Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

JAKKS Pacific, Inc. (NASDAQ:JAKK)

Q3 2008 Earnings Call Transcript

October 21, 2008 9:30 am ET

Executives

Genna Rosenbert - SVP of Communications and IR

Jack Friedman - Chairman, CEO

Joel Bennett - EVP, CFO

Analysts

Arvind Bhatia - Sterne, Agee

Drew Crum - Stifel Nicolaus

Ed Woo - Wedbush

Gerrick Johnson - BMO Capital Markets

Sean McGowan - Needham

Tony Gikas - Piper Jaffray

Jeff Blaeser - Morgan Joseph

Todd Schwartzman - Sidoti & Company

Operator

Good morning. My name is Sierra, and I will be your conference operator today. At this time, I’d like to welcome everyone to the JAKKS Pacific Third Quarter Results 2008 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-session. (Operator Instructions)

Thank you. I’d now like to turn the conference over to Ms. Genna Rosenberg. Ma'am, you may begin the conference.

Genna Rosenbert

Thank you, operator. Good morning, ladies and gentlemen. This is Genna Rosenberg, Senior Vice President of Communications and Investor Relations for JAKKS Pacific. Thank you for joining our teleconference with management of JAKKS Pacific to review results for third quarter and first nine months ended September 30, 2008.

On the call today are Jack Friedman, Chairman and Chief Executive Officer of JAKKS Pacific; Steven Berman, our President and Chief Operating Officer; and Joel Bennett, Executive Vice President and Chief Financial Officer.

Mr. Friedman will first provide an overview of the quarter and our operational results. And then Mr. Bennett will provide detailed comments regarding our financial results. Mr. Friedman will then conclude the prepared portion of the call with highlights our product lines and current business trends prior to opening up the call for your one-on-one questions.

Before we begin, I'd like to point out that any comments made about our future performance, events or circumstances including the estimates of sales and earnings per share for 2008 as well as any forward-looking statements are subject to the safe harbor protection under the Federal security laws.

These statements reflect our 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 our forward-looking statements.

For details concerning these and other such risks and uncertainties, you should consult our most recent 10-K and 10-Q filings with the SEC as well as our Company's other reports subsequently filed with the SEC from time-to-time.

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

Jack Friedman

Good morning, ladies and gentlemen. This is Jack Friedman. Thank you for joining us this morning to discuss our results for the third quarter and the first nine months of 2008.

As we expected, the third quarter was robust for JAKKS with traditional toys being the largest contributors. Third quarter 2008 net sales for JAKKS Pacific increased 12.4% to $357.8 million compared to $318.4 million in the third quarter of 2007. And sales for the first nine months of 2008 increased 10.8% to $634 million versus $572 million for the first nine months of last year.

At this time, we remain cautiously optimistic that we are still on track to our previous guidance for a year of growth for JAKKS Pacific. We expect traditional toys from our diverse product portfolio will resonate with consumers at retail who historically continue to buy holiday gifts for kids even in tough times.

We shipped many of our new fall items in the third quarter as retailers began to stock the shelves for holiday season and experienced strong sales in electronics, activity toys, dolls, action figures and pretend play products.

Last week, we announced the acquisitions of Tollytots Limited and Kids Only. Our two newest JAKKS's division, Tollytots Limited have as extensive line are of baby doll pretend play accessories mostly based on the Fisher Price and Graco brands.

And Kids Only is a leader in licensed indoor and outdoor kid sized furniture based on popular licenses. We expect that both will be accretive beginning in 2009. For 2007, combined sales of Tollytots and Kids Only was approximately $60 million.

Our financial position remains extremely strong and working capital is approximately $392.7 million. Including cash, cash equivalents and marketable securities of $192.8 million as of September 30, 2008. Leaving us with the ability to execute on additional acquisitions to further grow our business.

Before I get into more details about our outlook for the future, I’d like to turn the call over to Joel Bennett for a review of our financial performance for the first quarter of 2008.

Joel Bennett

Thank you, Jack. Good morning, everybody. Third quarter 2008 net sales were $357.8 million compared to $318.4 million in the same period of last year, an increase of 12%. Net income for the third quarter was $54.1 million or $1.70 per diluted share compared to $47.3 million or $1.45 per diluted share reported in the third quarter of 2007.

Included in net income are tax benefits relating to FIN 48 and other tax adjustments in the amount of $13.3 million or $0.41 per diluted share in 2008. And $1.4 million or $0.04 per diluted share in 2007, and $9.1 million or $0.18 per diluted share in pre-tax non-cash charges relating to the write down of certain of the Company's trademarks in 2008.

Net sales for the nine months ended September 30, 2008, were $634 million compared to $572 million during the same period in 2007 an increase of 10.8%. Net income for the first nine months of 2008 was $59.2 million or $1.88 per diluted share compared to the first nine months of 2007 of earnings of $55.6 million or $1.75 per diluted share.

Included in net income were the same adjustments as I mentioned previously. Now for our sales by product categories, worldwide sales of traditional toys, which include action figures, vehicles, electronics, plush, role play, dolls, seasonal products and promotional products were $332.4 million for the third quarter and $583.1 million for the nine-month period in 2008.

This compares to $299.8 million in the third quarter of 2007 and $524 million for the first nine months of that year. Sales in the third quarter were driven by our electronic toys, pretend play products, action figures, activity toys and dolls based on popular licenses, as well as our own internally developed brand.

Our craft activity writing products, which consists primarily of our Pentech and Flying Colors product lines, had worldwide sales of $20.6 million for the third quarter and $37.3 million in the nine month period of 2008.

This compares to $12.2 million for the third quarter of 2007 and $32.9 million for the first half of last year. We have several new activity toys including our Girl Gourmet Cupcake and Spa Factory lines which we expect will be strong contributors in this category for JAKKS in the future.

Worldwide sales of our pet products were $4.8 million for the third quarter of 2008 and $13.7 million for the nine month period. This compares to $6.3 million in third quarter of 2007 and $15.1 million for the first nine months of last year. Lower sales of our pet consumables were offset by sales of our AKC toys and other pet license products.

Gross margins for the third quarter of 2008 was 36.1% as compared to 39% in the third quarter of last year. And gross margins for the first nine months were 36% as compared to 37.6% over the same period in 2007. The decrease in margin is due to product mix and the write off of certain non-performing licenses in the quarter.

SG&A expenses in third quarter of 2008 were $71.7 million, or 20% of net sales, as compared to $59 million or 18.5% of net sales in the same period last year. For the nine-month period, SG&A expenses were $166.6 million or 26.3% of net sales as compared to $140 million or 24.5% of net sales for first nine months of 2007.

This increase is due to the write down of certain of the company's trademarks in the amount of $9.1 million in 2008 as well as increases in product development costs of $3.1 million for the quarter and $7.8 million for the year respectively in 2008.

During the quarter, we posted $700,000 in profits from the video game joint venture with THQ compared to $900,000 for the comparable period last year. For the nine month period of 2008, profits from the joint venture totaled $4.5 million as compared to $3.1 million for the first nine months of 2007.

Depreciation and amortization was $6.9 million in the third quarter of 2008 and $18.9 million for the first nine months compared to $6.2 million and $18 million respectively for the comparable periods in 2007.

Stock-based compensation was $2 million for the third quarter of 2008 and $6 million for the first nine months versus $1.5 million and $5.2 million for the comparable periods in 2007. Operations provided cash in the third quarter of 2008 of $20.1 million and $13.9 million for the first nine months compared to $13.8 million and $30 million for the third quarter and first nine months of 2007.

Our financial position remains very strong, as of September 30, 2008, our working capital was approximately $392.7 million, including cash and equivalents of $192.8 million. For the Tollytots and Kids Only acquisitions, we used approximately $27 million in cash, leaving us with a solid balance sheet with which to continue to execute on potential acquisition opportunities as well as continue our internal development of products.

We do expect to continue to grow our business by actively pursuing additional accretive and complementary acquisitions and executing on internal growth initiatives, including creating new products and securing new licenses to provide continued growth for JAKKS Pacific.

Accounts receivable at the end of the third quarter were $230 million compared to $209.1 million at the end of the third quarter 2007. DSOs were 58 days comparable to the 59 days in the same period in 2007. Inventory was $110.8 million at the end of the quarter, up from $93.8 million at the comparable period in 2007. This is a seasonally high number and we expect higher domestic sales than FOB sales, but we built up inventory for that purpose.

DSOs were 53 days compared 52 days in 2007 and capital expenditures were $4.8 million for the third quarter and $17.6 million for the first nine months in 2008 versus $6.1 million and $13.8 million for the comparable periods in 2007. We expect capital expenditures to total approximately $21 million for the full year of 2008.

With that, I will return the call back to Jack Friedman.

Jack Friedman

Hello again. We believe we have a terrific line up for Christmas 2008 and we previewed our 2009 line up at the Dallas toy fair last week to excellent response from our retailers.

We have major new initiatives and meaningful line extensions in all our product lines. Our Girl Gourmet Cupcake Maker is already doing well as retail and we're expanding this area significantly for 2009.

Our Spa Factory activity product lines, which features all of the ingredients for at-home spa parties, began shipping in the quarter to all major retailers with line extensions planned for next year as well.

We have several new exciting initiatives for next year for our core Plug It and Play TV game line which has been a catalyst for growth in several meaningful line extensions for JAKKS since its introduction in 2002. In the quarter, we shipped new tween titles, including the Hannah Montana Pop Tour Guitar that features ten original Hannah Montana songs as well as a Camp Rock version exclusively for Target stores with let kids play guitar just like their favorite Disney pop stars using the TV.

A brand of EyeClops Bionic Eye products continue to rack up industry awards this year. With we’re working EyeClops night vision goggles hitting both Toys"R"Us and Wal-Mart top list amongst others. They're well placed and expected to be drive for us this year.

Our UltiMotion video game line is based on one of the most popular trends in video gaming today. Motion games and our swing zone sports and Disney titles are well placed at our top accounts and others. We have more than eight doll line at retail in 2008 and we are pleased with our foothold in this category. The Hannah Montana will be Disney's number one priority for 2009 and continues to be the number one TV show for girls’ ages 6 to 8, 9 to 11, and 12 to 14, beating out any other show on TV.

We've excellent placement for our new singing holiday doll, Malibu Beach House and pretend play products and a beautiful line based on her new movie and new look for next year.

Fancy Nancy for us did a terrific job at Target stores and we have an expanded line for this hugely popular children's book series for this and next year. Cabbage Patch Kids celebrating their milestone 25 anniversary has been performing at retail this year and we look forward continued momentum through the holidays.

Look out for a large promotion with eBay kicking off the week before the presidential election where they will auction off four candidates and other signed collectible Cabbage Patch Kids to benefit JAKKS Care charities. They have said this is their single biggest holiday toy push and it will be fun to see who garners the most dollars. I'm guessing either Barack Obama or Sara Palin in her signature red suit.

We expect the media will have some fun with this one. Disney pretend play products based on Tinker Bell and Sleeping Beauty are very well placed at all retailers and we believe they will be continue to be hugely popular with young girls again this holiday season.

WWE and Pokemon action figures continue to be good contributors with many new assortments shipping this fall. And while we have continued to go full speed ahead on both of these brands, we have seen a bit of slowing at retail on both of these properties.

With thousands of toys in our diverse portfolio, we also have new initiatives and full ranges based on Neopets, Discovery Kids, SpongeBob, In My Pocket Miniatures, Kids Nascar, Smurfs and extreme sports vehicles, Wiggles, and Black & Decker, pets, new writing instrument initiatives, new seasonal products and several new collectible lines based on the unique and classic yet innovative categories that we expect to resonate with kids and collectors.

Despite the certainties related to our deteriorating economy, at this time we maintain a cautiously optimistic outlook for full year 2008. We have sold our award winning line into retail and our encouraged by initial sale throughs.

Along with our retail partners, JAKKS employees around the world are working hard to execute our strategy on behalf of our shareholders, and we expect we will achieve our expected results with another record year of sales growth for JAKKS Pacific in 2008 and beyond.

With that, I will open the floor for questions. Thank you all.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Arvind Bhatia with Sterne, Agee.

Arvind Bhatia - Sterne, Agee

Good morning, everyone.

Jack Friedman

Good morning Arvind.

Arvind Bhatia - Sterne, Agee

Couple questions first one is for Joel. Joel, as we look at full year gross margins, what do you guys thinking at this point? Are you thinking gross margins will be up versus last year? Just trying to get a sense of how Q4 will shape up there. And then the two acquisitions you mentioned did about $60 million in sales last year. Are there going to be some lines that you will discontinue within that or are you pretty much keep everything and then try to grow that business? And if you can give us a sense of margins for those two acquisitions that would be helpful.

Joel Bennett

Okay. In terms of the first one, margin, the margins are a little bit lower to a couple reasons this quarter, one of which is product mix. We've sold a lot more of the basic items within the CDI line. Also, we had a couple of non-performing licenses that had inventory and also minimum guarantees that we had accrued against.

Jack Friedman

I'd like to, this is Jack, I'd like to interject into that. We've also had a difficult time with managing costs in the Far East. There have been many, many price increases in commodities and labor and shipping, particularly in third quarter. We hope it's easing up now with the reversal of commodity prices and oil prices and expect to have a little less pressure on margins in Q4 and next year.

Arvind Bhatia - Sterne, Agee

Okay. So for the year, Joel, do you think you should be modeling flattish gross margins at the point?

Joel Bennett

Q4 still down a little bit because of product mix.

Arvind Bhatia - Sterne, Agee

Okay. And then the two acquisitions?

Joel Bennett

We're still evaluating the go forward but, in general, Tollytots had the higher volume with lower margins, and the Kids Only with the higher margins. They're basic licensed products and the product lines they have kind of run the range that we do. Although they're average margins are a bit lower. As private companies, and we've seen this with prior acquisitions, with private companies their concern is less for margins say as a percentage as opposed to being profitable companies, which both of them are.

So one of the things that we'll be doing is looking at how they operate and helping out in the marketing and pricing and promotional areas to improve their overall margin.

Arvind Bhatia - Sterne, Agee

Got it. And last question, Jack, is just in general, you said couple times you're cautiously optimistic, obviously this environment that's quite understandable. But if you can elaborate a little bit on what your discussions with retailers have been, what they're saying about taking in product. Are they being cautious in terms of taking inventory or you're not seeing anything there, you're just being conservative? Just give us a sense of what your, what the feedback has been from retailers?

Jack Friedman

I think, the best way I could say is, Arvind, is that toy merchants for many, many years, if there wasn't this economy, I think, we would be euphoric and probably raising our estimates for the year based on our product line and initial sale throughs. But I do think there's a sense of conservatism by the retailers in ordering product. There's a fear factor which is reasonable. We are well positioned to fill our retailers’ needs without taking too much risk. We think we have good skills at this, and two of our big items our Cupcake Maker and our spa line, are domestic only product lines and we're positioned well to fill the shelves with those items.

We're not concerned about our inventory level based on sales and expectations. These lines will definitely carry into 2009 and hopefully beyond. So we think we're in a great spot.

Arvind Bhatia - Sterne, Agee

What about the higher price point --

Jack Friedman

We have to be cautious in this environment.

Arvind Bhatia - Sterne, Agee

Right, what about the higher price point items, the night vision? Obviously with that concern would be what if there is too much inventory or not enough. I know it's a hard one to manage. What's the strategy there?

Jack Friedman

Well that's pretty well what I was referring to other than the domestically made products. Our caution is not on a Disney 7.99 toy. Our caution is on the higher priced items like the night vision and our Ultimotion. But we don't have high inventories on those products.

And, of course, we need the retailers to sell those products through. We have been on TV for about two weeks now and I can tell you that night vision sales are doing very well so far at retail. We feel very good about our position and we think we have a very, very good line for 2008 and I must say based on the Dallas toy fair the reports back to me and the enthusiasm around here, we look at 2009 with great excitement.

Arvind Bhatia - Sterne, Agee

Perfect. Thank guys and good luck.

Jack Friedman

You’re welcome.

Operator

Your next question comes from the line of Drew Crum with Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Hi, good morning everyone. Just one, First some clarification on your guidance for 2008, I just want to make sure I understand it correctly. The 280 are you assuming the reported $1.70 in the third quarter which I think would imply about $0.92 in the fourth quarter which would be down from last year. I just want to make sure I understand that correctly.

Joel Bennett

The original guidance, the -- or I should say the relied guidance of 280 doesn't reflect the tax adjustment.

Drew Crum - Stifel Nicolaus

Okay. Great. And then Joel, I think you mentioned product development in the quarter was $5 million?

Joel Bennett

No, increased $3.1 million over last year. It was about $8.4 million compared to $5.3 last year.

Drew Crum - Stifel Nicolaus

Okay. Can you say how much call the product testing was in the quarter, and when do you begin to lapse these incremental costs or should we continue to expect those going forward?

Joel Bennett

Those pretty much kicked in, the end of first quarter. And was fully in there in the second quarter. So that would anniversary in Q1, probably.

Jack Friedman

This is Jack. I'd like to put something in there. The more you see from us in product development expenditure, it's good news. If we're develop, we only spend money on products that we think we can sell and get support from our retailers. So the more product development money we spend, as long as we keep in the boundaries of margin, is really good news.

Drew Crum - Stifel Nicolaus

Okay. And then final question, is there any update you can provide on the arbitration involving THQ and then just given the developments with the WWE case, any update in terms of your outlook for legal costs for the balance of the year?

Jack Friedman

This is Jack speaking regarding the THQ case, lawyers for THQ and JAKKS are working on the arbitration and possibly direct talks. But there's no real updates on it, it's been a process that's too long in our opinion. But hopefully we'll come to the end of it shortly. In terms of the WWE case, we're delighted about the results from over the last two years by the decisions of both the Federal Courts and the Connecticut Courts. We do expect that legal costs will come down in the future. We did have high points in Q2 and into Q3 based on the Connecticut and continuing appeals and class action, but it should come down certainly next year. Dramatically --

Drew Crum - Stifel Nicolaus

Can you say what it was in the third quarter?

Joel Bennett

If you have another question, ask it. I'll look for it in the meantime.

Drew Crum - Stifel Nicolaus

Okay. I'll follow up with you guys. Okay, thanks.

Joel Bennett

Okay.

Operator

You're next question comes from the line of Ed Woo with Wedbush.

Jack Friedman

Good morning

Ed Woo - Wedbush

Congratulations. I had a clarification question. On you said that the guidance does not reflect the tax benefits, so does that mean you're GAAP guidance for the year is about 320?

Jack Friedman

When, let's see, hold on. Actually, Edward, if you have another question, I'm going to go through the --

Ed Woo - Wedbush

Sure, while we're talking about specifics, what was the interest of benefit that you received in the quarter? And then the last question I have is, how is Hannah Montana doing?

Joel Bennett

Real briefly, the interest benefit was $3.1 million.

Ed Woo - Wedbush

What specific was that?

Joel Bennett

Oh, that was related to the, the Fin 48 as well. Basically, we had previously reserved additional taxes and related interest on the tax position from -- I believe it was 2004. The statute ran this quarter so the reserve, or the tax provision and the related accrued interest got reversed in this quarter.

Ed Woo - Wedbush

Great. How is Hannah Montana doing?

Jack Friedman

This is Jack. I'll answer that. Hannah Montana is doing very nicely for us. We expect the major sales to us for the Christmas holiday season to come from our new electronic Hannah Montana, particularly the guitar and probably most importantly the Hannah Montana holiday doll line as well as the role play products.

Ed Woo - Wedbush

Great, I hope your Malibu Beach House does better than actual California real estate.

Jack Friedman

That's a good one. Thanks.

Operator

You're next --

Ed Woo - Wedbush

Thank you.

Operator

You're next question comes from the line of Todd Schwartzman with Sidoti & Company.

Todd Schwartzman - Sidoti & Company

Good morning, folks.

Jack Friedman

Good morning.

Todd Schwartzman - Sidoti & Company

Does your implied Q4 guidance assume sequential growth in third quarter from night vision and UltiMotion products?

Jack Friedman

Definitely there is a factor in them in Q4, and so far, frankly, at retail they're looking very well.

Todd Schwartzman - Sidoti & Company

So you two expect higher quarter-over-quarter sales in Q4 versus Q3 of those higher price point products?

Jack Friedman

Definitely.

Todd Schwartzman - Sidoti & Company

Great. Can you maybe speak briefly to which trademarks were written down and what prompted that?

Joel Bennett

Trendmaster's and Toymax, also Child Guidance. Toymax and Trendmaster's aren't used on products any longer, and Child Guidance based on current evaluation methodologies and also current levels of sales warranted a partial write down of that one. So the Trendmaster's and Toymax were written off in whole and roughly 50% of the Child Guidance trademark, I think it was about $5.5 million or there about was written down.

Todd Schwartzman - Sidoti & Company

Got it. Jack, I think you had mentioned that you're expanding in the area of the Girl Gourmet Cupcake Maker, can you elaborate on that?

Jack Friedman

Yes. We're coming out with a variable amount of sets. We're coming out with a candy maker which our retailers and we are extremely excited about, and I would expect, this is off the top of my head, I wouldn't like to be held to a fire on this, I would, I would guess that in 2009 we will get at least double the shelf space on this category of product.

Todd Schwartzman - Sidoti & Company

And those new SKUs coming out, did those, in fact, SKU under $30 for the most part or about the $30 level.

Jack Friedman

Under $30 and some of it, like our accessories to the present Cupcake Maker, like a mini cup decorator from $5.99 -- I'd say from $8.99 to $19.99 would be the most likely price range of the new product in the category.

Todd Schwartzman - Sidoti & Company

Good. Last question, when this Miley Cyrus' contract with Disney expire? Did she essentially sign on for one season at a time?

Jack Friedman

To the best of our knowledge, we've been told 2011.

Todd Schwartzman - Sidoti & Company

So she's under contract for two more seasons that haven't aired?

Jack Friedman

That's what we believe. That's what we've been told.

Joel Bennett

And they have given multiple seasons in advance as well.

Todd Schwartzman - Sidoti & Company

Got it. Thank you guys

Jack Friedman

You're welcome.

Operator

You're next question comes from the line of Gerrick Johnson with BMO Capital Markets.

Jack Friedman

Good morning.

Gerrick Johnson - BMO Capital Markets

Good morning, I was wondering if you could discuss retail take away in the third quarter and how that performed and the trends you're seeing so far in the fourth quarter?

Jack Friedman

We are, we can only speak for JAKKS. We are very satisfied with Q3 retail sales, we did say earlier on that we do see a little bit of weakness, nothing dramatic. We would say it was dramatic in both Pokemon and WWE action figures.

Gerrick Johnson - BMO Capital Markets

Okay. Well would you say your retail take away in the third quarter was above or below the ship in level you had in the third quarter?

Jack Friedman

I don't, -- measure that because a lot of what we ship in third quarter is for Q4 for the holiday season. But I can answer it in a different way. This is a guess, but I think a good guess, that our POS in Q3 was considerably ahead of Q3 POS 2007. But I can't prove that, it's just my feel.

Gerrick Johnson - BMO Capital Markets

Okay. That's good enough. Has there been a change in to the way THQ has distributed WWE video games this year. And if there has been, how does that impact the revenue recognition for you in the back half of this year?

Jack Friedman

We don't, we don't know of any change. If there's something that you hear or know, you might know better than us.

Gerrick Johnson - BMO Capital Markets

Well, you taking one brand across all platforms rather than specific brands for specific platforms and the timing of those launches, has there been any change relative to last year?

Jack Friedman

Quite frankly we stay in the background on it and really don't get involved on how they distribute it in terms of multiple platforms. But we do know that in November they're shipping all the platforms, I believe, it's on the 9 of November.

Gerrick Johnson - BMO Capital Markets

Okay. That's kind of what I was getting at. And --

Joel Bennett

Our profit has not changed.

Gerrick Johnson - BMO Capital Markets

Okay. And finally my last question, the fourth quarter, can you tell us what your expected FOB/domestic mix will be and how that compared to last year?

Jack Friedman

This is Jack. I can't give you even close to a good answer on that. We don't know what our spring sale in is in December and we don't truly know the take away on our domestic only product lines.

We do know that we are on the list of Wal-Mart, Target and Toys"R"Us for Christmas best seller lists and Wal-Mart did announce, I don't know if it's good or bad news frankly, that a number of JAKKS products will be sold at a discount for the hot product, hot toy product lines for 2008. So on one hand we know we have good sellers and will sell well, on the other hand we prefer the retailers make more margin and everybody be happy.

Gerrick Johnson - BMO Capital Markets

Alright. Thank you very much guys.

Jack Friedman

Very welcome.

Operator

Your next question comes from the line of Sean McGowan with Needham.

Jack Friedman

Good morning Sean.

Sean McGowan - Needham

Hi. Couple questions here, and many of them are just asking for a little bit more clarification. Joel, I heard you say that the guidance would not have included the tax benefit --

Joel Bennett

Actually, we're going to have to get additional clarification on that. I had a reconciliation that rolled to the guidance that we stated in the release, and I am going to -- I have to find out and let you know what items in and which items are out.

Sean McGowan - Needham

Okay. So, I also want wanted to know if that guidance would include or not include the asset write downs? So it's basically the same question, different brand.

Joel Bennett

Correct.

Sean McGowan - Needham

Regarding the recent acquisitions, you made some comment about the reality margins of one of Tolly versus Kids Only. Would you feel comfortable saying that the combined margin from those two acquisitions, gross margin, is somewhat lower than the corporate average and going forward, I mean existing for JAKKS?

Jack Friedman

JAKKS, I would say, yes, based on their past performance.

Sean McGowan - Needham

Right.

Jack Friedman

Over time, we expect it to fit in to our margins. We will get involved in product procurement from the factory. We do have power at the factory level. I think enhancing mode, I think enhancing margins and sometimes changing product around is one of our skills at JAKKS and we're confident we'll be able to do that. I can't tell you exactly how long that will take for it to kick in. But I don't know that we can increase margins substantially in 2009 but I would expect in 2010 that would fall into our regular margin in the 35% to 40% margin range.

Sean McGowan - Needham

Okay. I would assume that both of those companies do a substantially greater portion of their sales on an FOB basis rather than domestic. Is there any plan to do those a higher portion of those sales domestic and that might get you a here margin?

Jack Friedman

No, Sean, actually, on the first part of your question they do a very large of portion of their business on FOB sales and I would say through our analysis in reality, FOB sales are more profitable than domestic sales when you account for some lower tax rates, when you account for handling of product, warehousing of product, reshipping of product, etcetera if we did all our business FOB in the Far East, we would be happy.

Sean McGowan - Needham

Okay.

Jack Friedman

But that won't happen.

Sean McGowan - Needham

I hear you. And then last question on those acquisitions I think there was some talk, some talking with you guys in Dallas about putting some licenses that JAKKS has that maybe those guys don't have into the product line. With that and other cost savings would it be your expectations in '09 they would earn more in total than they would have on their own in '07?

Jack Friedman

I would like to think that they will make more money in '09 than '07. Again, it's a process, we're just the early stages of getting comfortable with the people and their way of doing business.

In terms of additional licenses and distribution, we think that will certainly come. I can't say to you now, Sean, that there's one, two, three, four licenses that immediately will go over there. But it certainly will happen when we expand -- when we get into expanding their product lines.

Sean McGowan - Needham

Okay.

Jack Friedman

They're very good toy merchants, which is a good part of this and has small and as small entrepreneurs they've done quite well.

Sean McGowan - Needham

Yes, I thought the lines were impressive. Joel, a question again of clarification on the $0.41 benefit from the tax, that's basically split so we see part of it in the tax rate and we see the other part of that in the interest expense benefit, is that right?

Joel Bennett

No. The $0.41 was in the tax benefit and then there was $0.07 in the interest roughly.

Sean McGowan - Needham

Does that, is that to say then that a total of that whole adjustment is really $0.48.

Joel Bennett

Correct.

Sean McGowan - Needham

Okay. Thanks for that. Jack, question on acquisitions. Would you rule out any further acquisitions being completed in 2008?

Jack Friedman

Well, we are coming close to the end of the year. I’d say almost at all times we have something on our plate that we're discussing with people. I wouldn't rule it out but I wouldn't bet on it.

Sean McGowan - Needham

Okay.

Jack Friedman

A further deal closing in 2008.

Sean McGowan - Needham

Thank you. And then the last question, can you give us an idea of international sales in the quarter versus a year ago? What you’re seeing overall internationally.

Jack Friedman

We're going to give you that answer.

Joel Bennett

It was $77.3 million in '08 versus $56.4 million in '07 for the same quarter.

Sean McGowan - Needham

Okay. And any noteworthy trends that you're seeing in those markets?

Jack Friedman

Well, we are getting, we stated actually over the last two years that we're getting more involved and more aggressive in the international markets and including some of our licenses to expand them internationally where we didn't have those properties and, in some cases, selling directly to some of the retailers internationally. International is certainly in area that JAKKS is putting a lot of time and effort into growing that percentage of our business.

Sean McGowan - Needham

Okay. So how we get the update on what's in those reconciliations to the guidance? Is that come later today or something?

Joel Bennett

Yes, we'll do it by email or something.

Sean McGowan - Needham

Okay. Alright. Thank you.

Jack Friedman

Thanks, Sean.

Operator

Your next question comes from the line of Tony Gikas with Piper Jaffray.

Jack Friedman

Good morning.

Tony Gikas - Piper Jaffray

Most of my questions were asked, but I want to back to some of the pricing and you do have some higher priced product like the night vision and UltiMotion and some of the Hannah Montana. What's the feedback from the retailers been? Number one, and, number two, do you think that you're guidance, what's in your guidance you've got quite a bit of conservatism in those numbers? And then I have a couple follow ups.

Jack Friedman

Regarding the night vision and EyeClops and Hannah Montana, the highest priced item would be the, the beach at the retailers are reasonably optimistic. We, with a little bit of conservatism, as we've mentioned it a number of times, Tony, nobody knows for sure what's going to happen. This Christmas for sure is not going to a booming Christmas overall. But we're well positioned, the particular higher priced items seem to be on the highly promotional list of our retailers, which is good news for sell throughs. And we have excellent shelf space on them and to date at retail the sales are quite nice.

Tony Gikas - Piper Jaffray

Okay. So you haven't placed any big bets on any one product?

Jack Friedman

No.

Tony Gikas - Piper Jaffray

Okay. What percent of the product line today is priced or what percent of sales would be related to product priced over $20 per unit at retail? Do you have a feel for that?

Jack Friedman

That would be, that would be a tough one but I would say less than half --

Joel Bennett

I would, under $29.99 would be, I would say about 60% of our product, 65% of our product.

Tony Gikas - Piper Jaffray

65% under $29.99. Okay. And then kind of looking to 2009 sales growth, you have a pretty good view what product is in the pipeline now for the year. Any kind of early view on sales growth next year and gross margins, should we see a rebound there?

Jack Friedman

The first part of it is somewhat dependent on Christmas sell through. We did say, Tony, and I don't mind repeating, our new product entries for 2009 at the Dallas Toy Show. The reception to those lines and extensions were extremely positive. So that bears well for part of your question. In terms of margins, there's no guarantees, but there is certainly some commodity prices coming down, oil is coming down, etcetera, shipping costs coming down, we hope that reflects through higher margin. But we can't say for certain that will happen.

Tony Gikas - Piper Jaffray

Okay. And then does the 2009 product line on average look a little lower priced than the 2008 product line?

Jack Friedman

Yes, I would say yes. Particularly, we have some new categories which looks great in the vehicle area, which probably the average price point will be $11.99, $12.99. So that would have an impact on it just in itself, and we don't have any new products in the $69, $79 range for next year other than continuing products.

Tony Gikas - Piper Jaffray

Okay. Thank you, guys. And good luck.

Jack Friedman

You’re welcome.

Operator

Your final question comes from the line of Jeff Blaeser with Morgan Joseph.

Jeff Blaeser - Morgan Joseph

Good morning. Just a couple quick follow-ups, the $27 million on the acquisition, is that included in the cash balance?

Joel Bennett

We closed in October, so the 1.92 adjusted would be 1.57.

Jeff Blaeser - Morgan Joseph

Okay. And the impact of the license write down, can you give us a number or a gross, what was that impact?

Joel Bennett

These licenses totaled about $3.4 million. Product mix was about $2 million, and then related inventory to some of those licenses was another $1 million.

Jeff Blaeser - Morgan Joseph

How that compared to last year?

Joel Bennett

Last year Q3, we actually have had, I think it was in Q4 is where we had I think the big license write off. So there wasn't a comp. We had a margins of 39%, which was our, approximately our target for last year and what we were expecting for this year. Adjustment for those items would put the including the product mix ship, would have put margins for the quarter about 38%.

Jeff Blaeser - Morgan Joseph

Okay. Thanks. And Hannah Montana up or down in the quarter year over year, and how long do you have that license for?

Jack Friedman

We have the license, actually all of our licenses with Disney are confidential. So I really can't give you an answer to that. And in terms of Q3, over last year, we shipped more product in Q3 last year over this year. It was the, the initiation and the forkness of Hannah Montana that was certainly, I don't know the numbers but it was certainly considerably larger shipping in Q3 '07 than in Q3 '08 and we're launching a new Hannah Montana doll line that coincides with the movie launch for spring '09.

Jeff Blaeser - Morgan Joseph

Okay. Great. Thank you very much

Jack Friedman

Thank you all, and thank you all very much. Thank you for following JAKKS Pacific and we look forward to many, many more calls and good news.

Operator

Thank you for participation in the JAKKS Pacific third quarter results 2008 conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: JAKKS Pacific, Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts