JAKK - Earnings call transcript Q4 2018

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Operator

Good afternoon and welcome to the JAKKS Pacific Fourth Quarter 2018 Earnings Conference Call. Management will review financial Results for the quarter ended December 31, 2018. JAKKS issued its earnings press release earlier today. Presentation slides containing information covered in both today's earnings press release and call are available on our website in the Investor section. This presentation includes videos showing some of our key products. afternoon Brent Berman, Novak, this Executive and call and Officer; Chief this are Chairman Stephen Chief On Financial Officer. Mr. provide product business first provide will an the of Berman quarter highlights of lines trends. current and overview and Then Mr. will and results, financial call your prior JAKKS the operational questions. up provide detailed opening Novak regarding for Pacific's comments to

Your of Instructions]. [Operator the be on for mute placed will call line the portion first

to market events, point JAKKS we circumstances, out to actual statements results any laws. any are uncertainties, would begin, beyond statements federal Before of projected about to performance, the Safe other cause company's subject under certain and which comments Harbor statements. EBITDA today could materially as differ estimates Pacific's the reflect These in protection and like are and future adjusted in or forward-looking risks company including trends conditions made forward-looking and/or well XXXX on and subject that best those from securities current to sales concerning XXXX the as judgment based

the other these subsequently details as and consult should well you the XX-K such the filings most other recent as company's For uncertainties, JAKKS’ and with SEC time-to-time. risks filed XX-Q and SEC concerning from with reports,

the been our has comments earnings filed stated as press adjusted with otherwise, Non-GAAP associated management EBITDA. company's today's addition metrics or financial previously. the In financial Unless GAAP release comparable the to refer measures within measure financial such issued most today Non-GAAP directly

with call to now the reminder, this over that recorded. conference I Berman. a is will And As being Stephen turn

Stephen Berman

year next our not review but of how performed most said was industry Us. to lost Brent and brands I a our our second earnings Toys After afternoon, for thank other quarter. will for we is the fourth the comments, today. sales. up And in that will talk due the discuss the last to would Us decrease the quarter "R" fourth fourth not Toys July, products exclusively our saw the the expectations. up performance. in U.S. to full fact year, with lost expect do looking that down most the that saw but see quarter X% transfer or of full now disagreed toy other retailers manufacturers of We MTB sales not to the JAKKS and Toys you picked quarter us everyone. a back line that XXXX. This Good retailers. happen quarter sales that in financial other during we bankruptcy believe until for unable the unprecedented industry. and make and the to anything to eventually XXXX be We are going performance joining sales held my Us the to principally compared our business in year about industry expected our afternoon year. sales the global the of and disruption that retailers down did last liquidation roughly we were the these that retail much of in in of because call U.S. we "R" Other sales transfer reported of were toy is by we of of "R" X% while that decline the When we for

into of pulled half consumer forward Toys a the to well shifting into to purchases were the XXXX, of quarter adjustment to the the half, continue that bearing industry's the expect XXXX, suppliers liquidation We "R" sales expect but appear completed to Us see have first the that of and by of the issue the lot the in most first the first major disruption in we that will mind largely XXXX. end of have

is it As in our and behind the signs a disruptive as encouraging us XXXX, future of and fourth now results in results. to can we this number we event was point focused quarter to on are our

with second our We EBITDA which around segment well fourth where in exceeded industry of EBITDA. IP the had year of in some have adjusted we consecutive our XXXX Sales leader. adjusted For XX% quarter, year-over-year. we are including in positive international many our own top-line evergreen were products for strong forecast within quarter new the products and base to continue categories the finishing sold internal up solid we and

expanded We beyond beyond a and have have retailers. our we to traditional increase online toys and traditional seen toy sales and seen nice success retailers in

approximately compared to quarter year in loss brought Toys net the our This year. of Our declined X%. fourth declined sales sales approximately to to last X% to due primarily Us the "R" full

able to for the Excluding expected. Us online financial and to XX% quarter were larger some we year in X% saw as full quarter for sales, were sales of "R" the results for fourth better the reduction up performances sales sales in Despite from our than produce Toys year fourth our we and customers. strong

As EBITDA full XXXX. positive margin first the Brent and half year we our greatly adjusted for operating posted our having improved despite detail will loss of significantly, shortly, gross challenging reduced extremely

we entertainment Beast. which contributed in was and Moana, XXXX which in Tsum significant as of the MorfBoard, we by content Squish-Dee-Lish of new Daniel Tiger, Perfectly mentioned half, were fourth Disney and products fourth Cute. you positive absence Princess, sales XXXX, second quarter, strong in launched the had several several and the sales of new Elena products Avalor, led Incredibles of there find X, During Nancy, properties launched just Harry Beauty Nintendo Frozen, such TP the year that contribution sales of Fancy recently or Offsetting Potter, Blaster, this Tsum quarter

call. life continue products are cycles end will We nearing that of some the such surprisingly also later in more Not momentum. the online saw their build Brent of declines Chocolate sales as to Surprise. Egg details emotional provide

as “R” this retailers accelerate total of over fourth been we sales Us Our to Toys results. sales and recent total of in see excluding quarter a in ours online total the a quarter in percent up from XX% has were XXXX. years. And sales through XXXX are in fourth dramatically goal the online Increasing pleased XX% nearly

the and we year to quarter, costs estimate and online the of operating total challenge our our sales sales full of XX% we and in more of basis, in improvements year were represented the for sales. by XX% the was up saw the our down total our over cost we year reduce around our Because On two SG&A total we costs GAAP points industry-wide took For sales over steps our for because our anticipated than a XX%. gross structure. margin that early

were Novak. down and than more in reduction the I both by more call fourth than turn Our sales. full sales a now year over inventories receivable will Brent? Brent and our to the considerably accounts quarter

Brent Novak

Thank last Stephen XXXX Net everyone. for XXX.X year. and XXX.X million, you, to the quarter fourth afternoon compared sales down million good were X%,

share the million compared all million EBITDA year. net XX.X As sales loss to Adjusted loss last to was XXXX diluted diluted fourth X.X of with Reported quarter decline the essentially $X.XX million was negative of million, $X.XX or for share, the fourth decrease quarter was in due the for X.X Toys year, case compared to in of of quarter Us. “R” negative fourth the quarter a the to a per X.X for in net XXXX. income per a

licensed The We the the XXX.X was a net net million to to X%, contributions a for per as compared a play loss dressup from our quarter positive EBITDA category the Working Adjusted Incredibles year label of gross drivers of for sales more million Potter, by offset were Nintendo compared ons, than Perfectly Wars. action than last and more Buddies driven we XX.X Fancy net $X.X brand lines driven $XX.X These Malley the plus million full the an Sales kids to XXXX private products content last customer. dolls, Star Cute, by by expected or both of loss X, $X.XX as fort X, share down XXXX Sales more other well activity in follows. million $XX.X XXXX, year. the gross figures, Frozen, $XX.X declines XXX.X year fourth of full fourth year million of entertainment amounted year million vehicles, in $X.XX last XXXX. role in Incredibles pick, products as full quarter, category such Egg for XXXX and for a several as ball XX% right Blaster $XX.X of real fourth of including other category with sales were and were compared in TP the activity than share second of lines $XX.X million as up quarter decline diluted of Reported XX% forts year. offset income per including, fourth outdoor Disney the to Princess one down was the Nancy, brands areas. XXXX which girls category Avalor Harry from furniture, XX% as million to XXXX Sales XXXX were in by Chocolate comparable of in For and million products the produce $XX.X XXXX. diluted the more from more compared or well $XX.X major boys for million Squish-Dee-Lish by for quarter in electronic the in of in XXXX. year to Alina million, saw Surprise, quarter, performance of number million and Tsum and Moana, as down of were nice offset and in roleplay and our Tsum $XX.X and products a declines sales compared launched were which were in XXXX, seasonal half

third of is ball up fourth category in XX% $X.X in decline As business segments in kids' impacted to as furniture. well of also the as which by million pick in driven category in by a $X.X Halloween case in million the doll our Sales increased was activity fourth quarter was Sales quarter, quarter the were one figures, to XXXX. XXXX, indoor and our XXXX sales the in compared a were increase in million and strong accessories, plush of Tiger. million Daniel preschool The the of baby from category our $X.X primarily increase $X.X XXXX. in games

were fourth descriptions. up group in quarter by same strength International takes Looking and we as to Canada million business in for quarter by $XX.X million Toys were for quarter "R" category break sales the and $XX.X earlier. $XXX.X quarter the already in $XXX.X Us down in driven earlier the sales fourth driven to when sales net the product compared described U.S. compared XXXX sales to drop at Europe. the And the Halloween as stronger sales in in segment. and million prior mentioned puts by at well million year the the XXXX fourth

due ago the in the Gross totaled net recorded said, XX.X% compared driven year XX.X%, XXXX due margin the fourth in Moving XXXX, was compensation of and in fourth XX.X% prior minimum to down That quarter XXXX decrease net related of XX.X the bad TRU higher significant in with items depreciation fourth a XX.X% have million X.X to the the XX.X gross restructuring shortfalls. year-over-year P&L. of million fourth quarter shortfalls non-recurring Gross lower and XXXX quarter quarter. selling sales expenses million to The large recovery we first Reported year to was And the direct charges. XXXX increase sales XX.X% year and of guarantee including gross XXXX to compared in than was margin in the in part non-recurring compared guarantee the debt XXXX. SG&A a margin lack a one-time more lack highest for full of bad margin from quarter, gross debt prudent or XX.X%, favorable to the compared amortization the quarter XXXX. or XXXX. period. X.X mix, announced minimum by items in charge was XXXX seen since to and it the plan to fourth the product million, expenses the sales, in relates and in quarter, the margin of a fourth reflects the previously forecasting in inventory primarily percentage XXXX

bad and on SG&A million SG&A in charge costs expenses XXX.X a debt included the million, year, of which XX.X impairment compared recently net basis excluding categories. million XXXX, write-offs XX.X the in year. in XXX.X last fourth items and year-over-year in was tax Income of For SG&A for spending due the which XXX,XXX full compared lower due expense of reduced a restructuring to debt expenses million included QX to was a X.X a primarily across plan million, to bad compensation XXXX X.X charge. quarter number part totaled million announced Lower these of to

jurisdictions XXXX. expense operate. The on tax in income X.X levels was million cash compared million tax XX.X down cash used quarter activities operating which payables provision full we the the of income Net in and in XXXX, in based operating net tax variability various for X by is was year, million to For the in million, liabilities. changes our compared the taxable XXXX, quarter accrued provided timing fourth in the due to to of X.X when fourth of of activities of income paying

For operating of provided net quarter. when and a XX.X X.X cash cash activities used XX.X XXXX, in positive the in operating million full XXXX compared negative was million advances fourth XXXX, cash in cash XXX,XXX, to flow XXXX activities paid year net to million fourth due in quarter part in additional down by XXXX. the Free in with

million flow XXXX. driven X.X free year full cash by decline was flow for the XXXX were operating periods in negative cash the the previously in negative For million, to decline The noted. free XX.X above cash in compared

XX, $XX.X the XXXX, and of equivalents cash totaled $XX to million our cash December XXXX. including of end million compared cash restricted As at

days, to improving in down in on flat continue fourth of of quarter from XXXX position We million million quarter. the million XXXX. the December to $XXX.X $XX.X December days XX XXXX the the $XXX.X also quarter the with of and improved the XX receivable relatively from focus invest at balancing fourth the fourth in business were XX reported Accounts end need of XX, the quarter the licenses. in as while as security at end to the million versus fourth quarter. days quarter liquidity days fourth Inventory XXXX were the DSOs XX, XXXX. XX was in DSIs fourth XXXX of the XXXX XXXX of $XX.X company's

due XX, debt American million million company's million includes Great $XX.X December notes of of $XX The term of with November exchanged As convertible and previously convertible XXXX. June $XXX Capital million outstanding fourth quarter XXXX. due loan the the the $X.X XXXX XXXX. under $X.X in $X.X first the expenditures credit subsequently fourth our XXXX were repaid the quarter of quarter. $X.X facility, to compared in million was million during of notes million

the our The outstanding $XX.X year year-end full excludes The compared diluted was for notes. year full the million million $XX.X For share in an CapEx and on million both shares fourth share are loss calculations average XXXX with diluted per million count XXXX senior XX.X XXXX common quarter of XXXX. XX.X based outstanding. the shares underlying convertible

would half Before XXXX our call like a over back the internal expectations expectations for pass the We the Stephen, discuss to I I XXXX. to our back year. on closed of exceeding positive note for

although As regarding "R" Us Toys is Stephen mentioned, the believe liquidation. the worse we behind us

to continue to disruption that some in there adverse believe will and We XXXX. be impacts

content by are receiving we some we are from side, positive the encouraged On customers the XXXX. of early the regarding our in coming indications

X. Frozen Specifically

or plan. give have or expected approximately take We percentage X% seen we also announced a by XXXX and $XXX to previously on will Currently progress increase the few some net gross points. restructuring margin good the believe sales in line from year-over-year benefit million

sales of would Toys in in of in which sales EBITDA And future compensation over products call Therefore events can generated sales adjusted and also million our approximately seasonality perspective, significant no jurisdictions. that million. final stock expect the sales half to to $XX quarter to acquisition first year. $XXX XXXX of XXXX of Incredibles like with not certain estimable and half which be XXXX to many sales turn totaled first half reconciliation achieved significantly estimate I first weighted restructuring balance charges, related of will XXXX provided. and based gross that, non-recurring back expected Stephen? of amounts be year. more excludes we be back X and the to accuracy. million GAAP “R” Adjusted Stephen. net Us will is back costs we a certain X.X to expense that the roughly our the in the gross are I reasonable with towards a half jurisdictions the From of to benefited the note currently those EBITDA items, with non-cash objective the from degree currently XX% in be pertain Assuming including We generated approximately

Stephen Berman

you, Brent. Thank

share about Before XXXX. optimistic we important reasons. will the be of some we in thoughts a some get properties to of think Q&A, and XXXX I on number will trends We're for

expect relationships that, we have still the with. to be Toys of shipments but quarter more have to XXXX, we business First, comparisons after “R” the strong And the anniversary the to to first retailers. other Toys we by Us are customers expect picked winners easier. Us in up “R” We be big

year to licenses with have than And sales. be lineup up content almost our entertainment very drive of shaping more will is an that content. of rich expect we XXXX share Second, unprecedented we

continue to strategic we constitute our our having our Third, a IP higher of own goal portion spend IP consistent with of our own sales. total

properties Disney that in we Fancy is shipping well very year be which or new sales for in in and either doing XXXX. continued several will the have ratings toy We content should and Nancy, from including benefit full

We have Command best as Fair such Lightyear product Story Parents tied which Star X received the the to Buzz Center, of award Toy Magazine. from Toy

items. Mermaid up vanity. release anticipated the The products of of Dolls, We out course, Role from for celebration, And will XXth Disney also Frozen for Play that have time special will Aladdin action this beautiful celebrating have Little be and of Dress year, X Thanksgiving. the highly live be including the anniversary in film and clamshell we

styled office weeks have film. One original a Role after character the in Dolls, leading feature date driver note and of release, We up from Dress reindeer box a shipping key play is Play. the kid the to up several the special products size event popular including

in and brand to Frozen factor XXXX. significant both XXXX the expect We be

years several with program TV screen a Starting also new year. Nick should us for growing we of very a well dinosaurs other in great Disney trend and into summer, new and Bunch for children in series goes do are animated Daniel for this old that Gyganosaurus, this toys on a the was beyond licensed well Harry is six XXXX. Junior. strong to of exclusive addition success has products, for to strong licenses Godzilla game pre-school done In Potter, which have quarter Becca’s in for ages products with popular on and the year. year. Junior returns whole and to featuring big the us the three Disney momentum last Tiger digits fourth well years video double a to tied have Nintendo we XX% XXXX to franchises. recent very Walmart. in positioned after the One XXXX the we very line over

to the games. tied from another Hedgehog continue Sonic video beloved figures action and Megamen have on TV on will character video We theaters XXXX. in And based to that benefit both in game classic content new the is

on only own Kenyatta But extend of expect vehicle end XXXX. some into largely the Power yet action broader latest riders sheet electric an look would based more from Blaster, dozer fun surprise and X also year We that Fiesta way will activity another over liquidation addition a fort Us first motor collectibles should benefit IP system. hit to line for and of In while giving full this for for be powered our Slot our Blasters we line. storm, the by broaden the of from have TP is Ninja distribution XXXX presence Shot, our is the "R" this two in the Kid products the several which categories those the versatility of but to game, disruption not starting to TP both follow of with sets year's promising experience half. a more conclusion, last Toys is

a new and are of cost to will the new return our operator. our some will we very we positioned brands questions, for With So to the to now sizing take right by structure profitability encouraged some performances of good our be position us puts well The that of opportunities future. in XXXX. us that also in of allow

Operator

question now Thank from you. session. Stephanie Wissink our Jefferies. comes We’ll Instructions] from first [Operator question-and-answer And begin the

Your line is open.

Stephanie Wissink

the that everyone. the wondering will talking to are Stephen, question JAKKS. us year? if industry the growth the for help is I forecasts terms relative X% thinking are appreciate you. always of What afternoon, for you're you this backdrop Thanks. be just candor first expectation? of when that with Good industry and in about you growth thinking you your How can about

Stephen Berman

that our TV And our for hitting going U.S. retailers us internationally. new afternoon fruition of both with very distribution, year JAKKS, the component the Good The have with online can are, the JAKKS for IP really show new up, we're brick coming off Well alternative very, and deeper strong sales after starting the both U.S. and distribution the morning. distribution well, out. are online we seeing as online all of in all to and and content Stephanie, mortars as speak that consistent. three getting our content the have, plan for to from categories based you coupled well growth amount We're very of I a has our come about different as tremendous and good many into content we our of of specifically a movie mass and grown in well the internationally. that categories own line lineup, know, very depth channel

So year. it's really like us a perfect this storm for

nice the we which for several had on a had one Halloween sides retailers as going distribution last us this North well separate XXXX we year dramatic very into up of the our XXXX, Halloween, seeing went liquidation. in as is additional addition, growth year in segment America, as In into we're line that online content

believe speak can't past what MTD And what besides know for So so have we call they for hardships good is or don't believe XXXX. the really separately I going are a see just but forward. the we and that the which toy properties it obviously broad again, it first of future coming growth us line one industry for exactly industry the and quarter Frozen behind and we I we be the out, year, we a nice which first did Frozen call will course, originally, was XXXX. really the after strength top, did up the most sought the that top the real following was X, product through

Stephen Berman

that's Steph for why more heavily guiding back when look why kind that But we're the you at to -- seasonality of half.

first half, the in coming the XX% the in half. balance So second

Stephanie Wissink

we property relative Frozen this X this time. And we and had X help perspective. bit assume then here? access the maybe consumer are more you about Typically, But subcategories products the insight the you from about mentioned and several things to us think time wanting share Stephen, to understand of do into what of is just Frozen to around? Disney that little similar that for less Or globalization scope last how you license to sequels merchandising productive in have have to thinking should how a a you that understand time?

Stephen Berman

well believes as came movie originally came sequels be sequel are license product the out Incredible, for as many than Incredibles original the the Frozen retail will believe storyline but did believes much And second out Normally of content the to well. bit success are it original, less from when characters passionate the inclusive of sense powerful. the lines as was understanding little surpassed it as us we also the when The For instance what's movie educated of more as is out but to be. of in we time. first more Frozen is for the the unknown and Disney the of extremely came now of the it similar, will the the the the us success much an Disney well and of

breadth So of we're is really our our expansive. line extremely now

for they know more around by that made ups, We success. being the plans the have world of a broad are line much the promotional worldwide array retailers retailers, are in exclusives

So success everyone from and us is worldwide success and counting retailer. on the pushing for from the from Disney

equal So on good today. see believe is being original this pretty based really to we the what a I

Stephanie Wissink

you. And quickly then for Brent really

do expect flow Just forecast to on know EBITDA for you XXXX? in growth cash XXXX. Based sales the in to you up on be cash generating what this year. your had use I cash

Brent Novak

QX cash we're increased projecting million, now. what would Yes, be free XX adjusted about so flow? right EBITDA that's

a capital of There loaded So we in working movement be there, into going again of to sales. cash should because be be half more generate XXXX. able we're to some terms going bit back may

Stephanie Wissink

Thank great. that's guys. you, Okay,

Stephen Berman

approximately one data other down and was same X%. is we the in Steph the And will NPD that U.S. XXXX thing in have NPD sales be

Operator

from Instructions]. comes your Garrett Please Johnson And ahead. next Capital. BMO go from [Operator question

Your line is open.

Garrett Johnson

in of others So the as weak. out Toy weak. of called strength called being Europe Fair space you We lot heard in a around being very have out Europe Europe very commentary

what So Europe. in doing well there you business differently? Why's your seeing are you. Thank

Stephen Berman

is to the is One are product Garrett. territory. specific that afternoon us seeing points Good points for price the the for our right resonating and addition our price appropriate we're line, in products having

marketing UK have sales certain countries general operation for There weakness at have have business certain only to distribution for across we for partnerships part also our our extremely is but we're changed was us So model in specific retailers. us in nice actually focus. us going. depth and more I can focused Italy, speak for operation that retailers things of much we is Spain seeing And in nice we see of at too pockets a direct built some

lot a been fruition things So to of coming on we've working last started year.

Brent Novak

Yeah in some note that volatility that but incredible on the Stephen's. to was to that add so Europe and to forward just strong going pretty create

Garrett Johnson

and we about the Okay in update the actually launched on are anything What's didn't same loss. we initiative? same hear

Stephen Berman

sell brick then there and model we're HE Rose, is and Walmart.com, we Ricky's stores placement structural from to more to focus distribution the early that to and call marketing Fit for garnish working our four fourth focused our retail say at new mortar. is loss have one and both and through and in in retail, and influencers quarter throughs. Butt And we now the same Fun online be with Riley of launches is now Target specific based actually retailers in necessity the on addition a The sell Fab with the with actual launched it issues on XXXX we the

Garrett Johnson

more one quarter. but I should How around talk first. did this you perform? the about bounce Can to POS one sorry that and Okay in your ask

Brent Novak

But at as POS levels from overall provided generalizing not retailers year additional pockets not up call the last address. the quarter first the into the there items we year specific throughs it going and of board, in tremendous of last don't the to I'm that having and of sell week very As high actually XXXX over year see material of the so that's into we have we levels We inventory company need across inventory be listening ended shipping. healthy low to very XXXX. to retail or well came will to inventory nothing us. a that are it have amount into for And that very the going end are

Garrett Johnson

so the your was in quarter? POS Okay, up

Brent Novak

I key that me. if the don't up was it have front so don't year over I just year data have in of

Garrett Johnson

right. you. Okay. Thank All

Operator

concluding concludes And now I'll call Stephen remarks. session. that turn back the for question-and-answer Berman over

Stephen Berman

XXXX. you, ladies very gentlemen updating much. forward our strong and thank a first call. you and everybody forward And looking to Well Thank for after quarter to the we look

Operator

for That concludes may and thank this you participating now you conference call, disconnect.

JAKKS Pacific (JAKK) 26 Feb 192018 Q4 Earnings call transcript