory, we always go back and work with our distribution partners. For instance, the pet segment of our business we're not structured correctly to do the pet trade business overseas, so we go to different partners that are really strong in those categories to assist us. And we have extremely strong distribution partners for various segments of our business.

Okay. Thanks guys.

Thanks, Drew.

(Operator Instructions) Ed Woo, Wedbush Securities.

I had a question about the guidance. You said that the earnings per share guidance -- that excludes any charges you guys are incurring for the -- I guess the Oaktree bid.

Yes.

And then the other question I had is you seemed pretty optimistic about most of the products doing as expected or better than this year. Was there any particular lines that you were I guess disappointed in or did not do as well as you expected?

I would say for the most part we usually don't break out certain segments, but there has been -- as every year, there are areas that usually perform better than the rest. And I would say this year we had -- the Pirates of the Caribbean toys did well, but not get up to our expectations for the fall area. We thought we would have a nice fall business for it in toys. That being said, it is doing extremely well in our Disguise segment of business and other segments.

Our Golden Tee plug and play game is doing nice, but not really what we expected to our expectations. On the reverse side, you have Smurfs that did better than our expectations and Real Steel better than our expectations. But in overall areas, we do expect some slowdowns. That's kind of how we review each year and each quarter with the sell-through's and going out to our retailers and figuring out what's doing well, what's not doing well.

And with that, we end up then hopefully backing off of future orders, canceling that and then looking at other areas that we can perform. A good area that we actually have done better than last year as well is our basic everyday business from Kids Only. Our table and chairs line and furniture has done extremely well.

Again, these aren't areas that we would consider grand slams, homeruns and that's the way we run our business. We run it with singles and doubles. That is why we have a very strong evergreen business.

Things that really perform in turn into major ball homerun grand slam like T-Pain, we'll end up chasing it. We will never be able to that grand slam area in certain segments because we will not build the inventory or liabilities that will be necessary. So with this slowdown in certain areas we have pickup in other areas. So that has been part of, I would say, more the consumer product area of our business that we look at every quarter, every week, every year.

That sounds good. Heading -- I know it is only two weeks into the quarter so far, but have you seen any noticeable change in retail either in the US or international that either would give you optimism or give you concerns from where it was three months ago?

I would say that we have always been looking with a cautious outlook just because the -- call it economic retail environment. But nothing has changed that we have seen over the last couple of months to now. Being in the first month of fourth quarter, we haven't seen any true different patterns changing with retailers from the mass to the drug trade to the big box stores as well as international.

I think there's been a nice positive outlook on the basic business that we see, not just from us, from [our other] competitors as well as the kind of must-have items. People are still paying for those items. So nothing has really changed in general.

Okay, thank you and good luck.

Thank you Ed.

Sean McGowan, Needham & Co.

Good morning, guys.

Good morning, Sean.

I've a couple of questions as well. Could you give us a rough idea of the size of Moose Mountain?

It's in mid-$30 million range.

Any comment on the payment price?

Multiples consistent with the industry and our recent acquisition.

How about sizing Smurfs for us?

We [would] break out the dollar amount, but I would say for Smurfs we're just in the completion of our extension with the rights with them. And it's been an evergreen product prior to the movie. It did have a very nice pickup with the movie. Kind of -- I think it took everyone by a little bit of a shock as the movie did really, really well and it's a really unisex product line.

So it did better than our expectations internally, but we're continuing to the next movie which will be two years from now. It's a great basic business and we do it worldwide. It is very strong overseas.

So you do have the rights for the next movie?

We are finishing that off right now.

Okay, Smurf (multiple speakers)

We have had a long-term relationship with them for a long time.

Smurf fabulous. (multiple speakers) (laughter) Someone had to say it. Was there any impact from currency in the quarter, either on sales or (inaudible)

No. Generally our exposure is pretty low, although we did have more than usual in Canada of all places. Our domestic sales are (inaudible) (technical difficulty) dollars and our FOB sales are done likewise in US dollars. We think that will change as our international operations expand to more local business. But right now it really is a nominal [act to us].

Looking at the product breakdown, I'm a little surprised at the continued weakness in role-play. What is behind that? Was there a key license or something that was dropped?

No, the majority of the role-play area that shifted -- twofold. One is we had a very large private-label business that we were doing for the past few years, but as the margin criteria really slipped below what was acceptable to us, we had to walk away from it.

It was significant in the sense of revenue, but bottom-line it wasn't dramatic to us. So that is really the big shift. The other shift is we have put T-Pain, which was in that area, into our electronics category. So that was the other shift.

But besides that, and you will [come out to see the line], the area of business looks tremendous and we haven't seen any real slowdown in our regular CDI role-play business.

Okay. Some of your larger competitors over the last couple of days have reported sales outside of the US that were really extremely strong, so is there any particular reason you're not seeming to benefit from a lot of that strength internationally?

The majority of it is [dealt with] license-based properties versus intellectual properties. (technical difficulty) And I will use Mattel, who has extremely strong internal brands -- the Barbie, the Fisher-Price just to name the two main ones. That being said, we have picked up more rights overseas, such as Smurfs. I believe it is Hello Kitty, Real Steel.

We had many different licenses in addition to our new licenses that we're expanding on with regards to Halloween. We normally we had a non-compete to go into the Halloween business that ended January of this year, which does takes time for us to build the internal properties as well as the different territories. It is carnival versus Halloween.

But now what you will see is our own intellectual properties are going into next year from our Spy line, from our Train World, from our [Jabber Watch], to our Action Cam, to Monsunos, Pogles, Max Force -- these are just to name a few. We have much more breath of our own product that really adapts well.

For the majority of the Western and Eastern territories, we are just finishing off our deal with Monsuno in Japan. So, really, a lot of our own products really, really bode well for us overseas. You will see much stronger growth for us in 2012 and beyond.

Okay, thanks. Joel, any stock-based compensation in the quarter? Can you give us detail on that?

Yes. It was $428,000.

In the quarter?

In the quarter and $1.5 million for the nine months.

Year-to-date, okay. And last question; I look at the balance sheet, it looks like the combination of intangibles and others seemed to drop pretty sharply in the quarter, and yet I don't see a big impairment charge or something. How did that happen?

Am I missing something?

Let's see --

I think it was about $36 million at the end of the second quarter and it looks like it is about $24.6 million in the third quarter.

We have a lot of amortization. A lot of that relates to the recent acquisition. The burn off rate is pretty rapid. Our trademarks and goodwill are as they were at the end of the year, but mostly it is the amortization and I can give you that figure. It was about --

It's like the drop in intangible is bigger than the total D&A.

Pardon?

The drop in intangible is bigger than the total D&A. That number that, intangible number that held fairly steady or not a huge amount of difference for several quarters, and then all of a sudden it is down $11 million.

Yes, we didn't have any write-offs, but I will get verification (multiple speakers) come back.

Okay. Thanks a lot.

(inaudible) if not, if anyone has that (multiple speakers) they could let me know.

Okay, great. Thanks, and I will see you tomorrow.

Thank you, Sean.

(Operator Instructions) Scott Hamann, KeyBanc Capital Markets.

Hey, good morning guys. When I'm looking at the industry in terms of shelf space, what you kind of thinking for the industry in terms of retail shelf space and then JAKKS specifically? Do you expect to gain some shelf space this year?

That's a very good question. Retail shelf space in general, not just for toys but all merchandise, has been shrinking because a lot of the retailers are going into the food category. But for JAKKS, as we're in so many various segments of business units, we're not seeing an effect. We're actually taking more of a smaller pie.

But it has shrunk more so because of truly the food becoming very much a component of the mass retailers versus years past, that wasn't there. And the only way that they're able to grab space at their current chains or new chains is by decreasing shelf space in certain segments, whether it means electronics like TV or whether it means soft goods, apparel, or toys or call it consumer goods like shampoos and so on.

So we're seeing those parts shrinking, but it has not affected us because we're also in from electronics, toys, to preschool, to outdoor furniture product, to Halloween, so it really hasn't affected us. That's a very good question.

Okay, and then Joel, just on gross margin kind of thinking about fourth quarter here and the year, I thought you had anticipated it would be up kind of in the back half of the year. Can you kind of -- what are some of the moving pieces there and what should we be expecting kind of going forward here?

Most of it relates to a mix, but we can look out and moderate our operating costs. So we're balancing out the year. We had originally expected greater expansion, but it looks like we will be around where we were last year -- 32.8%.

Again, just having that visibility into the quarter where we are seeing the shift in the mix, we're able to react in operating costs as well as some of our direct selling like advertising and marketing.

Okay, and then kind of just conceptually thinking about next year, with the higher mix of your own IP, we should expect to see some expansion there, right?

Yes, absolutely.

Okay. And then Stephen, just one final question; there is no current buyback authorization in place, right?

Correct.

Okay. Has anything changed with your thoughts on use of cash or excess cash flow as it relates to buybacks? The stock kind of coming off a little bit; it seems like that would be a pretty good use. What are your kind of thoughts around that?

Our focus is truly to deliver value to our stockholders and we look at every avenue. But our strategy sheet remains the same, which has been always building off evergreen products, evergreen licenses, expanding into new categories and new areas of business which uses our capital, acquiring strategic acquisitions like a Moose Mountain or other potential acquisitions. We always will look at use of capital as we did with our dividend and/or buybacks. We always look at that -- what is the proper use of capital, and what is the right use.

But one of the main things, we manage really tight controls and overhead. So we try to keep everything really focused. And we review really all avenues that bring shareholder value, and that being one.

Okay, thank you.

Thank you. Ladies and gentlemen this concludes the question and answer portion of our call. I would now like to turn the call back over to President and Chief Executive Officer Stephen Berman for closing remarks.

Both ladies and gentlemen thank you for your time. It's been a long call. We're very proud of our Company. We're very proud of our business looking into the remainder part of 2011. And we are beyond extremely excited for 2012, more than we ever have been since the inception of the Company. So thank you very much.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day everyone.