JAKKS Pacific, Inc. Q4 2008 Earnings Call Transcript

Feb.23.09 | About: JAKKS Pacific, (JAKK)

JAKKS Pacific, Inc. (NASDAQ:JAKK)

Q4 2008 Earnings Call Transcript

February 18, 2009 9:00 am ET

Executives

Genna Rosenberg – SVP, Corporate Communications & IR

Jack Friedman – Chairman & CEO

Joel Bennett – EVP & CFO

Stephen Berman – President & COO

Analysts

Luke Shagets – Sterne Agee

Todd Schwartzman – Sidoti

Sean McGowan – Needham & Company

Operator

Good morning, ladies and gentlemen, and welcome to the JAKKS Pacific fourth quarter and 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer. Please note that this conference is being recorded. I will now turn the call over to Ms. Genna Rosenberg. Ms. Rosenberg, you may begin.

Genna Rosenberg

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 the results for the fourth quarter and full year of 2008 ended December 31, 2008.

On the call today are Jack Friedman, Chairman and Co-Chief Executive Officer of JAKKS Pacific; Stephen Berman, President and Co-Chief Executive 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 of our product lines and current business trends prior to opening up the call for your one-on-one questions.

But before we begin, I would like to point out that any comments made about our future performance, events or circumstances, including estimates of sales and earnings per share for 2009, as well as any forward-looking statements, are subject to 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 fourth quarter and full year 2008. We achieved our capitalized guidance for the year with net sales increasing to $903.4 million, up from $857.1 million in 2007. For the quarter, we had net sales of $269.3 million compared to $285.0 million in the prior year.

We continued to have top selling items in our portfolio that performed for JAKKS and our retail partners, including our award-winning EyeClops Night Vision Goggles, Girl Gourmet product line, Disney pretend play products and others, especially considering the overall retail environment and state of the US economy and believe we further strengthen our standing and important relationships with our retailers, licensors and other key stakeholders in our business. But we also experienced declines in some of our lines, including Pokemon, Care Bears and Hannah Montana.

And we had an impact to earnings in the year due to the rising cost of raw material, labor, testing and development, and increases in TV advertising, all of which affected margins across the board and resulted in earnings of $76.1 million or $2.40 per diluted share for the year versus the $89.0 million or $2.77 per diluted share last year.

For 2009 we have been implementing company-wide cost savings initiatives to reduce overhead as well as to improve our margins across every JAKKS division. We are pleased to have closed on three acquisitions in the fourth quarter, Tollytots, Kids Only and Disguise, executing on an important part of our growth strategy. After these acquisitions, we still finished the year with a strong cash position of $169.7 million.

We have been working diligently on integrating these acquired divisions into our infrastructure and evaluating strategic cost savings in this area as well, as we seek to maximize profitability and while we do expect it to take time to fully digest and assimilate our recently acquired divisions, we will continue to evaluate other potential acquisition opportunities, while simultaneously executing on internal growth and cost savings initiatives.

Our three new divisions, Tollytots, Kids Only and Disguise, will each contribute to JAKKS’ growth for the future. Tollytots has an extensive but focused line of leading licenses for baby doll accessory. Kids Only is a leader in licensed indoor and outdoor furniture based on popular licenses, and Disguise is an innovative and well respected Halloween custom company that also has strong synergies with JAKKS’ core businesses. We expect all these companies to be accretive in 2009. For 2009 and beyond, we will continue to be a value player with a major of our product lines retailing for under $20, offering consumers great play value for their money.

Before I get into more details about our outlook for the future, I would like to turn the call over to Joel Bennett for a review of our financial performance for the fourth quarter and full year of 2008.

Joel Bennett

Thank you, Jack. And good morning, everyone. Fourth quarter 2008 net sales were $269.3 million compared to $285.1 million in the same period last year. Net income for the fourth quarter was $16.9 million or $0.55 per diluted share compared to $33.4 million or $1.03 per diluted share reported in the fourth quarter of 2007. Net sales for the year ended December 31, 2008 were $903.4 million compared to $857.1 million during the same period in 2007, an increase of 5.4%.

Net income for the full year of 2008 was $76.1 million or $2.42 per diluted share compared to the full year of 2007 when earnings of $89 million or $2.77 per diluted share. Included in net income are tax benefits relating to FIN 48 and other tax adjustments in the amount of $13.3 million or $0.39 per diluted share in 2008 and $1.4 million or $0.02 per diluted share in 2007, and $9.1 million or $0.21 per diluted share in pretax non-cash charges relating to the write-down of certain of the company’s trademarks in 2008.

Now for our sales by product categories. Worldwide sales of traditional toys, which include action figures, vehicles, electronics, plush, role play, dolls, kites, pull toys, and outdoor promotional products were $233 million for the fourth quarter of 2008 and $803.9 million for the 12 months ended December 31, 2008. This compares to $263.4 million in the fourth quarter of 2007 and $762.0 million for the full year of 2007.

Sales in the fourth quarter were driven by our electronic toys, pretend play products, action figures, activity toys and dolls based on popular licenses, and our own internally developed brands, but were offset by declines in other lines in these categories, including Pokemon, Care Bears, WWE and Hannah Montana.

Our craft, activity, and writing products, which consist primarily of Girl Gourmet, Pentech and Flying Colors product lines, had worldwide sales of $28.6 million for the fourth quarter of 2008 and $65.9 million for the full year. This compares to $6.7 million in the fourth quarter of 2007 and $39.6 million for 2007. New activity toys, including our Spa Factory line and Girl Gourmet Cupcake lines, were strong contributors to this category in 2008, and we are adding line extensions in 2009 to expand these brands.

Worldwide sales of our pet products were $6.9 million for the fourth quarter of 2008 and $20.7 million for the 12-month period. This compares to $9.4 million in the fourth quarter of 2007 and $24.5 million for the full year of 2007. Lower sales of our pet consumables were offset by sales of our AKC toys and other licensed pet products.

Gross margins for the fourth quarter of 2008 were 34.4% as compared to 38.2% in the fourth quarter of last year. And gross margins for the full year of 2008 were 35.6% as compared to 37.8% over the same period in 2007. Lower royalties were offset by higher product cost and the accelerated write-off of the tools and molds related to expiring licenses and abandoned product lines.

SG&A expenses in the fourth quarter of 2008 were $83.8 million or 31.1% of net sales as compared to $76.7 million or 26.9% of net sales in the same period last year. For fiscal 2008, SG&A expenses were $241.3 million or 26.7% of net sales as compared to $216.7 million or 25.3% of net sales for the full year of 2007. This increase is due to higher product development costs, including testing which increased $3.8 million and $11.6 million for the quarter and year respectively, and advertising in support of our increased number of key items, which increased $6.1 million and $7.0 million for the quarter and year respectively.

During the quarter, we posted $12.6 million in profit from the WWE video game joint venture with THQ compared to $18.1 million for the comparable period last year. Full year profits from the joint venture totaled $17.1 million, down from $21.2 million in 2007. As for the pending arbitration to resolve the preferred return dispute, JAKKS and THQ have each filed our submissions to the arbitrator this week, and final resolution is expected by the end of March or beginning of April.

Depreciation and amortization was $7.4 million for the fourth quarter of 2008 and $26.3 million for the full year of 2008. This compares to $6.7 million or $24.7 million for the comparable period in 2007. Stock-based compensation was $1.3 million for the fourth quarter of 2008 and $7.3 million for the full year of 2008 versus $3.8 million and $9.1 million respectively for the comparable periods in 2007.

Operations provided cash in the fourth quarter of 2008 of $44.8 million and $58.7 million for the full year of 2008 compared to $57.6 million and $87.7 million for the fourth quarter and full year of 2007.

Our financial position remains very strong with cash in the amount of $169.7 million and working capital $329.6 million. For the Tollytots, Kids Only, and Disguise acquisitions, we used cash of approximately $65 million in 2008, leaving us with a solid balance sheet with which to continue to execute on our potential acquisition opportunities. We do expect to continue to grow our business by actively pursuing 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 fourth quarter was $147.6 million compared to $174.5 million at the end of the fourth quarter of 2007. DSOs were 49 days, down from 55 days in the same period in 2007. Excluding Disguise, which was acquired at the very end of 2008, inventory was $81.3 million, up from $75.5 million at the end of the comparable period in 2007. DSOs were 50 days compared to 49 days in 2007.

Capital expenditures were $5.4 million for the fourth quarter and $23 million for the full year of 2008 versus $4.3 million and $18.1 million for the comparable periods in 2007. And we expect capital expenditures to be approximately $20 million in 2009.

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

Jack Friedman

Thank you, Joel. For 2009, we have a solid, diverse lineup in our portfolio and have received an excellent response from our retailers, first at the Dallas Toy Fair last October and more recently in Hong Kong and at the high level meetings with our key retail partners. Media is also previewing the line this week in New York for the Toy Fair, and we expect JAKK products will top many hot toy lists again this year.

The billion question is, exactly how will this year play out with consumers given what is going on with the recession affecting all America and especially discretionary goods, manufacturers, including toy makers. We are confident in our ability to weather the tough economy. But as I mentioned, we embarked on this year with an abundance of caution and strategies in place to enhance and maintain profitability.

We will be working closely with our retail partners, watching and managing inventory shifting focused product that will keep JAKKS product on the retail shelves and moving. We have major new initiatives and meaningful line extensions in all our product lines that we expect to resonate with kids and make sense monetarily to parents. As families are traveling less and looking for value-driven products to keep kids occupied at home, we believe the JAKK portfolio is reflective of this trend.

Our Girl Gourmet cupcake maker has been doing extremely well at retail since its 2008 launch, and we are expanding this area significantly for 2009 with new food play activity lines. Consumers have been responding to it, with Girl Gourmet having been a strong seller at retail during the holidays.

Girl Gourmet Sweets is a make-your-own candy jewelry product line and the Girl Gourmet Cake Bakery expands on the microwavable mini-cup – mini-cake making with the line of mini two-tiered extreme fondant cakes like those seen on the Food Network. We have many new Girl initiatives, including products based on our newly acquired licenses for the new Disney Princess and Fairies, an edgy pop culture license called SkelAnimals, Hannah Montana new Spa Factory activity products and more.

Our core Plug and Play TV Games line has been in line for the past seven years and has been a catalyst for growth into several meaningful line extensions for JAKKS since its introduction in 2002. For 2009 we are applying real motion gaming accelerometer [ph] technology into our core TV games line, bringing the usually popular play patent to the masses for a retail of about $29.99 along with our new TV game titles for approximately $19.99 with a whole new look at retails.

Our EyeClops products continued to perform for JAKKS with our real working EyeClops Night Vision Goggles having been a tough pick this past holiday season. New EyeClops products for this year include a handheld video projector that has been extremely well received, that is priced at less than one-third of what others sell for at retail, a new improved and lower priced versions of the night vision goggles and original EyeClops Bionic Eye.

JAKKS has an extremely strong vehicle line for this year with all key introductory price points under $5.99, and we will launch our brand new GX racers along with new MXS and NASCAR vehicles and the reintroduction of Fly Wheels. WWE continues to be a strong contributor in 2008, but both WWE Pokemon action figures saw a slowing at retail last year. We will continue to ship both lines this year, but we will closely watch inventory levels and work of retailers on these lines. We expect to begin shipping our new USC [ph] toys later in the year as well.

We have low-priced new introductions based on Club Penguins, Neopets, Discovery Kids, Spongebob, In My Pocket miniatures, Black & Decker, pets with new riding instrument initiatives, new seasonal product and collectibles, including several based on the Star Wars franchise and of course the benefit of products from our newly acquired divisions will be contributing to JAKKS in 2009.

From a product standpoint, we have a robust portfolio this year comprised of brand new initiatives and innovative and value-driven line extensions, and long-standing relationships with key licensors and retailers, coupled with our commitment to product innovation and cautious planning to reduce working capital needs and capital expenditures and improve margins will position us well for 2009 and beyond.

As for our 2009 guidance, we anticipate growth in revenue from 2008 levels to $920 million, with earnings of $2.25 per diluted share, which results anticipate lower gross margins and increased acquisition amortization attributable to our recently acquired businesses and higher product testing charges. Because our newly acquired businesses, particularly the Disguise Halloween business, will significantly contribute to revenues and profitability until later in the year, our forecast anticipates first quarter net sales in the range of $105 million to $115 million and an overall loss per share in the range of $0.29 to $0.36 per share, approximately $0.27 per share of which is attributable to the cumulative net loss after increased amortization charges and overhead costs relating to the new acquisitions, while contributing very little revenue for Q1.

Despite the uncertainties related to the US recession, we remain committed to running a profitable JAKKS Pacific. We have commitments from our key retail partners and along with JAKKS employees around the world we are working hard to execute on our strategy and on behalf of our shareholders for 2009 and beyond.

With that, I will open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Luke Shagets from Sterne Agee. Please go ahead.

Luke Shagets – Sterne Agee

Thank you. Good morning.

Jack Friedman

Good morning.

Luke Shagets – Sterne Agee

Yes, just real quick, what is your expectations in terms of full year impact on the increase in amortization charges related to the new acquisitions? I know it’s $0.27 in the quarter, but what’s your full year expectation?

Joel Bennett

Incrementally about $5.5 million.

Luke Shagets – Sterne Agee

Okay. All right. That’s all I have right now. Thank you.

Operator

Our next question comes from Todd Schwartzman from Sidoti. Please go ahead.

Todd Schwartzman – Sidoti

Hi, good morning, folks. Could you first maybe just speak briefly to the rationale for the creation of the co-CEO position for you guys?

Jack Friedman

We think with the growth that we’ve had at JAKKS and we expect to continue growing, and we believe strongly there are opportunities out there for addition – accretive acquisitions. And this is Jack speaking. I’m a sales – or [ph] more involved in that area than the day-to-day business at JAKKS. And we think it’s a proper rationale for the type of business in the environment we are dealing with.

Todd Schwartzman – Sidoti

Okay. And Steve, you had mentioned the increase in product testing cost for the quarter. I missed that. Could you repeat it please?

Stephen Berman

That was probably – that was probably in the – one moment. Yes. We had higher product development cost, which includes the testing in the quarter of $3.8 million and $11.6 million for the year. And for 2009 we are expecting additional testing cost in the range of $8 million to $10 million.

Todd Schwartzman – Sidoti

So the $3.8 million, was that the year-over-year increase or was that the total for the quarter?

Stephen Berman

That was the year-over-year increase.

Todd Schwartzman – Sidoti

Great. And how much did the three acquisitions increase SG&A?

Stephen Berman

Their run rate is about $27 million.

Jack Friedman

That’s before synergies, which take time to integrate into our operation. That’s – the $27 million is based on their 2008 SG&A.

Todd Schwartzman – Sidoti

And that’s the three of them in the aggregate?

Stephen Berman

Yes, correct.

Todd Schwartzman – Sidoti

And in terms of accretion, again, in the aggregate, can you give us a sense of what the bottom line contribution will be for full-year ’09?

Jack Friedman

No, not really at this point. But you opened up something I would like to mention, which is we are taking under the circumstance of the economy we are dealing with and various pressures, and frankly pressure from some of our retailers in terms of them maintaining margins et cetera, an extremely conservative approach which we think is proper. So we’ve kind of lumped everything together, discounting what potential sales are for the year and have not built in any further savings from integrating the acquisitions into JAKKS. So, once again, hopefully things will get better later in the year, but we are taking an extremely conservative approach, which we think is the proper presentation to the Street and proper for running our business.

Todd Schwartzman – Sidoti

So that $2.25 guidance, does that include or exclude the impact of the acquisition?

Jack Friedman

It includes the impact of the acquisitions, but it doesn’t include any further savings later on in the year integrating those acquisitions.

Todd Schwartzman – Sidoti

Any synergies above and beyond the 2008 numbers or the Q1 result?

Jack Friedman

There are certain – there are minimal synergies built into our forecast for 2009 overall, and we hope that these synergies will further increase during the year, but we are not building that into our model at this point.

Todd Schwartzman – Sidoti

And your take on the economy that’s built into that guidance, assuming flat or things get a little worse from here?

Jack Friedman

No, it’s kind of built around where the atmosphere is right now and the economy. There is no build-in for a further decline or a better improving situation.

Todd Schwartzman – Sidoti

Got it. Thank you.

Jack Friedman

You’re welcome.

Operator

Our next question comes from Sean McGowan from Needham & Company. Please go ahead.

Sean McGowan – Needham & Company

Thank you. Joel, could you talk a little bit about the directional flow on some of the factors affecting gross margin in ’09, you know, component costs, labor et cetera?

Joel Bennett

Labor still continues to be an issue although we are striving to make headway on the raw materials part of the business. Beginning in 2008 we started to aggregate our commitment for components. And with the lower oil prices we have seen some prices come down. But in general, there are still cost pressures on the product side.

Jack Friedman

This is Jack, Sean. My further comment on that would be our CEI [ph] division, as an example, has seen a higher growth than other divisions. And our newly acquired divisions, all have had in the past lower margins than JAKKS has been accustomed to. And we are working very diligently to increase our margins, but for now – once again, I don’t want to keep saying it, but we are taking a very conservative approach to all areas of the business for 2009, including margins, including revenue and including conservative approach to synergies.

Sean McGowan – Needham & Company

Okay. Joel, a commentary on what the tax rate is expected to be in 2009?

Joel Bennett

31.5%.

Sean McGowan – Needham & Company

Okay. And the depreciation and amortization, do you think it will stay at that $7.4 million rate for the quarter?

Joel Bennett

Incrementally, on top of – we will have about $5.5 million for the year, which is about $1.8 million for the quarter – I'm sorry, let’s see. I’m sorry. Actually the number is $6.4 million, not $5.5 million. About $6.4 million incrementally for the acquisition-related assets on top of what we had this year was about $26 million. So it will be in the 32 to 33% – 32 to $3 million [ph] range for 2009.

Sean McGowan – Needham & Company

Okay. And last question, could you – would you mind going over – you mentioned one-time tax benefits and some one-time charges, and just a little quick, would you mind going over that again?

Joel Bennett

Sure. FIN 48 benefits was $13.3 million. It was about $0.39 per share.

Sean McGowan – Needham & Company

That’s for the year?

Joel Bennett

For the year, correct. And there wasn’t any in the quarter. We had written off some trademarks in 2008, which was $9.1 million. And that was I think $0.18 per share.

Sean McGowan – Needham & Company

Okay, thank you.

Joel Bennett

And lastly, for the quarter, the JV was down about $5.5 million.

Sean McGowan – Needham & Company

Right. Okay, thank you.

Joel Bennett

Thank you.

Jack Friedman

And we thank you all very much for your time. And I’d just like to add one more highlight. Our EBITDA remains strong. We have an extremely strong balance sheet for our size. We have a strong cash position. And I said it earlier, but we are diligently looking at further opportunities in this tough marketplace of continued growth to JAKKS through acquisitions and internal growth. And with that, I thank you all very much. Have a good day.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may all 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!