Exhibit 99.2
MARVEL ENTERPRISES, INC.
Moderator: Allen Lipson
March 2, 2004
9:00 am ET
Operator: Ladies and gentlemen, thank you for standing by. Welcome to
Marvel Enterprises' Fourth Quarter and Year-End Results
Conference Call. During the presentation, all participants will
be in a listen-only mode. Afterwards, we will conduct a
question-and-answer session. At that time if you have a question,
please press the 1 followed by the 4 on your telephone.
As a reminder, this conference is being recorded today, Tuesday,
March 2, 2004. I would now like to turn the conference over to
Mr. Allen Lipson, President and Chief Executive Officer, Marvel
Enterprises. Please go ahead, sir.
Allen Lipson: Thank you, Operator. Welcome to Marvel's Fourth Quarter and
Full-Year 2003 Conference Call. On the call with me today are Ken
West, our CFO, Avi Arad and David Maisel, CEO and COO
respectively of Marvel Studios, Tim Rothwell, head of our Global
Consumer Media Group and Gui Karyo, head of our Publishing
Division.
We plan to make our overview comments as concise as possible to
allow time for Q&A. Before we get to the heart of the call, David
Collins will present a few cautionary comments.
David Collins: Certain statements that the Company will make on this conference
call and simultaneous Webcast are forward-looking statements that
involve risk and uncertainties such as the statements of the
Company's plans, goals, objectives, expectations, intentions, and
financial guidance.
Participants on this conference call and Webcast are cautioned
that while the forward-looking statements made today reflect the
Company's good faith beliefs, they are not guarantees of future
performance and involve known and unknown risks and uncertainties
and the Company's actual results could differ materially from
those discussed on this phone call.
Certain of these factors that could cause or contribute to such
differences are described in today's news announcement and the
Company's filings with the Securities and Exchange Commission,
including the Company's annual report on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K. Marvel
assumes no obligation to publicly update or revise any
forward-looking statements.
Allen Lipson: Thanks, David. I'd now like to turn the call over to our CFO, Ken
West, for a review of the fourth quarter and full-year financials
as well as our Q1 and updated 2004 guidance. Ken?
Ken West: Thank you, Allen. Good morning. This morning we are reporting
operating results above the updated financial guidance we
provided on November 4th and I'll take just a few minutes now to
review the highlights of the quarter as well as our updated
financial guidance for 2004.
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Consolidated net sales of $85.8 million in the fourth quarter
were on par with the prior year's fourth quarter of $86.5
million; however, this year's results reflect higher sales in
licensing and publishing segments. Whereas, toy sales declined as
expected on both absolute and relative terms. As a result of this
shift in mix, largely to higher margin licensing sales, fourth
quarter consolidated gross profit increased to approximately $64
million, reflecting a gross profit percentage improvement from
56% to 75% of net sales quarter-over-quarter.
Consolidated SG&A is up over the fourth quarter of 2003 and as a
percent of net revenues, SG&A has increased from 35 to 45%. As we
discussed in the last two quarterly conference calls, included in
SG&A are accruals for estimated studio royalties, which are
significantly greater than in 2002, representing the estimated
studio share of merchandise licensing associated with the various
movie projects already released.
Operating income for the fourth quarter increased 15% to
approximately $27 million from last year's fourth quarter
operating income of approximately $23 million. The quarter's
results reflect continued strong retail sell-through of consumer
products, based on our library of characters, and more
specifically very strong performance of Hulk and Spider-Man
licensed items. The robust retail performance of Marvel-branded
products generated a significant number of what we term overages
in the fourth quarter, which are earned royalties in excess of a
licensee's minimum guarantee.
During the year, Marvel entered into over 300 new or amended
license agreements and additionally earned overages in 2003
aggregated in excess of $45 million dollars from 175 different
licensees, which compares to approximately $11 million of
overages earned in 2002. Licenses recently closed, generally for
a two-year term, have been concluded at substantially higher
guarantees and, therefore, the overages for 2004 are forecasted
to approximate half the amounts earned in 2003.
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Fourth quarter results in 2003 also reflect continued overage
payments made to the Spider-Man movie merchandising joint venture
we have with Sony. Our 50% interest in these payments, net of
expenses, represented approximately $2.4 million in the '03
fourth quarter, a contribution that was higher than originally
projected.
Net income amounted to $13.5 million in the fourth quarter of '03
compared to net income of $7.2 million in last year's fourth
quarter. Net income attributable to common stock per diluted
share rose to $0.18 compared to a loss per share of $1.03 during
last year's - that is 2002's - fourth quarter, which quarter
includes the effect of a one-time preferred stock dividend of
approximately $56 million.
Net income for the year 2003 amounted to a $151.6 million as
compared to $22.6 million in 2002 and after preferred stock
dividends, fully diluted earnings per share amounted to $2.01 in
'03 as compared to a loss of $1.18 in '02.
Late in the fourth quarter, we identified that our third quarter
tax reserve analysis was not complete and that we principally
valued federal net operating loss carry forwards or NOLs. As a
result, we released the valuation reserved for a portion of the
state NOLs in the fourth quarter, which resulted in the increase
in the 2004 effective tax rate from the previously estimated rate
of 36% to 41%. This adjustment has no impact on free cash flow
for '04 or, in fact, for a number of years thereafter.
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As a result of reported operations, cash and short-term
investments rose to approximately $247 million at the end of the
year, up from $211 million reported at September 30, 2003.
Yesterday's cash and short-term investments have grown to a
balance in excess of $270 million. Now for updated guidance for
'04.
Now to review '04 guidance and the first quarter provided in
today's news announcement, for the full-year 2004 we indicated
that we are forecasting net sales and operating earnings towards
the high end of the range previously stated with operating income
now projected in the range of $185-$195 million. Forecasted net
sales have risen to the range of $450-$460 million, also an
increase over previous guidance for the period.
Despite the forecasted increase in operating earnings for 2004,
because of the Company's accounting for income taxes as
previously noted, earnings per share, attributable to common
stock holders, are estimated within the range of $1.23 to $1.37.
The increase in effective rate from 2003 to 2004 does not at all
accelerate the amount of income taxes to be paid in cash. We
anticipate that we will commence paying federal income taxes
starting in the second quarter of '04 as previously indicated.
Our estimate of 2004 income taxes to be paid in '04 range from
$46 to $50 million dollars.
We have also provided initial first quarter guidance of sales and
operating income, whereby operating income is anticipated in the
range of $44 to $47 million as compared to $55 million in the
first quarter of 2003. The first quarter results of 2003 include
a significant videogame license extension, which in fact was one
of the largest licenses ever generated for Marvel, which is not
projected to have an equal in the first quarter of 2004.
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General merchandise licensing remains strong, plus we have begun
to ship large initial orders of Spider-Man 2 movie toys, the two
principal driving forces toward our sales projection of $110 to
$115 million in our first quarter.
The Company announced a three-for-two stock split to be
distributed on March 26, 2004 to stockholders of record on March
12, 2004. After adjustment for this stock split and a normal tax
provision, diluted earnings per share is projected in the range
of $0.19 to $0.22 for the first quarter of '04, as compared to
$0.38 during the comparable period in 2003. We continue our plan
to be debt free by end of our second quarter by paying off our
existing $152 million of 12% Senior notes when first callable,
which is June 15, 2004, for an aggregate payoff figure of $160
million.
In summary, we greatly look forward to 2004 and the benefits of
the four theatrical releases scheduled this year. Allen?
Allen Lipson: Thanks, Ken. As we have demonstrated with our full-year results
today and in Ken's remarks, Marvel's licensing business is
hitting on all cylinders and is one of the key drivers in our
expectations and financial guidance for continued growth in 2004
and beyond. Given our optimism for the future, as well as our
desire to make our equity as accessible as possible for the
broader space of investors, as you have already heard, our board
approved a three-for-two stock split.
The stock split echoes management and the Board's confidence in
the long-term prospects of Marvel's business and also sets the
stage for further improving the liquidity of our shares. Of
particular importance, we believe that by reducing our share
price Marvel stock becomes more attractive to retail and other
investors, many of whom are Marvel fans.
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We believe such investors can have a longer-term investment
outlook and we also believe that Marvel shareholders can have a
greater affinity for purchasing Marvel branded products and
entertainment.
With our business on a very solid footing and clearly focused on
generating cash, in the second half of 2003 we began implementing
a growth strategy focusing on building out each of our divisions
to better position them for long-term growth.
As our business model revolves around exploiting intellectual
property with relatively small or limited capital costs, our
growth initiatives have been primarily based on building our team
of human capital. Accordingly, during the latter half of 2003 and
year-to-date in 2004, we have substantially enhanced our
management team. Key hires and appointments over the past few
quarters include the substantial strengthening of our core
licensing business with several strategic hires.
Tim Rothwell was appointed the head Marvel's Worldwide Consumer
Media Group, joining us from Universal where we worked closely
with him on the Hulk merchandising campaign. At Marvel, he is
leading a team to enhance growth in domestic markets, plus
focusing greater attention and resources on international
licensing opportunities, an area that, until recently, we had
been unable to pursue.
As I had previously stated, our international licensing
activities represent an area of substantial long-term growth,
particularly given the strong demand we have witnessed for our
characters abroad by a feature film project. Staffing up to
pursue international-licensing opportunities, we also hired Bruno
Maglione as President International and Bill Rahn, Managing
Director, Japan and Asia.
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Bruno and Bill have opened our first licensing offices outside
the United States in Europe and in Asia, where they will leverage
their experience and contacts to support our long-term
international-licensing goals. Our international offices are off
to a great start, but we are not anticipating any significant
contributions from these offices to our financial guidance until
the second half of 2004.
In publishing, we have enhanced our operations with the
appointment of Dan Buckley as publisher of Marvel Comics and
appointed Gui Karyo, who was Executive Vice President of
Operations and Chief Information Officer, to also oversee
operational and fiscal management of our publishing business. Dan
and Gui are doing an excellent job as reflected in our Q4 results
and are now working on projects to expand our distribution and
demographic reach later this year and next.
On the entertainment front, we recently announced the hiring of
David Maisel to serve as President and COO of Marvel Studios. We
view David's role as providing the financial, business and
strategic support we need to develop a broader base of
entertainment projects, including in television and direct to
video. Avi Arad, CEO of Marvel Studios, and his creative team
will continue to lead our dialogues and marketing efforts in
conjunction with David's efforts to develop the underlying
production and financial support.
Though we already have a very substantial pipeline of projects,
many of which we have listed in today's news announcement, given
our 4,700 strong character base, we still see a tremendous
opportunity to continue our momentum and both expand as well as
diversify our slate of entertainment projects. At this time, I'd
like to call on Avi Arad to give us a brief overview of the
status of our entertainment development efforts. Avi?
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Avi Arad: Good morning, everybody. 2004 is going to be a busy year for us.
April 16th we are releasing our first movie for the year, The
Punisher, the movie we are making with Lions Gate, previously
Artisan. The marketing effort started aggressively and I'm sure
many of you saw the trailer. And beginning next week there will
be spots on air and we're very excited about it. That will be
followed by Spider-Man 2 from Sony; that movie is coming out July
2nd. We feel that we have a spectacular movie and we expect to
continue our success in the Spider-Man franchise. We are hard at
work on both movies and starting to develop the scenarios for the
sequels.
On August 12th, New Line is introducing Blade 3. Blade 3 marks
one of the new landmarks for the Marvel franchise. This is the
third movie in the Blade franchise. It's bigger and better and
further proof of the power of the franchise that we can put out
the three movies on a real, quite obscure character of ours. When
the movie comes out, when you see it, it will be pretty clear
that Blade 4 will be in the works. And in October, there will be
Man-Thing: again, a Lions Gate release. It's a horror movie; part
of our horror universe, a very old character. And that's the
slate for 2004.
Into 2005, it's been quite busy for us. We are going into
production for the 2005 release of Fantastic Four. It's a
tent-pole movie that will be in July 2005. Elektra starts
production in May with Jennifer Garner. We don't have a release
date yet but we're going into production. And Iron Man, which
will be a November 2005 release, which will go into production in
the middle of the year. Ghost Rider, again with Sony, and again a
late 2005 release, and so is Luke Cage, again with Sony.
Out of this production slate for the 2005 releases, some of these
movies are to support all of our core businesses such as
Fantastic Four, Iron Man and Ghost Rider. They lend themselves to
toy lines, various licensing and, obviously, videogames. In the
pipeline into the 2006 season, we are in development, in process,
on X-Men 3, Hulk 2, Punisher 2, Iron Fist, Black Widow, and the
highly anticipated Namor, that we hope to release in 2006 from
Universal Pictures. That's it.
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Allen Lipson: Thanks, Avi. Before I continue, I'd like to turn it back to Ken
for one thing because I think he recognized he made a mistake.
Ken West: Absolutely. In fact, I have stated before our forecasted net
sales for 2004, but my notes were not appropriately updated and
since that our forecasted range of sales is really in the range
of $420 to $440 million and I had misstated it previously.
Allen Lipson: Thanks, Ken. As we look at the full-year 2004 from a financial
standpoint, we expect the continuance of a very strong operating
income and cash flow generation. Further, as we have repeatedly
indicated, it is our intention to call, in mid-June, our
remaining $151 million in 12% senior notes for $106 per note for
a total of approximately $160 million. While we would make
payments totaling $18 million in interest for these notes in
2004, divided equally between the semiannual interest and the 6%
premium for calling the notes, given our strong cash generation
and relatively modest capital requirements, it will still leave
us with roughly $110 million of cash and certificates of deposit.
With the elimination of the senior notes, Marvel will be free of
restrictions on dividends and stock repurchases, which were
associated with the terms of the senior notes and we will then be
in a position to consider these matters.
We will also be considering additional ways to deploy our cash
and high return, low risk, accretive opportunities such as our
purchase last year of Cover Concepts, a specialty-advertising
firm that provided us with an excellent entry into the
Kindergarten to Grade 12 market nationwide. Such opportunities
take time to identify and develop.
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On the M&A front, we continue to be open to and actively look at
possible acquisition opportunities. Again, our acquisition
criteria are focused on the addition of complementary
intellectual property or businesses that are not capital or risk
intensive in nature and which are accretive to shareholder value.
And that brings me to the end of my prepared remarks.
However, before we open the call to your questions, I did want to
address some questions that have been asked of us in the recent
past regarding inventory and inventory practices within our Toy
Biz division. Essentially, we have heard rumors that we have
excess inventory in China and in the customer channel. We have
also heard allegations of improper revenue recognition, whereby
we allegedly book revenues without shipping the goods, thereby
inflating our operating results.
As President and CEO, I categorically deny these rumors and more
importantly, I do so on this call, which is an SEC sanctioned
disclosure forum, the transcript of which will be filed with the
SEC. Our revenue recognition policies are very clear and very
easy to audit. We do not book toy revenue until the customer has
taken possession of the goods and title has passed. By far the
majority of our toy sales are on an FOB basis in China, secured
by letters of credit. Further, our toy sales are based on
customer orders. We are not able to stuff the channel as has been
alleged. I trust this fully answers these rumors; however, we are
willing to answer any related questions.
With that, Operator, we would like to open the call to the Q&A
period. Operator, may we take the first question.
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Operator: Thank you. Ladies and gentlemen, if you would like to register a
question, please press the 1 followed by the 4 on your telephone.
You will hear a three-tone prompt to acknowledge your request. If
your question has been answered and you would like to withdraw
your registration, please press the 1 followed by the 3. If you
are using a speakerphone, please lift your handset before
entering your request -- one moment please for the first
question.
Our first question is from the line of Arvind Bhatia, Southwest
Securities. Please proceed with your question.
Arvind Bhatia: Good morning, guys.
Group: Good morning, Arvind.
Arvind Bhatia: Good quarter. Okay, first question - Avi, did I hear you say that
a sequel to Spider-Man is being contemplated at this point? And
if that is what you intended to say, are we looking at maybe a
2006 or a 2007 type of time frame for Spider-Man 3? That's my
first question. And then a housekeeping question: Q4 overages, I
don't know Ken, I know you mentioned the annual number. If you
have the Q4 overages number, then I have a couple of follow-ups.
Allen Lipson: All right, Avi, do you want to go first?
Avi Arad: To your first question, Spider-Man 3 is in development -
contemplated release date would be probably 2007.
Arvind Bhatia: Gotcha. This is new, isn't it?
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Avi Arad: I'm sorry?
Arvind Bhatia: This is a new development or this has been going on for some
time?
Avi Arad: New development to continue the franchise?
Arvind Bhatia: The timing, I guess.
Avi Arad: Well, you know, best-case scenario, I can tell you 2006, it's a
big movie and we'd rather play it safe and talk about the 2007 at
this point. If there should be any surprises, we'll update you.
Arvind Bhatia: Okay.
Ken West: Arvind, with respect to the overages that were recorded in the
fourth quarter 2003, and that was a very strong sell-in period
for various licensees for Marvel-related merchandise, and that
amount aggregated approximately $16 million, an increase over
2002's fourth quarter.
Arvind Bhatia: Thank you.
Operator: Thank you. Our next question comes from the line of Gordon Hodge,
Thomas Weisel Partners. Please proceed with your question.
Gordon Hodge: Good morning. I have a couple questions. If you could expand a
little bit on the margins in the fourth quarter on the licensing
side. It looked like you had higher splits with studios maybe
than we were expecting. If you could just discuss gross margin,
which I gather remains quite high and then how the studio splits
and maybe the mix of Hulk versus core classic Marvel character
licensing went in the quarter? That would be great. Thanks.
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Ken West: Okay, sure. You're absolutely right in respect that the gross
profit associated with license activities has a very consistent
high margin and operating margins and licensing have been
affected by the sharing with the studios. And in absolute terms
for 2003, our accruals associated with studio sharing aggregated
a little shy of $40 million dollars, which compares to the amount
in '02 of less than $3 million. So as we continue to have very
healthy merchandise licensing associated with studio related
projects like The Hulk and Spider-Man, we'll have a lot of
sharing associated with those positive economic results.
Gordon Hodge: So did you have significant Hulk sales in the fourth quarter? I
would assume those would have been largely diminishing at that
point or was it mostly Spider-Man then that kicked in?
Ken West: There was strength in both Hulk and Spider-Man specifically in
the third and the fourth quarter and we were very pleased with
respect to both properties' licensing results.
Gordon Hodge: Great, and then one more question for Avi. You mentioned that you
were going into production on Fantastic Four. Does that mean you
have a director and that the film has been greenlit at Fox?
Avi Arad: Okay - we are interviewing at this point. We are down to three
directors. We are feverishly interviewing them. It's really up to
us now to pick a director. We have a great script and we are just
trying to make a decision based on who we feel is the best man
for the job. In the meanwhile, the process of pre-production has
started.
Gordon Hodge: Excellent. Thank you.
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Operator: Thank you. Our next question comes from the line of Robert Routh,
Natexis. Please proceed with your question.
Robert Routh: Yes. Congratulations on the quarter, guys. A few quick questions
- first, you mentioned that you categorically deny the rumors
that have been spreading around and, obviously, they've been
spreading around for quite some time now. It's been almost, I'd
say, a year that certain individuals and entities have come out
with speculation about accounting practices, management
practices, etc.
I'm just wondering whether or not, at some point, management
would consider taking action against these individuals since you
are publicly saying that you are categorically denying them; then
there comes a point where it becomes almost a responsibility, I
would think, to just almost go after these people and get them to
stop doing what they're doing since it obviously impacts the
stock in the market. And I'm wondering if you could comment a
little on that.
Second, I'm wondering if you could comment on the recent deal you
signed with Lions Gate. Obviously, for Black Widow and Punisher 2
and Iron Fist and whether or not there's opportunities for a
further collaboration with Lions Gate/Artisan in the future on
additional projects.
And finally, I'm wondering if you could tell us what you expect
your cash balance to be at the end of Fiscal '04 based on your
existing budget and what your actual free cash flow number was
for 2003?
Allen Lipson: With respect to your initial question, what we're doing at the
end of the day is focusing on our business. That's what we have
to do and, obviously, the numbers are going to speak for
themselves quarter after quarter as we do better and better and
we come out with the numbers or, you know, hit guidance or exceed
guidance.
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Obviously, I personally am somewhat upset about this whole thing
because it falls into, you know, the question of integrity of
management. But at the end of the day, the rumors are going to go
away because the numbers are going to be there. I am confident of
that and it's all going to be a tempest in a teapot because they
are all going to go away. We just produce and what else can I say
about that?
Robert Routh: Fair enough.
Allen Lipson: With respect to Lions Gate, David, why don't you take that?
David Maisel: Sure. We very much like the deal that we announced with Lions
Gate last week and we like the structure of that deal for our
properties and the upside it gives to Marvel. And to your
question about whether we do deals with Lions Gate going forward,
we're analyzing every opportunity in the studio for our
properties and we're talking to all the potential partners and
obviously we like working with Lions Gate very much so they will
be part of those discussions going forward.
Allen Lipson: And, Ken?
Ken West: Yes, with respect to cash flows. Cash flows generated from
operating activities in the current year were approximately $171
million, which compares to $75 million in 2002. And based on our
current projection, after paying for the Senior Notes' interest,
retiring all $151 million of Senior Notes and starting to pay
federal income taxes, we anticipate ending 2004, based on these
current projections, with some number approximating $200 million
of cash in the bank.
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Robert Routh: Okay, great. And just one follow up: Given that after '04 you're
going to lose your tax shield with -- even though that's high
cost debt - making your discount rate, your cost of equity, is
management at that point or currently considering anything that
you can do to mitigate taxes going forward?
Ken West: In fact we are initiating some discussions with our outside
auditors and tax advisors to create a worldwide tax structure to
mitigate all future taxes and it's a nice problem to have and
we're looking forward to addressing that positively sometime late
in '04.
Robert Routh: Okay, great. And that $200 million number you gave? That's a net
cash number year-end '04 12/31 based on guidance?
Ken West: Exactly, in fact as anticipated, we will not have any debt at
that time based on what we've projected so far.
Robert Routh: Great. Thank you very much.
Operator: Thank you. Our next question is from the line of John Taylor,
Arcadia. Please proceed with your question.
John Taylor: Good morning, I got a couple of questions. In the past you've
talked about the layering effect of your various properties, and
I wonder if you could talk about that within the context of your
revenue guidance for 2004. Just kind of break that into pots to
whatever level of detail you feel comfortable.
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And then the second question is did you get much in the way of
early shipment of Spider-Man toys in the fourth quarter to be on
the shelf in the first quarter? Is there much of Spidey 2 toy
revenue in that toy line?
And then, yeah, I guess those are my two, thanks.
Ken West: With respect to the sales recorded in 2003, specifically the
fourth quarter of Spider-Man 2 movie toys, there's approximately
$10 million that has been sold and recognized as income in '03
for that, so hopefully that properly addresses that.
And as far as the layering impact for licensing and all the
characters in '04, I mean we continue to benefit from exactly
that point, which is, you know, consistent with whatever we've
met or mentioned in prior calls. Classic licensing for classic
characters and movie-related characters continue to build and the
momentum is strong with respect to each of those characters. And
we look forward to just generating the benefits associated with
those cash flows and new license renewals.
John Taylor: Let me try that a different way. What I guess I'm trying to get
at is if you look at your revised guidance of $420 to $440, can
you give us a rough guess as to how much of that has to do with
properties that are really launched in 2004 versus things that
are - you might consider carry-forward, a catalog kind of thing?
Ken West: We expect that a majority, or almost half, of the revenue
associated with projected 2004 is to be generated from toy
activity, which is principally focused on Spider-Man movie toy
action figures. So clearly -- and role-playing games. So clearly
that's going to be a driving force in the toys. And the licensing
surrounding that is also anticipated to be quite strong.
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John Taylor: Okay so it sounds like new properties are probably going to be as
a percent of total, a higher number in '04 than they were in '03?
Is that fair?
Allen Lipson: Yeah, you're probably right.
John Taylor: Okay thank you.
Operator: Thank you. Our next question is from the line of Marla Backer,
Research Associates. Please proceed with the question.
Marla Backer: Thank you. I have a couple of questions. First of all I would
like to know on the international front, what are you finding so
far in terms of international? Where has the popularity been? Is
it primarily Spider-Man? Is there interest in some of the other
characters? And as a percentage of total revenue, where do you
see that currently and what's your projection in '04 and then
possibly, you know, a couple of years out?
Allen Lipson: Tim, why don't you - could you answer the question in terms of
the international appeal of characters?
Tim Rothwell: Absolutely. Basically we've set up two international operations,
as Allen had mentioned earlier: one in an office in Japan and
also one in London. And our driving property continues to be
Spider-Man, but what's very nice about it, Spider-Man's the
entree into discussions for broader relationships with other
potential licensees in these international markets.
So Spider-Man is clearly a driving force at this time. Europe,
we're finding the market to be very, very similar to the US,
whereas there's a very wide appeal for a collection of Marvel
characters. In Japan though it clearly is Spider-Man is the
driving force and we'll build a base of business there.
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Marla Backer: Mm-hmm, okay.
Avi Arad: Tim, I want to add to that, that so far all the entertainment
properties out of Marvel, our movies, performed practically as
well as they performed in the US around the world.
Tim Rothwell: That's right.
Avi Arad: So it seems to be that the level of interest in our properties
again driven the same way. If entertainment works, we take a
property that may have been unknown and now they're known the
world over. And it plays - basically it plays the same as in the
US. So we feel that the awareness is growing and the interest is
growing on a worldwide basis.
Tim Rothwell: Yes, a great example of that was Hulk, for example. Hulk traveled
internationally very, very well from a licensing standpoint, and
very solid merchandising programs were in place internationally
on Hulk.
Marla Backer: Mm-hmm, okay. And can you give us some idea of what international
currently constitutes as a percentage of total and where you see
that going?
Ken West: I can address specifically that the international licensing for
2003 was approximately 8% of the licensing revenue. And we're
anticipating that that amount is going to be growing. But
proportionally it's depending upon the mix of licensing to toys
and publishing. And toys will be the dominant revenue generator
for '04 compared to '03.
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Marla Backer: Okay. All right, thank you. And then a question on potential M&A
opportunities. Now the Cover Concepts acquisition was relatively
small. I think that the company generated some $4 million at the
top line and, you know, we were estimating that you paid
something in that ballpark.
Going forward is that along the order of what we should be
thinking for you, in terms of what you're willing to pay, number
one. And number two, when you say, "complementary," are you
talking about increasing your demographic target audience or, you
know, what kind of "complementary?" You've talked in the past
about going from action, you know, genre, to even moving into
comics - I don't mean comics, I mean comedy. So what do you mean
by, "complementary?"
Allen Lipson: Well, two things. First the Cover Concept was relatively - in
terms of cash, was relatively insignificant. Do I mean that
potential M&A would be in that order? No. It could be of course
much - could be larger. The issue is whether it is complementary
-- and I'll get into that -- as well as accretive to shareholder
value. That's the issue. Cover Concepts was a very specific
acquisition that we did because of the distribution network that
it had, and that's what we were looking at -- the distribution as
opposed to the overall business.
With respect to complementary, we already have 4,700 characters
and we are in all genres right now. We already have comic
characters -- characters that are comic, horror, superheroes,
non-superheroes. Complementary would mean getting into different
demographics in terms of maybe skewed more toward girls, females,
maybe younger. That's what I meant by complementary to the
existing character - to our existing intellectual properties.
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Avi Arad: Allen, let me jump in with that. We are currently developing a
slate. When we look at what movies we want out, they follow quite
a specific marketing plan, looking for the areas that we feel we
want to further extend.
You'll see over the next two years more female-oriented films, or
characters like Black Widow, like Elektra, that are going to take
care of a demographic in an area to expand into. You'll see more
exposure into family fare, characters like Power Pack, which is
sort of the Spy Kid of the Marvel Universe. So we will continue
mining our own 4,700 characters to expand the customer - consumer
base.
Marla Backer: Mm-hmm, okay. Thank you.
Operator: Thank you. Our next question is from the line of Peter Mirsky,
Oppenheimer. Please proceed with your question.
Peter Mirsky: Thanks very much. Actually most of my questions have been
answered. Maybe I could ask a question of Tim -- Tim Rothwell.
How are you approaching the international - your international
effort - newly or differently from what you were doing in the
past? And I assume in saying that second half will be the - when
the international kicks in significantly, that Spider-Man will be
driving that?
Tim Rothwell: Well Spider-Man clearly in 2004 is a dominant property for us.
But the key is, it's actually having seasoned executives on the
ground in these very important markets.
So by adding Bruno Maglione to run our European operations -- in
the past Marvel has relied solely on agents. Now we're in a
process where we have Bruno, who is reassessing all of our agent
relationships in countries outside of the UK. And we're
structuring new deals. We're making a lot of changes with who
represents the interest of Marvel internationally.
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Same thing in Japan. We're changing agents, we're moving over to
more of a guaranteed structure with our agents. So in another
words, instead of, "Here's our library, agents, and, Go out and
good luck," now we're taking a more aggressive approach, bringing
on stronger agents. Our agents are having to put up financial
guarantees so that they have to perform in the marketplace.
So that's probably one of the most significant changes there. And
then also I myself will be spending quite a bit of time
internationally. And we're going to go around to key countries
all around the world. And as our slate solidifies - theatrical
slate solidifies, you know, we're going to go out into the key
markets and we're going to present our big events, therefore just
building stronger merchandising programs, building stronger
retail programs around the world.
Peter Mirsky: Thanks. Just a quick follow-up. So the - presumably the increased
guarantees improve the predictability of the numbers overall?
Ken West: Absolutely.
Peter Mirsky: Great, thank you very much.
Operator: Thank you. Our next question is from the line of Paul Tryon of
First Albany Capital. Please proceed with your question.
Paul Tryon: Yes, hi guys. Did you give a percentage of that $440 that will be
license revenue next year?
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Ken West: We did not, but it's going to represent between 35 and 40% of
projected '04 revenue.
Paul Tryon: Okay, between 35 and 40%? Okay.
Ken West: Correct.
Paul Tryon: That was - okay. That's all I have, thanks.
Ken West: Okay.
Operator: Our next question is from the line of Joe Hovorka, Raymond James.
Please proceed with your question.
Joe Hovorka: Thank you. This question for Ken. You said that there was $40
million or just shy of $40 million of accrual in the licensing
business for studios. What was that number in the fourth quarter?
Ken West: What I meant - the $40 million, approximately, was the charging
of the - not just the accrued liabilities end of the year, but
the charge in '03, and the amount that was accrued in the fourth
quarter was approximately $17 million.
Joe Hovorka: Okay, and I think in the past conference calls -- and you maybe
have already said this. I apologize; I was on late. But what
percentage of your licensing business was generated by movie
properties in the fourth quarter?
Allen Lipson: Ken you want to take that?
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Ken West: It's not that we actually track our own revenue specific like
that, however I can guess that the movie properties -- we can get
back to you on that. I just - I don't want to guess on that
factor.
Joe Hovorka: Okay, thank you. That's all.
Operator: Thank you. We have a follow-up question from Gordon Hodge, Thomas
Weisel Partners. Please proceed with your question.
Gordon Hodge: Yeah, this is kind of a follow-on to the last question. I'm just
curious for the year, I think when - during the analyst day you
had given us a number of licensing revenue unrelated to movies
and I'm just curious if you have an update of that number for the
year. Or maybe that's - you may have to get back to us, but
anyway, if you have that it'd be great.
Allen Lipson: When you say unrelated to the movies, you mean unrelated to
movies that appeared during the year?
Gordon Hodge: Yeah I guess really - I think what you call classic Marvel
character licensing revenues, if you have that number that would
be great, for the year.
Ken West: Instead of estimating I think I'm going to - let's actually
quantify that and we'll get back to you.
Operator: Thank you. We have another follow-up question from Arvind Bhatia,
Southwest Securities. Please proceed with your question.
Arvind Bhatia: Yes, I actually wondered if you can comment on the 2006 line-up a
little bit, from the standpoint of what properties will be
attractive for toy lines. I know there is, you know, the Hulk 2
-- obviously that's going to be great. But, you know, just would
like to get your color on what...
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AviArad: Okay.
Arvind Bhatia: What's most exciting for 2006?
AviArad: Okay. I think the most toyetic - one of the most toyetic things
in the Marvel Universe is Sub-Mariner Namor, which we are in
development with Universal Studios now for the last three years.
Basically you can look at it - it's Star Wars under water. It's a
story about an Atlantis vis-a-vis Earth, and David Self, an
acclaimed writer, wrote the script. And it's planned for 2006. We
are now talking to directors. We have visual designs. It's a
very, very extensive toy line and other opportunities the world
has never seen before.
Sort of the likes of what Jurassic Park brought to viewers seeing
the world that otherwise you couldn't get to, the undersea is a
fascinating frontier that probably is connected to the future in
energy, food, medicine and so on and so forth. And we have
something quite spectacular and we - the plan is to release the
movie for 2006.
Hulk 2 for 2006, again will be supporting all core businesses. It
will be a different version of the Hulk. It will be that - as we
all remember, the origin was hard and wrenching. Hulk 2 will be
what we call "Hulk Lite." It will be more about the heroic one.
We have - on the docket we have things as Captain America and
Nick Fury, both of which are large toy lines. But again, it's a
little early for us to say it's definitely for 2006. What we are
comfortable with is X-Men, Hulk, Namor, Black Widow and Punisher
2. It's a busy slate, but there'll be at least three core
business support movies for 2006.
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Operator: Thank you. Our final question of the day is from the line of John
Taylor, Arcadia. Please proceed with your question.
John Taylor: Hi, so it sounds like international is going to be a bigger mix
of revenue in '04 maybe. And did I hear you correctly, I wonder
if you could maybe, you know, quantify that for us -- percent in
'04 versus percent of '03.
And then did I hear you correctly say that some piece of
international was not in guidance? That may have been in your
prepared remarks. That's the first one.
And then if I'm looking at the slate of film releases coming up,
could you tell us which of these are subject to the shared
royalty agreements and which ones are basically much more sort
of, you know, closer to 100% Marvel? Thank you.
Ken West: As far as quantifying the international licensing for '04, as I
mentioned for '03 international licensing was less than 10%. And
our projections for international licensing in '04 have it rising
between 10 and 15 - to 10 and 15% of the licensing revenue
anticipated for '04.
So we're really looking at actually doubling our international
licensing efforts, and results.
Operator: Thank you. Mr. Lipson I will turn the call back over to you.
Allen Lipson: Thank you. Before concluding this call I would like to thank all
of our investors for their interest and support, and for your
participation on today's call. We look forward to updating you on
our continued progress when we report our first quarter results
in April.
Thank you for joining us today.
Operator: Ladies and gentlemen, that does conclude the conference call for
today. We thank you for your participation, and ask that you
please disconnect your lines.
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