JAKK - Earnings call transcript Q2 2019

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Operator

Good morning, and welcome to the JAKKS Pacific Second Quarter 2019 Earnings Conference Call with Management, who’ll review financial results for the quarter ended June 30, 2019. 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 Investors section. This presentation includes videos showing some of our key products.

And on the call this morning are Stephen Berman, Chairman and Chief Executive Officer; and Brent Novak, Chief Financial Officer. Mr. an lines the and provide highlights and first product of current will overview quarter of provide Berman business trends. Mr. Then prior provide will and of detailed regarding call to results the JAKKS up the questions. Novak for opening Pacific’s comments operational financial

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

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

directly EBITDA. will otherwise addition, as or within measure comments press such issued non-GAAP stated, earnings has release adjusted reconciled financial GAAP In today financial previously. associated today’s the measures to refers non-GAAP financial metric management by most been comparable the Unless to the company’s

this reminder, a conference As is recorded. being

over the With Stephen I that, call to now turn to like Berman. will

Stephen Berman

then with performance. comments today. the after my additional comments. we will our our morning, during comments, of After second about performance performance, XXXX. will morning, quarter thank come announced Good joining some about going our we’re generally which the everyone, and some talk transaction, general review financial to with completed this will for start Brent discuss This recently morning you I back second which us and I recapitalization quarter

needing move finally recapitalization overhang a pleased without can and focus on the of to keen some we business transaction have transaction. we forward type very that uncertainty with executed complete am the of comprehensive a I and

We licensors, partners other suppliers, business great are of employees. our friends our and customers, including stakeholders, grateful to supporting advisers course, have us, and, such shareholders and

sales ended first which our no the was QX to XXXX, the U.S. the no results. the quarter still Toys"R"Us, in of the liquidation the and beginning. to XX this the Even comparisons retailers Therefore, just June those in other to Toys"R"Us the sales in disruption we considerable prior are saw The with sales on industry quarter either had year or sales. year. to Moving U.S. from in response clean

the quarter division, Some XX% even of saw in quarter. strong which the ahead highlights peak Disguise in growth a was in up quarter we its the almost were, of our

Aladdin, and properties, new in setting also notably contributions strong licensed Nintendo. We was key sales us from of Toy for saw well X our second shipped. the POS licenses half over Disney QX, the up with XX% products Story Godzilla, up

ball the Our of our adding last gross declines pits. by strong strong in with than activity were offset X These margins. with to second of of seasonal which well and particularly the quarter tents, of both play performed Squish-Dee-Lish, more sales above-average in of tables Incredibles business evergreen and were areas strength quarter in introduction the year

Essentially, QX accounted X. in decline in for result, all compared be can the the approximately sales by declined year. net a As XX% decline of to last Incredibles

of year sales. growth our the full achieved we approximately of half year XX% expected expected our of However, first target in sales the

Toy the in more we which timing half launches, sales related our Story in be content As launching product also which was notably first due call, entertainment to quarter year-end in key much drive X, second should Frozen the to to into QX QX. released is on we of XXXX and said sales and X, XXXX expected the late November, skewed but

with coupled third Though King in licenses, a normal Top product our our goods few, do half. sales return skewed based as to of increased further and are today. gross our gross in Disguise quarter shift also such Pokemon, name Kim X, important most our expect a XXXX than the in Lion to action, second live mix more expected LEGO Movie margins second to quarter. reduced bookings to on X, Wing, levels of we The Several Descendants closed-out margins Possible XXXX

second gross quarter, As to SG&A was able taken due were first the lower in year cost. to to XXXX quarter the the case steps our offset margin and we in last of sales partially effects reduce

effective the proposed to in tariffs there business. impact have September the on to impact, and past levers front, the a logistics are at on negative tariffs. of process steps we the the sourcing, where go modify price number These evaluating we changing can our in that Generally, would pull tariff been in the On effect mitigate are the offsetting including effect X of possible. into have increases of

announced how some and near-term take there impact to Given negative peak they these how would in periods results. broad shipping are, tariffs close recently effect be may

evaluating and We are third this the impact the could currently quarter fourth quarters. in that have

partners find We suppliers will with continue retail an path. work to our to and optimal

the $XXX want due outstanding amount XXXX. matures aspects of Approximately face We debt Brent, that call has the summarize XXXX. $XXX I been year the convertible some million and had next over of of a with recapitalization in debt in transaction. hand I extended of approximately Before to to million

facility we has believe prepaid. Great the be million to Great increase Wells XXXX, XXXX. payoff facility. million which maturing with will will the debt facility, in to ability issued Fargo the the will American secured help from which use included loan Fargo under new now credit in Wells amended of credit American Great borrow of our loan. fund collateral is in now to August $XX We loan term $XX January term the support The and been years, American extended term and Our matures The three

of with $XXX and of held approximately debt common debt, issued debt. our outstanding extension preferred was part million of amount convertible issued the common essentially mandatory does into million As $XX And a provision convertible secured convertible the to Hoc the the of stock option stock preferred preferred not the XX.X% stock stock. not include at is converted to by Hoc the Group reduction Ad We stock The face of the Ad our Group. holders. of a

$X roughly Oasis. the just the also conversion features million, a the of debt adjusted that recapitalization outstanding summary by the transaction. remains to This We of of some is $XX which held of of price convertible is

X-K the that SEC exhibits please of all and the were with the supporting filed details, For refer related today. Form to

complete, we pursue recapitalization objectives Meisheng, with new and transaction shareholder. a with the not of a continues transaction One our resolve. be With point, large while beyond term JAKKS through and we final to a supplier complete did and can Meisheng business the strategic near vigor

over turn now Brent will call the I to Brent? Novak.

Brent Novak

morning, P&L you, and commentary. provide finishing and I Stephen, sales composition the up review color then Thank first with will highlights more good before from some sheet on everyone. the the financial balance

compared quarter $XXX.X Net last were sales for XXXX million the year. $XX.X to million, down second XX%

declines by the that newer a the XXXX sales declined to said, was QX notable from of year, the significantly X properties. which that prior Squish-Dee-Lish, with our other As Incredibles including benefited year-over-year, from due partially Stephen as offset all expected, fact essentially decline were

owned at target, the decrease increased driver in of gross of of closing year. from products some approximated from last products driven out products product licensed IP XXXX away well Gross margins. noted, our in sales XXXX of with sales in XX% was evergreen licensed margin main and full first compared The higher-margin our lower-margin, XX.X% our older half growth Stephen QX second as substantial was by some to the in down shift lower toward the As half a quarter as certain XXXX. year expected XX.X%,

impacting Product of as mix gross cost percentage drove sales, higher a margin. our also royalty net

declined direct approximately on the year-over-year costs. a year-over-year line QX in declined on lower co-op QX reduction X% by in XX% selling in basis, expenses result of and other with advertising the sales. basis, net SG&A expenses Our expenses a Total in

the provision the associated in of and year. loss operate. year. we taxable strategic of income refinancing other total costs tax jurisdictions in net Reported levels and to was process, loss variability which various $XX.X in or based a changes million acquisition-related The a or of Excluding income million shareholder quarter is in transaction last second $X.XX to per of net tax the XXXX JAKKS with of income SG&A $XX.X diluted attributable last on compared share QX $X.XX diluted per in

second of category to in second the Adjusted of XXXX $XX.X down to in $X.X for in quarter were Role Activity negative Dolls, of the XXXX. the products drivers XXXX our XXXX in girls sales amounted million and million quarter quarter second million dress-up, XX% follows: Plush The Sales second EBITDA to year. of was compared $XX.X category last for quarter by as the negative the Playing compared $XX.X comparable quarter, million

saw Llama. Frozen, Toy expected and contributions declines our Squish-Dee-Lish. in lines, a by were Nintendo content-driven as lines, contributions our more four as Harry XX% year. of entertainment offset brands Story than more million Moana Sales including Blaster, Incredibles were electronic as Incredibles role several by slow-rising foam and XXXX in compared and play vehicles, of positive well Your the Nancy Sheet boys $XX.X second number Who’s action products, for These We to Aladdin from category Positive than products in down such offset two. two, were girls Storm $XX.X figures, and TP Godzilla, million, the quarter declines Potter, last Fancy from

ball pits, a ball Wheels $XX.X we which Sales also category, increased in weather in the million MorfBoards million compared second one XXXX $XX in second XXXX. brand, products, Sales segments, Halloween were unfavorable and and including X% XX% to quarter a strong our Fly furniture to were our in saw Despite by activity tents partially in up licensed in offset in which of markets, Maui the many MorfBoard million growth products decline pits business $XX.X outdoor XXXX. outdoor in kids seasonal $XX.X million is our of conditions ride-ons, XXXX furniture, kids and from quarter, sales.

a previously, showed Disguise in the the year-over-year decline in a orders we and shipments. due in shift in to said timing we first quarter part sales As of

in the XX% second third quarter, various Plush which four Toy products. in sales approximately with accessories, increase is of first sales million Disguise year-over-year quarter essentially of was The up the Figures, baby ahead Disguise. Activity in of $X flat the were and at category typically Sales quarter. the by sales were highest our preschool led the For games and and second Story the Doll year-over-year, months, quarter other six

sales Pull Declines Daniel strong Finger in were initial Tiger’s of by Gigantosaurus. My offset and game Neighborhood our

a to Looking by at compared two compared were due second XXXX declines to to down quarter of sales second decline Canada XX% net the last Incredibles products. Incredibles $XX two the sales XXXX by for were in XX% million sales and for International in down million, $XX.X and business segment, products. in year, driven $XX.X XXXX U.S quarter Squish-Dee-Lish $XX.X primarily million,

And XXXX second quarter second quarter changes the the earlier. was of cash we already the Net XXXX by the million category sales breakdown Halloween in mentioned to activities $X operating of cash activities to operating in used for working in million capital. provided in of compared net $X.X due

was six the first compared roughly cash the million $X.X million. XXXX, months in negative to cash XXXX second was flow used quarter and second the XXXX in at in negative just of same under the For net $X quarter. million operations XXXX Free $X.X

quarter. second Accounts totaled June of cash in and days of XXXX operating June $XX days quarter XX in with cash $XX.X XXXX, As from as June cash The primarily reported were due as June was XX, to cash June $XX.X and XXXX $XX.X Inventory in quarter from of XX last improved the XX, was days of XXXX was as the in our quarter equivalents million outflows XXXX as million, XX DSOs $XX.X quarter. cash second million compared of receivable XXXX, million million and including of from to DSIs versus quarter. in second million decline XXXX, June to last XX, XX restricted XX, $XXX.X as expenditures. million days $XX XXXX, compared XX, capital XX, second the XXXX. the XXXX. down

all amounts XXXX due convertible As long-term. term American. $XX.X for of loan XXXX, When debt above of convertible exchanged November a debt with account June of million includes the notes due million previously principal XX, taking transaction, the $XX.X $XXX million and into notes the for in Great June recapitalization company’s is

XXXX expenditures approximately XXXX. of in of $X quarter to were Capital is XXXX balance exception the $X.X XXXX. notes during $X.X classified the due XX, June second of million With long-term as sheet million at on million second and convertible of the the the quarter June compared

common the average diluted second calculation XXXX XX, shares convertible compared XXXX. The XX.X of per weighted June million based outstanding to second second million on for a The XX.X outstanding share count loss at XX.X quarter XXXX. underlying million our quarter is the excludes senior diluted for quarter share notes shares

Before I discuss I Stephen, to would pass the like call of for back the our over expectations XXXX. remainder to

the start third We’re XXXX second and off quarter. to great the to a half

We our that sales year-over-year XXXX or points. million, continue net estimate in increase approximately give few will or $XXX X% a to to take by percentage

second and first While adjusted half margin that XXXX EBITDA previous half XXXX our some our in the quarter may of we of unchanged met the expectations, gross of year line we the top expectations second persist remain experienced the XXXX. pressures into our believe

EBITDA items, improvement XXXX Stephen estimate adjusted range Therefore, provided. show no call acquisition-related this last EBITDA will are EBITDA significant $XX roughly and events will outcomes. not of of but Berman. and restructuring the year currently to non-recurring year, As the degree to that, GAAP possible adjusted a a be expense, to year accuracy. top end of be which over including a our over that we and pertain prior I with our reconciliation compensation charges, significant Adjusted million reasonable would non-cash amounts future for result, of of a believe of turn costs back many estimate-able can And with stock-based excludes

Stephen Berman

Brent. you, Thank

will share in and second will the the to think be of half we properties trends XXXX. important get we on Before thoughts I Q&A, some

partners. recapitalization addition bondholders extremely know to parties our of interested a working financial and consummate Toys"R"Us you a XX been all with dealing as our with with other on we’ve to as and for or As in the the transaction and well strategic months, past liquidation hard also effect its banking sales conditions, transaction Meisheng

on a XXXX been are on second about to and great have licenses. the for can XXXX some business. solely place Near continues This number distracting, running continued the that now and be our entertainment optimistic of in and for and disruptive effort content we have of we year focus the a has in agreement pleased half, strong an we term, second half to we be reasons. efforts

sales. We expect Story King, Toy Gigantosaurus others Pokemon, two, our four and Lion Nintendo, Frozen drive to holiday

of our a constitute Chocolate Blaster, to our having IP, TP owned The few of and Slap own our a X-Power are strategic our sales. total expand with Sheet Storm, Dozer, continue goal Poop name We Ninja retailer IP consistent higher portion favorites. the Maker to

very sales been growth. strong Moi, has It XXXX. about typically in much business haven’t spoken looking the which quarter we Disguise lately sees solid at growth the year-over-year Our third strong. in best is C’est showing is and

about the is the very small, While be continue potential. base optimistic brand’s we still to

Mermaid the Thanksgiving. will year, lead or should has time release business segments XXth out including last good this several rebounded two are are either and play Seasonal be interest Little in anniversary Frozen in From Our line. of versus the growth for renewed Disney, nicely has new that tents. showing to

We ahead broader projects office Up of of have and shipping special Role a box the feature including dolls, release, array Play. Dress

Frozen the and a brand of expect second to both factor We XXXX continue in for well to toys well into companies. us be the XXXX. sell significant Video other and game-related half

Hedgehog and to allow entertainment continues which we benefiting addition system More The into Nintendo, distribution to well, been into our see addition content. exciting forward, activity to has of from pushed motor year, which the grow the Mega perform an Man have XXXX. system broaden. Sonic In next should electric continues new to

expected, profitability This the puts recapitalization continued the a first coupled disappointing a day in and gross sales XXXX. second us JAKKS. are like for are our came half. for margins, positioned of we good with in our dawning position our fiscal sales believe as on we gross well improving discipline The transaction while improvement we improve in half growth conclusion, half margin our to first is focused and we new In in

and advantage take forward taking that, With to of questions. many We’re look we will our Operator? invigorated now opportunities.

Operator

Jefferies. And first Steph from question Instructions] from our Wissink is [Operator

Steph Wissink

Stephen, you you a and platform purely versus a a of wanted Halloween question of to Disguise. has into just really everyone. outperformer about first Thanks, I’m the curious I can talk about year-round good And, been strong ask perennial if evolution that the This in morning half. business? more business a

Stephen Berman

Sure. Good morning, Steph.

seeing to I Firstly, very expressed as actually quite last Halloween and is a strong as growth few we we think year-over-year before, properties has And Disguise compared growth an seen new industry. year, have a year.

So of in to stronger the in it QX more since of us and Disguise. to build past us ship allowed new than growth properties, a we due allowed had QX to which the tremendous a amount

Steph Wissink

are retailers merchandise expect Or advance that taking what on and earlier? in Stephen, be a that the they to earlier stronger you it of buildup Halloween? floors seeing a placing is

Stephen Berman

since Halloween. we percentage domestic. – And FOB shipped normal disguise. order into simply of for a It’s there’s large It’s actually just a for order years. – it’s earlier QX the more actually forward past quite on on a basis going business growth QX, FOB than our extremely an need they buildup And to to strong a of year-over-year, so remember, for than in we’re strong them QX

Steph Wissink

Okay.

not to QX? QX we in as It’s contribute to should that expect well? pull-forward So growth segment into

Stephen Berman

are we year. have internationally And we international based, in Correct. licenses Disguise also have shipping past so the more newer that we’re than

Brent Novak

Yes, are disguise good Steph, full expecting we for growth year, year-over-year.

Steph Wissink

about average? mean it company. your think the kind above over-indexing And company that of Should total growth, way, by you we below good or

Brent Novak

Yes.

Steph Wissink

we we that think for that can more two, opportunity meaningful few A Frozen you domestically scale should then am driver years of this international given ago. but around? for this things market year, also pipeline property talk the But second are at the that, the a to you. just a if one another about into a of Stephen, about internationally? bit How such both exciting How Okay. looking little coming And the wondering lot I you was time half.

Stephen Berman

we we from XXXX, the we’ve actually Well, for in had actually have figured in what in we since experience and two, past. had SKUs rights it – the past we the Frozen better out worldwide performed

strong expectations extremely So the worldwide. are

in and sell-throughs more the over Princess increased has giving which for strength has – year months. addition, In online Frozen first and the retailers both both extremely the half brick-and-mortar of past And is Disney few strong, for retailers as additional buildup even two. of are continued placement as well the

So and strong. the placement and expectations extremely is excitement

Steph Wissink

gross last That’s Brent, encouraging. on the hear, I from just you want just drag that we the sure Good the and gross you expect margin that portion to one came of phasing the closeout. I that the know for understand closeout be of is What some XX% to to from to of persist, margin. can XX.X%. you portion make so willing would but we least to drag? decline going model of at quantify a that out of

Brent Novak

Modeling that bigger would I in terms mix out it quantifying, would or of say, still, overall. was Yes. – smaller a the meaningful. I had contribution just would’ve been I than was Closeout closeouts. it say than would the qualification qualitatively,

So really was the that. big driver

year, like last lower example, products them high-volume at sold year high margins. This that Incredibles were Squish had we volume. For at you and sold two

than were And two we expected those for lines. much lower the unfortunately, margins

So as well. then say we the largest mix/pricing. have sales contributor did I’d closeout was And

negatively our it impacted of percentage mix because of as The the more percentage IP owned on margins that just was a was issue, a higher revenue. well, as margins products licensed other so versus impact royalty

may a the start as we are that the off do mentioned quarter. call, believe to third we into second the But on the half. So good in pressures persist we

normal And levels we quarter. margins the in to be expect third at do more

that in higher-than-expected in where can in with that we number came our to year you down margin brought with even sales EBITDA last look achieve at. we So our QX, disappointing But expectation. able previous hold cost were gross at and adjusted line

So a that was certainly positive.

Steph Wissink

structure, could, share diluted then two and back modeling be count perspective. a the year half And then capitalization if to a with just great. basis, fully housekeeping, and The new going expense on full from what’s basis? That’s interest on we a new then the Okay. for

Brent Novak

So the $X.X we common $X $X.X is roughly stock million. issued million, that million

XX% about it’s shares. So outstanding of – the our of

count. to range. the you the So interest as actually now, right we they’ll see the going – that But expense can see will of annualized in some X-K the interest something cost. then But be price from those will be And all is a expense there well file impact $X.X Where about doesn’t outstanding convertible all stock just the million-ish, there. be that’s added the of But later interest when $X that like million, the will overview is look interest notes. any cash details financing maybe from perspective, to today. that the costs in for it That an an you’re probably will be amortization non-cash. – of rates

Steph Wissink

Very helpful, you thank guys.

Operator

is Johnson from [Operator Instructions] And Gerrick BMO question our from next Capital Markets.

Gerrick Johnson

All right, thank you.

can changes source How get difficult So your mentioned to quickly And tariffs. be potential that sourcing you changes how that around to in easy done? is in do? of or

Stephen Berman

sew Good molding Gerrick. could out take a of to quickly cut to in years. and and get done, moved How amount traveling material and China regards areas manufacturing a and with have Mexico. of injection Vietnam have also move we of to But addition it been couple other the would morning, to

we’ve different also wars. our that But before So the tariff preparing Kids been previous, have the areas in working in Only! for. and call been it, we we hit with tariffs have with business furniture

They’ve increasing in what the up which we stayed same time, changed the retailers, ended we’ve strong. the slightly. retail actually sell-throughs prices, to various what And price seen accepted increase a our furniture, at which But doing bit. extremely increased indoor is outdoor prices furniture, had haven’t actually the

our the at majority through the increase years. it last, done an retailers of China be And of will least time. businesses, different of still done some seen be we’ve in at that moving but part, So generally, the and areas for we’ve same for we will areas most going to two manufacturing the other

with been where worldwide of be we retail very our partners will price increases achieved. closely speaking And have

doing areas to to price to of businesses. done lower also and of cost where same lowering the pricing continue business reductions we’ve different amount or of a or spray-ups addition, possible in in In amount are by the – stitching our of allow sell continuously our on keep areas for just us

Gerrick Johnson

traditionally FOB And playing couple shop, mix see great. of an do versus next changing And you that how are is guys say, FOP out, this years? domestic year? over of that you Okay, how the

Stephen Berman

an domestic from We’ve been It’s stay year-over-year. preferably it. We to to from very We we’ve consistent it’s XX% benefit past. up, that’s well or as well, their XX-XX. what the our as similar as based retailers it And seems like our had been FOB, loads it’ll use add anywhere even they to when get FOB XX% tariffs, as split for own that capital. business, worldwide, It years. less the of in to with get

So be goes as our goal to on. would time increase it

Gerrick Johnson

$XXX we quarter, to lastly, your EBITDA. Last projection million projections. And XXXX for Can on adjusted on sales, in comment comment are you able saw million in you that? Okay. $XX

Stephen Berman

strongest Not if Frozen, highest too expecting year. you and same. feel with at that year the on It’s actually the a with time. as XXXX. based we’re remember this strong forward have past, year And as the season for up. And coming the in early the strong we lineup very But we holiday this well was second going

Gerrick Johnson

to that the Expecting be same even…

Stephen Berman

what the had as we’ve it in be very similar past. expecting We’re to same, growth the

Gerrick Johnson

time for last prepared the complete surprise. everyone’s it. was time Well, Okay. a This

be little that bit more shifted a towards So would would assume correct be assumption? this a would I that year,

Stephen Berman

it year we experience the the No, a people is in And promoting it because it’s because have the the definitely it’s In XXXX, – first and we’ll the definitely part it five on expectations had full the the of half – experienced stronger we have sales. an way movie, year past. – second a was weeks remember, in only prior air second before, of stronger have the Christmas. to – but part unknown for Disney

two for very real partake a it. it minor of addition Frozen we’ll have is In because strongly Disguise forecast no very because Disguise there’s that’ll awareness in

was So interactive lines have into past, going year. the following performer year, we our next which one our like that the the in number shipped doll,

into a have SKUs the So going XXXX. retailers' strong still for we lot and spring fall, of expectations for are new

Gerrick Johnson

Okay, Stephen. great. Thank you,

Operator

time. have further questions this And we no at

Stephen Berman

call a Ladies for with today. and appreciate coming and earnings announcement year and the our later to gentlemen, financing closing you apologize this the happy very looking at of very that you date. forward the time thank But was We much. come. the to and years done we’re Thank

Operator

Thank you, Thank and concludes today’s gentlemen. now may call. you participating, That and ladies disconnect. for you

JAKKS Pacific (JAKK) 9 Aug 192019 Q2 Earnings call transcript