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

RC2 Corporation (NASDAQ:RCRC)

Q2 2008 Earnings Call

July 30, 2008 4:45 pm ET

Executives

Curtis Stoelting – Chief Executive Officer

Peter Henseler - President

Analysts

Todd Schwartzman - Sidoti & Company

Gerrick Johnson - BMO Capital Markets

Timothy Conder – Wachovia

David Cumberland - Robert Baird

Linda Bolton Weiser - Caris

Sean McGowan - Needham & Company

Operator

Good day, and welcome to the RC2 first 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.

Curtis Stoelting

Thanks Kelly. Good afternoon, and welcome to our 2008 second quarter conference call. Today I’m joined by Peter Henseler, our President. On the call today we’ll cover the quarter and year-to-date results and Pete will provide some additional new product information. We’ve also allowed time for questions at the end.

Before we get started, I’d like to mention this call is being broadcast live over the Internet on www.earnings.com and ww.vcall.com. Replay will also be available through these web services starting this evening.

I also want to remind everyone that any forward-looking statements made on this call are subject to many uncertainties in the company’s operations and business environment, and I would refer you all to our complete forward-looking statement disclosure and our second quarter release which is incorporated by reference for purposes of this call. I’ll also refer you to disclosures made in the company’s quarterly and annual filings with the SEC.

For the call today, I’m going to cover some financial highlights. As you know the full financial information is provided in our earnings release and attached to the release are tables which show our results both on an as-reported basis and excluding the impact of recall related costs. I think those disclosures are very thorough, so I’m not going to cover all that in detail.

A few highlights from our quarter. Second quarter results we showed an improvement over our 2008 first quarter comparisons. Overall comparable sales declined by 2% as compared with a 14% sales decline in the first quarter.

Our preschool, youth and adult products category reported a slight increase in comparable sales. We saw comparable sales increases in our Learning Curve Thomas & Friends product lines and in our John Deere product lines, partially offset by declines in Bob the Builder, Johnny Lightning and ride-on product lines.

Declines in our mother, infant and toddler products category are primarily a result of eliminating low margin products in our care and toy product lines; we did have sales increases in our First Years travel gear and feeding product lines.

For the quarter, international sales returned to healthy growth with an increase of 25%. 8% of that growth was a result of foreign currency exchange. Our chain sales channel was down 6% in the second quarter and that compared to a decline of 25% in the first quarter, so we saw an improvement in that channel, and non-chain sales channel as well.

During the second quarter comparable gross margins increased by 200 basis points versus the prior-year period benefiting from a positive sales mix and a partial benefit from current year price increases.

As you know, some of those took effect in the second quarter, with the additional price increases taking effect July 1 of this year, so they will have a positive impact on the second half.

Those increases in positive sales mix did help to offset increases in our product costs as we continually are seeing inflation in our product costs. We expect product cost pressures to continue throughout the second half of 2008 and into 2009.

Operating expenses increased on a quarter-to-quarter comparison due to higher fixed sales and marketing costs. Sales declines and higher operating expenses negatively impacted our operating income performance in the quarter.

We remain concerned about the softness in overall consumer markets and consumer spending. We remain concerned about ordering trends and retailers’ point-of-sale comparisons, but we have seen an improvement on ordering trends and POS data beginning late in the second quarter and continuing on into the third quarter.

While it remains difficult to predict the retail sales environment in the holiday season of 2008, we remain optimistic about our new product introductions. Pete will give you some additional detail on our new 2008 products that are slated to be introduced in the second half, as well as some early highlights on our 2009 new product pipeline.

During the third quarter, we expect to complete the acquisition of the Children’s Publishing Division of Publications International Limited. As we talked to you before, the children’s publishing business is a strong strategic fit with our Learning Curve brand and creates an early learning platform which complements both of our product categories.

The Children’s Publishing portfolio and its licensing relationship will leverage RC2’s operating infrastructure and enhance the growth opportunities for our Learning Curve brand, both late this year and in 2009 and beyond.

On behalf of Jody Taylor, our CFO who is out on medical leave, I’d like to cover a few other items as they relate to the quarter.

Consolidated inventory turns came in at 2.5 times versus 2.6 times in the prior year. Our consolidated days sales outstanding are approximately 76 days and that’s the same as they were at the end of the first quarter.

Our CapEx for the quarter was approximately $2.6 million. Our CapEx plan for the full year of 2008 remains at approximately $13 million, with depreciation and amortization expense for the year estimated to be about the same amount.

And lastly, there were some small tax adjustments recorded in both the first and second quarter, which impacted the tax rate percentage that was calculated in each of those quarters.

I think it’s most helpful to look at the effective tax rate for the six-month period ended June 30, which is 38.7% on a GAAP basis and 32.3% excluding recall costs. Our estimated tax rate for the second half of 2008 ranges from 34% to 36%, depending on the mix between U.S. and foreign income.

Before I turn the call over to Pete and then come back and take some time for your questions, as always, I would like to thank our dedicated team members around the world who are working every day to improve our results and create new opportunities for RC2.

Pete is going to take some time now to talk about some of those new opportunities that our teams have created.

Peter J. Henseler

Good afternoon and thanks Curt. I’m going to cover some additional detail on new key categories and product direction and some market trends that are emerging, and all this pointed forward is put forward to our back half of 2008 and 2009.

I’m going to start with the preschool, youth and adult product categories and we are pleased to have experienced some of our core categories firming up in sales; namely, the Learning Curve, Thomas & Friends and our John Deere product lines.

In assessing our play results and looking forward, there are several factors that have most impacted our results and are really helping shape direction for our future.

As you recall, we invested in developing new product segment in 2007 in radio control and unfortunately, while our product was well received and selling was fairly good, we did not achieve strong enough retail sales results and as a result, these product lines did not meet our margin expectations.

Due to this performance in this category in late 2007 and Spring 2008, we are opting to reduce our radio control investment for 2008 and this reduction has impacted our Q2 sales results.

Secondly, the retailers this year continue to have a major focus on movie entertainment properties, placing a lot of major support around the big movies such as Batman, Iron Man, Speed Racer, Hawk, Indiana Jones, seems like an endless dream this year.

Our strategy has been to avoid investment in the volatile world of big movie licensing. However, the retailer trend during Q2 was to devote a lion’s share of their promotional merchandising resources against these movie properties, which again impacted promotional support that we had on our preschool business.

However, we are seeing an emerging trend that we are beginning to study with, what I deem, older-age movie properties and this continuation of down-aging the products targeted at our traditional preschool age children.

This year, more than previous years, we’ve seen a significant amount of these big entertainment properties come out with products that are targeted and competing for the preschool dollar and space. That has had some level of impact into the sales of our core product lines.

As we look forward, we like most consumer companies, are very cautious about the remainder of this year and how consumer confidence will impact overall spending in the holiday season.

Based on these variables in the consumer markets and associated costing challenges Curt talked about, we’ve made a decision last year and are continuing that focus this year to nail our product focus for 2008.

We are directing more of our resources on our core franchises at Thomas & Friends and John Deere with a number of new products debuting in both of these categories in the second half of this year; in addition, for keeping the majority of our investments in 2008 and for 2009 in the preschool category.

In fall this year we’ll be debuting in the girls’ preschool aisle, the Caring Corners brand, which I think most of you listeners are aware of. Caring Corners through very creative open-ended play introduces girls to the importance of caring, sharing and preparing through the time tested play pattern of Dollhouse play with a lot of character behind it.

We are currently meeting our retail sales plans and selling with Caring Corners and expect with a very successful launch this fall and Holiday season that we will be able to expand this portion of our girls’ preschool business in 2009.

In addition to that, we’re very busy working on Super WHY!, which is a top-rated PBS kids’ preschool show that teaches the fundamentals of reading while entertaining kids through great storytelling. Our Super WHY! products which are currently in development are expected to ship in Q2 of next year.

Now switching to our mother, infant and toddler business, we are monitoring several emerging trends in adjusting products as necessary as driven by market conditions. Directionally we believe the juvenile categories are actually experiencing more impact from the current consumer slow-down than we had originally anticipated.

What we’re seeing in our market shop and consumer conversations are that they’re purchasing the basics for their children, things like diapers and formula, and either delaying or forgoing purchases of incremental juvenile products or actually reusing hand-me-down products from their other children when they were babies or passing them along to new mothers.

With that said though, we have a very positive long-term view about the juvenile category and specifically our First Years mother, infant and toddler business. We are investing more to develop innovative product solutions that meet today’s consumer needs and provide more value for both our retail customers and consumers.

Even in slower periods which we’re finding this year, the infant and toddler consumers will respond to products that innovate and meet caregiver’s and their child’s needs.

Our pipeline of new products is robust and we’ll begin rolling out many of these new products late in the fourth quarter and into 2009. Just a sampling of some of these, in travel gear, which is a new category for us this year, we have two new convertible seats and the new belted-booster planned for 2009 introduction.

In the care category, our Kick-n-Go coaster captures the trend of early baby exercise and movement and we’ve had great initial interest and read from our customers on that.

We will significantly expand our safety-gate program that will be supported by an entire line of gates, the most extensive line in the market, that will be branded under our First Years brand and again you’ll be seeing that late fourth quarter, early first quarter.

Lastly, we believe we have a market changer in breast pumps and that’s under the product name My Pump, which will be marketed under the First Years. It is a very unique pump that really meets consumer needs both in the need of portability and discreet usage, so we’re very excited about that product and think that will have a big impact in our feeding business.

In closing, the RC2 organization is extremely focused on our mission of being one of mom’s trusted sources for care and play. With the addition of the earlier learning and reading coming on board through our acquisition, it’ll too become one of our key category platforms.

We remain very committed to investing and delivering product innovation that continues to make parenting easier and more enjoyable and fun for the family.

Now I’d like to turn it back to Curt.

Curtis Stoelting

Thanks, Peter. Now we’d like to take some time for your questions. Kelly, do you want to pick up for the Q&A?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Todd Schwartzman - Sidoti & Company.

Todd Schwartzman - Sidoti & Company.

Can you talk a little bit about the operating margin; if Publications vis-à-vis RC2, as it is currently configured?

Curtis Stoelting

Again we are not in a position to give specific guidance in terms of those numbers, but their margins are in line with our targeted margins, so mid to high teens is what we’re looking for there.

Todd Schwartzman - Sidoti & Company.

Okay. And with the maintenance of 2008 EPS guidance, what are you now expecting in the way of interest expense in the back half of the year?

Curtis Stoelting

On our core business, our net debt is roughly, I don’t remember what it was exactly at the end of the quarter, roughly $50 to $60 million. Interest rates have been stable, so we don’t see any big change. Obviously, once we close the acquisition, then we’ll have a new debt structure and we’ll be happy to update that upon closing.

Todd Schwartzman - Sidoti & Company.

Okay. Switching gears for just a minute, have you received the final approval as yet on the settlement in the Barrett case?

Curtis Stoelting

In the Barrett case and just to broaden that out a little bit, that’s one of the class action lawsuits related to the recalls from last year. We are in the final stages of the settlement process. I believe all the notifications have gone out that are required through the court direct settlement, and we believe that the settlement will be finalized late third quarter.

Todd Schwartzman - Sidoti & Company.

Okay. How much of that cash will insurance cover roughly?

Curtis Stoelting

What we said in the past is we are pursuing recovery. We have not recorded any offsets. At this point we’ve factored in all of our expenses and any recoveries we get would be pluses to that.

Todd Schwartzman - Sidoti & Company.

Okay. Great, thanks.

Operator

We’ll turn now to Sean McGowan - Needham & Company.

Sean McGowan - Needham & Company

Thank you. Curt and Pete. Can you give a little bit more specifics on where you saw increases outside the U.S.? There were some pretty robust sales increases; specifically what products were driving that and what geographic regions?

Curtis Stoelting

Sean, I’ll talk about the regions and Pete can speak to the products. In terms of the regions, we saw pretty good results again in local currencies in pretty much all the markets we serve, with particularly good performance in Australia and Europe. Asia continues to exceed our expectations. To have that level of overall sales increase, we’re pretty much happy with performance in all of our markets.

Sean McGowan - Needham & Company

Okay, and products?

Peter Henseler

On the product side, Sean. The play business drove a lot of that increase. We did quite well, and again that was pretty much across markets. Our infant business is a smaller piece of our international business, but again, we continue to build positive increases in that category as well.

Sean McGowan - Needham & Company

Okay. Curt, do you have a sense at this point of how much currency exchange rates helped the bottom line?

Curtis Stoelting

I think they probably flow through pretty accurately in line with what we saw on the top line.

Sean McGowan - Needham & Company

Okay, you mean that it would be 8% of the international profit, or a couple of percentage points to the total?

Curtis Stoelting

I think if you took the 8% top line and you flowed that through your model, you get 20% or so of that, 15% to 20% of that running through your op income.

Sean McGowan - Needham & Company

Okay. Back to Thomas & Friends, where are you seeing a lot of strength there? Is it across all retailers or is that more in the specialty channels?

Curtis Stoelting

Specialty continues to be a little challenging for us, and some of that driven by market conditions. But we’re continuing again to see good strength internationally with Thomas, good growth in our new trading partners here on our business. Overall in terms of impact, the specialty has been the weakest of our channels.

Sean McGowan - Needham & Company

I know you don’t like to talk about specific customers, but if you look at the three biggest toy retailers, it would surprise me to find that Thomas business was up, recent sell-in in those retailers just because shelf space seems to be somewhat constrained relative to last year. Where are you seeing increases outside of those retailers?

Curtis Stoelting

Sean, I don’t agree with your assumption. I think you have to look at each retailer individually and we’re not going to, for competitive reasons, do that on a conference call.

You can draw your own conclusions from your store checks. But we have store count reductions at certain retailers, but I don’t believe in stores where we’re fully represented we haven’t lost shelf space for Thomas. In fact, we’ve increased shelf space.

Sean McGowan - Needham & Company

Right, I’ve seen that.

Curtis Stoelting

But I would agree with your assumption that sell-through has been stronger than sell-in. We started to see that turning late in the second quarter and we think there is some good momentum with that brand and other brands as we move into the second half.

Sean McGowan - Needham & Company

Okay. Then last question, as it sounded from Pete’s commentary that there were a couple of areas that you are pulling back on, or you seeing more weakness than expected. Can you tell us if there are offsets to those areas that make you feel confident in reiterating the guidance for the year?

Curtis Stoelting

Absolutely. As Pete mentioned, we had a lot of top-line on some of the RC products last year, but probably negative bottom line. In this year, as we’ve really talked about really since the beginning, it’s all about bottom-line performance.

As we all know in our business, that really happens in the second half of the year and that’s where our focus is. Not real focused on top line, much more focused on bottom-line cash flow results for this year and with a strong new product pipeline coming for 2009.

Sean McGowan - Needham & Company

Right, which is what you were saying at the beginning of the year. What I was asking was, it sounds like as the year has gone on, a couple of areas were potentially a little softer than expected. I think you said that the juvenile area is turning out to be more sensitive to the economy.

As the year has gone on, there have been other areas that are stronger than expected that would allow your outlook for the whole year to be unchanged.

Curtis Stoelting

Yes, absolutely. International continues to perform well for us and we think that’s going to continue. Preschool, even though it’s not to the level we want it to be, certainly is performing at a much better clip than it has been the preceding couple of quarters, so we are making up some softness on the JP side with some better results in other markets and in our other category.

Sean McGowan - Needham & Company

Okay, thank you.

Operator

Thank you. We’ll hear next from Linda Bolton Weiser - Caris.

Linda Bolton Weiser - Caris

Maybe I’m mistaken here, but I thought that the revised licensing terms with Thomas indicated that the royalty rate would come down in the second half of 2008 and have a favorable effect on earnings, was my assumption.

Given that you’re keeping the guidance the same, why would you keep it the same even though there should be a favorable effect from that? Can you just explain more thoroughly?

Curtis Stoelting

You and Sean just need to get together, because I think you’re answering each other’s questions. Part of what we’re benefiting from, where we do have some weaknesses, is lower royalty rate on the Thomas Wooden Railways, we’ve previously announced beginning in the third quarter. Again, we’ve factored that in and that gives us comfort in our guidance for the full year.

Linda Bolton Weiser - Caris

Okay, I got you. And again I don’t know how much you can say on this, but it’s my understanding that at some point in the future, you would discontinue or lose Take Along Thomas part of the line. Is that correct? And if so, what kind of timeframe are we talking about? Two years, three years, one year? Can you give some color on that?

Curtis Stoelting

We haven’t said that, Linda, what we’ve said is that we have shortened the existing term of the license. And again, for competitive reasons and for confidentiality, we don’t get into specific licensing terms. We believe that any shortening of the license is more than offset by some of the other games that we got in the comprehensive settlement agreement.

Linda Bolton Weiser - Caris

Okay. There were some other new products that were launched, I don’t know, last year and continuing this year, can you comment on how the other Take Along products are doing? Like Take Along Nickelodeon? And weren’t you supposed to launch Take Along Sesame Street this year?

Curtis Stoelting

Those products are in the market, and they continue to do numbers; the numbers haven’t been as strong as we’d like. Pete mentioned a lot of competition from movies, we think that’s had an impact, and the reality is, on the Nickelodeon characters, I think the overall market for a lot of those characters, we’ve seen a decline.

Not just for us but for other people who make licensed preschool Nickelodeon characters; but they’re still in the market. They are still selling through and listed, and we will continue to monitor those and build off of those product lines throughout 2008 and into 2009.

Linda Bolton Weiser - Caris

Okay. Can you comment on - it’s beyond the testing stage now, but the trials in Target for Thomas that were going on? Has it maintained shelf space? Has it been reduced or increased?

Curtis Stoelting

We’re well beyond any trials. We’ve had our tribulations, but we’re past those as well. The overall Thomas business we’re not going to talk about specifics, but I’ll let Pete talk maybe reiterate what he already said.

Peter Henseler

I’m not going to give any sales updates on that for competitive reasons, but that was a rollout last year to Target, and we will continue to build and expand our Thomas business at Target in 2008-2009.

Linda Bolton Weiser - Caris

I know that there had been some question as to whether a mass retailer could handle the high number of SKUs in that type of thing. How is that working out?

Peter Henseler

The Wood launch at Target last year was very successful, and it’s evidenced by the continued support for that product line this year.

Linda Bolton Weiser - Caris

Okay. Thank you.

Operator

We’ll hear now from David Cumberland - Robert Baird.

David Cumberland - Robert Baird

Good afternoon. On Caring Corners, did you ship any of that or recognize any revenue related to that in Q2?

Peter Henseler

Just a fraction.

Curtis Stoelting

We didn’t expect to. We really anticipated it would, the bulk of the shipments would be in late third quarter and into the fourth quarter, based on the price point and the nature of the category.

David Cumberland - Robert Baird

Staying on Caring Corners, how reliant do you expect the launch of that to be on free publicity to making top ten lists; that type of thing, or would you expect the launch to be mainly supported by your own promotional efforts?

Peter Henseler

We’ve got a very integrated promotional program of PR, media tour with our spokesperson, our own advertising, so we expect that the fully-integrated program is going to give us the push it needs for awareness and takeaway as well as a very robust program with our retailers both in in-store demonstration as well as promotional support, so we feel good about the support we wound up.

David Cumberland - Robert Baird

My other question. Is the timing of the CPD closing happening a bit later than you expected when you announced the deal last month?

Curtis Stoelting

No. We knew it would have a life of its own like all acquisitions do and we still expect it to get it closer than the window that we had planned.

David Cumberland - Robert Baird

Great. Thank you.

Operator

We’ll hear from Timothy Conder – Wachovia.

Timothy Conder – Wachovia

A couple of things here. First of all you alluded that the sell-through on a couple of products was a little bit better, but in particular could you just comment on as a whole year retail inventory levels on a year-over-year basis in the U.S. and then versus your international channel?

Peter Henseler

I think it’s pretty well documented. They continue to be very cautious with inventory, putting more of that inventory on the suppliers, so that hasn’t changed. That’s been going now for a good period of time, and we expect that to continue; shipping it closer to consumer take away.

Timothy Conder – Wachovia

Okay. But on a year-over-year basis, Pete, would you say then implying that your inventory levels in the channel are actually lower?

Peter Henseler

It’s hard to say. I’d say they’re probably about the same, maybe a little lower.

Timothy Conder – Wachovia

Any differences between the U.S. and international?

Peter Henseler

No. We see the same trend in international as well.

Timothy Conder – Wachovia

Okay. And then, Curt, in the overall guidance that you reiterated here, what type of sales assumption do you have on the core business comparing that to I think it is the $472 base last year ex the discontinued product line?

Curtis Stoelting

As you know Tim, we have not given top-line guidance and we are going to let you do something, earn your money and I’m sure you’ll do a great job collectively.

Timothy Conder – Wachovia

Okay. Then in the settlement payment with HIT, you really didn’t comment too much on that. Could you expand on that? It sounds like it gives you, I think Linda was alluding to it a little bit, the shortening of the Take Along product line. How does that play then as you expand on the (inaudible) opportunity?

Curtis Stoelting

Tim, really all I can say there is what we put in our release. In any settlement there’s always some puts and takes, and we think that over time we’ll more than offset with the upsides some of the short-term downsides.

And we are excited about (inaudible), but we don’t have any plans yet to launch that in North America. But we’ll let you know as soon as we do.

Timothy Conder – Wachovia

And that should start shipping in 2009 in the international market?

Curtis Stoelting

No, our plans are there to let the media take good root and we won’t be in the market with product until 2010.

Timothy Conder – Wachovia

Okay, and then finally, any quantification you can give us this year, gross margin, operating margin, however you want to refer to it, as to the input cost impact on the year-over-year basis that you will not be able to offset with pricing?

Curtis Stoelting

I think where we are today, we’ve done a pretty good job of offsetting; there’s always a little bit of a lag, being that the cost increase is coming and the price increase is taking effect.

But as we talked about before, I think based on everything that’s happened to-date, we’ve pretty well mitigated them between supply chain savings and price increases. But as we look forward, we’re still seeing additional cost increases that will probably be affecting us late this year and into 2009.

It’s too early for us to comment on our ability to offset those. We do think that we will be looking to offset those again, both through cost-saving initiatives and price increases, but it’s too early in the game to really comment on that.

Timothy Conder – Wachovia

Okay, but it’s fair to say for 2008 you should have everything pretty well offset and then we’ll assess it for 2009 as you price your line for the spring?

Curtis Stoelting

I think that’s a fair statement. I do think we are seeing vendors looking for pricing increases earlier than we have historically, we’re still in negotiations on that. So we’ll just have to see how that plays out; there could be a little creep in inflation in Q4, but we’ll do everything we can to hold the line.

Timothy Conder – Wachovia

Okay. Thank you.

Operator

Next we’ll hear from Gerrick Johnson - BMO Capital Markets.

Gerrick Johnson - BMO Capital Markets

I just want to get back to the Thomas thing. Just wanted to be clear as to what we are comparing Thomas to last year when you say that sales or shipments were up. Does last year’s Thomas sales number add back the reduction in sales from returns related to the recall or does it not?

Curtis Stoelting

We try to look at things on a comparative basis. The numbers I was giving you would take into account any adjustments related to the recalls.

Gerrick Johnson - BMO Capital Markets

Okay. That’s helpful. Do you expect it to be up for the back half?

Curtis Stoelting

That’s our plan.

Gerrick Johnson - BMO Capital Markets

Okay. Thank you.

Curtis Stoelting

What do you think, Gerrick?

Gerrick Johnson - BMO Capital Markets

I’m leaning in Sean’s direction on that one.

Curtis Stoelting

It is hard to believe you are going to agree on something. I think time will tell. I think we are seeing good order patterns and very good POS data on the brand right now and we’re hopeful it will continue. We know we’re up against some strong headwinds from overall consumer spending, but everybody is in the same boat there.

Gerrick Johnson - BMO Capital Markets

Okay. All right, thank you very much.

Operator

We’ll hear a follow-up question from Todd Schwartzman - Sidoti & Company.

Todd Schwartzman - Sidoti & Company

On the potential or likely deferral of purchases of infant and toddler products that you saw in favor of hand-me-downs in the quarter. Is that across all price-points or is it more skewed towards one end of the spectrum.

Peter Henseler

I think it’s categories and again it’s a trend we’re studying and watching. As you know juveniles go through products pretty fast. If you have a second child maybe a consumer will want something new for their second child; they will use the product from their first. We’re watching it and trying figure out the impact, but I think it’s driven more by product form right now.

Curtis Stoelting

Actually price points too. I think obviously higher price points are where we’re seeing the pull-back, on our everyday more consumable product lines like our infant and toddler feeding, those aren’t as impacted. But higher ticketed toy and care products obviously are going to be more impacted in these economic times.

Todd Schwartzman - Sidoti & Company

Do you have enough evidence to suggest that the First Years is not alone in facing this at this point?

Curtis Stoelting

Yes, I think we do. We never have perfect data. But we do get overall industry data. And we try to triangulate on that. Not to say that the industry is trending exactly like our trend is.

One of the things that we talked about on the first quarter and on this quarter is that we launched a lot of new products last year. We’re not launching as many new products this year, number one.

Number two, in the First Years brand, with all the price pressure and cost pressures, we did discontinue some lower margin products which cost us some volume, but have helped us blend up the margin mix that you’re seeing.

I think those are the right decisions to make. We’re very confident that brand will grow late this year and into 2009 with a full complement of new products, even in these economic times, because we’ve made the proper adjustments.

Todd Schwartzman - Sidoti & Company

Thank you. And finally, should we expect to see anymore acquisitions announced in the next 18 months?

Curtis Stoelting

I would never say never, but our history has been that when we do a good size acquisition like the publishing business that we’re in the process of acquiring, that we really focus on that, and we really get the integration done. That’s our primary focus for the next 12 to 18 months.

I think that’s the way it’s going to play right now. We really want to do the heavy lifting there, generate the incremental cash flow from the cost savings, and at the same time, start to build the longer term synergies of creating more new products in the early learning platform.

There’s plenty for us to do right there. We’ll generate cash, we’ll pay down debt, and then we’ll be in good position down the road when the time is right for the next acquisition.

Todd Schwartzman - Sidoti & Company

So we’ll probably not see a dividend for quite some time?

Curtis Stoelting

Again, I’ll never say never. But I think that right now, that wouldn’t be on our list of use of capital.

Todd Schwartzman - Sidoti & Company

Terrific. Thank you.

Operator

It appears that there are no further questions at this time. I’ll turn the conference back over to you for any additional or closing remarks.

Curtis Stoelting

Thanks again to everyone for participating on the call today. We look forward to speaking with you throughout 2008. Take care.

Operator

Thank you. That does conclude today’s call. We thank you for your participation and have a great day.

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: RC2 Corporation Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts