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Executives

Curtis Stoelting – CEO

Peter Henseler – President

Analysts

Joe Mackie [ph] – Wachovia

Sean McGowan – Needham & Company

Linda Weiser – Caris & Company

David Cumberland – Robert W. Baird

Gerrick Johnson – BMO Capital Markets

Jim Larkins [ph] – Wasach [ph]

RC2 Corporation (RCRC) Q3 2008 Earnings Call Transcript November 3, 2008 4:46 PM ET

Operator

Good day, and welcome to the RC2 third quarter 2008 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Curt Stoelting, Chief Executive Officer. Please go ahead.

Curtis Stoelting

Thanks, Allen. Good afternoon, and welcome to our 2008 third quarter conference call. Today I'm joined by Peter Henseler, our President. On the call today we'll cover the third quarter and year-to-date results and Peter will provide some additional information on new products. We've also allowed time for your questions.

Before we get started, I'd like to mention that this call is being broadcast live over the internet on www.earnings.com and www.vcall.com. Replay is also available through these web services starting tonight.

I also want to remind people that any forward-looking statements made on this call are subject to many uncertainties in the company's operations and business environment. I would respectfully refer you to the complete forward-looking statement disclosure and our third quarter release which is incorporated by references for purposes of this call.

I'll also refer you to the many and full disclosures that company makes in its quarterly and annual filings with the SEC.

As you know, we have again provided you in our release with full financial information and we have also attached tables which show the results excluding recall-related and nonrecurring items. So I'm not going to take the time to go through all those. I think we've done our good job of providing all that to you in the written earnings release.

There are a few administrative and housekeeping matters that I want to cover before we get to the commentary on the quarter. Inventories turns at the end of Q3 are at 2.3 times versus the end of the last quarter at which time they were 2.5 times. DSOs at the end of the third quarter 83 days compared to 76 days at the end of the last quarter.

CapEx in Q3 was $1.8 million. And we have reduced our full year CapEx plan from $13 million down to $11 million which will be lower than our annual depreciation and amortization expense.

Lastly, our tax rate for Q3 was just a tad over 36% with our year-to-date tax rate right around 34%. We expect fourth quarter tax rate will be between 34% and 36%, depending on the mix between U.S. and foreign income.

Before I get into the commentary on the quarter, I would like to thank our finance team and our bank group for finalizing today our new senior credit facility and the details of that are outlined in our press release and is also on SEC – detailed filing on that as well.

Let me make a few comments on the quarter. Third quarter reflected conservative ordering by retailers in North American market and that was pretty well across the board, big and small. We continue to see good growth in our international business unit; international sales were up 12% in the quarter, despite currency head winds of about 3% to the negative.

Sales trends and our mother, infant, toddler category improved from the first half of 2008. We were down 1% and we have been running behind that in the first half of the year. Based on IRI data we are performing better than the overall JP industry as in North America. And JP is standing for Juvenile Products industry. So as a benchmark even though we are slightly behind prior year sales we believe we were performing better than the industry.

We think our new product introductions will continue to benefit sales trends in the fourth quarter and in 2009, and we will talk about those as we get into later parts of the call.

In our preschool youth and adult products category, our sales declined 9% on a comparable basis. The decrease coming mostly from Bob the Builder and Nickelodeon license preschool products. Shipments of Thomas & Friends were lower in the quarter than last year, but retailers POS data increase for many of our Thomas & Friends products.

Comparable gross margins excluding recall-related items declined by 80 basis points in Q3 due to higher product and transportation costs which were partially offset by cost improvement programs, improved sales mix and price increases. We have benefited from lower zinc costs and recent declines in oil prices will benefit transportation costs. However, product costs pressures persist as resins, China labor packaging and currency costs remain at high levels here in the fourth quarter, and we see no immediate relief on those items as we enter 2009.

We remain very concerned about the current economic conditions and its impact on retailer ordering and consumer spending. In the current environment, it's difficult to predict with high certainty, retail sales trends and ordering patterns for the fourth quarter.

There are four things that we do know. Number one, it's clear that early holiday retail sales are off to a slow start. Number two, POS data has been inconsistent. Day-to-day, week-to-week and month-to-month comparisons are difficult to interpret in the current environment. Number three, value is important to consumers. We are seeing strength in many of our classic heirloom toys such as John Deere die-cast tractors and Thomas & Friends, Wooden Railways trains and accessories. Four, holiday toy and infant products sales will happen. We know the parents will take care of their kids even in tough economic times.

In the face of difficult economic and consumer spending cycles we continue to closely monitor product line profitability while remaining focused on cost reduction and cash preservation. We continue to work every angle possible to manage our supply chain costs and consolidate our purchasing with highly qualified and competent suppliers.

We will selectively increase prices in 2009, especially in international markets which are experiencing currency fluctuations. Lastly, we are tightly managing controllable costs including personnel costs.

Looking forward, we will continue to be guided by our strategic plan and we will continue to accelerate the development of high-value product lines. We also remain committed to completing acquisitions that build long-term shareholder value. Our new product pipeline in both product categories is strong for 2009.

And I am going to turn the call over to Pete Henseler who will provide you with some additional details. Pete?

Peter Henseler

Thanks, Curt. I will take a few minutes here this afternoon to provide an update on two of our most recent industry tradeabouts. The ABC Juvenile Products Show which was held in September, and the Toy Industry Association preview show which was recently completed last month. Both of these shows focus on new products that we are previewing for 2009 delivery. Please note that the shows that they are called preview shows. So we use these shows introduce both our line extensions for our current brands and to introduce new products. What is actually presented in these shows in the final market versions will in some cases undergo some revisions as we meet with our customers and we will make those changes before the final products make it to the market.

Now while it's still too early to share all of the details on a call like this we are pleased with the early response to our new product offerings. And here is few details on our 2009 mother, infant and toddler business.

As Curt mentioned our focus in 2009 is very much driven by value. And we define value not only delivering products at the right price but combining innovation, fashion, design, and improve the merchandizing as well. And we have several initiatives to bring a fresh new approach here.

The first is our First Years MiPump breast pump which capitalizes on the ongoing trend, first time moms breast feeding their new babies with a product it addresses the needs in today's mom.

Next, we have the First Years Kickin' Coaster which is the first infancy to provide infants an opportunity to get some basic leg and tummy exercise while sitting in an infant recliner.

We are also going to be introducing our most complete line up of children's household gate in 2009. The First Years gates combine both quality and fashion with a very simplified merchandizing and packaging execution that will simplify and make the shopping experience much easier for parents.

We will also be expanding our product line in our baby travel gear which just this year was our first year introducing that with the expansion of the True Fit convertible and compass booster seats.

We will also be expanding our successful American Red Cross program (inaudible) baby care. We are introducing a complete line up of household baby safety items that help baby proof and make it safe in home.

And lastly for 2009 we will be introducing the Lamaze body care products for pregnant and new moms. It has complete line up of products that have been formulating for the special care and needs of expected moms.

As I mentioned last month we also completed our 2009 Toy Preview Show in Dallas. Our teens are hard at work at a very strong line up of new product extensions in both our Thomas & Friends and John Deere products lines as well as Caring Corners dollhouse line.

Now in addition to showcase in our core products we debut several new categories for 2009. In the preschool area, we debut the preschool early learning toys supporting the new PVS TV hit Super WHY. Super WHY is quickly risen to become the No. 2 most watched preschool show at moms and the No. 3 most watched show at preschool kids.

We have over 20 new products that will be debuting in late spring of 2009 covering expansive product categories from plush to role play vehicles, and early learning products. And with media expansion beginning in the UK and Australia, we are very optimistic that this property will also have appeal outside the North American market.

In our youth and adult area we have two new launches in 2009. First, we will be celebrating the 40th anniversary of Johnny Lightning with the release of a new special collective segment. The newer segment in the last two years – it's our first segment in two years. It has a collective of searching for today, very affordable price points in a large collection of vehicle. In fact, we have over 700 vehicles in the program and a retail price points will be between $2 and $2.50. That we covered both those areas of value and collectibles in this 40th anniversary collection.

Now lastly, in the early summer 2009, we will be supporting the (inaudible) release at the Fast and the Furious movie. This is the fourth installment of this very successful franchise that reunites the main stars in the first movie, Paul Walker and Vin Diesel. Early response is good, and this movie franchise has had a history of being a strong license property for vehicle sales. Now, we will have more details on feature cast as more information becomes available. Thanks for your time.

Now, I would like to turn the call back to Curt for wrap up and questions.

Curtis Stoelting

Okay. Thank you, Peter. And I like to turn the call into Q&A. So Allen, do you want to take over?

Question-and-Answer Session

Operator

(Operator instructions). First, we will hear from Joe from Wachovia.

Joe Mackie – Wachovia

Hi, it's Joe Mackie [ph] here. Just wanted to get some additional details on the credit facility for (inaudible). I haven't seen the AK, but is this a three year facility that for 2011?

Peter Henseler

Yes, the three-year term loan and revolving credit facility.

Joe Mackie – Wachovia

Okay, great. And can you remind us what the size of the facility that you went to $145 million. What was the size of the previous facility?

Peter Henseler

I think the previous facility was a little larger than that. And we really size this one based on what our current needs are.

Joe Mackie – Wachovia

Okay. Great. So there is nothing to read into that?

Peter Henseler

No, at this point, with capital kind of under – you're kind of paying for capital where they use it or not we are really sizing it to what our needs are, recognizing that when the capital markets especially the debt markets improve that we probably want to be back out looking for better terms when it stands right for that.

Joe Mackie – Wachovia

Great. Can you talk a little bit about current channel inventory? You mentioned that retailers were more conservative as far as ordering this year. Can you comment on the domestic and international inventory levels right now?

Peter Henseler

We are well higher than like to be in terms of what we got in our warehouses, and I think that's the reflection of what our retail partners are doing all around the globe. They are leaning out there inventories and really relying on resupplies, especially, fourth quarter supply from us. We have made those adjustments and we made the best decisions we can, but I don't think there is a tremendous amount of inventory in the channel on a – and frankly, I don't think there will be the way the retailers with the cautious ordering we are seeing at a retailers.

Joe Mackie – Wachovia

Great. And then final question here on the Super WHY products. You mentioned – Peter mentioned debuting late spring in 2009, when do those begin to ship to retailers and any guidance you can kind of give us based upon what you expect from that line next year?

Curtis Stoelting

The first products we're really begin shipping probably in Q2 next year at a limited basis and really get fully ramped up in early Q3.

Peter Henseler

And of course, Joe, we don't give guidance for individual product lines.

Joe Mackie – Wachovia

Right. Understood. Thanks, guys.

Operator

And next we will hear from Sean from Needham & Company.

Sean McGowan – Needham & Company

Hi, guys, how are you?

Curtis Stoelting

How are you, Sean?

Sean McGowan – Needham & Company

Good. I got couple of questions. Curt, specifically, could you help us with what exactly the – is going on those recall adjustments. Are these insurance settlements?

Curtis Stoelting

There is a couple things going on in the quarter, Sean. Some of it is recoveries that we made from insurance; some level of it is recoveries we made from vendors. And some of it is that – some of the anticipated colasses related to replacements, especially is related to the class action settlement, came in at lower levels and/or our teams did a better job of managing those colasses so that we have some accruals that we don't need going forward. So the combination of all those things resulted in total of about spread around $3 million that came back as to the gird in the third quarter.

Sean McGowan – Needham & Company

Might there be some additional positive adjustments in the future?

Curtis Stoelting

Right now, I think we made our best estimates of what additional accruals we need. Frankly, there is not a lot of lap. We got some lingering legal issues not class action related, but couple individual cases as well as some regulatory matters we get to deal with. And we made I think conservative estimates on what going to take to clean up so I don't think it will be material and we are going to really – if we get a positive answer, that will be great, but I think we got the downside protection.

Sean McGowan – Needham & Company

Okay. Shifting gears in on a Juvenile Products category, mothers and babies, what -– remind us where shipments are year-to-date and how point of sales is year-to-date? You say it was down 1%. I assume that was in the quarter. How is that looking in year-to-date?

Curtis Stoelting

I don't have the year-to-date number in front of me, but I believe we probably down mid single digits. And as you know from our discussions in previous quarter we did remove some products from the markets that we couldn't get price increases on we are not making acceptable margins. And then had something to do with the sales decline. We have also just seen – that category has been affected by the economic and consumer spending slow down as well. The IRI data is confidential, but what I can tell you is both on the year-to-date number that I gave you and on the – certainly on the third quarter number, we are kind of – for the year-to-date number we are kind of in line with what the overall industry is reporting to IRI, and in the third quarter, we actually meet that benchmark.

Sean McGowan – Needham & Company

Okay. How big an issue is the BPA shift in regulations?

Curtis Stoelting

We take it seriously because our consumers are taking it seriously. And this isn't anything new to us, in fact, we have already made the adjustments and as of this point in time we are BPA free in terms of all of our product lines.

Sean McGowan – Needham & Company

Does that have any impact on your shipments?

Curtis Stoelting

I think it will have a bigger impact going forward, and has had in the past. We did have some transitions happening in the second, third quarter. It slowed down some of our shipments as we replace the previous product with the BPA free product. That's all behind us and we expect more positive compare us in settling those categories. We are also doing the better job I think of labeling our products, consumers know at the point of purchase that our products are BPA free.

Sean McGowan – Needham & Company

Okay. Couple of others, the best case you can make at this point if dollar stays at the current level, how significant of a head wind would it be for all of 2009, and how you look at that?

Curtis Stoelting

Well, Sean, I am not smart enough to figure that out for all of 2009. But what I do know is there is definitely going to be head wind for the fourth quarter. And our exchange rates are today its pretty significant. We are looking at – you can do the math on the various currencies, our major currencies are pounds, Australian dollars, and euro, dollars, and you can look at how those traded out versus the U.S. dollar, but we are expecting a 10% to 15% impact on some currency fluctuations, which will translate into some head winds in terms of both sales and EPS for the fourth quarter.

Sean McGowan – Needham & Company

Okay. And then finally, perhaps couple of others, on the credit facility, was the payment schedule comparable to what the new schedule is – on the old facility versus the new one?

Curtis Stoelting

I don't know, I've forgotten about the old one. We got our money's worth at our old facility. We are moving forward. I think our current amortization on the term loan is $3.5 million per quarter which is not a problem for us with our cash flows.

Sean McGowan – Needham & Company

Did the old facility have that – I think kind of timing early part of '09?

Curtis Stoelting

I can’t remember – I think at one point – I think we refinanced old facility and it was just kind of like a super revolver type thing. I am not sure we had any (inaudible) amortization – tend to go back and read the document.

Sean McGowan – Needham & Company

And finally, with POS of Thomas up and I think favorable shelve space allocation going on, would you expect to begin in the – at least in the fourth quarter starts Thomas up?

Curtis Stoelting

I will let Pete handle it, as he is a lot smarter predicting Thomas sales than I am.

Peter Henseler

I think I mean it's really going to get down to how aggressive our retail customers gave or bringing inventory and how they see their first quarter going so. We would like to think that we were going to continue to see improvement with Thomas. But as Curt said earlier, it's been sporadic week-to-week, but we are definitely seeing, if you look at it over the last 16 weeks we see positive trends, and we see no reason that to continue to build positive trends. The question will be how fast would Thomas go, and independent on our retailer order sales.

Sean McGowan – Needham & Company

Thank you very much, guys.

Curtis Stoelting

Thanks, Sean.

Operator

(Operator instructions) Next we will hear from Linda from Caris.

Linda Weiser – Caris & Company

Hi, how are you doing?

Curtis Stoelting

Good. How are you Linden?

Linda Weiser – Caris & Company

Okay. Can you give us a little more color on Thomas? Are you seeing both the Wooden and Take Along POS up the retail or what's going on with Take Along exactly?

Curtis Stoelting

As you know, we don't – we have to be careful but how we dissect POS data, it's confidential information, and we don’t give specific breakouts on individual product line. So we are trying to be responsive and we have such parameters around. So I don't know what I can say as we have already said we did, we did have lower shipments in the third quarter than we did in the prior year third quarter. But the POS numbers are improving, continue to improve kind of on a week-by-week, month-by-month basis. And we are very optimistic about all of our Thomas product lines as we go forward.

Linda Weiser – Caris & Company

Okay. So is that a matter of working down the inventory a retail I guess? Is it that just still hangover from the slower POS that happened right after the recalls last year? How do the inventory gets built up so much in retail in the first place?

Curtis Stoelting

I don't know that the inventories built up so much, Linda. I think what we have seen over the last couple of years and we certainly see – continue to see an acceleration especially in the third quarter. We don't see customers big or small, whether that's a large chain like Target or toys are us or an independent specialty store take on as much inventory early in the year for any other brands frankly. And I think that's more reflective of what's going on out there. I don't think the channel of inventories are crowded on partly in our product lines, certainly not Thomas. And I think we are certainly a much better shape in terms of shelf presence this year, than we were a year ago.

Linda Weiser – Caris & Company

Okay. And then can you just update us – have you completed or are you still in process of doing your plant relocation in China, and can you just talk about that a little bit and how you are trying to control costs in China?

Peter Henseler

Sure. We have been seeing some pretty significant head winds in China, as you know, Linda. Currency being first and foremost, it's really difficult to overcome, roughly 9% increase in currencies year-to-year. But also China labor continue to increase as due taxes, I just mean the other costs are doing business. What we have done as you know has taken the approach of moving into lower costs region within China and we have been right on track with our new facility in the north, the new learning curve industrial zone, the first facility has been up and running sands in to first quarter and is right on track with plant production for this year. The second facility opened up mid year this year and is ramping up quickly. So we feel like we have done the right moves in terms of taken significant amount of our China-based production into a lower cost region.

Linda Weiser – Caris & Company

Okay. And just on the FX, I am seeing two of the three currencies that you mentioned actually was favorable comparisons in the third quarter, euro was up versus a dollar, the Australian dollar was up, only British pound was down, so how was that come up in negative three for the quarter?

Peter Henseler

I know you are going to ask that. I would ask the same question. And it's just has to do with the mix in currencies in between the two years. And I was little surprised I think I have seen currency impacts anywhere from plus 3 to flat, but we check and double check, it really has to do with the level of sales we did in pounds and Australian dollars. So if you look at the Australian dollar we do have a significant operation in Australia.

Linda Weiser – Caris & Company

Okay. And then 10% to 15% that you mentioned earlier, that's the effect on your international sales or on total sales?

Peter Henseler

Just international sales. Again, that's just the impact from translating back local currencies into U.S. dollars.

Linda Weiser – Caris & Company

Right.

Peter Henseler

Dollar strengthens – we translate less sales back.

Linda Weiser – Caris & Company

Right. Okay. And then can you just – is there anyway you can comment on whether the reduction in Thomas royalty expense was material in the third quarter?

Curtis Stoelting

Everything is material to me. Certainly when it comes to royalties so, we certainly had a positive impact versus the prior two quarters of the year but not as we compare to the third quarter of last year.

Linda Weiser – Caris & Company

Okay. And Pete, you were just mentioning again the Fast and Furious movie that you mentioned when would those products be going, shipping to retail?

Peter Henseler

Second quarter.

Curtis Stoelting

The movie I believe is scheduled for the first half of June 2009, and I know Pete's particularly excited about because Vin Diesel is back. The other nice thing from a product point of view is that they are using a lot of the same cars they did in the first two movies, they however use those. And of course we gave all the tools for those products in our tooling bank. So we will be able to dust off some tools and get one last by the way apple here on F1, F4.

Linda Weiser – Caris & Company

I guess I was look for my time following you, but what was the year that you have those product sales previously?

Curtis Stoelting

You are testing my memory now. But it was I think the second movie was in 2002, 2003. I can't go back and look at out. But, again, without dwelling on the past we think it's a nice thing incremental opportunity for next year without a lot of investment in our parts, should be pretty productive from return on invested capital part of deal.

Linda Weiser – Caris & Company

Right. And then finally I know that you probably don't want to be talking a lot about '09 but I mean are you thinking that with the new products that you have and I mean commodity (inaudible) certainly should be down comparison wise in the second half of '09 at least? Are you thinking you can have earnings growth in '09?

Curtis Stoelting

Well, it's too early for us to put a number out there for '09, but I am excited about the couple things as it relates to 2009. Pete talked about many new products that we are introducing, much stronger pipeline of new products, especially certainly in our MIT business, mom and toddler business for next year. I think we have great new product line on the preschool play side with the Super WHY. So I am excited about top line growth in 2009. And I don't know where costs are going to go. We are still facing some head winds fourth quarter and first half of 2009. I don't know where resin prices are going to be in the second half, but we will do everything we can to manage and make our product line as productive as we can. At the same time, manage our discretionary expenses as best we can. So the goal is certainly off of what we think hopefully will be a little point certainly in the last 12 months of period to grow our earnings in the future from here.

Linda Weiser – Caris & Company

Right. Okay. Thank you.

Curtis Stoelting

Thank you.

Operator

Next we will hear from David from Robert W. Baird.

David Cumberland – Robert W. Baird

Thanks. Hi. Just looked up too fast, too furious came out in '03.

Curtis Stoelting

Thanks, David.

David Cumberland – Robert W. Baird

Curt, you mentioned value being important to consumers, are there any tactics you are pursuing in the holiday season in response to that?

Curtis Stoelting

We got a tremendous amount of promotion plan. Some other on new products like Caring Conners and others just around our everyday, Good Sellers like Thomas and John Deere. We also, as you know, David, we launched our new infant toddler products for 2009, actually start shipping in the fourth quarter, and I think most of those promotions really first quarter promotions, but some of them do hit the shelf little early. So we are excited about those categories as well. So I think our marketing programs are good. I think we got a good combination of how we are reaching consumers both through the internet, both from point of display, at shelf, and with some mass media around Caring Conners. But it's a tough environment. And at the end of the day value is going to be the most important thing and I think to a large extent our product line plays well there, because it's really kind of basic reliable product that consumers now provide a lot of play value. So I think it's a tough thing to see we are going to promote or way out of the slump. But we are going to do we think we can to maximize sales.

David Cumberland – Robert W. Baird

And then are there any product lines that have contributed to sales this year that when you look at next year there not really part of the plans and you will be easing them out?

Curtis Stoelting

I think probably as we look at things today we see less than that, we see less of a drag going forward than we had in the past. And I think we got things pretty tidy right now. Obviously, your newest product lines are (inaudible) most vulnerable for carry forward. Because you just don't have any operating history with them yet, but we monitor all that closely but I think we will reason what I know today we will have kind of less of a drag going into 2009 and then we have over the past couple of years, certainly over the past couple of years.

David Cumberland – Robert W. Baird

Thanks. And my last question. If you could provide some details on the investment trade-off?

Curtis Stoelting

Yes, the investment trade-off was a small investment we made three years ago. It was in a preschool vehicle brand called media. And although the products – the property did get on television it was on one of the smaller children's networks and we just were able to establish enough consumer awareness to launch a broader toy program, either last year or this year. So we decided not to pursue that, and therefore, we got the investment.

David Cumberland – Robert W. Baird

Thank you.

Curtis Stoelting

Thank you.

Operator

(Operator instructions). Next we will hear from Gerrick Johnson from BMO Capital Markets.

Gerrick Johnson – BMO Capital Markets

Hi, good afternoon. Just wondering what the status of Take Along, Thomas and the Wal-Mart right now? And do you see any changes to that arrangement in the near future or next year?

Curtis Stoelting

(inaudible) might take a long time, it's distribution (inaudible). Pete, do you want to take that one?

Peter Henseler

Yes, Gerrick, as you know, I mean we have we are only in few hundred stores at Wal-Mart this year. We are working hard to regain distribution and as soon as we find that out we will later bidding out, but we are working hard to get a back in and we are optimistic that we can get back there.

Gerrick Johnson – BMO Capital Markets

Okay.

Curtis Stoelting

Thank you.

Operator

(Operator instructions). Next we have a follow-up from Sean, Needham & Company.

Sean McGowan – Needham & Company

Hi, again, you offered some BKS guidance. And I didn't see revenue guidance I must have missed it. Can you comment on that please?

Peter Henseler

Sean, first of all, let me compliment you that this is the first quarter while you haven't switched firms so it's good to in stability there.

Sean McGowan – Needham & Company

Totally unfair, the same place to 17 years. What's almost the volume you, Curt.

Curtis Stoelting

We do some order from averaging, we are just fine. Anyway what was your question again?

Sean McGowan – Needham & Company

Revenue guidance will there be any?

Curtis Stoelting

Revenue guidance for the world or for RC2?

Sean McGowan – Needham & Company

For RC2 for the fourth quarter. You offered some EPS guidance, I was just wondering where you put brackets on revenues got?

Curtis Stoelting

I don’t think we ever done any top line guidance. I think you got a pretty good data on what the numbers were last year and the historical trends between third and fourth quarter. And you also know that the fourth quarter really comes down to a large extent to retailer – reorders which are really to allow consumer spending. So I think of all the years that peeps in projecting the fourth quarter, this is probably the most difficult one to project. And I will go back to kind of the four things that we do know for sure. And the fourth one is that we do know that toys and infant products will be bought in holiday season. A lot of the things won't be in terms of consumer discretionary, but certainly, we do know that the parents will take care of the kids even in tough economic times. And we just got to get our fair share.

Sean McGowan – Needham & Company

And how is Judy doing?

Curtis Stoelting

Judy is doing fine. She's in here plus 6.

Sean McGowan – Needham & Company

Thank you.

Operator

And next we will hear a follow-up from Linda with Caris.

Linda Weiser – Caris & Company

Hi. Just a question on the gross margin. It seems like it was up actually pretty strongly in the last couple of quarters. I think because you had favorable mix because of reducing some products that were unprofitable. Has that does not continued or you done with that or was it just that the raw material comparisons were so much worse in the third quarter? How come you didn't have better gross margin performance?

Peter Henseler

You got it, Linda. We just – the head winds have gotten stronger in terms of product costing and transportation costing for instance. They continue to accelerate throughout the year, and we did get some price increases which did help offset, and we did, change out some of our lower margin and eliminate some of our lower margin products and product lines which had positive impact. But if you look at it excluding the effective recall items on a comparable basis we did see about an 80 basis point decline in gross margins in the third quarter. And we are going to – we are still facing head winds, because some of those additional costs where the products or transportation costs are now sitting in our balance sheet, and we will come to the income statement in the fourth quarter.

Linda Weiser – Caris & Company

Right. And do you have any early thoughts about pricing in '09?

Curtis Stoelting

As I mentioned in my comments, what we are looking in '09 we believe will require a little more of a surgical approach. So we really be looking to take price increases on a more selective basis than we did this year. And we certainly will focus on international markets where the currencies are having a negative impact, we try to call back some of that lost profit, depending on which way currencies go over the next few months.

Linda Weiser – Caris & Company

Okay. Thank you.

Curtis Stoelting

Thank you.

Operator

Next we will hear from Jim Larkins [ph] with Wasach [ph].

Jim Larkins – Wasach

Hello. Just wanted if you said anything else on Juvenile publishing. Is that can we say gone or is that potentially come back some time in the future?

Curtis Stoelting

That's a good question. What I can tell you is strategically we still think it's a very good fit. We still like the business. We just ran into the credit market and a cost to capital that did make sense for us to complete the deal. And it's painful to walk away from it, but I do think it will be a chance hopefully when capital and credit markets improve to revisit that, but I don’t know when.

Jim Larkins – Wasach

Okay. Thanks for the comments.

Curtis Stoelting

Thank you.

Operator

It appears to be no further questions. I like to turn it back to our speakers for closing remarks.

Curtis Stoelting

Okay. I want to thank everybody for their time today on the call. I also want to thank our dedicated team members around the world who are working everyday to improve our results and creating new opportunities. And we look forward to speaking with you all again in the first quarter of 2009. Take care.

Operator

We thank you for your participation. That does conclude today's third quarter 2008 earnings conference call. Have a pleasant day.

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Source: RC2 Corporation Q3 2008 Earnings Call Transcript
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