JAKKS Pacific Inc (JAKK) 2015 Q3 法說會逐字稿

Good morning, and welcome to the JAKKS Pacific third-quarter 2015 earnings conference call with management, who will review financial results for the quarter ending September 30, 2015. JAKKS issued its earnings release earlier this morning. Presentation slides containing information covered in both today's earnings release and call are available on our website in the investor section.

On the call this morning are Stephen Berman, who was recently named Chairman of the Board, in addition to his responsibilities as Chief Executive Officer; and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, and 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. (Operator Instructions).

Before we begin, the Company would like to point out that any comments made about JAKKS Pacific's future performance, events, or circumstances, including the estimates of sales and earnings per share for 2015, as well as any other forward-looking statements concerning 2015 and beyond, are subject to Safe Harbor protection under federal security laws. These statements reflect the Company's best judgment based on the 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 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 would like to turn the call over to Stephen Berman.

Good morning, everyone, and thank you for joining us today. Third-quarter financial performance is in line with the roadmap we set for the year, and we are confident that we are on the right track to achieve our full-year 2015 guidance.

Beyond this year, we are already excited and looking forward to 2016 and 2017. Our current momentum continues, with margins steadily improving as we increase profitability on our planned sales projections. We are more profitable on current sales and more efficient with operating expenses in what is shaping up to be a strong and solid year.

We were up against unusually high comps from last fall with the meteoric sales of our Frozen toy product lines, especially Snow Glow Elsa, an industry phenomenon. But we knew this going into the year, and we planned accordingly. We continue to see strong demand for our broad array of categories, licenses, and brands, and we are well positioned for the retail success this holiday season.

Reiterating what I mentioned last quarter, we remain laser-focused on the core aspects of our business strategies: leveraging our P&L by concentrating on margins, pursuing operational efficiencies, strategically growing international and emerging markets, and continuing to create consumer demand across our broad range of categories.

Receiving an extra boost of consumer awareness, many of our key drivers such as Hulk Smash, Max Tow Truck Turbo, and Sing-A-Long Elsa have recently been in the spotlight with various retailers, industry experts, and media touting them as hot toys for this holiday season. The Big-Figs line is performing well, and leading the pack is the wide assortment of Star Wars: The Force Awakens figures. JAKKS was a part of the Disney Consumer Products global unboxing event leading up to Force Friday on September 4, which marked the global launch of The Force Awakens merchandise.

Our Star Wars Big-Figs line was a standout at retail. More than 130,000 fans attended the record-setting midnight opening events in the US and Canada alone. Just this week, ticket sales for the movie's opening in December created global excitement, and our 31-inch scale figures appeared on the Great Wall of China. Earlier sales indicate that both kids and collectors are responding well to these oversized figures with great value.

Core Frozen POS continues to remain strong for us. We are especially encouraged by the consumer response to Sing-A-Long Elsa, and the Do You Want to Build a Snowman jewelry box. The overall success of our fall Frozen line is indicative of the continued strength of the property, and its retail performance has provided buyers with confidence for another strong year in 2016.

A new bright spot in our Disney girls line is the TV promoted Little Kingdom segment, which features miniature Disney Princess characters with mom-approved play makeup. Girls are responding positively to this new, innovative play pattern and unique form factor.

Retail sales of our core line of Disney Princess dolls, dress-up, and role-play are solid. We introduced low-priced impulse items such as Disney princess themed shoes, tiaras, jewelry, and much more. These accessories are driving incremental volume with consumers purchasing more accessories along with Disney Princess dresses than in the past. In addition, the Color of the Sea Ariel doll is also performing well at retail.

With a rich and deep line of Nintendo figures and plush toys, our retail point-of-sales for these toys remain strong. Early readings on the Nintendo Mario Kart Anti-Gravity Racer RC is encouraging, and the TV commercial for this RC is just beginning now.

In the third quarter, JAKKS digital division and its DreamPlay initiatives focused its efforts on releasing companion apps for several new toy introductions, including Animal Babies Nursery, MXS Big Air, Street Dogs, 3DIT Character Creator, and 3DIT Animal Creator. This quarter we will be releasing several new standalone sport apps under the Action Shot Sports brand, including football and soccer.

We consolidated our seasonal business into one division this year, which included Moose Mountain and Kids Only!. The licensed activity tables, ride-ons, ball pits, and game categories were all up in the third quarter. Our evergreen products, such as the Wave Hoop, Skyball, and Sky Bouncers continue to sell well, while the water toys and outdoor category business winds down in the third quarter.

Our focused approach to grow our international presence continues to pay off with another record quarter. We have strategically increased our overhead to support increased operations in various key markets. Europe continues to do well, as does Latin America. We have extraordinary success across many of our product lines, particularly with Frozen and Star Wars.

Retail sales in international markets have already started strong, out of the gate, for the fourth quarter. We now ship to more than 65 countries through our direct sales organization, as well as we sell to more than 300 distributors and retailers outside of North America.

Historically, the week to Halloween is when we see the biggest uptick in retail costume sales, so we will have more to report in the next quarter. We did have a strong sell-in to the retailers going into Halloween, with clear-cut winners in our girls and boys costume lines.

Some of our more popular costumes expected to be this year are Disney's Descendents, Disney's Pixar Inside Out, Hasbro's My Little Pony, Disney's Cinderella for the live-action movie, Disney's Frozen, Microsoft's Halo, Nintendo's Super Mario and Legends of Zelda, and Saban's Power Rangers.

I am especially enthusiastic about our current products across the diverse brands, licenses, and categories on shelf for the fourth quarter. The first nine months of the year have positioned JAKKS well, and we are confident going into the holiday season. Our product lines are also striking a chord with our consumers.

Now I would like to turn the call over to Mr. Joel Bennett to review our financial results for the third-quarter 2015. And then I will give further updates of our business for the remainder of 2015, and an early look into 2016.

Joel?

Thank you, Stephen, and good morning, everyone. Net sales for the third quarter of 2015 were $337 million compared to net sales of $349.4 million reported in 2014. Reported net income for the third quarter was $45.8 million or $1.12 per diluted share. This compares to reported net income for 2014 of $44.1 million or $1.03 per diluted share. And adjusted EBITDA for the quarter was $52.5 million compared to $52.8 million achieved in 2014.

Net sales for the 2015 nine-month period increased 4.7% to $582.3 million compared to $556 million in 2014. Reported net income for 2015 was $32.6 million or $0.89 per diluted share compared to net income of $18.7 million or $0.61 per diluted share in 2014. And adjusted EBITDA for the nine-month period was $53.1 million compared to $42.4 million in 2014.

Worldwide sales of products in our traditional toys and electronics segment increased to $204.3 million for the third quarter of 2015 compared to $173.8 million in 2014. And traditional toy sales increased to $332.7 million for the first nine months of 2015 versus $259 million for the first nine months of 2014. Sales this quarter in this segment were led by Disney Frozen toddler dolls, Nintendo plush toys and figures, and Star Wars figures, driving the category to an overall increase this quarter.

Worldwide sales from our role-play, novelty, and seasonal toys segment were $132.7 million in the third quarter of 2015 compared to $175.6 million in 2014. And sales for role-play, novelty, and seasonal toys for the first nine months of 2015 were $249.6 million compared to $297.2 million in 2014. Disney Princess dress-up and role-play, including Frozen, and Disguise Halloween costumes led sales in the category this quarter.

Included in the category numbers are international sales of approximately $94.6 million for the third quarter of 2015, up from $67.4 million in 2014. And international sales for the first nine months of 2015 and 2014 were $165.6 million and $107.2 million, respectively. Disney Frozen and Princess dolls, Nintendo, and Slugterra products drove the increases in 2015 sales in the international markets.

Gross margins for the third quarter of 2015 and 2014 were 31% and 27.1% of net sales, respectively. And gross margin for the first nine months of 2015 was 30.7% of net sales compared to 28.1% of net sales last year. The increase in gross margin during the third quarter is due, in part, to ongoing cost-reducing efforts and lower license minimum guarantee shortfalls in 2015, and product mix shift away from higher competitively priced Disguise sales in 2014. And the increase in gross margin for the nine-month period in 2015 is primarily due to license minimum guarantee shortfalls and inventory impairment charges taken in the second quarter of 2014, and higher competitively priced Disguise sales in 2014, in addition to ongoing cost-reducing efforts and lower license minimum guarantee shortfalls in 2015.

SG&A expenses in the third quarter of 2015 were $59.7 million or 17.8% of net sales as compared to $50.9 million or 14.6% of net sales in 2014. SG&A for the first nine months of 2015 was $141.6 million or 24.3% of net sales compared to $132 million or 23.8% of net sales in 2014. The increases in SG&A in dollars and as a percentage of net sales is due primarily to higher media buys and co-op advertising in 2015, as well as increased temporary help incurred on the fulfillment of domestic shipments. We are reengineering processes and investing in capital equipment that will enable us to reduce these costs significantly beginning in 2016.

Consistent with the seasonality of our business and on higher year-to-date sales, operations used cash of $40.2 million for the third quarter of 2015 compared to using cash of $72.5 million in 2014. As of September 30, 2015, the Company's working capital was $271.6 million, including cash and equivalents and marketable securities of approximately $81.2 million.

Depreciation and amortization was approximately $7.4 million in the third quarter of 2015 compared to $8.6 million in 2014. Capital expenditures were $4.4 million for the third quarter of 2015 compared to $1.8 million for the third quarter of 2014. For the full year, we expect capital expenditures to be in the range of $14 million to $15 million.

In 2015, other income included a credit of $5.6 million for the reversal of the remainder of the Maui acquisition earn-out liability based on their expected 2015 results, which will not be sufficient to trigger an earn-out payment. In 2014, the Maui earn-out adjustment amounted to $5.9 million.

As for our tax rate, the effective tax rate for the quarter was 2.9% and is expected to be minus 13.1% for the fourth quarter and 14.6% for the full year. This could change if there is a shift in sales; and, therefore, taxable income between the US and Hong Kong entities.

Accounts receivable as of September 30, 2015, were $292.9 million, down from $304.3 million at the end of the third quarter of 2014 due to lower Q3 sales in 2015, resulting in DSOs in 2015 of 78 days, comparable to 2014.

Inventory as of September 30, 2015, was $81.4 million, down as expected from $88.8 million in the third quarter of 2014, as we continue to sell through inventory brought in domestically due to high demand for our products. This resulted in comparable DSIs in 2015 of 40 days as we head into our peak selling season.

The Company continues to expect net sales for the full year of 2015 to be in the range of $730 million to $740 million, with earnings in the range of $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 just wrapped up our fall toy preview meetings a couple of weeks ago, and we're even more encouraged by the fantastic response from retailers, licensors, and industry partners to our fall 2016 product lineup. This comes on the heels of the similar response we received to our spring 2016 line, which is shaping up JAKKS for a strong 2016 year.

Disney's Tsum Tsum, based on the popular app which now has more than 50 million downloads, have truly created a sensation. JAKKS' highly anticipated collectible Tsum Tsum figures will launch at Target this November, and then will be in full mass distribution in early 2016. Next year, JAKKS will be launching over 150-plus characters from Disney's vast portfolio of properties. Retailers and consumers can't wait to get their hands on these collectible Tsum Tsum figures.

Disney's Publishing developed Star Darlings and launched with pre-teen chapter books, online content, and apps. In November, our Star Darling line of dolls, accessories, and activity items will launch exclusively at Justice stores. The line will be in full mass distribution in early 2016. And as the property gains momentum, Disney will support it with additional content such as music and much more.

JAKKS has also taken over as a master toy licensee for Sofia the First in EMEA and Latin America in 2016. We will launch a line of dolls, accessories, play sets, role-play, and dress-up items. Elena of Avalor, Disney's first Latina princess, will be introduced in a tentpole episode of Sofia the First next summer. We will launch a tight line of role-play and dress-up items for Elena of Avalor next year.

The Star Wars: The Force Awakens movie premieres in December, and new waves of Star Wars Big-Figs will continue to hit retail shelves. Next year, we will have another incredible lineup of Big-Figs tied to major theatrical releases. In the first half of 2016 alone, we will introduce large-scale figures Batman versus Superman, Teenage Mutant Ninja Turtles, and Warcraft.

Also in 2016, we have a new line extension in the Funnoodle category with a Fun Heroes line. It's a new line that combines action play with water play. We have support from several retail customers, with more coming on board.

A new innovative sports game in the Maui line has been well received, as well. Plus, new licenses such as Nickelodeon's Blaze and the Monster Machines, Elena of Avalor, Moana, and Spider-Man Adventures, just to name a few, for our ride-on, ball pits, games, and kids furniture categories.

We have already locked in several retail promotion programs for the first half of next year. And we are working with our retail partners to create customized design displays, expanding our distribution and showcasing our products in a new way to consumers.

Our new pet line has been very well received so far, and we expect 2016 to be a turnaround year for our pet business. We will be launching with our own IP, and have added a new Disney license to our pet division. We have placement confirmed in several key retailers and continue to work on expanding this business.

In addition, in 2016, we are extremely excited that Disguise will launch the first-ever Lego licensed customs. Retailers are already clamoring for these for the next Halloween. Also high on retailers' requests for next year are Warcraft, WWE, Powerpuff Girls, and Shopkins, plus The Secret Life of Pets and Disney Princess Belle, Ariel, and Rapunzel.

Looking forward, we are focused on executing worldwide, with strong pipelines of products already in the works. We have done a great job of aligning ourselves with the most prolific storytellers in the industry and have expanded our slate of entertainment licenses, in addition to building on our own JAKKS original IP.

This ends the prepared portion of the call, and we will now open it up to Q&A. Thank you very much.

(Operator Instructions). Steph Wissink, Piper Jaffray.

Congratulations, Stephen, on the Chairmanship.

Thank you very much, Steph.

Just a couple of questions from us. First, I think maybe Joel, you mentioned briefly some shifting in some of the order flow, and I just wanted to follow up on that point; if you could talk a little bit about maybe the magnitude of some of the shifts that you saw between Q3 and Q4, and if that related specifically to Disguise or another portion of the business.

And then, Stephen, just your enthusiasm around some of the product initiatives: I'm wondering if you can help us appreciate the trend line in the business and how that might shape up, relative to your full-year guidance, where you feel like you are trending within that range. Thank you.

Just real briefly on the shift, the buying patterns of the retailers have been shifting probably for the last decade. It is normal puts and takes, based off of sometimes logistics and whatnot. But it was definitely within our range of expectations to be able to achieve the full year, which we are highly confident about. But nothing remarkable about it, this quarter.

And Stephen, on the guidance? Maybe talk a little bit about --.

For the remaining part of this year, actually -- and going into, I'd say, the first half of next year, because it blends both together -- across the categories, it's tough, because when we name a license like Hulk, we have probably one of the top toys this year, called Hulk Smash. But in addition, the Hulk license goes through various segments of our business, from Moose Mountain to Kids Only!, and so on.

But the depth of the line from our Sing-A-Long Elsa, our general Princess line, our Build a Snowman jewelry box, our Ariel bath toy, in the seasonal area our PAW Patrol, Minions and Frozen. In Halloween, we have My Little Pony; Descendents is a sell-out in our Halloween segment. It has done well beyond what we expected. Cinderella has done phenomenal; Inside Out, Power Rangers, just general Disney Princess, Legend of Zelda.

There's a lot of excitement. And we've met with a lot of our retailers worldwide over the last, I'd say, six weeks. Not surprisingly, but the retailers are very excited about the toy industry.

There are areas of the industry that have slowed. There are categories that aren't overall doing well. So some of the open-to-buys at retailers have, I would say, slowed down for the moment, but has nothing to do with JAKKS' product, per se. So, overall, our products in all of our categories, except for maybe a couple, are doing extremely well with sellthroughs.

The international segmentation of our business, as you can see, is growing exponentially, not just from first quarter to second quarter. I think we had our best third quarter; going into fourth quarter is extremely strong. We are investing a lot of money internationally. I just recently came back from China, which I had been there six times this year.

A lot of things are really hitting on the mark, so we're just really overall excited because we have the right brands in the right categories. So we're not just looking at a certain license and a certain item to make our year. It's all of it combined that makes our year. So it's a really comfortable feeling to be in right now of having such great licenses and being leaders in these categories.

So we're really excited for this year. And next year we got such a lineup: Tsum Tsum, which I'm not sure if everyone understands; I brought it up on our previous call. It is probably one of the hottest properties in Japan in over a decade. Our lineup of Tsum Tsum figurines and stationery, the receptiveness from I would say all retailers have been extraordinary.

The Lego lineup of product, which I have not gotten to see because of the relationship we have with Lego doesn't allow me to see the product but they allow us to do the product. The Lego line is worldwide and is exceptional. So there's just a lot to go through. And it's not just for fourth quarter; it's really early into spring and the remaining part of 2016.

Sean McGowan, Oppenheimer.

I have a couple, as well. First, can you talk about how your Halloween sales are going? There has been some stories of Halloween costume sales being down. And I know you've said in the past, even though when Halloween falls on a Saturday, it's usually a good thing for you guys. So could you comment on that, please?

Thank you, Sean. For JAKKS, we are -- in our internal forecasts, we are on track or probably will exceed our external forecasts. We had a drop-off last year as Marvel wasn't part of this year's line, but it's also picked up in several areas like Descendents, Inside Out.

But what we're looking at -- and I've been reviewing data, and it was earlier on, I think, this morning on CNBC -- that it looked like Halloween sales, which means not just costumes: it means decoration, inside the house, outside the house, candy -- was tracking 7% below the year before, through NRF. It was on CNBC. But for JAKKS itself, we are right on track with what we expected, or a little bit better than what we expected in our February internal forecasting.

So for us, we see things good. But this is just a data point that we've seen. And remember, Halloween sales -- the last eight days of October is when the majority of the Halloween sales occur.

Right. So in other words, you are probably down versus last year, but that's because of that Marvel shift --?

Yes, that was because of more so Marvel than anything else. But we're up from our internal forecast.

Okay. All right, thank you. And when Joel broke out the segment sales data, I was a little surprised to see the traditional toy side doing much better than the role-play side. Let me just ask, is Frozen up year-on-year in this quarter?

Great question and understanding. So Frozen is up for us internationally dramatically year-over-year. Frozen is extremely strong for us this year in the US, but not as euphoric or the frenzy that we had last year. So, call it the role-play dress-up, we did an extraordinary amount of various dresses, line of dresses, general dresses; and the Snow Glow Elsa doll, those were really dramatic sales.

But besides that, everything else in those areas are strong. But we really had exceptional numbers in those two areas of businesses last year.

Scott Hamann, KeyBanc Capital Markets.

In terms of the gross margin, the fourth quarter looks like it's implied up a little bit to get to your 31% number, so I just wanted to make sure that that was still a good number for you. And with sales coming down, I guess implied almost $100 million in the fourth quarter, what is driving that gross margin to be better?

And then secondly, just in terms of your -- it sounds like you are doing a lot on the gross margin side, but also on the operating expense side, to make the business more profitable longer-term. Can you give us a sense of where, maybe from a gross margin or operating margin basis, you expect this business to be over the next couple years, as you unroll those initiatives? Thanks.

Sure. As far as Q4, we started -- Q4 of 2014 was really an inflection point for us, where we started to really gain ground on improving margins from re-costing items. A lot of the legacy items have generally lower margins, and we can't effect any price increases on a lot of that product. So we've gone back to the factories, and actually switched factories, in some cases, to achieve higher margins.

And so we started with the lower-hanging fruit. And through those continued efforts, we expect the 31%-plus to be achievable to get to the 31% for the full year. So we're very encouraged by, again, what we achieved beginning in Q4 of last year, and we just see that continuing to roll out as we work through the many, many SKUs that we have.

As far as general guidance, going forward, our expectation is that we can grow gross margin about 100 basis points per year. In 2015, we are actually ahead of target, since we are expecting to hit north of 30%, or call it approximately 30%, in 2015; middle of 2014, again, hitting the inflection point. We are seeing that we could achieve 31% for the full year.

As far as operating margin, our target for this year was in the mid-single digits. And again, through leveraging the infrastructure, we expect to be able to lever that up as well. We don't have the same scale as some of our bigger peers, but we certainly think we can expect to get to high-single-digits over the next 3 to 5 years.

Drew Crum, Stifel.

Stephen, you had some fairly positive comments concerning your Disney business for 2016. I know it's a little early to be giving forecasts, but do you think Disney can grow for the Company in 2016? And then specifically to the Disney business, can you quantify what you are inheriting in terms of the Sofia the First license? Thanks.

So, Disney business is so broad, because when we speak Disney, we speak Disney as The Walt Disney Company, which is the owner of the Disney Princess, the owner of Marvel, the owner of Lucas, so it's a very broad question.

But where we picked up internationally the master rights in EMEA for Sofia the First, which is the dolls, the dress-up, the role-play. So we picked up a broad array of categories for Sofia the First, just internationally. And we're excited as well as we've had our retailers in from I'd say Tesco, [Carston], a bunch of the retailers around the world, from Australia, and they're excited.

We also picked up -- which I think everyone should Google -- Tsum Tsum, which is T-S-U-M, T-S-U-M, which means stack-stack. Disney has over 50 million downloads from the game in Japan. It's one of the hottest phenomenons in Japan. And we're growing that, which is outside of the normal, call it, The Walt Disney Company evergreen platforms.

We have Alice in Wonderland, which goes from the doll line to some, I believe, role-play, in addition to Halloween. And when Alice in Wonderland came out -- I believe it was five years ago; I'm maybe off on the timing -- it was one of our top-selling Halloween costumes, five years ago. We also have the Elena of Avalor.

There's a lot of different areas, from Descendents, which I think will grow; Inside Out; Frozen is going to have a lot of momentum next year because Disney has a lot behind it; Cinderella, the Marvel platform, which is just a machine in itself. We have it in various segments from Moose Mountain, our Kids Only!. They have Captain America next year.

So, you have Moana, which is next year. The movie I think is November 23. So in the Disney pipeline, it's an ever-growing pipeline that just doesn't -- it doesn't let up. So when there's some areas that are in a transition period, there's other areas that are just in a growth period. So for Disney, it's great. We have the rights. A lot of rights that we have in the US, we have the rights for China with Disney.

So on a Disney pipeline, again, The Walt Disney Company, which is very broad, there's so many different segments of it. I think we talked about it earlier, with a doll line that we're working with them in Publishing called Star Darlings that we're working with them very closely, and throughout the US and internationally. So there's just a real large pipeline of products from the Disney Corp.

And then there's a large pipeline of products that we're doing in on our own, our own IP. We have a large pipeline of products that is not Disney. But like WWE, we have in various segmentations, in role-play, dress-up, Halloween, Make It Pop. We have Batman, Superman.

Our pipeline going forward is probably one of the strongest pipelines of licenses, but not just strong licenses; they really bland appropriately within our categories. So Hasbro's licenses in our Halloween category are extremely strong. They are really strong in our Moose Mountain and Kids Only! area, so we really have just great content within our categories.

And Stephen, what markets do you have the Tsum Tsum license?

We have it in North America and some other markets. I don't want to give the incorrect input on the other territories. But I do know North America, and still working on some specific other territories for the actual toys, which are the figurines, as well as the stationery. But it's a pretty broad line.

Okay. Just one last question. Joel, can you remind us what you are forecasting as far as free cash flow is concerned for 2015?

Yes. It's $32 million to $35 million.

Sean McGowan, Oppenheimer.

I had a couple of others before, I didn't get a chance to ask. So, we were talking about the role-play, and what's really driving that decline? If your Frozen stuff is holding up well, maybe the role-play is not, but what else is driving that decline?

I would say probably we shipped so many dresses last year in the Frozen category of business, that that's probably driving the decline. It was such a dramatic amount of dress-up, and we have dress-up -- we have the tiaras. But it was a -- remember the frenzy about -- it was on eBay, and the dresses were selling for so much. So I believe that's probably the biggest decline in the role-play.

Because then in just Frozen, our Sing-A-Long Elsa doll -- not Sing-A-Long Elsa doll -- it was our Snow Glow Elsa doll hit such dramatic units that those were the two big areas of Frozen.

But one thing I will tell you: Frozen is extremely strong. All the tertiary categories or peripherals, those are when a license matures, kind of slow down. But our core Frozen line is still extremely strong. It's a business on its own.

Okay, thanks. And then the last thing, Joel, would you mind repeating what the depreciation and amortization was in the quarter? I missed those numbers.

That was -- and to clarify, I think we had the same thing happen in the second quarter, as free cash flow for the year will be $130 million; $100 million from a reduction of working capital, and $32 million to $35 million from current-year operations. D&A for the quarter was $7.4 million, Sean.

Okay, thank you.

Gerrick Johnson, BMO Capital Markets.

What are some of the key international markets you've added infrastructure in over the last year? And where are you targeting going to in the future? And also what was the currency impact on the top and the bottom line for you in the quarter?

Okay, so on the currency impact, we really don't get dramatically affected, because we sell on an FOB basis, the majority of the sales on an international basis. And we do get affected slightly from the Canada currency and maybe a little bit with Australia.

But the areas in which we set up operations and hired people -- Germany was a brand-new set up, Mexico was a brand-new set up, China was a brand-new set up, and UK was a built operation. Because UK actually serves as, call it, the central area for the Nordic, for the EMEA. So those are the ones that we are -- we've put people on the ground and offices and showroom.

The next areas that we're working on that we'll have in place shortly is France, Spain, Australia, and Italy. So those are the ones that we're putting our people on the ground. The reason for that is now we've garnished a tremendous amount of product; and when you open up offices in certain territories, you're dealing with employment law, you deal with a lot of different restrictions and taxations.

So we needed to make sure that we had long-term product for each of these categories. And now that we do, in the many variations with the licenses that we extended, it allows us now to expand in these territories. And it allows us to expand really quickly. We're already doing really well. So we could have dramatic expansion, as we've seen, just by putting people on the ground.

Okay. So does this mean, going forward, there will be a shift from FOB shipments to these regions to more of a quote-unquote domestic delivery?

We'll still keep -- like we do in the US, we'll still keep it -- majority of it being an FOB business. There will be backup, like on TV supported items of domestic inventory. But I'd still say, like the way we have it in the US, it will be primarily an FOB business.

Okay. And if I can ask one more, please: fourth quarter, anticipate sales down, what? 35%, 40%, year-over-year. Should we see similar segment performance that we saw in the third quarter in the fourth?

That's a good question, Gerrick. I just don't want to miss --.

Yes, in general. Just again, the seasonality will be consistent. This time last year we had the Frozen frenzy, now it's -- we say jokingly just hot -- but all the categories are performing.

Yes, except, as we mentioned earlier, Halloween will be slightly down, so there is a mix. And I don't want to give you the incorrect answer. So if you call back, it would probably be better for us to work it out.

But there's a shift with -- there's a big pick-up in boys, because of the Star Wars. And then there's a shift lower in Halloween. So I just don't want to give you an incorrect answer.

All right. Thank you very much.

Linda Bolton Weiser, B. Riley.

I was just curious about the share repurchase pace. Is there any reason why you wouldn't get the $30 million done by the end of March 2016? And if you will get it done, then that signifies an acceleration per quarter, like over $10 million in the next couple quarters. Am I thinking of that the right way?

Look, I think the best way to put it is there's a few independent directors that have -- that when we put the purchase program in place, that allows the Company to purchase common stock and/or negotiate the convert notes. And it's reviewed very often by the independent directors. So it would be hard to say that it will be finished or won't be finished.

We did put it in place, and I know that the independent directors and Board have been working on the common stock, as well as working on converts. So, the goal is out there. We have the $30 million buyback, I think, through May. So there's a very good opportunity with it, but there's -- it just depends on the market and on the program.

To clarify, the date was simply a backstop for our lender, GE. We have no doubt that, at that time, if it hasn't been done, or if we have completed it by then, that if the Company wanted to do so, we could do an additional buyback.

Okay. So it could be that you could get it done, but through May rather than March?

No, it could be done within the period that we announced, I think. It just depends on the purchase plan that's been in place. But there's definitely a chance that it could be done by March. There's no reason for it not to, but there was a specific plan.

And it may not just be, again, the common stock. It may be also the converts. So it's part and parcel.

Okay.

Does that answer the question, Linda?

Yes, yes. So then, I know you said earlier -- I just didn't catch what you said about the Maui earn-out reversal. Did you indicate there would or would not be a positive influence on earnings on that for the fourth quarter? I just didn't catch what you said.

No. Nothing in the fourth quarter.

Okay. And then, of course, nothing in 2016 as well, correct?

Correct.

Okay. And then can you just talk about -- I guess you alluded to some increased investment on your SG&A line. And then you talked about some measures that are being taken in the future to reengineer certain things that might reduce those costs. Again, were you referring to SG&A, or was that more of a COGS thing in terms of the reengineering?

And then when you think about going forward, how should we think about the SG&A? I guess I was hoping it would be flat, at about $30 million to $32 million per quarter, give or take. But are we going to see it creep up as you invest, as your business continues to grow?

Well, there's two things: one, internationally -- I think I mentioned it earlier -- that we are investing in international. I think Gerrick asked the question about the new offices and so on, which does take investment. But that investment will be offset by the growth in sales, so I don't think that would be an impact to us of changing our true SG&A.

It would probably be an immediate investment. But on an annual basis we will benefit from it because of the sales and profitability that we'll see.

Joel, I believe, was talking about our re-costing of our legacy items.

The warehouse.

And we had additional costs that were our warehouse, which was the temporary help that was hired during this quarter. And we are in the process of investing to lower the actual temporary help, which will then allow us stronger efficiencies and lower the cost on an annualized basis. So I think that's what Joel was talking about.

So on your question of does SG&A change, Joel?

We expect to continue to lever. Some of the things that hit in the quarter were timing. We continue to expect to lever the infrastructure, as we have reduced it over the last couple years, and making targeted investments. And a lot of it is people, and we are doing it on a very cost efficient basis, so we don't expect SG&A to increase next year -- I should say, as a percentage. We're adding proportionate investment in those areas. But we expect to maintain the proportion going forward, and actually levering the infrastructure that we have in place.

Ed Woo, Ascendiant Capital.

Congratulations on the quarter, as well. I did have a question on -- you said earlier that Q4 sales are better than expected. Is that what I heard correctly?

And also, what are you seeing out there in terms of the retail environment? I saw quite a few of your peers have said that Q4 sales are likely to improve, just because people are timing sales better. And how do you feel about retail inventory right now?

As far as the Q4 sales, we're very confident that we're going to achieve that guidance that we had set out. We did indicate that there are generally, just the way the buying patterns of the retailers are, some shifts, and that occurs on a regular basis. So I don't know that we implied that Q4 was any better, other than the normal shift that occurs between quarters. But we're still looking at the same guidance, and very strong about that.

Yes, we feel very good about this upcoming holiday season, and looking into next -- the first half of next year, and next year, from where we sit today.

And what was your other question?

About retail inventory: do you feel that you have enough inventory out there? Unique throws me off; and no issues with supply chain getting products in?

Well, I'll speak for JAKKS. We are extremely comfortable with our current production, our current inventories that we've brought in for the fourth quarter, and getting ready for Chinese New Year, which is February, which is a unique time prior to Easter. So for JAKKS, we are feeling comfortable, very comfortable.

And the other part is, on retail inventories, there are inventories of other companies at retail which slows down open-to-buys at specific retailers until they've worked down their inventories. So, for us, we are feeling very good. And what we've heard from the various big retailers -- call it around the world, or call it Western Europe and North America -- that toy sales are strong. There are some areas or some categories that aren't doing well for them. But, overall, the toys sales, they are excited about.

Great. Well, thank you, and good luck.

Jeffrey Thomison, Hilliard Lyons.

It was hoping you could discuss your current relationship with WWE, and the scope of your recent deal with them, and what this means for future opportunities with them.

Well, first of all, we are pleased to be back in business with them. We looked at it from both sides, let bygones be bygones, and let's focus on what's needed. And what's needed was to have a great brand. And what's great from JAKKS is we have a great vehicle to get their brand out into the market.

And we went into specific categories in which other people weren't working toward. And we have a broad array of product that's being launched for next year, which is Halloween and role-play. And we have, I believe, action figures in the Asian Pacific which we are excited about. And there's other categories in which we are looking at for 2017.

So, it was really kind of -- it was time for both of us to be working back together again. They have a terrific boys brand, and we have a terrific development team that understands that brand for over -- I would say almost 20 years we've been working with them. So it was time for us to get back into business, and really work to build the business together. So, we're very excited to be working with them again.

So are you saying that next year, you will have presence in a certain number of categories, and then 2017 perhaps a little bit more in terms of categories?

Yes, that's correct.

Okay, great. That's all for today, guys. Good luck the rest of the quarter.

Steph Wissink, Piper Jaffray.

Just one follow-up on Tsum Tsum and Star Darlings. I think in both cases, you have exclusive this holiday season with specific retailers. But then, Stephen, you mentioned in your prepared remarks that you will go full distribution in the first quarter. Can you just talk about the magnitude of the step-up and the opportunities around those two properties? Thank you.

Obviously, you really did walk the showroom and listen to what people said. So, we actually are launching Tsum Tsum this year with Target. And then we have a complete rollout for -- starting in December, January, February -- to specific mass retailers, then all, just basically because of capacity. I think that number of units are well in the millions. So we're launching with Target this fall, and then North America, and I'm sure other territories early in the year.

And then Star Darlings is a collaboration between Disney, The Walt Disney Company, and JAKKS that we are launching first with Journeys during fall. And then it has a complete wide lunch with all major retailers for next year.

So, both of those are exclusive at the initial launch, and then go broad early in 2016. And very -- I will tell you, people -- Tsum Tsum itself and Star Darlings, that's why I wish people got to see it; it's really exciting when you give it to children, when you show retailers; it's exciting. We're really happy to have it, and we believe it could become a phenomenon. It's terrific.

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

Thank you very much.