JAKKS Pacific, Inc.
Q4 2020 Earnings Call Transcript

Published: 18 Feb 2021

[Operator:]

Good afternoon, everyone. Welcome to the JAKKS Pacific Fourth Quarter Earnings Conference Call with management, who will review financial results for the quarter ended. For the quarter ended December 31, 2020, JAKKS issued its earnings press release earlier today. The earnings release and presentation slides for today's call are available on the company's website in the Investors section. On this call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, along with highlights of product lines and current business trends and a discussion of impact of COVID-19. Then Mr. Kimble will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions.

[Stephen Berman:]

Good afternoon, and thank you for joining us as we review our performance in 2020 and our plans for 2021. John will go over the financial results in more detail. But let me start by saying we are very pleased with how the company performed in the fourth quarter and for the whole year in 2020, especially consider the many challenges we faced. For the last two years we have been working diligently to improve our profitability, even as we have faced significant revenue challenges. We've embarked on a 3-pronged plan to improve results. First was to reduce our product cost and operating expenses to allow us to be more profitable on the revenue that comes from our core product categories. Second, we've been working to drop lower-margin products and take into account the total cost of a product, not just its product cost. These 2 steps have lowered our breakeven level and positioned us well for even stronger profits when we do launch successful promotional products. Third was to focus on the balance sheet by reducing our high-cost debt and stretching out the maturities of our debt. We have already accomplished some of this in 2019 and 2020, and we'll be working on further improvements in 2021. I'm extremely pleased with how well our efforts to improve profitability have paid off, and we can see the results of these efforts in many ways. Our fourth quarter gross margin rate was the highest quarterly gross margin rate in nearly a decade.

[John Kimble:]

Thank you, Stephen, and good afternoon, everyone. Net sales for the 2020 fourth quarter were $128.3 million, down 16%, compared to $152.5 million last year. Reported net loss attributable to common stockholders for the fourth quarter was $11.7 million or $2.55 per basic and diluted share compared to $20.6 million or $6.95 per basic and diluted share in the fourth quarter of last year. The fourth quarter of 2019 included adjustments related to the impairment of intangibles, changes in fair value of convertible senior notes and preferred stock derivative liability, restructuring, bad debt recovery and other charges totaling $12.8 million net of taxes. In the fourth quarter of 2020, such adjustments totaled $8 million, primarily due to changes in fair value of convertible senior notes and preferred stock derivative liability. Excluding the impact of such adjustments as well as stock compensation expense, our adjusted net loss attributable to common stockholders in the fourth quarter of 2020 was $3.6 million or $0.80 per basic and diluted share compared to $7.8 million or $2.62 per basic and diluted share in the fourth quarter of 2019. For the full year 2020, adjusted net loss attributable to common stockholders was $6.3 million or $1.72 per basic and diluted share compared to $18.9 million or $7.27 per basic and diluted share in 2019. Adjusted EBITDA for the 2020 fourth quarter was $3.9 million compared to $3.3 million in the fourth quarter of 2019. Our full year 2020 adjusted EBITDA was $28.1 million compared to $18.9 million in 2019. The 5.5% adjusted EBITDA margin is the company's highest full year result since 2016 when it reported a 5.9% adjusted EBITDA margin on an additional $191 million in top line sales. Compared to last year, our girls targeted business declined in the quarter, inclusive of dolls, role play, dress-up and preschool toys and consumer products, net sales were $73 million in Q4, down 28% compared to $101.8 million in the prior year. The big driver of the decline was the strong sales of Frozen merchandise as well as the Frozen 2 film was released theatrically in November of last year. Excluding Frozen products, sales of girls products were up nearly 25% compared to prior year. Among the strongest performers are toys in our Disney Princess and Perfectly Cute home and baby ranges. For the full year, net sales in our girls-targeted business declined 11% to $275.2 million. Excluding Frozen products, sales of our girls products rose 2% for the full year 2020.

[Stephen Berman:]

Thank you, John. I'd like to turn to 2021 now and outline how we plan to keep the momentum going with exciting new products that will drive sales, continuing the efforts to keep costs down and how we can further strengthen our balance sheet. We came through 2020 with our core business intact and strong. Our retail inventories at very low levels, our operating costs significantly reduced and very lean working capital. We are set up very well for growth in 2021, and we believe that this year we'll continue to see parents and kids looking for core, basic products, popular entertainment licenses with proven play patterns. For decades, we have been introducing new and innovative products in multiple categories based on iconic characters from Disney, Pixar, Marvel and Star Wars. Disney announced last week that its Disney+ streaming service has accumulated nearly 95 million subscribers since launching in November 2019. In addition, Disney is constantly adding new content to its library and to the offering on Disney+. What this means for JAKKS is that all of these subscribers have year-round access to a great quantity of premium Disney content whenever they want it. And we have known for years that what drives demand for licensed toys isn't just when kids see a movie in a theater, it's when they can bring it into their home and watch it over and over again. In our girls business, we believe taking advantage of Disney's momentum and building on our own success. We anticipate 2021 to be the third straight year of top line growth on the core Disney Princess brand. This growth is being driven by several key factors, including the Disney Princess Style Collection, a line of core roleplay items designed for today's modern girl. Our core Disney Princess Dress Up and large doll business as we move into our first full year of the recently launched easy-to-dress large doll line and matching girl size dress up dresses. And we expect growth to be driven by both expanded retail distribution as well as an increase in consumption. Items of this line include magic in the motion Rapunzel and Sing Along Elsa. We will continue to introduce new products in the Frozen franchise with new items such as Arrindell Snow Queen. Outside of our core Disney Princess broad line of products, 2021 also brings new theatric releases, extending our Disney portfolio. Raya and the Last Dragon releases simultaneously in theaters and on Disney+ with Premier Access on March 5. JAKKS' products are already on shelves and include core play patterns of large dolls, dress up and role play accessories as well as a feature figurine, 6 inch petite settee and a large-scale light and sound feature Sisu Dragon coming this fall. This fall, JAKKS is extremely excited to launch products inspired by the Walt Disney Animation Studios' November release, in Kanto, which tells that tale of an extraordinary family, the Madrigals, who live hidden in the mountains of Colombia, in a magical house, in a vibrant town, in a wondrous charm place called Encanto. The film features all new songs by Emmy, Grammy and Tony award-winning composer of Hamilton and Moana, Lin-Manuel Miranda. The JAKKS line will offer an array of play patterns that our consumers know and love from fashion dolls and large dollars to dress up and role play Toys. The centerpiece of the line is a collection of small dolls that deliver a magically integrated world of play celebration to family and the magical house in which they live. Other growth products we have for 2021 include extensions to our perfectly cute doll line at Target, where we expect growth this year. We will also be launching a new line of collectibles and toys based on the Haribo candy brand, one of the world's most popular line of gummy candies. In addition, we will be releasing other fun and innovative new girl lines, which we will announce later this year. In our boys division, we will be leveraging the momentum we have in our video game related products, including Apex Legend figures, Super Mario Brothers figures, playsets, plush, RC and more and the Sonic the Hedgehog figures, playsets, RC and other products. In addition, we expect our sales of Black & Decker play tools to continue to be strong in 2021. Other new exciting products include one that we've been working on for years, the rerelease of Creepy Crawlers, which is our own IP and has been a classic toy brand going back more than 45 years. In addition, we are launching a brand-new, fun and innovative item, the XPV Blade Saw RC vehicle, which is packed full of high-performance features and an iconic design. In seasonal, our ReDo Skateboard line continues to perform well with growth at Target and Amazon. We have acquired various licenses that will enhance and broaden this line this year. For 2021, JAKKS is jumping into the trampoline business with a new line of licensed and unlicensed trampolines launching this summer. Our activity tables, ball pits, play tents and foot-to-floor ride-ons are among our most steady selling categories of core products, and we will maintain this momentum with the best-in-class evergreen licenses, including Mickey Mouse, Minnie Mouse, Frozen, Paw Patrol, Fisher-Price, among others, and new licenses based on Paw Patrol movie and Blue's Clues. Finally, we have good momentum in our Disguise segment. Retail inventories were left clean by better-than-expected retail sales around Halloween. We are bringing to market an expanded product line in 2021 with new disguise offerings from NBC Universal, Sony and Nickelodeon, amongst others. In 2021, Halloween lands on a Sunday, which usually gives the industry a lift compared to when Halloween is on a weekday. Of course, a rebound in Halloween sales assumes that the pandemic is sufficiently under control to allow for more of a normal level of celebration. In closing, I would like to thank our incredible team around the world for all their hard work in the challenging environment we have today. We continue to take the steps needed to position the company for profitability growth, and we couldn't do it without the dedicated team we have around the world. With that, we will now take questions. Thank you.

[Operator:]

. Our first question comes from the line of Steph Wissink with Jefferies.

[Steph Wissink:]

Stephen, the first couple of questions are for you. And then John, I have one for you as a follow-up. I'm intrigued by some of your comments on Disney, Disney+. So I'm wondering if you can just help remind us, Stephen, what percentage of the business is Disney in a normalized environment? And help us think through also the split between domestic and international in terms of how you go to market, and what the rollout of Disney+ internationally might mean to the international growth opportunity for that partnership. And then secondly, I think you mentioned in your script the top 3 retailers were up double digits in POS. I'm wondering if you could just talk a little bit more about what you might have seen across different channels of retail. And then the online, I think you mentioned was up 40% in Q4. If you can just remind us what that is as a percentage of the total as well.

[Stephen Berman:]

All right. Thank you, Steph. So if I go right into Disney+, firstly, Disney overall between all the different segments and divisions in which we have from Disguise to seasonal, to boys, to girls and so on is approximately anywhere from 43% to 50% given the year. And the split internationally, we'll work on in just a minute. For us, with the Disney+ initiative, it couldn't become at a better time. Through this pandemic we've seen a lot more people eat up content more so at home than ever before. And it's become a new pattern of watching more at home. And even though theaters are an amazing fun entertainment for families and for children, I think it's much more conducive for people to do things at home. And the repetitive watching as it was years ago with VHS to DVDs and Blu-rays, kids would continually watch the same episodes, but they would have to put in the DVD and so on. Now they just go to Disney+, and they could watch new episodes, old episodes, and they just have an abundant amount of content that they can continue to watch in various forms. And for us, that just bodes well, whether it's our current everyday business that we have with Disney or whether it's a theatrical loss like Raya, which is coming out in March, which will be both theatrical and Disney+ premium, I think. As well as when Encanto comes, I believe it's scheduled for theatrical, but Disney+ just gives it the carrying forward that we normally don't have when a movie comes out just in theatrical. So when a movie comes out, you get that immediate burst of sell-throughs and so on, and then you wait for the streaming version, the DVD version, which is usually 3, 4 months later, we have that now 365. So when it comes out, it's on Disney+ or streaming. The kids are able to have that content more and more at their hands and allows them to have - just really be invigorated with the toy products in which we make because they have the play pattern of the theatrical or just whether it's the normal television version of their content. So for us, it's a dream, and we're excited for this year. And going forward, the Disney company, the Walt Disney company itself is really - we're lucky to be partners with them as they just - they are kings of content. So for that, we're excited about going forward. Internationally, it really depends on the launch in areas in which the content arrives. So it really is by country. And some content doesn't necessarily work as well in certain countries versus others. So it really is a country-by-country basis of how we perform with Disney+. But wherever Disney+ is, we believe we'll be performing better with our Disney content in those countries. For the top 3, I'll have John just jump over of the online sales because he has that in front of them.

[John Kimble:]

Yes, sure. Hi, Steph. For the online, and you asked about POS 2, they're obviously somewhat - they're obviously related. To parse that out and just make sure we're being clear about stuff, from a year-over-year perspective, when we talk about double digits, we're talking specifically about the toy piece of that. Our Disguise business is down for the year as we've been talking about all year. And so, similarly, our Halloween POS was down a little bit year-over-year. So if you blended the two out from a total company point of view, POS at the top 3 accounts as high single digits, with the Toy/CP being double digits. Then on the dot-com part, it's starting to be a little bit harder to keep track of, is the big accounts who are both brick-and-mortar and online start to combine some of that inventory in buying. It makes it a little bit harder, at least for us to segregate it. Maybe other people can do it, but we're not - we're still working our way there. Whether or not it's the traditional players or online-only players, we saw that part of the business, the online sales piece growing 40% year-over-year. Whether or not that was the Halloween piece or the toy piece. So clearly that becoming a bigger portion of the mix. And I could also add that for the players who are online only, we see them becoming - we see them as we look backwards becoming a bigger portion of the mix, and presumably that trend will continue, especially as the brick-and-mortar guys keep pace with that.

[Steph Wissink:]

That's helpful. And then a follow-up for you, John, on cost. They've done so much work on the middle of the P&L. I think you mentioned - or Stephen mentioned the product costing - cost of product overall, just thinking about the weight of the number of lines that you carry, but also on the interior in the operating expense structure. So maybe it's helpful to think through what's the threshold in revenue that covers your expense structure? Or another way to think about it, what's the top line opportunity in terms of incremental margins as you grow off of this base, should we start to see some incremental margin enhancement above and beyond the cost takeouts that you've done?

[John Kimble:]

Well, I certainly think when you talk about the G&A portion of the P&L, that's where I am always kind of focused on trying to get scale. I was really pleased when we called out that our operating margins were profitable on a full year basis. I think that's the right kind of corner you want to turn. And then it's just a question of how big can we get that margin given overall we've got a certain degree of scale given what our top line is, right? If our top line had another 0 at the end, that scale looks a little bit different than where we are. But I think the journey kind of continues, in some respects. It's like flipping over every rock and then revisiting things. And you can go up and down the P&L to that effect. Certainly, to the extent we want to be able to put more money back in for things like demand creation. So it all doesn't drop to the bottom line. There are a lot of costs that were cut in 2020 that we'll have to creep back up in '21. Someone will probably want to get on an airplane at some point. So incrementally, that's more, as you know, we also kind of stepped up for short-term pay cut in 2020, which we don't plan the anniversary this year, some deferred spending against IT, kind of those usual things. Trade show spending this year obviously isn't lined up to be what it used to be. But at the same time, what I at least feel good about, I think, we all do is there's still several areas that we continue to look at that we think we can kind of shave off some pennies here and there, so to speak. And so I think it's - we're hardly out of ideas yet as the topic goes.

[Steph Wissink:]

Okay. Do you want us to model some level of stability in the cuts you've achieved but maybe a little bit of a give back on some of the, let's call it, reopening expenses, that would be affiliated with your business?

[John Kimble:]

Yes, I think that's right. I think that's right as you think about the back part of the year, trying to figure out at what point in time do we start to turn a corner towards something that feels a little bit more familiar. I think that's a part of it. I certainly think you can think about last year in terms of, we did a significant restructuring in Q2. So we still have some pickup this year as we kind of lap that period in time in the front part of the year. But Steph, also let me add to this just one more thing. We do believe and we do see growth, both profitability and in revenue this year going in through 2021. So we do see it on both sides.

[Operator:]

. Our next question comes from the line of Gerrick Johnson with BMO Capital Markets.

[Gerrick Johnson:]

I was wondering how you're planning Raya and the Last Dragon given that it's a hybrid launch. How do you think about the opportunity there? Well, let's say, if it was a couple of years ago, and it was - it is pure theatrical, how would you plan it then? And how would you plan it now? Is it you're funding more conservatively, or? I'm just kind of curious about that hybrid model and how you think about it.

[Stephen Berman:]

Okay. So for Raya, that's a good - it's a very good question. For Raya, it was - previously it was going to be launched during - it was around November 21 or 22. Similarly, when Moana occurred and Frozen during those tentpole movies and now because of the pandemic and theatrical releases have changed dramatically, it's being launched both theatrical and on Disney+ in March. So we're originally going to have goods on shelf during November. We've pulled that back to have the launch during spring. So now it's not a holiday launch. So it changes that dynamic because it's not during, call it, the Thanksgiving and Christmas period. But normally, on a spring launch we have actually stronger demand on the spring launch because the retailers have been aware of Raya for a while. They've seen the content. The content is absolutely gorgeous. And so what we're planning is actually we're planning on a nice spring launch with it, and we're planning for it to grow throughout the year because of the way it's on Disney+ versus we would be planning a lower amount during the first, second quarter. If it was theatrical and let it build for the streaming, which would be later in the year. So now that it's all combining with one, we believe that the actual push and the retail, call it, the retail plans for fall are stronger than we normally would have had based off of streaming. So it really is boding well for the retailers and JAKKS and Disney the way that this rollout. This would be a really good test of how products prevail with - sets a blockbuster movie coming out in March. I think it's March 5, it comes out of March 12. I think it's March 5.

[Gerrick Johnson:]

So yes. So that's interesting. So do you think it could be bigger overall, the way it's rolling out as a hybrid?

[Stephen Berman:]

Yes. Again, it's spring versus it being launched - remember, it's a different time period. So I do - so as it's...

[Gerrick Johnson:]

Well, spring.

[Stephen Berman:]

Yes. So spring, I do believe, based off what we see on the retail commitments and what their plans are, even now for fall with it without the movie coming out, it will be a stronger release platform versus the typical way we're used to in the past years.

[Gerrick Johnson:]

Yes. Interesting. Okay. And then I've asked everyone this question, and hopefully I'll get finally a straight answer. What do you think the U.S. and the global toy industry will do in 2020? Do you think it will grow in the U.S. versus - sorry, 2021, do you think it will grow versus 2020? And can you give me a ballpark range? Because no one's been able to give me that kind of number yet.

[Stephen Berman:]

Okay. So this is, again, an opinion from myself and going out to retail and understanding what retailers are saying worldwide, not just North America. But if we just talk specifically North America, I believe it's going to be mixed. I do believe there's going to be pockets of really strong growth, seasonal activity areas. There's still big growth. We're still in the pandemic. We still have spring and summer where I do believe outdoor activities and things will be much more sought after. So I do believe segments in that area. I think the board games segment you'll see - you won't see growth based off of the tremendous amount of purchases that were done early in the year and even in the second half. Girls area, I see growth. But I don't see - if you put it all together, we'll see growth in Halloween, which is not really considered toy, but we will see growth based off of the cutbacks that occurred worldwide last year with the pandemic. And we do know just based off right now in the states, things are panning out a lot better around the U.S. and around the world. So we believe that there will be a Halloween, so we'll see growth there. But I don't say the industry is going to grow as a whole. I say there's pockets that will grow, and there's going to be pockets that definitely won't grow. So I don't know on a percentage basis, Gerrick, I wish I could give it to you. I'd have to kind of spend a little time. But I don't see - when you see like the 16% growth, I know JAKKS is growing. I know all our categories. We believe that we are extremely strong and benefit in. But I cannot see the total industry growing as a whole. I do believe segments. And I'm not sure the shrinking of the other segments, if that offsets growth.

[Gerrick Johnson:]

Okay. Okay. I'll ask one more, then I'll cede the floor back to Steph. How are you feeling about inputs, Mattel called out inputs as a pressure on margin going forward? What are you seeing in input costs?

[Stephen Berman:]

So we go through this yearly whether there's input costs - oil prices, resins, everything, it goes up and down. That's - it's part of the toy business since THQ days. So having that input cost coming, you kind of offset it by getting more efficient in logistics, getting more efficient - we're an FOB business versus much broader than a domestic. So the input costs are going to affect some, but we've known this for a while. So for us, we've worked on it throughout the year with cost reducing a lot of our legacy items. So we're picking up our gross margin from that avenue. The only part that we see that's been really affecting, we call it the manufacturing world, there's been the freight container issues and so on, but we've mitigated that and dealt with it. But the input costs, I see it, but it's part of our everyday business.

[Operator:]

We have a follow-up question from Steph Wissink with Jefferies.

[Steph Wissink:]

I just had one follow-up question for you, Stephen. Thinking more about Disney+. I mean clearly that platform is a robust source of data. So I'm also wondering if as you partner with Disney, if they're giving you any lead insights into rising trends that they're seeing in terms of consumption, just given what we've seen happen at retail with respect to the takeaway around some of the key content-oriented triggers. Is there anything that Disney is providing you as a partner that gives you a sense of where you might need to lean into inventory on something that is starting to up-trend within Disney+?

[Stephen Berman:]

Yes. I think within Disney+ and just in general, we - with all the separate divisions that we have, there's a tremendous amount of communication going on with the Disney company, the Walt Disney company in totality of what's occurring and by what level, what age grade and the content. But on the details of it, one of which we would not be able to disclose, the details, because it's analytics from the Disney side. But everything - what they're doing, obviously, is winning subscribers. And if you look at the subscriber base, grows so quickly, that just means more eyeballs are getting that content. So right now it's a fast bullet train with what they're doing with the Disney+. And I believe later in the year we'll have much more analytics because they're getting it daily as it comes as they're launching a lot more content via Disney+. So later in the year we'll have a lot better analytics of kind of the questions you're asking, and it will be done by the content and category and age grade. But they have a lot of analytics that have been given out to our staff.

[Operator:]

I'm showing no further questions at this time. I would now like to turn the call back over to Stephen Berman for closing remarks.

[Stephen Berman:]

Firstly I hope everyone is well, that's on this call, and we appreciate everyone's time. And we have several follow-up calls after this. And look forward to speaking to everybody during our first quarter review. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.