JAKKS Pacific Inc (JAKK) 2015 Q1 法說會逐字稿

Good morning ladies and gentlemen. Thank you for joining the JAKKS Pacific first-quarter 2015 earnings call with management. Today, JAKKS will review the results for the first quarter ended March 31, which the Company released earlier today. Please note that the presentation slides containing information covered in today's earnings release and call are available on the Investors section of our website.

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. Then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of product lines and current business trends prior to opening up the call for your questions.

Your line will be placed on mute for the first portion of the call. (Operator Instructions). Please note that this conference is being recorded.

Before we begin, the Company would like to point out that any comments made about JAKKS Pacific's future performance or events or circumstances, including the estimates of sales and earnings per share for 2015 as well as any other forward-looking statements concerning 2015 and beyond, are subject to Safe Harbor protection under federal securities 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 the reports subsequently filed with the SEC from time to time.

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

Good morning, everyone, and thank you for joining us today. I will begin with a few remarks about our 2015 first quarter and then I'll turn the call over to Joel Bennett, who will provide more details on our financials.

We could not be more pleased with our strong 2015 first-quarter performance exceeding last year's results by a healthy margin and surpassing our expectations and guidance. JAKKS has continued to focus on fundamentals, monitoring sell-throughs and market demand while focusing on margins and leveraging our P&L and continuing to pursue operational efficiencies.

We continue to be encouraged by the results of our Disney product line. Helped by the new animated short Frozen Fever, Elsa and Friends continue to show strength and retail. Our Disney Princess and Disney Fairies lines also continue to be consumer favorites at retail with the support of content releases such as the recent Cinderella live action movie and Disney's Fairies Legend of the NeverBeast DVD release.

Also showing strong performance at retail are Max Tow Truck and our Max Tow Minis, Nintendo figures and plush, our Star Wars large-scale figures, Daniel the Tiger plush and place sets, license ball pits, ride-ons and wagons and children's indoor and outdoor furniture. Our seasonal product lines, including Maui Wave Hoops, Sky Balls and gliders and Funnoodle water floats, are also showing strong encouraging results.

Our ability to foresee early the combination of the port labor slowdown and port congestion allowed us to work closely with our partners to ship more inventory, protect our space at retail and ensure that cargo keeps moving. We are confident that we have mitigated any serious impact of the port issues on our business as we continue to ship product to our customers. Our retail partners recently recognized JAKKS Pacific and our divisions for these efforts and for being a valuable partner in driving sales and profits for them. JAKKS received the 2014 Vendor of the Year award from Toys "R" in the US and in Japan. Our disguise division is recognized as seasonal vendor of the year by both Walmart and Target. And Disney recognized JAKKS as the licensee of the year in Europe, Middle East, Africa, and best girls in trees licensee in the UK and Ireland.

2015 is looking very solid and strong. Our inventory at retailers and our inventory levels are in very good shape and our products continue to be in demand at our retailers. Our commitment to product innovation, focus on operating efficiencies along with margin improvement initiatives should position us well for profitability this year and beyond.

Now, I'd like to turn the call over to Mr. Joel Bennett to review our financial results for the first quarter of 2015 and then I will give a further update of our business this year and beyond. Joel?

Thank you, Stephen, and good morning everyone. Ahead of expectations, net sales for the first quarter of 2015 increased to $114.2 million, up 38% from net sales of $82.5 million reported in 2014. The net loss for the first quarter decreased to $7.6 million, or $0.40 per diluted share, compared to a net loss for 2014 of $16.3 million or $0.74 per diluted share. Adjusted EBITDA for the first quarter improved to negative $900,000 from negative $11.6 million in 2014.

Worldwide sales of products in our traditional toys and electronics segment increased to $65 million for the first quarter of 2015 compared to $35.7 million in 2014. Sales in this segment Q1 provide by Disney Frozen toddler dolls, Nintendo plush and figures, and Star Wars figures driving the category to an overall increase this quarter.

Worldwide sales from our role play, novelty and seasonal toy segment increased to $49.2 million in the first quarter of 2015 from $46.8 million in 2014. Disney Princess, dress-up and role-play, including Frozen, Princess and Fairies, dominated sales in the category this quarter, driving the category to an overall increase. Included in the category numbers are international sales of approximately $42.3 million for the first quarter of 2015 compared to $18.3 million in 2014. Disney Frozen and Princess dolls and Nintendo and Slugterra products drove the big increase in 2015 sales in the international market.

Gross margin for the first quarters of 2015 and 2014 were 31% and 28.5% of net sales respectively. The 250 basis point increase in gross margin in 2015 is due to lower product costs offset in part by higher royalties.

SG&A expenses in the first quarter of 2015 were $39.6 million, or 34.7% of net sales, as compared to $38.4 million, or 46.5% of net sales, in 2014. The modest increase in SG&A dollars resulted in a significant decrease as a percentage of net sales due to significant increase in net sales in 2015.

Depreciation and amortization was approximately $2.8 million in the first quarter of 2015 compared to $3 million in 2014. Capital expenditures were $3.1 million for the first quarter of 2015 compared to $1.2 million for the first quarter of 2014. For the full year, we expect capital expenditures of approximately $12 million.

We were anticipating a tax benefit Q1 but our effective tax rate for the first quarter was 6% due to a shift in earnings with higher-than-expected taxable income in Hong Kong, the UK and Canada. However, our full-year effective tax rate is expected to remain at approximately 15%.

Consistent with the seasonality of our business and on significantly higher Q4 2014 sales, operations provided cash of $38.8 million for the first quarter of 2015 compared to using cash of $11 million in 2014. As of March 31, 2015, the Company's working capital was $234.2 million, including cash and equivalents and marketable securities of approximately $105.3 million compared to working capital of $120.4 million as of March 31, 2014.

Accounts Receivable as of March 31, 2015 were $104.3 million, up from the $65.4 million at the end of the first quarter of 2014 due to significantly higher sales in 2015 and due to the timing of sales during the quarter. DSOs in 2015 were 82 days, an increase of 11 days from the 71 days in 2014.

Inventory as of March 31, 2015 was $79.5 million, up from $42.2 million in the first quarter of 2014 due to higher sales and continuing high demand for our products and also as a contingency measure to better deal with issues in the Port of Los Angeles. This resulted in DSIs of 114 days, up from 77 days as of March 31, 2014.

Finally, as for guidance, the Company reaffirms its previous forecast of net sales for the full year of 2015 in the range of $730 million to $740 million with earnings in the range $0.71 to $0.75 per diluted share and adjusted EBITDA in the range of $56 million to $58 million.

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

Thank you, Joel. We are continuing to be prudent and cautious in 2015. We are assessing how the trends are playing out for the remainder of the year and are closely monitoring market conditions.

As I stated in the 2014 year-end call, we would love nothing more than to exceed our expectations and guidance in 2015 as we did in 2014. So where opportunities arise, we will react nimbly and efficiently as we did last year.

Our current sell-throughs at retail remain strong for our broad array products which, coupled with the operating efficiencies we continue to strive for, we feel will result in a strong, profitable year.

Let's start with our girl's Disney business, which had strong sales and sell-throughs this quarter. Our North American and international business both delivered strong growth. Our Frozen products continue to be in demand. The Cinderella live-action product line is a hit around the world and a nice boost to the portfolio with a very focused line. With Frozen Fever that was released with the Cinderella live-action film as well as additional content, events and promotions by Disney, Frozen products should continue to stay hot this year.

We'll be TV advertising two strong items this fall, Sing-Along Elsa and the Do You Want to Build a Snowman music box. In the Disney Princess line, we are excited about our launching of a brand-new figural makeup and glamour segment called Little Kingdom, and we'll also have a new feature doll, Colors of the Sea Ariel, both of which will be TV promoted. We should also get a nice boost around Cinderella when the DVD releases in late September with a new Cinderella live-action toddler doll that will launch in conjunction with the DVD.

In our boys segment, Max Tow has continued to sell well during the first quarter and the new Max Tow Turbo is slated to outperform what Max Tow truck did last year. Max Tow Minis had a strong launch in Q1 and are projected to provide nice incremental revenue for this segment this year.

In our big figs line, we are off to a great start in 2015 and we are setting the stage for our 20-inch and 31-inch and 48-inch scales to have great success this year and beyond with new licenses and expanded distribution.

We are looking forward to launching our own proprietary product called 3D It character creator, which allows kids to design, create and customize their very own characters. It is receiving much interest and excitement with the trades and has already won its first award at New York Toy Fair earlier this year. It will be carried by all the major retailers and will ship internationally as well with some of the hottest boys licenses.

With the new Marvel's Avengers: Age of Ultron movie hitting theaters in May, we expect our new Marvel RC vehicles, including our Ultimate Hulk Smash RC, to be some of the hottest boys products this fall. With a TV campaign launching in the fall, we are expecting a tremendous response to Hulk Smash at retail. We are already working with our retail partners on unique merchandising options for our Hulk Smash such as end caps, power programs, in-store product displays and more. Our Marvel 1/24 scale remote-controlled vehicles are just hitting store shelves now and also feature popular adventure characters such as Iron Man and Hulk.

Evergreen items such as our ball pits, wagons, indoor/outdoor furniture performed well in Q1 for the licenses such as Frozen and Cinderella, including the Frozen Big Wheel. For the rest of the year, we're looking forward launching these same great items plus games for licenses, including Star Wars: A Force Awakens; Marvel's Avengers; Doc McStuffins; and Frozen; and other popular characters, including Minions and Paw Patrol.

Our Wave Hoop, Sky Ball, Sky Bouncer and Mini Sky Bouncers and Sky Riders were all key drivers for Q1 in our seasonal and outdoor segment. We have new Funnoodle products as well that will ship in second quarter. We are very excited to see the sales on these products as we move further into the spring and summer months.

Now turning to our international business, year-over-year growth is up significantly year-over-year. JAKKS UK, which was named a top 10 manufacturer and NPD for fourth quarter 2014, continues the strong momentum going into Q1. Our new locally-based Vice President of Sales in Germany is already showing results with Q1 shipments already outpacing the previous year. Our Latin American business continues to grow as JAKKS builds a strong presence throughout the region. And in Mexico, we are projecting a third straight year of triple digit percent growth with the opening of our Mexico City office and showroom in second quarter. The JAKKS amazing showroom and office opened in late 2014 in China and is off to a solid start.

In closing, we are looking forward to a strong performance in 2015 with the contributions coming from a broad array of products and markets. We believe we have a formidable product lineup and expanded reach into international markets that position us well for a solid and profitable 2015. At the same time, we are looking hard to develop new products and initiatives to better position our portfolio for growth in 2016 and beyond. We are expanding internally our own items within each category and business units and we are increasing our licenses across many of our core categories and extending many current agreements. We also have secured a number of entertainment blockbuster licenses launching in 2016 and we hope we will have more to announce in the coming months.

We are also working on developing new technology-driven products and app launches in our digital division. In addition, we are increasing our international presence, which continues to grow through the expansion in new territories and emerging markets.

Lastly, we continue to grow in many of the mature markets in which we currently conduct business. These initiatives along with our core evergreen products and our focus on operational efficiencies and disciplined margins should mature improving profitability in the future.

Thank you for everyone's time today for the prepared portion of the call. With that, we'll open up the call to Q&A. Thank you.

(Operator Instructions). Steph Wissink, Piper Jaffray.

Just two questions from us. The first, Stephen, you talked about a lot of great product initiatives. If you could just help us understand the product mix and the margin balance that we should be thinking about for the balance of the year here with respect to those new initiatives.

And then secondly, as you look out over the next couple of years, you referenced some key licensed properties. Can you just give us a sense of how licenses -- what percentage of revenues those are and how they should flex and ebb over the next couple of years just so we can appreciate some of your tiebacks to some of these new properties and some of the cycles related to those properties.

Okay. For the first question, the average margin that we are focusing on for this year and going forward is approximately 31%, and it varies between each of our divisions, from our boys division depending on the products mix to the girls division which has licenses and non-license, to disguise that has a various product mix of several licenses. But the average gross margin is approximately 31%, so I hope that answers that question.

Going forward, what we are doing, we've worked on over a year and a half is expanding our initial categories and broadening these categories to make it more diversified as a company, both internationally and in the US. So for instance, our seasonal division which consisted of Moose Mountain, the foot to floor write-ons, the Kids Only which are outdoor furniture and other write-ons seasonal, which is Maui, hula-hoops and balls, we've expanded the categories within each of these segments with new products. At the same time, we've had new additional licenses as we mentioned in each of these categories that are long-term licenses such as the Disney Princess and core Princess lines, some of which are the Marvel lines, Minions, Paw Patrol. So where the licenses are appropriate, we are adding them to each of these categories.

We have a lot of categories that we haven't mentioned that are really basic evergreen lines that we have worldwide rights usually, excluding Japan, which are character-based flashlights, the makeup line which we just discussed in our initial press release. So these new areas of businesses on top of our current focus business and the digital aspect of our business is where we are going to see growth both in the US and internationally.

Plus, a lot of the new licenses that we have obtained, we have Worlds of Warcraft or Warcraft the Movie which comes out by Legendary Films, which is first quarter next year, which will be a blockbuster worldwide. We have The Avengers: Age of Ultron; we have Halo; we have Minions; we have Batman and Superman. So, we have a very strong lineup going forward for the next three years and new categories. So for instance, with the new Star Wars film, we have a 48-inch Darth Vader and Storm Trooper in addition to our big figs.

Nintendo just launched -- or just announced their launch of their new mobile game line, which they've never taken Mario and Friends into the mobile aspects. They've been more of a game unit company. We have a very long-term license with Nintendo worldwide, excluding Japan. So again, what we're having now is more worldwide licenses like World of Warcraft, Nintendo and so on that will expand our business going forward for the next few years.

Okay. Thanks guys for all the detail. Best of luck.

Linda Bolton Weiser, B. Riley.

So you did a -- or you provided an explanation about receivables and inventory and the effect on working capital. Do you think that you'll still have sort of high-ish inventory or higher than normal next quarter and third quarter just to safeguard against any operational issues? And if so, do you have any view on how your cash flow is going to turn out for the year? I mean, I'm expecting you should be able to get still fairly positive operating cash flow and free cash flow for the year. Maybe you could comment on that.

And then do you think that you would be thinking about something like share repurchase, or do you still feel it's prudent to protect the balance sheet and be able to safeguard against these operational things in the future? Thanks.

The port issues were isolated to 2014 although there was some cleanup. The backlog that was caused by the slowdown mostly in 2014 built up our inventory level, and we will be working through that over the next quarter. And then we started building up inventory levels for all the new product launches that we happen in the back half.

So as far as the --

Just to add to that, Linda, on the inventory, the inventory is very strong. The inventory, it has -- it's the Cinderella live-action; it's Frozen; it's a lot of our seasonal products; it's licensed Avengers products. So it's things that we discussed in our 2014 year-end and fourth quarter that we were building up the inventory levels to mitigate any port issues, which we did. And we are happy we did so because we had I would say zero port issues that affected us through last year and this year. So the inventory that we've done has been planned for and we are 20 days into the quarter and we are having still great shipments.

Our sell-throughs from Frozen to Daniel the Tiger to Nintendo, miWorld materials are all above expectations. So we are very comfortable with our inventory level.

I'll let Joel answer about the receivables and then I'll go back and talk about the buyback and so on.

Yes, again, because of the year-over-year growth by quarter, especially which is quite pronounced in the fourth quarter and also in Q1, but we do expect to extract the working capital out after the peak season in the third quarter. So, we do expect to have positive free cash flow in 2015.

And then, Linda, did that answer those two questions okay?

Yes, yes, sure.

You asked to comment about whether the converts -- we, the Company and the board, always continue to look at the best use of the Company's cash. So whether it's a stock or debt repurchase, dividends, acquisitions or building working capital, we look at it on a monthly basis. And the Company you need to remember has a history of doing all of these at times when it feels it's correct. So, we regularly consider this at every meeting and we review it at every meeting. And we have a history of doing all of these that I just mentioned.

Okay. And then I guess if you take your sales guidance for the year and plug in some numbers for the next few quarters, it does indicate a deceleration of sales growth, maybe not as robust as what we saw here in the first quarter. Do you think second quarter will still be quite strong like up double-digit -- I know you don't really want to give quarterly guidance -- and then more of a tail-off in the back half or the growth will be more even? Is there any way you can give us an idea for the cadence of how sales growth will progress?

I think given the momentum going into Q4 in light of the -- it was an easier comp in the fourth. So I guess the way to frame it, since we don't give quarterly guidance, is the toughest comp will be fourth quarter.

Right. Yes. I think, at least in my model, I would expect a decline in sales year-over-year in the fourth quarter. But I'm just kind of wondering leading up to that, it still sounds like momentum is quite strong in the second quarter from your comments today it sounds. Would that be accurate?

We said it in the call earlier, sell-throughs, and we base everything based off of sell-throughs around the world and not just sell-ins. Sell-throughs continue even after Easter to be extremely strong. So we monitor weekly, daily sell-throughs, and where there's opportunities, we react to them. So as we said, right now, we are very comfortable with the year and so we'll monitor it as we speak. But right now, things look really strong on a sell-through basis and a sell-in basis.

Sounds good. And then one last question. I know at one point last year in your commentary, you had noted you just wanted to be conservative because of the uncertainties about Mattel having difficulty and Mattel having excess inventory out there at retail. Mattel seems to have cleaned up the inventory somewhat and their POS is doing better. Do you actually view that as a positive like less risk or is that more of a competitor risk in the girls area? How do you kind of view what's going on with a big competitor?

First, I actually like to hear when our industry is doing well. And when you look at how Mattel came out with their numbers on Friday, or Thursday, excuse me, and showed that they had really nice segment growth, that's really good for our industry as well as looking at Hasbro's numbers. Yesterday it was -- we commend them very much.

What we've gone through, and I'll use Lego that's had nice strength, that's very healthy for our industry. What has diminished are the smaller players in our industry and we are garnishing a lot more shelf space in the areas that we compete in. So we are leaders in the foot to floor ride-ons, we are leaders in Halloween, we are leaders in a lot of the categories, the toddler dolls that we have underneath our Tolly division or the role-play. So, in those areas, we don't compete against a lot of the -- what you just mentioned, Mattel and Hasbro. We actually are a licensee in Halloween of Hasbro. We have Hasbro's -- they are a great friend of ours as a competitor. We license the foot to floor ride-ons with Mattel. We license Fisher-Price foot to floor ride-ons. So we like that our industry is looking better.

What has happened is a lot of these smaller companies or even some of the Japanese companies have really diminished, which is allowing JAKKS and call it other competitors to garnish more shelf space. What we had two, three years ago, you had retailers condensing shelf space because the industry was retracting. Now you see it otherwise that the industry is not retracting. There is less competition out there and retailers want the toy and kids consumer products in the market to drive their guest, their consumer in. So we are seeing a kind of turnaround in that form, which is really healthy for all of us.

Great. Thanks very much.

Sean McGowan, Needham.

Thanks for the questions. I have a couple. I'll take them one at a time. So looking, Joel, at the sales breakdown of role-playing and costumes, that only showed a 5% growth year-over-year despite the fact that this time during the first quarter of last year, all of the Frozen costumes were in such short supply. I would've expected a bigger increase at that segment. So can you talk about maybe what some of the offsets were to Frozen being up so much?

Frozen drove the traditional category, which is part of the large increase that we had in traditional. It's the dolls. So, Frozen transcends all of the different product categories.

Right, but I'm saying that, within the segment of role-playing, I would have thought that the year-over-year increase in Frozen would've been really strong because it was in such short supply a year ago. So, was there something else that was strong a year ago that's down this year to make that whole segment only up 5%?

Actually, go to your second question and I'll pull out the --

I'll dovetail on some of Linda's questions. So can you comment on how much of the accounts receivable has maybe already been collected or you would expect that to be collected in the second quarter? That was a bigger increase year-over-year that I would have thought and certainly much bigger than the sales. So when does the increase or the year-over-year comparison in accounts receivable get more in line with sales?

Yes, most of the sales were done on an FOB basis, which turn in three to four weeks as opposed to domestic sales which have in upwards of 90-day terms. So the proportion of sales within the quarter occurred a little bit later. So, those are actually -- turning most of that is already converted. So we have had very little issues with bad debt. So, the AR is sort of an automatic turn to cash. So the fact that it was higher, it had more to do with the timing of the sales within the quarter as opposed to anything else. So, there's still high-quality receivables.

Okay.

On the role play, we actually had a very strong part with the Cinderella live-action and doll and dress-up. I think we actually sold more of the non-dress product areas for Frozen, i.e. the Olaf snow cone maker, the Switch-Em-Up Olaf, the Cinderella toddler doll and so on. I just don't have the actual dress-up part in front of us.

Okay, maybe I'll follow-up that separately then. And again, something Linda was talking about and I know you don't give the quarterly guidance, but directionally would you expect the bottom line in the second quarter to show improvement versus last year? I mean this is a tremendous improvement in the first quarter. Would you also expect the bottom line in the second quarter -- I'm not asking for a profit forecast -- but do you expect that to be an improvement in the per-share loss I assume compared to last year?

Actually, you've got two things that are going on is, one, we have fewer shares, so it will have a negative impact in 2015. So in a loss quarter, we still expect Q2 to be a modest loss, but we expect it to be lower loss in dollars because the share count is about 2.5 million less. It will actually work the other way.

Q2 last year, we were just under 31%. Our gross margin was 30.5%. So the differential is lower but in leveraging our infrastructure, we do expect to have -- and we'll have a full quarter of -- actually no, we won't have a full quarter of interest in 2014, so a couple of things that are -- in terms of the comp. We issued the notes at the end of third quarter. So there are some offsets. Net-net, we expect net income or actually the net loss to be lower but the EPS about the same.

Okay. That's helpful. And what's the tax assumption -- what's the cadence on your tax assumption as the year goes on? It's kind of weird to have a tax provision in a loss quarter. Would you expect the same thing in the second quarter?

Yes. It has to do with the timing of the taxable income in the different territories.

Got it. I'm assuming that. I just wanted to confirm that that is going to be the case.

Yes.

Okay. And then one last thing, if you wouldn't mind just repeating, Joel, the CapEx, the CapEx numbers for the first quarter year-over-year.

It was $3 million in 2015 and it was $1.2 million in 2014, still on track to $12 million for the full year.

Okay, thank you.

Ed Woo, Ascendiant Capital.

I had a question in terms of FX impact. Did that impact your sales in international? I know it was very strong, but did it pull back anything at all?

(multiple speakers) if you would, could you start over because it broke up on our side when you were starting. I'm sorry.

Sure. I had a question about FX impact. Was there any? Did it have any impact on your international sales?

No, it didn't. Most of our international sales are on an FOB basis in US dollars, so we have fewer or less international operations in local currency than some of our competitors and other multinational companies.

Okay. And what are you seeing in terms of economies? It looks like your international sales have been pretty strong. Have you seen any big difference between the economies and retail environment in international versus the US?

It depends on countries. I'll give you a good example. We've seen very strong growth in the UK while we've seen a lower growth in Russia due to the ruble. It's devalued about 80%. And even though the devaluation in Brazil with the currency, we are getting growth in Brazil and a lot of these other emerging markets.

And so I would tell you -- and I'm grabbing the sheet -- where we've been focusing on, we are growing. United Kingdom we've grown. France we've grown. Ireland we've grown. Italy we've grown. Almost every territory from Australia, Denmark, Mexico, United Emirates and Germany. So all of these territories we are growing and then we're also growing in emerging markets as China, there's other areas that we have not announced. So we are very nimble in how we manage our international business and very aggressive at the same time, but we see no major impact, only where there's been a dramatic amount of currency fluctuation, like Russia.

Great. Well, thank you and good luck.

Thank you.

Thank you. And I'm showing no further questions at this time. I will now turn the call over to Mr. Stephen Berman for closing remarks.

Everybody, thank you for your time today. We will have some follow-up calls throughout this morning and look forward to seeing people on the road as well as at our upcoming toy fair. Thank you very much.

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.