JAKKS Pacific Inc (JAKK) 2016 Q3 法說會逐字稿

Good morning and welcome to the JAKKS Pacific third-quarter 2016 earnings conference call with management who will review financial results for the quarter ending September 30, 2016. JAKKS issued this 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 Investors section.

On the call this morning are Stephen Berman, Chairman 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 then Mr. Bennett will provide detailed comments regarding JAKKS' specific financial and operating operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of the product lines and current business trends prior to opening up the call for your questions. (Operator Instructions)

Before we begin, the Company would like to point out that any comments made about JAKKS' specific future performance, events, or circumstances, including the estimates of sales and earnings per share for 2016, as well as any other forward-looking statements concerning 2016 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 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. This morning, we are going to review our performance during the third quarter, highlight some of the products we believe will allow us to have a strong fourth quarter, and bring solid momentum into 2017 and a number of initiatives we have undertaken to further our goal of transforming JAKKS Pacific from a toy company to a kids consumer products company.

Although most of our products performed as expected during the third quarter, our overall financial performance came in below our expectations with sales and EPS declining. We continue to expect much better year-over-year performance in the fourth quarter, but we have reduced our full-year outlook.

What we saw in the quarter was a host of crosscurrents. On one hand, overall year-to-date toy industry sales remain pretty strong, although some toy categories are decelerating, and we have several top sellers such as Elena of Avalor, Tsum Tsum, Nintendo, and Gift ems brand. Our role-play segment got a boost from the addition of Lego-themed costumes which we believe will become a staple.

On the other hand, in recent months, we have seen retailer after retailer in multiple non-toy product categories report weak results and lower their outlook for the year. Overall retail traffic in stores is weak, and while toy sales have been good overall, experience shows that when retailers see weakness in several categories, they sometimes cut purchases even in the categories that are selling well.

One of the biggest drivers of our sales expectations shortfall was the decision we made in third quarter to suspend shipments to a major US customer. This decision was difficult, but we felt it was the right thing to do. This not only had an impact on our third quarter, but also on our outlook for the year.

Another factor that curtailed our sales in the quarter is the lingering effect of the Brexit vote in the UK. The British pound has plunged in value since the vote in late June, reflecting a growing pessimism about the economic impact of the decision to leave the EU. Although our sales in the market are in dollars, it still hurt our sales because it effectively makes our product considerably higher in price than they used to be.

In addition, to the direct currency impact in the UK, we are seeing some softness among some Eurozone customers where economic concern over the impact of the Brexit is still weighing on consumers' minds.

We have also seen a number of major Hollywood films that have either not performed to expectations at the box office, or even if they have, they haven't generated the expected level of retail demand for toys. We see this in both the US and in our international results, and this led to lower than expected sales for our movie-related toys. The result is that overall sales were down approximately 10% for the quarter, whereas internally we had expected sales to be flat. For the full year, we are still expecting sales to grow, but at a more modest pace than our prior expectations, which we will detail later in the call.

While the quarter showed a number of sales challenges, we remain extremely confident that we will end the year with strong sales momentum.

In addition to continued strength in Tsum Tsum, Gift ems, Nintendo, and Disney Princess, we expect solid sales from new products such as Elena of Avalor and Moana, the two newest properties from Disney. Our reentry into the world of WWE is also going well, and we have already begun shipping products tied to Star Wars: Rogue One, the next film installment in the franchise that debuts in December.

During the current holiday quarter, Tsum Tsum will benefit from broader licenses with Marvel being added to the Disney characters and a broader geographic distribution and more retailers within existing geographies. Gift ems is one of just a handful of successful, collectible lines and has exceeded the expectations of retail buyers so far.

Along with one of the most successful new properties we have launched in years, Gift ems is our own IP, so it has terrific margins.

Finally, even though it has been three years since Frozen was launched and the property is down from its peak, it will still be a very strong contributor to our holiday sales. There is new content coming from the Walt Disney Company in the form of video shorts and new music. And just as when Frozen was doing extremely well in 2014, it took some business away from the other Disney Princes products, more recently received very good sales of non-Frozen Disney Princess products, and we are expecting that to continue in the fourth quarter.

So this adds up to a strong sales outlook for fourth quarter. Right now, we will hear more financial details of the quarter, as well as our revised outlook from our CFO, Joel Bennett. Following his comments, I will comment on several new initiatives we have recently announced, as well as some of the key drivers we could look for in 2017 and beyond.

Joel?

Thank you, Stephen, and good morning, everyone. Net sales for the third quarter of 2016 were $302.8 million compared to $337 million in 2015 with reported net income of $30.6 million or $0.82 per diluted share versus $45.9 million or $1.12 per diluted share in the year ago period. Included in the 2015 earnings was non-cash income of $5.6 million or $0.09 per diluted share related to the reversal of previous earnout accruals from our 2012 acquisition of Maui Toys. And adjusted EBITDA for the third quarter of this year was $42.7 million compared to $52.5 million in the third quarter of 2015.

Now moving on to our sales performance by category, worldwide sales of products in our traditional toys and electronics category decreased to $163.5 million for the third quarter of 2016 compared to $204.3 million in 2015. Sales in this category were driven by Disney Princess dolls and Star Wars BIG-FIGS, along with private label products, but there was an overall decrease caused by our suspension of shipments to a major US customer, declines in the UK and Western Europe that accompanied the recent plunge in the British pound, and by lower than expected sales of some movie licensed products.

Worldwide sales from our role-playing novelty and seasonal toys category were $139.3 million in the third quarter of 2016, up 5% compared to $132.7 million in 2015. This increase was driven by the popularity of Tsum Tsum collectible figures, Black & Decker role-play products, and the initial sales of Lego costumes, partially offset by lower than expected sales of some movie licensed products.

Included in these category numbers are international sales of approximately $72.9 million for the third quarter of 2016, down from $94.6 million in 2015. Again, this was driven by declines in the UK and Western Europe that accompanied the plunge in the British pound, as well as lower than expected sales of some movie-related products.

Gross margin in the third quarter was 31.4 percent, up modestly from 31% last year as a result of continuing market expansion efforts offset in part by product mix shifts and the deleveraging effects of the sales decline. SG&A expenses in the third quarter of 2016 were $60.6 million or 20% of net sales compared to $59.7 million or 17.7% of net sales in 2015. SG&A in dollars were up slightly due to higher marketing costs, offset in part by lower variable selling costs on lower sales, and the increase as a percentage of net sales is due primarily to a decrease in sales.

Operating margin was 11.3% down from 13.2% last year due to the sales decline and the deleveraging of fixed costs. Adjusted EBITDA for the third quarter was $42.7 million compared to $52.5 million in the year ago quarter, down due primarily to the decline in sales.

Consistent with the seasonality of our business, operations used cash of $39.4 million for the third quarter of 2016 compared to using cash of $39.9 million in the same quarter of 2015. As of September 30, 2016, our working capital was $247.6 million, including cash and cash equivalents and restricted cash of approximately $48.2 million. This compares to $271.6 million in the same quarter of 2015.

Accounts receivable as of September 30, 2016, were $272.3 million, down from the $292.9 million at the end of the third quarter of 2015, due to lower Q3 sales in 2016. This resulted in DSOs in 2016 of 83 days, up from 80 days in 2015.

Inventory as of September 30, 2016, was $75.1 million versus $81.4 million in the third quarter of 2015, resulting in comparable DSIs in 2016 of 43 days as we head into our peak selling season.

Capital expenditures during the quarter were $5.1 million compared to $4.7 million for the third quarter of 2015. For the full year, we expect capital expenditures to be in the range of $14 million to $15 million. The effective tax rate was 3.4% for the third quarter of 2016 compared to 2.9% for the third quarter of last year and is expected to be 17.5% for the full year of 2016, which could change if there is a shift in sales and, therefore, taxable income between the US and our international entities.

The diluted earnings per share calculation in the third quarter includes about $1.8 million in after-tax interest, added back assuming conversion of our convertible notes, an average of $16.4 million common shares outstanding during the quarter and an additional 23.1 million shares assuming the conversion of the convertible debentures.

During the third quarter, we purchased approximately 173,000 shares of common stock at a total of $1.5 million or an average of $8.69 per share, bringing the total to $29.3 million in stock and convertible notes repurchased under the current $30 million authorization.

The capital allocation committee, which is made up of independent directors, is very sensitive and attuned to the deployment of cash with the aim of achieving maximum shareholder value. This includes potential acquisitions, as well as the purchase of the Company's stock and debt, all of which we have done in the past and will continue to do so opportunistically.

However, it is also aware that a public announcement of repurchases prior to any transaction could impair our ability to maximize value. So the board has determined not to announce buybacks prior to executing them, but we will timely disclose them in the appropriate SEC filings.

Now to our revised 2016 outlook. Based on the full-year impact of the sales declines I mentioned before, we now expect net sales in 2016 to increase 1% to approximately $755 million with earnings of $0.56 per diluted share, down from our prior outlook of sales of approximately $800 million with earnings of $0.78 per diluted share. And we expect adjusted EBITDA to increase 4% to approximately $53 million compared to our prior outlook of approximately $65 million, reflected in the revised guidance as gross margin for the year of 31.8%, down slightly from our prior outlook of 32%.

Before turning the call back to Stephen, I would like to make a few quick points about Q4 and the first half of 2017. While I will not be providing our 2017 guidance until the fourth-quarter conference call in mid-February, we do want investors to understand that Easter in 2017 comes during the second quarter as opposed to the first quarter in 2016. The three-week shift is expected to cause a meaningful shift in marketing expenses from Q1 to Q2.

Additionally, with the Chinese New Year about two weeks earlier on January 28, inventory levels at the end of 2016 may be higher than normal to plan around the expected 10-day factory closures for the holiday.

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

Thank you, Joel. Before opening the call for questions, I wanted to talk about a number of initiatives we have recently announced, as well as other factors that leave us feeling good about our prospects in 2017 and beyond.

Last week, we announced the formation of Studio JP, a content development joint venture we have formed with Rising Anime, the animation studio of Meisheng Culture & Creative Corp. Meisheng is one of China's leading creators and licensee of entertainment content. In addition, they are our consumer product distribution partner in China. The goal of this new JV is to produce high-quality animated content that will be owned by the joint venture and for which JAKKS will have the merchandising rights in all markets outside of China. We believe it is very important to expand our own IP, and we have seen how valuable high-quality animation content can be over many years, and we are excited about this move.

The objective of this joint venture is to curate intellectual properties whose animated stories will provide (technical difficulty) generating opportunities in the areas of toys, apps, media and other consumer products. The content created will be owned by the joint venture and for which JAKKS will have the merchandising rights in all markets outside of China, but in China the products will be distributed by our joint venture with JAKKS Meisheng. We believe it is extremely important to expand our own brands and IP, and we have seen how valuable it is to expand in this direction.

In addition, the content that Studio JP will create will also support our own IP. You will see animated shorts featuring some of our new products beginning next year.

Over time, we will be able to monetize the content in a way that produces very high-margin revenue.

We also recently announced the acquisition of C'est Moi, a brand of revolutionary skincare and cosmetic products for kids. All over the US, Europe, and Asia, we are seeing the growing trend of keys using skincare and wearing makeup when they are performing, whether it is cheerleading, acting, dancing, or gymnastics. Kids need special products that will stand up to the rigors of active performance where they are running and jumping and possibly working up a sweat. But, more importantly, they need products that are safe for their young skin. C'est Moi was launched five years ago by a mom whose daughter had an adverse reaction to wearing makeup formulated for adults during a dance recital. We wanted to enter this category in the right way, so we are acquiring this young brand with the goal of rapidly expanding sales and profits. We are not buying the company for its current level of sales, but what we believe we can grow it into. We are entering in this strong category through an acquisition rather than simply developing our way in because we have been so impressed by the product and we believe this will allow us to grow quickly in this high-margin category. Those of you that have been following us for a long time know that this is not the first time we have ventured into a non-toy category. We have developed or acquired our way into pet products, the Halloween business, pool products, candy, juvenile products, and other categories.

For years we have seen an opportunity to make JAKKS into a company that is not just a toy company, but a kids consumer products company, and we will continue to look for ways to further this transformation. We have been in the process of hiring staff for this division with the best-in-class people from the cosmetic and skin care industry.

If you look at these two moves, as well as some of our new initiatives and product introductions, you will see that we are working hard to increase the portion of our business that is based on our own IP. It is our expectation that these two moves, the Studio JP JV and the C'est Moi acquisition will be accretive to earnings in 2017.

We are entering new, high-growth, high-margin categories which are in some cases less seasonal and less reliant on licenses. We love our licensing partners, and we are very busy adding new licenses and extending our current licenses. New licenses such as from the Walt Disney Company Beauty and the Beast, from DC Super Hero Girls and Lego and getting back into WWE, but we also think that the best long-term plan for shareholders is to also have a stronger portfolio of our own IP inclusive of licensed products. This will help to increase the predictability and repeatability of revenue.

Next year we are launching a new kids fitness initiative with a line of products that encourages active play. The product will be a new fitness factor that will include physical and digital components to capture the attention of six- to 12-year-olds and encourage them to get out and move.

We just wrapped up our fall 2017 toy preview meetings a few weeks ago, and we are very encouraged by the response of retailers, licensors, and industry partners to our fall product lineup for next year. Some of the products that we expect to continue to show growth into 2017 include the collectible lines of Tsum Tsum and Gift ems. Tsum Tsum features Disney characters, and the line keeps expanding in every way, including new Disney properties, new geographies, new retailers within existing areas, and new properties featuring the license. The Advent calendar, which is a $40 item, is one of our top selling items at major retailers this holiday season, and we think it will be a good staple for years to come. 2017 will be the third year we have the product line in the market, but we think it will be one of the best years yet.

Tsum Tsum remains a great example of JAKKS at its best, moving quickly to maximize opportunities with our value licensing partners while bringing creativity and innovation to the product. We are extremely excited about Gift ems. This collectible line is our own, so the margins are especially high, and we have been very happy with the initial results so far in 2016. We expect this line to more than double in 2017, and it could be up a lot more than that. The line isn't just about collectible figures. There are miniature dolls, each character with a back story and play sets. The dolls are diverse and are from all over the different parts of the world and teach girls not only geography, but they learn about different cultures. There is really no limit to how we can expand this line.

The world of Nintendo is back with a vengeance. Nintendo figurines, plush, and accessories are already selling very well for us, but we think next year should be a significant jump in sales because of the first time introduction of mobile games, featuring so many of its beloved characters. Mario, Luigi, Yoshi, Link, and so many other great Nintendo characters are well known to players of Wii and other platforms.

Well, starting soon, the audience will broaden dramatically when iPhone users can play games anytime, anywhere. As you look forward into 2017 and beyond, distribution and momentum continues to build around our entire Nintendo line.

Our Disney Princess (technical difficulty) is solid year to date, and there are several reasons to think our Disney girls toys will continue to grow next year. Elena of Avalor debuted on the Disney Channel in July and has been pulling in some strong ratings, and our sales of role-play and dress-up products took off immediately. Next year, our rights expand to include large dolls, and we have even more innovative role-play items for next year.

There are other Disney drivers next year we are very excited about. Disney's Beauty and the Beast, a live-action film starring Emma Watson debuted in March. She has a huge following of loyal fans, and we believe the film will bolster our Disney Princess business. Tangled the series will air on Disney Channel next year. Home entertainment releases from Moana and Beauty and the Beast next year should keep demand high, and we expect another good year out of Frozen with a new animated special airing in the holiday of 2017.

Our international sales in 2017 will benefit from the continued expansion of our direct sales efforts. Our new German sales office helped sales in Germany double so far this year, and we expect additional growth next year.

Our sales in China were up over 400% year to date. In addition, we will be adding a direct sales office in France in 2017. Partly as a result of this expansion of direct sales offices, as well as our strong performance, we will continue to secure broader geographical rights when we get a license. By the end of 2017, we will have direct sales offices in the UK, France, Germany and Mexico, some of the world's best markets of toys, and our partnership with Meisheng should allow us to see strong growth in Asia.

When we open up a direct office, we see a big increase in sales, but of course, we also have higher expenses. Over time, profits trend higher when we have our own offices, and we are pleased that this expansion is proceeding so well.

This ends the prepared portion of the call, and we will now open it up for questions and answers. Operator?

(Operator Instructions) Steph Wissink, Piper Jaffray.

I wonder if you can just talk a little bit about your decision to suspend shipment to that large retailer. I understand it was a hard decision, but just talk through your conversations internally as a team about isolating that risk. And then, maybe, Joel, if you could just tie that to the inventory balance, I would assume that the inventory would have been down potentially even a little bit more without that suspension, and you are seeing some nice improvement in your product margins. So maybe just help tie together those elements around concentrating the risk, minimizing some of the disruption and also seeing some improvement in your working capital.

Okay. Thanks. I will answer the first question regarding the suspending of shipments to a large US retailer. We have been discussing it internally, as well as we have been discussing it with advisers, some of which are large banks, and we came to the conclusion that, at this time, based off of what we have seen and what we have read, with regards to the retailer, that it would be best served for our Company to suspend shipments to this retailer to minimize any risk going forward.

As far as the inventory stuff, one thing, more than half of our business is done FOB China, so we typically don't have inventory produced for them. So, on that side of the business, we were able to reallocate the production capacity to other orders, other customers. But you are correct that we did have some inventory domestically allocated for them. So inventory would have been down a little bit more, and that will be sold in the ordinary course. So we are not expecting any closeout based on those inventory quantities.

Thanks, Joel. That is really helpful. And, Stephen, just a second question for you on the Nintendo partnership. I know you didn't spend a lot of time on it in your prepared remarks, but it is a pretty important partnership doing some innovative things. Can you maybe talk a little bit about what is on deck for Q4 and 2017 related to that partnership in particular?

We are actually extremely excited with Nintendo. Our line has increased 3 times what it was for 2016, going into 2017. Today, actually, I think at 7:00 Pacific standard time, Nintendo has an announcement being announced that should have some even more positive news that is coming out for them. They actually have a new game coming out December, which is Mario Run, which will be on the iPhone. They launched a system -- the NES system November 16 in the US and the following week in the UK. They have two mobile games coming out in March, and all of this is a positive to where Nintendo is really, really focusing on the marketing efforts. And we have seen what happened with the Pokemon Go and then what happened with the (technical difficulty) afterward, and we see retailers around the world. And we have master toy rights globally with Nintendo, excluding Japan, but we do sell into Japan with a distributor, that we believe next year will be probably the biggest year we have had with Nintendo because of all the new efforts and marketing that they are doing around their brand, which they have been very quiet for the past couple of years. But they are really having a strong put in, and we have geared up, retailers have geared up with us. So we are really excited for Nintendo next year.

That's great, Stephen. Thank you. And then, just final question related to C'est Moi. We are somewhat familiar with this brand just given our coverage of beauty but talk a little bit about it with respect to the development platform and personal care, what you are seeing in that end market -- it has been a strong growth market -- and then, also, how you expect to use your portfolio of your own brands or licenses or even the IP that exists and can start to expand into new distribution end markets.

This is great. C'est Moi, for us, is a category in which we are extremely excited about. The makeup/skincare category is one of the fastest-growing segments globally, and we believe we tapped into exactly the right brand, the right methodology for kids today. Years ago it was taboo for children to wear makeup, and with the huge influencers and the way that kids are now utilizing makeup at a younger age. We hit the right product line, the right makeup of the product line, which is organic and non-toxic, and it is really performance makeup and skin care. And we have shown this to a broad array of retailers, both overseas and in the US, and there is nothing but, I would say, accolades and receptiveness of people wanting it now.

But what we are doing is, we have hired a staff and we continue to hire staff in the skincare and makeup fields to make sure we launch it appropriately. It is one of the fastest-growing segments, as I mentioned, with Ulta, the Sephora, the Walgreens, all the retailers, the targets, everybody entered into these categories and giving it more space and are giving space to kids skincare and makeup. So it is something that we are really extremely excited about going forward.

We also have shown it to some of our largest licensors, and going forward, there will be two initiatives. One is C'est Moi as a brand, which we believe could be a separate segment of our Company, and then the other will be a tie-in with our licensee or licensor partners where we see fit and where it is appropriate for the brand. But I think this is just a start to something very big for our company and not just the company is excited, but our retail partners. And new retail partners and distribution partners are excited that we have this brand and what it looks like for the future.

Thank you, guys. Best of luck.

Drew Crum, Stifel.

Stephen, I wondered if you could address the performance of Disguise during the quarter. You mentioned the Lego costume line doing well, but I think you had a number of puts and takes in the quarter, Halloween being a Monday this year. I think in the past, you have said that the business tends to perform better when Halloween is on the weekend, not the case this year. Just address the performance in Disguise in the quarter.

Sure. Disguise will be flat year over year, approximately, or slightly up. There has been some nice areas of business, as you mentioned. Lego was a terrific new launch. We have the Lego Batman product that will ship in Q4, which is non-Halloween related, but is role-play related, and there is a movie that is coming out in February. But there were some misses that didn't perform well such as Warcraft, Alice in Wonderland. So there are some expectations for some of these to do better, but on the reverse side, Elena of Avalor has done extremely well.

So it kind of became a mixed bag, but we stayed flat or up slightly year over year, and having Halloween on a Monday has been good, but it is much better to have it on a Saturday or Sunday. But what it had done or what it has done, it allows people to have Halloween parties both male and female, throughout the weekend, both -- not male and female, but children and adults. But it really didn't have a major impact of growth when you see it like on a Saturday or Sunday.

Got it. Okay. And then, shifting to Star Wars, I didn't hear much comment on the performance of that business in the quarter. Just given the timing of the retail promotions this year versus last year, how much did that impact sales for the Company during the third quarter?

Because marketing hasn't really started for Rogue One, we really didn't have much of a forecast internally for Q3. Everyone is excited for the Star Wars movie, Rogue One, in December, and we are excited with what we have in place at retail globally, except Japan. We have strong commitments, and now we are just waiting for the movie. But it really didn't impact the quarter itself, and the movie is not until December, and Disney, with their huge marketing campaign and their PR behind it, retailers and ourselves believe in it very strongly.

Again, we only have a small portion of the Star Wars business in our BIG-FIGS, so we are not a huge -- we don't have a huge category of Star Wars product in our portfolio.

Got it. Okay. Last question, Stephen, I think you mentioned that you are seeing weak traffic. I presume that is bricks and mortar retail. Just remind us what you your exposure is to the online channel.

Online has actually grown -- it is growing well over double-digit this year, and it is not just online with online retailers, it is online with the brick-and-mortars. So it may be online with the Walmarts, the Costcos, the Toys "R" Us, the Targets, the Kohls, not just the Amazons or the like of (inaudible) and so on.

So we actually have increased our online sales as retailers. The brick-and-mortar retailers are really focusing on online sales. For instance, Walmart is doing online and in-store pickups, and they are very focused on that. Costco is very focused on online.

So we are getting -- it is growing at an extremely fast rate year over year. The foot traffic at retail -- and it is everything that we hear from retailers or we hear from stories of retailers' earnings or speaking with several investment banking firms or banking firms -- that traffic has been just slow for, call it, it was seasonal as well as the month of October. Not in the toy segmentation. Toys are actually performing well, but having less traffic just means less sales overall. So we are hearing that there is just less traffic to date in primarily brick-and-mortar outlets, not naming one in particular, just in general.

Got it. Okay. Thanks, guys.

Gerrick Johnson, BMO Capital Markets.

So this (multiple speakers). So this retailer that is facing challenges, how much do they represent of total sales? Is there any risk for any accounts receivable write-downs? And then, if you exclude this retailer, what was your retail takeaway or POS in the quarter?

We can't disseminate what each retailer does, more for competitive reasons. But this retailer itself was one of the largest US retailers, which we suspended shipments on, and our exposure of our receivables is nominal. So does that answer your -- there was another part of your question that I don't think I answered.

Yes. It was just if we just exclude that retailer, what was your POS in the quarter?

POS was throughout -- I would say throughout actually what we just previously mentioned, of several of the movie-based properties did not perform to our expectation, as well as the movies didn't perform to the expectations that everybody believed. Our sell-throughs from the Elena of Avalor across the board, I don't want to name -- there is Whimsy & Wonder, which is our private-label program at Target, (inaudible), Daniel the Tiger. We have had really, really strong sell-through. Gift ems, we had a successful launch. It has expanded at a few of our major retailers, and it is just growing and growing so far to date. But there are so many categories, it is hard to list the sell-through in each of our areas.

No, Stephen. I was looking more more or less looking for just a number, up 5%, flat, something like that for your total portfolio.

Yes. No, again, it is such a vast portfolio in so many different channels that there isn't a number that we can calculate. I mean, it is just -- what we can do is give a general feel across all of the lines.

Okay.

But, to answer, sell-throughs have been strong, have been very decent, and we are excited for fourth quarter and beyond.

Okay. And I just have a couple more here. The litigation charge, can you remind us what that was for?

We had a suit with a former licensor, and this relates to not our legal costs, but actual settlement that we paid in connection with that.

Okay. And then, JP Studio, is this -- I think you said that JP Studio in conjunction with some other things will be accretive next year. But what did this cost on the front end, are there startup costs we have to consider, and when do you see income from this specific endeavor?

I would say -- in our previous statement, we talked about Studio JP and C'est Moi of being accretive next year. It will be a little bit over $2 million in startup fees and with regards to more staffing than anything else and kind of presentations, whether it is at the makeup shows, as well as having to show at MIP and other type of conferences. But it will all be built into our next year's forecast.

Okay. Thank you.

(Operator Instructions) Ed Woo, Ascendiant Capital.

I had a question about -- you mentioned there was a lot of (inaudible) from the vent Brexit and devaluation of the pound. Do you see that as a concern that is going to linger long into 2017?

It is something that I think -- well, part of it was sort of the collateral aspect of just general sentiment, but to remind everybody, our general exposure is that not that we sell in local currency and we have a translation gain. It is that most of our international sales are done in US dollars, so our goods become relatively more expensive. And I think that, over time, as that settles in, we think that people will get back to their normal buying patterns.

Great. And then, you mentioned there were some pockets of weakness in certain European areas, and then you also mentioned that in the US that there were some categories that were not performing as well within the overall strong toy industry. How does that affect your outlook heading into this holiday? Do you think you are much more bearish than you were three months ago, or do you think you are about the same?

Well, we mentioned earlier that there were several movie based properties -- products that didn't perform well to our expectations, due to the movie itself or movies themselves that did not perform as well in the box office. So that actually had a hindrance in our future forecast of those product lines within those move-based products. Everything else, we see across the board our seasonal business is done well.

As I mentioned, Halloween, it is flat to up slightly. So we are seeing really -- the toy industry, I believe, has pockets of areas that are doing better than expected. Our girls area, which includes Tsum Tsum, Gift ems, Disney Princess which includes Frozen, all are seeing really strong and great sell-through. So it is a little bit of a mixed bag, but the ones that have impacted us the most are the movie-based properties that didn't perform well.

Well, well, thank you, and best of luck for this holiday.

Jeffrey Thomison, Hilliard Lyons.

I had a question -- several questions that you have already answered, so that only leaves me one housekeeping question for Joel, and that is you gave some third-quarter numbers on share count and interest add back. Given your guidance, what does that imply for fourth quarter on a basic account and for the year would be a fully diluted count, I guess?

Yes. Basic is expected to be $16.5 million and fully diluted 40 million shares.

40?

Yes.

Okay. What would the interest add-back be for the year? Do you have that?

Yes. $1.8 million net of tax.

Okay. Great.

Per quarter. Yes.

Okay. I will follow up later.

Linda Bolton Weiser, B. Riley.

Sorry if I missed this, but can you give the operating cash flow number for either the quarter or the nine months?

Yes, we can. That was in the call. It was about $40 million, both 2016 and 2015, use of cash for both quarters year over year.

So use of cash at $40 million in the third quarter of 2016?

And 2015. Correct.

Okay. And then, just on C'est Moi, I am just sort of interested in -- I mean, in your press release, you kind of named the prestige beauty market being something like $15 billion or something in the US. Do you envision expanding your capabilities in this area to enter the adult prestige market at some point? And then, on C'est Moi, where -- what channels do you envision it being sold in the US? Do you envision it being in department stores or like Toys "R" Us or both?

So C'est Moi is actually a kids-focused brand, but we will tell you, just from having people use it -- and we have been working on this -- on working in the, call it, the skincare, cosmetic field for almost two years, looking at companies, getting educated on this area. We are focused more for kids performance and makeup more than adults. The adult area is a mature area. Many companies have tried to get into the kid market. I know some people collectively that are very strong in this area of business. Our format and distribution plans are in the makeup field. So it would be like Ulta, Sephora, and it could be in the segmentation at a Target or a Tesco or in the Nordic where we have been speaking to various customers. It is in a makeup area business. It is not toy makeup. It is in a new, call it, distribution channel for JAKKS, which is a growing channel at retail.

So, if you are looking at -- it is not going to be at a kids area of focus -- that is solely focused like in toy or solely focused in clothing. It is really in the makeup department. We have met with several large companies, both in North America and in the US, and they are -- if we were able to gear up faster, we would be able to get it on shelves earlier. But there is different timetables when you are dealing with actually the manufacturer of the product. There is different testing procedures. Our normal way we are so quick to market, we would have this in the market in the first half of the year, but we are planning the second half of the year. We have YouTube influencers lined up that will help us market to kids. So it is a broad long-term launch, and if you look at the companies that are currently out there, the makeup industry and not just prestige, that is the information we have, is one of the fastest-growing areas of business globally.

So we couldn't be more excited. We have met with retailers. They want it faster than we could actually produce it, but we want to launch it and market it correctly because this is a long-term process and initiative for JAKKS.

Okay. That's helpful. Thanks. And then, on the Maui earnout reversal, is that a benefit in the quarter, and is that included in the $42.8 million of EBITDA?

That was related to the third quarter in 2015, and it was not in the calculation of EBITDA.

Okay. And is that -- that will not occur in 2017, will it?

No. Linda, it was from -- it was in the comparison. It was in Q3 2015, not in 2016.

Not in 2016. Yes. The earnout period ended in 2015.

Okay. Got you. Okay. That's all for me. Thank you.

I will now turn the call back over to Stephen Berman for closing comments.

Thank you, everybody. We appreciate the time that everyone was on the call, and we look forward to our upcoming analyst meeting and continuing investor meetings throughout the year and looking forward to 2017 and beyond. Thank you very much.

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