JAKKS Pacific, Inc.
Q1 2015 Earnings Call Transcript

Published: 21 Apr 2015

[Operator:]

Good morning ladies and gentlemen. Thank you for joining the JAKKS Pacific First Quarter 2015 Earnings Call with management. Today, JAKKS will review the results for the first quarter ended March 31, 2015 which the company released earlier today. Please note that presentation slides containing information covered in today's earnings release and call are available on the Investor section of our website. On the call today are Stephen Berman, President and Chief Executive Officer and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, then, Mr. Bennett will provide a detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of product lines and current business trends prior to opening up the call for your questions. [Operator Instructions] Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance or events or circumstances, including the estimates of sales and earnings per share for 2015 as well as any other forward-looking statements concerning 2015 and beyond are subject for Safe Harbor protection under Federal Security laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risk and uncertainties which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time. With that, I will like to turn the call over to Mr. Berman.

[Stephen Berman:]

Good morning everyone and thank you for joining us today. I will begin with a few remarks about our 2015 first quarter and then I will turn the call over to Joel Bennett who will provide more details on our financials. We could not be more pleased with our strong 2015 first quarter performance exceeding last year's results by a healthy margin and surpassing our expectations and guidance. JAKKS' has continued to focus on fundamentals, monitoring sell-throughs and market demand while focusing on margins and leveraging our P&L and continuing to pursue operational efficiencies. We continue to be encouraged by the results of our Disney product line and helped by the new animated short Frozen Fever, Alice and Friends [ph] continue to show strength at retail. Our Disney Princesses and Disney Fairies lines also continue to be consumer favorites at retail with the support of content releases such as the recent Cinderella live action movie and Disney's Fairies Legend of Neverbeast DVD release. Also showing strong performance at retail our Max Tow Truck and our Max Tow Mini's. Nintendo figures and Plush, our Star Wars large scale figures, Daniel Tiger plush and playsets. Licensed ball pits, write-ons and wagons and children's indoor and outdoor furniture. Our seasonal product lines including Maui Wave Hoops, Skyballs and gliders and fun noodle water floats are also showing strong encouraging results. Our ability to foresee early the combination of the Port Labor slowdown and port congestion allowed us to work closely with our partners to ship more inventory, protect our space at retail and ensure the cargo keeps moving. We’re confident that we have mitigated any serious impact of the port issues on our business as we continue to ship product to our customers. Our retail partners recently recognized JAKK specific and our divisions for these efforts and for being a valuable partner in driving sales and profits for them. JAKKS' received a 2014 vendor of the year award from Toys"R"Us in the U.S. and in Japan. Our disguise division was recognized as seasonal vendor of the year by both Walmart and Target and Disney recognized JAKKS' as the licensee of the year in Europe, Middle-East, Africa and Best Girls and Tween's licensee in the UK and Ireland. 2015 is looking very solid and strong, our inventory at retailers and our inventory levels are in a very good shape and our products continue to be in demand at our retailers. Our commitment to product innovation, focus on operating efficiencies along with margin improvement initiatives should position us well for profitability this year and beyond. Now I would like to turn the call over to Mr. Joel Bennett to review our financial results for the first quarter of 2015 and then I will give a further update of our business this year and beyond. Joel?

[Joel Bennett:]

Thank you, Stephen. Good morning everyone. Ahead of expectations, net sales for the first quarter of 2015 increased to a $114.2 million up 38% from net sales of 82.5 million reported in 2014. The net loss for the first quarter decreased to $7.6 million or $0.40 per diluted share compared to a net loss for 2014 of $16.3 million or $0.74 per diluted share. Adjusted EBITDA for the first quarter improved to negative $900,000 from negative $11.6 million in 2014. Worldwide sales of products in our traditional toys and electronics segment increased to $65 million for the first quarter of 2015 compared to $35.7 million in 2014. Sales in this segment in Q1 were led by Disney Frozen Toddler dolls, Nintendo Plush and Figures and Star Wars figures driving the category to an overall increase this quarter. Worldwide sales from our role play, novelty and seasonal toy segment increased to $49.2 million in the first quarter of 2015 from $46.8 million in 2014. Disney Princess dress up and role play including Frozen, Princess and Fairies dominated sales in the category this quarter driving the category to an overall increase. Included in the category numbers are international sales of approximately $42.3 million for the first quarter of 2015 compared to $18.3 million in 2014. Disney Frozen and Princess Dolls and Nintendo and Slugterra products drove the big increase in 2015 sales in the international markets. Gross margin for the first quarter of 2015 and 2014 were 31% and 28.5% of net sales respectively. The 250 basis point increase in gross margin in 2015 is due to lower product cost, offset in-part by higher royalties. SG&A expenses in the first quarter of 2015 were $39.6 million or 34.7% of net sales as compared to $38.4 million or 46.5% of net sales in 2014. The modest increase in SG&A dollars resulted in the significant decrease as a percentage of net sales due to significant increase in net sales in 2015. Depreciation and amortization was approximately $2.8 million in the first quarter of 2015 compared to $3 million in 2014. Capital expenditures were $3.1 million for the first quarter of 2015 compared to $1.2 million for the first quarter of 2014. For the full year we expect capital expenditures of approximately $12 million. We were anticipating a tax benefit in Q1 but our effective tax rate for the first quarter were 6% due to shift in earnings with higher than expected taxable income in Hong Kong, the UK and Canada however our full year effective tax rate is expected to remain at approximately 15%. Consistent with the seasonality of our business and on significantly higher Q4 2014 sales operations provided cash of $38.8 million for the first quarter of 2015 compared to using cash of $11 million in 2014. As of March 31, 2015 the company's working capital was $234.2 million including cash and equivalents and marketable securities from approximately $105.3 million compared to working capital of a $120.4 million as of March 31, 2014. Accounts receivable as of March 31, 2015 were $104.3 million up from the $65.4 million at the end of the first quarter of 2014 due to significantly higher sales in 2015 and due to the timing of sales during the quarter, DSOs in 2015 were 82 days an increase of 11 days from the 71 days in 2014. Inventory as of March 31, 2015 was $79.5 million up from $42.2 million in the first quarter of 2014 due to higher sales and continuing high demand for our products and also as a contingency measure to better deal with issues in the Port of Los Angeles, this resulted in DSIs of a 114 days up from 77 days as of March 31, 2014. Finally as per guidance the company reaffirms it's previous forecast of net sales for the full year of 2015 in the range of $730 million to $740 million with earnings in the range of $0.71 to $0.75 per diluted share and adjusted EBITDA in the range of $56 million to $58 million. And with that I will return the call back to Stephen Berman.

[Stephen Berman:]

Thank you, Joel. We’re continuing to be prudent and cautious in 2015. We’re assessing how the trends are playing out for the remainder of the year and are closely monitoring market conditions. As I stated in 2014 year-end call we love nothing more than exceed our expectations and guidance in 2015 as we did in 2014. So where opportunities arise we will react nimbly and efficiently as we did last year. Our current sell throughs at retail remain strong for our broad array of products which coupled with the operating efficiencies that we continue to strive for, we feel will result in a strong profitable year. Let's start with our girls Disney business which had a strong sales and sell-throughs this quarter. Our North American and international business both delivered strong growth. Our Frozen products continue to be in demand. The Cinderella live action product line is a hit around the world and a nice boast to the portfolio with a very focused line. With Frozen Fever that was released with the Cinderella live action film as well as additional content, events and promotions by Disney. Frozen products should continue to stay hot this year. We will TV advertising two strong items this fall. Sing Along with Elsa and the Do you want to build a snowman music box. And the Disney Princess line we’re excited about our launching of a brand new figure makeup and glamor segment called Little Kingdom and we will also have a new feature doll Colors of the Sea Ariel both of which will be TV promoted. We should also get a nice boast around Cinderella when the DVD releases in late September with a new Cinderella live action toddler doll that will launch in conjunction with the DVD. In our boys segment, Max Tow has continued to sell well during the first quarter and the new Max Tow Turbo is slated to outperform what Max Tow truck did last year. Max Tow minis had a strong launch in Q1 and are projected to provide nice incremental revenue for this segment this year. In our big figs line we’re off to a great start in 2015 and we’re setting the stage for our 20 inch and 31 inch and 48 inch scales that have great success this year and beyond with new licenses and expanded distribution. We’re looking forward to launching our own proprietary product called 3D Character Creator which allows kids to design, create and customize their very own characters. It's receiving much interest and excitement with the trades and has already won it's first award at New York Toy Fair earlier this year. It will be carried by all the major retailers and it will be ship internationally as well with some of the hottest boys licenses. With the new Marvel's Avengers

[Operator:]

[Operator Instructions]. And our first question comes from Steph Wissink from Piper Jaffray. Please go ahead.

[Steph Wissink:]

Just two question from us, the first Stephen. You have talked about a lot of great product initiatives. If you could just help us understand the product mix and the margin balance that we should be thinking about for the balance of the year with respect to those new initiatives. And then secondly as you look out over the next couple of years you referenced some key license properties. Can you just give us a sense how licenses or percentage of revenues those are and how they should flex and ebb over the next couple of years just so we can appreciate kind of your tie backs to some of these big properties and some of the cycles related to those properties.

[Stephen Berman:]

Okay, for the first question the average margin that we’re focusing on for this year and going forward is approximately 31% and it varies between each of our divisions from our boys division depending on the products mix to the girls division which has licenses and non-license to disguise it has a various product mix of several licenses but the average gross margin is approximately 31%. So hope that answers that question, going forward what we’re doing, we have worked on over a year and half is expanding our initial categories and broadening these categories to make it more diversified as a company both internationally and in the U.S. So for instance our seasonal division which consisted of Moose Mountain, foot-to-floor ride-ons. The kid's only which are outdoor furniture and other ride-ons and seasonal which is Maui Hula Hoops and Balls. We have expanded the categories within each of these segments with new products, at the same time we have had new additional licenses as we have mentioned in each of these categories that are long term licenses such as the Disney Princess and Core [ph] Princess some of which are the Marvel lines, Minions, Paw Patrol. So where the licenses are appropriate we’re adding them to each of these categories. We have a lot of categories that we haven't mentioned that are really, really basic evergreen lines that we have worldwide rights usually excluding Japan which are character based flash lights which are character based flash lights, the makeup line which we just discussed in our initial press release. So these new areas of businesses on top of our current focus business and the digital aspect of our business is where we’re going to see growth both in the U.S. and internationally plus a lot of the new licenses that we have obtained, we have World of Warcraft or Warcraft The Movie which comes out by Legendary Films which is first quarter next year which will be a blockbuster worldwide. We have the Avengers

[Operator:]

Thank you. And our next question comes from Linda Bolton Weiser from B. Riley. Please go ahead.

[Linda Bolton Weiser:]

So you provided an explanation about receivables and inventory and the effect on working capital. Do you think that you will still have sort of highish inventory or higher than normal next quarter and third quarter? You know just to safeguard against any operational issues and if so do you’ve any view on how you’re cash flow is going to turnout for the year. I mean I'm expecting you should be able to -- still fairly positive operating cash flow and free cash flow for the year and maybe you can comment on that. And then do you think that you would be thinking about something like share repurchase or do you still feel it's prudent to protect the balance sheet and be able to safeguard against these operational things in the future? Thanks.

[Joel Bennett:]

The Board issues were isolated to 2014 although there was some clean-up of the backlog that was caused by the slowdown mostly in '14 built up our inventory levels and we will be working through that over the next quarter and then we start building up inventory levels for all the new product launches that we have in the back half. So as far as the--

[Stephen Berman:]

Just to add to that Linda, on the inventory, the inventory is very strong inventory. It's the Cinderella live action, it's Frozen it's a lot of our seasonal products. It's licensed avenger products. So things that we discussed in our 2014 year-end and fourth quarter that we were building up the inventory levels to mitigate any port issues which we did and we’re happy because we had I would say zero port issues that affected us through last year and this year. So the inventory that we have done has been planned for in 20 days into the quarter and we’re having still great shipments. Our sell-throughs from Frozen to Daniel the Tiger to Nintendo, My World [ph] are all above expectation. So we’re very comfortable with our inventory level. I will let Joel answer about the receivables and then I will go back and talk about the buyback and so on.

[Joel Bennett:]

Yes again because of the year-over-year growth by quarter especially which is quite pronounced in the fourth quarter and also in Q1 but we do expect to extract the working capital out after the peak season in the third quarter so we do expect to have positive free cash flow in 2014.

[Stephen Berman:]

And then Linda, did we answer those two questions, okay?

[Linda Bolton Weiser:]

Yes, sure.

[Stephen Berman:]

So I will go -- you asked a comment about whether the converts. We as a company and the Board always continued to look at the best use of the company's cash so whether it's a stock or debt repurchase dividends, acquisitions, or building working capital we look at it on a monthly basis and a company you need to remember has a history of doing all of these at times when it feels it's correct. So we regularly consider this at every meeting, and we review it at every meeting. So and we have a history of doing all of these that I just mentioned.

[Linda Bolton Weiser:]

Okay, and then you know I guess you kind of take your sales guidance for the year and kind of plugin some numbers for the next few quarters. It does sort of indicate a deceleration of sales growth maybe not as robust as what we saw here in the first quarter. Do you think second quarter will still be quite strong like up double-digit. I know you don’t want to really give quarterly guidance and then more of a tail-off in the back-half or the growth will be more even like is there any way you can give us an idea for the cadence of how sales growth will progress?

[Stephen Berman:]

I think given the momentum going into Q4 in-light, it was an easier comp in Q4, so I guess the way to frame it since we don’t give quarterly guidance's, the toughest comp will be fourth quarter.

[Linda Bolton Weiser:]

Right, yes. I think at least in my model I would expect a decline in sales year-over-year in fourth quarter but I'm just kind of wondering like leading up to that. It still sounds like momentum is quite strong in the second quarter from your comments today it sounds which can be--

[Stephen Berman:]

As we said in the call earlier sell-throughs and we based everything based off of sell-throughs around the world and not just sell-ins. Sell-throughs continue even after Easter to be extremely strong. So we monitor weekly, daily sell-throughs and where there is opportunities we react to them. So as we said right now, we’re very comfortable with the year and so we will monitor it as we speak but right now things look really strong on a sell-through basis and a sell-in basis.

[Linda Bolton Weiser:]

And then one last question. I know at one point last year in your commentary you had noted you just wanted to be conservative because of the uncertainties about Mattel having difficulty and Mattel having excess inventory out there at retail. Mattel seems to have cleaned up the inventory somewhat and their POS is doing better. Do you actually view that as a positive like less risk or is that more of a competitive risk in the girls area, how do you kind of view what's going with your big competitor?

[Stephen Berman:]

First, I actually like to hear when our industry is doing well and when you look at how Mattel came out with their numbers on Friday or Thursday and showed that they had really nice segment growth. That’s really good for our industry as well as looking at Hasbro's numbers yesterday it was -- we commend them very much. What we have gone through and I will use Lego that’s had nice strength, that’s very healthy for our industry. What has diminished are the smaller players in our industry and we’re garnishing a lot more shelf space in the areas that we compete in. So we’re the leaders in the foot-to-floor ride-ons, we’re leaders in Halloween, we’re leaders in a lot of the categories, the toddler dolls that we have underneath our tele [ph] division or the role play. So in those areas we don’t compete against a lot of what you just mentioned Mattel and Hasbro. We actually are licensee in Halloween of Hasbro, we have Hasbro's they are great friend of ours as a competitor, we license the foot-to-floor ride-ons. With Mattel we license Fisher Price, foot-to-floor ride-on. So we like that our industry is looking better. What has happened is a lot of these smaller companies or even some of the Japanese companies have really diminished which is allowing JAKKS' and are called other competitors to garnish more shelf space. What we had 2-3 years ago you had retailers conducting shelf space because the industry was retracting. Now you see it otherwise that the industry is not retracting, there is less competition out there and retailers want the toy and kids consumer products in the market to drive their guest, their consumer end. So we’re seeing a kind of a turnaround in that form which is really healthy for all of us.

[Operator:]

Thank you. And our next question comes from Sean McGowan from Needham. Please go ahead.

[Sean McGowan:]

I’ve a couple, I will take one at a time. So looking Joel at the sales breakdown of role playing costumes, that only showed a 5% growth year-over-year despite the fact that this time during the first quarter of last year, all of the Frozen costumes were in such short supply. You know I expected a bigger increase at that segment. So can you talk about maybe what some of the offsets were to Frozen being up so much?

[Joel Bennett:]

The Frozen drove the traditional category which is part of the large increase that we had in traditional, it's the dolls. So Frozen transcends all of the different product categories.

[Sean McGowan:]

Right, but I'm saying that within the segment of role playing I would have thought that the year-over-year increase in Frozen would have been really strong because it was in such a short supply a year ago. So was there something else that was strong to make that whole segment only up 5%?

[Joel Bennett:]

Yes, go to your second question. Till then I will pull out the--

[Sean McGowan:]

I will dove tail on some of these questions, so can you comment on how much of the accounts receivable has maybe already being collected or you would expect that to be collected in the second quarter that was a bigger increase year-over-year than I would have thought certainly much bigger than the sales. So when does the increase or the year-over-year comparison and accounts receivable get more in-line with sales?

[Stephen Berman:]

Yes most of the sales were done on an FOB basis which turn in 3 to 4 weeks as opposed to domestic sales which have an upwards of 90 day terms. So the proportion of sales within the quarter occurred a little bit later so those are actually turning most of that is already converted. So we have had very little issues with bad debt. So the AR, is sort of an automatic turn to cash so the fact that it was higher it had more to do with the timing of the sales within the quarter as opposed to anything else. So there is still high quality receivables. And we’re still looking Sean, on the role play, we actually had a very strong part with the Cinderella live action in doll and dress up and I think we actually sold more of the non-dress product areas for Frozen i.e. the Olaf Snow Cone Maker, the Switch Em Olaf, the Cinderella toddler doll and I just don’t have the actual dress-up part in front of us.

[Sean McGowan:]

Okay, I will follow-up that separately then and again on something when I was talking about and I know you don’t give the quarterly guidance but directionally would you expect the bottom-line in the second quarter to show improvement versus last year, I mean this is tremendous improvement in the first quarter, would you also expect the bottom-line in the second quarter not at profit forecast but expect that to be an improvement in the per share loss I assume compared to last year?

[Stephen Berman:]

Actually you got two things that are going on is one we have fewer shares, so it will have a negative impact in '15. So in the last quarter we still expect [indiscernible] to be a modest loss but we expected it to be lower loss in dollars that’s because the share count is about 2.5 million less. It will actually work the other way. Due to last year we were just under 31%, our gross margin was 30.5%. So the differential is lower but in leveraging our infrastructure we do expect to have and we will have a full quarter of -- actually no we won't have a full quarter of interest in '14. So a couple of things that are in terms of the comp, we issued the notes at the end of third quarter so there is some ops that net-net we expect -- or actually the net loss to be lower but the EPS is about the same.

[Sean McGowan:]

And what's the tax assumption -- what's the cadence on your tax assumption as the year goes on? It's kind of weird to have the tax provision in the last quarter, would you expect the same thing in the second quarter?

[Stephen Berman:]

Yes, it has to do with where the timing of the taxable income in the different territories.

[Sean McGowan:]

Got it. I'm assuming, I just wanted to confirm if that’s going to be the case. Okay and then one last thing if you wouldn’t mind just repeating Joel the CapEx and the capability numbers for the first quarter year-over-year?

[Joel Bennett:]

It was 3 million in 2015 and it was 1.2 million in 2014. It's still on track to 12 million for the full year.

[Operator:]

Thank you. And our next question comes from Ed Woo from Ascendiant Capital. Please go ahead.

[Ed Woo:]

I had a question in terms of FX impact, did that impact your sales in international and I know it was very strong and did it pull back--

[Stephen Berman:]

Could you start over because I broke up on our side, will you start, I'm sorry.

[Ed Woo:]

Sure. I had a question about FX impact. Did it have any impact on your international sales?

[Stephen Berman:]

No it didn’t, most of our international sales are on an FOB basis in U.S. dollars. So we have say few or less international operations in local currency than some of our competitors and other multi-national companies.

[Ed Woo:]

Okay. And what are you seeing in terms of the economies, it looks like your international sales have been pretty strong. Have you seen any big difference between the economies and retail environment in international to the U.S.?

[Stephen Berman:]

It depends on countries, I will give you a good example. As we have seen very strong growth in the UK while we have seen a lower growth in Russia due to the rubble, it's devalued about 80% and even though the devaluation in Brazil with the currency were getting growth in Brazil in a lot of these other emerging market. So I will tell you if I'm grabbing a sheet, where we’re set and where we have been focusing on we’re growing. United Kingdom we have grown, France we have grown, Ireland we have grown, Italy we have grown, almost every territory from Australia, Denmark, Mexico, United Emirates and Germany. So all these territories we’re growing and then we’re also growing in emerging markets as China, these are the areas that we have not announced. So we’re very nimble in how we manage our international business and very aggressive at the same time. But we have seen no major impact only where there has been a dramatic amount of currency fluctuation like Russia.

[Operator:]

Thank you. And I'm showing no further questions at this time. I will now turn the call over to Mr. Stephen Berman for closing remarks.

[Stephen Berman:]

Everybody thank you for your time today. We will have some follow-up calls throughout this morning and look forward to seeing people on the road as well as in our upcoming Toy Fair. Thank you very much.

[Operator:]

Thank you. And thank you ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.