Stephen Berman - Chairman and Chief Executive Officer Joel Bennett - Executive Vice President and Chief Financial Officer.

Steph Wissink - Piper Jaffray Drew Crum - Stifel Linda Bolton Weiser - B. Riley Ed Woo - Ascendiant Capital Mike Hughes - SGF Capital.

Good morning. And welcome to the JAKKS Pacific First Quarter 2016 Earnings Conference Call with management who will review financial results for the quarter ending March 31, 2016. JAKKS issued its earnings release earlier this morning.

Presentation slides containing information covered in both today's earnings release and call are available on our website in the Investor section. On the call this morning are Stephen Berman, Chairman and Chief Executive Officer; as well as Joel Bennett, Executive Vice President and Chief Financial Officer. Mr.

Bennett will first provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then provide his overview of the quarter as well as provide highlights of product lines and business trends prior to opening the call for questions. Your line will be placed on mute for the first portion of the call.

[Operator Instructions] Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales and earnings per share for 2016, as well as any other forward-looking statements concerning 2016 and beyond, are subject to the Safe Harbor Protection under Federal Security laws.

These statements reflect the company's best judgment based on the current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements.

For details concerning these and other such risks and uncertainties you should consult JAKKS Pacific's most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time. With that, I would now like to turn the call over to Joel Bennett..

Good morning, everyone. And thank you for joining us today. In line with expectations net sales for the first quarter of 2016 were $95.8 million compared to $114.2 million reported in 2015. This decrease reflects the sale performance in 2015 one of our key product lines in the international market.

The net loss for the first quarter was $17.4 million or $1.00 per diluted share, compares to a net loss for 2015 of $7.6 million, or $0.40 per diluted share. 2016 earnings include the loss of $0.05 per share due to fewer common shares outstanding during the quarter as a result of the company's ongoing stock buy-back program.

On a static share count the earnings would have been a loss $0.96 per diluted share in the middle of our Q1 guidance range. Adjusted EBITDA for the first quarter was negative $9.2 million, compared to negative $900,000 in 2015.

The guidance and actual results reflects higher marketing expenses in 2016 including the timing of expenses associated with an earlier Easter which contributed to the decline in earnings. Worldwide sales of products in our traditional toys and electronic segment were $41.7 million for the first quarter of 2016 compared to $65 million in 2015.

Sales in this segment in Q1 were led by Disney Princess and Frozen toddler dolls through down Europe, BIG-FIGS featuring Star Wars and Batman vs. Superman and our new Warcraft figure. Worldwide sales from our role play novelty in seasonal toy segment increased $54.1 million in the first quarter of 2016 from $49.2 million in 2015.

Increases in our Disguise Halloween costume and also our kids' furniture and activity tables drove the increase this quarter. Included in the category numbers our internet sales were approximately $23.9 million for the first quarter of 2016 compared to $42.4 million in 2016.

Disney Frozen and Princess Dolls while continuing to make strong contributions were lower in 2016 as anticipated. Gross margin for the first quarter of 2016 and 2015 were 32.5% and 31% of net sales respectively.

The 150 basis points increase in gross margin in 2016 is due to lower product cost and lower royalties as we continue our margin expansion initiatives. SG&A expenses for Q1 2016 were $45 million or 47% of net sales as compared to $39.6 million or 34.7% of net sales in 2015.

The increase in SG&A dollars in 2016 was due to higher marketing expenses as previously mentioned and resulted in an increase as a percentage of net sales due to the lower net sales in 2016. Depreciation and amortization was approximately $4 million in the first quarter of 2016, compared to $2.8 million in 2015.

Capital expenditures were $3 million for the first quarter of 2016, compared to $3.1 million for the first quarter of 2015. For the full year, we expect capital expenditures of approximately $12 million.

Consistent with the seasonality of our business on lower sequential quarterly sales and higher accounts receivable at year end, operations provided cash of $32.6 million for the first quarter of 2016, compared $38.8 million in 2015 resulting in free cash flow of $29.6 million and $35.7 million respectively.

And at quarter end, the company's working capital was $226.9 million including cash and cash equivalent of $118.9 million compared to working capital of $234.2 million as of March 31, 2015.

Accounts receivable at quarter end were $85.5 million down from the $104.3 million in 2015 due to lower sales in 2016 and due to the timing of sales during the quarter. DSOs in 2016 were 80days, a decrease of two days from the 82 days in 2015.

Inventory as of March 31, 2016 was $53.5 million, down 33% from $79.5 million in the first quarter of 2015 due to ongoing working capital management and forecasting efforts resulting in DSIs of 92 days down from 114 days as of March 31, 2015.

Under the current authorization to repurchase up to $30 million worth of the company's common stock and/or convertible notes, approximately 2.9 million shares of common stock have been repurchased at a cost of $23 million an average of $8.04 per share and $2 million principal amount of our 2020 convertible notes at a cost of $1.9 million have been repurchased through the end of the first quarter.

Since March 31, 2016, we've acquired $590,000 of principal amount of our 2018 convertible notes at $98.5 million which leaves $4.4 million available for repurchases. Lastly as per guidance, we are reaffirming our previous forecasted net sales for the full year 2016 to increase 7% to approximately $800 million.

Earnings to increase 10% to approximately $0.78 per diluted share subject to share count changes and adjusted EBITDA to increase 28% to approximately $65 million. This guidance reflects anticipated growth and gross margin and operating margin and an effective tax rate of 15%.

Using EBITDA as a proxy for cash flow from operations and excluding changes in working capital due to the substantial variability that occurs based on the timing of sales and production within and between quarters, free cash flow for 2016 based on forecasted EBITDA of $65 million and an aggregate of $26 million for CapEx, cash interest and cash taxes is estimated to be approximately $39 million.

And with that I'll turn the call over to Stephen Berman. .

Civil War movie opening in May. Kids can choose their favorite superhero and control this R/C vehicle as either Captain America or Iron Man for twice the fun.

As the worldwide master toy licensee of Warcraft movie baseline features multiple scales of collectible figures representing both the horde and the alliance including JAKKS' BIG FIGS large scale figures. It is now available at Toys R Us and that will be in full mass distribution in May prior to the movie's opening in June.

JAKKS has specific global licensing agreement with the WWE to manufacture, distribute and market a line of consumer products based on WWE superstars and divas. And it hits television shows Monday night with Monday Night Raw and Smack Down.

So line includes everyday dress up, role play and seasonal costumes in the US which are at target now and will be in full distribution this fall. Additionally, we are the master toy licensee for WWE in Asia which will bring new sales opportunities from that market in a second half of this year.

JAKKS continues to enhance the license world of Nintendo product line with all new figures and plush items available this spring. We are rolling out a multiple waves of items ranging from 2.5 inch figures to plush toys with sound effects straight from the game.

The mix assortment keeps consumers engaged and coming back to retail to find new characters. This fall we will be introducing additional figures and plush as well as tape racer and the Mini Mario Kart and anti gravity R/C vehicle. Last year our Disney business began to expand beyond our core businesses of Princess and Frozen.

Tsum Tsum is our biggest news for 2016. Our sales continue to build as the collectability games momentum with new characters and new waves. We've already launched waves one and two and we are gearing up to launch the Marvel Tsum Tsum segment this summer.

Our consumer activation such as Tsum Tsum takeover Tuesdays are resonating with collectors and fans. While increasing our digital footprint with influencers in the social space. The product line has also received rave reviews from retailers and press.

Our Disney Princess low price impulse items such as shoes, tiaras, jewelry and more continue to be key volume drivers in Q1. Our feature dolls and dress up business also performed well in the quarter.

Our Sing-A-Long Elsa doll and the Do You Want To Build the Snowman Jewelry Box, continues to be two of the two top US performers across our Disney branded portfolio.

Sing-A-Long Elsa doll performed ahead of plan this spring and to maximize the items potential this fall, we have solidified an aggressive promotional program by offering it exclusively to Walmart. The Jewelry Box also performed well above our plan and will continue to be a key driver going into the fall.

New content for two all new and powdery female characters Elena and Avalor and Moana will further support this business segment later this year. The Little Kingdom make up segment delivered impressive results now that it is available in full distribution. And we'll support it with a successful TV spot.

With a consistent flow of goods in the pipeline as well as TV plans for this fall, we anticipate this segment will continue to do well. We will launch Sofia the First in EMEA and in Latin America with broad offerings of dolls, play sets, role play and dress up in the fall and we will share more on this product launch next quarter.

Our Alice Through the Looking Glass collected dolls are making their way to all major retailers this quarter coinciding with the live action movie release in May. So far we have received a good response from retailers. The beautiful detailed in this collected dolls combined with good price value should resonate with fans.

In addition to the dolls, we also have a line of Halloween costumers for our Disguise division coming soon.

While it is off season for Halloween, our Disguise division continues to ship, reorder for independent e-commerce site and in second quarter we are excited to shift new key drivers such as the first official Lego license costumes, Shopkins license costumes and the Secret Life of Pet license costumes based on the universal movie slated for this coming summer.

Our seasonal division and steady business with new licenses and product innovation driving our dominance in the category. The Maui and Kids ONLY furniture and activity table segments were up double digit in the first quarter. Licenses such as Micky and Mini Mouse and Paw Patrol are currently performing well at retail.

And this quarter we ship Teenage Mutant Ninja Turtle big real ride on and activity tables as well as Finding Dory and Kiddie pools, fall pit, activity tables and chairs in time for the theatrical movie release state. As you can see we have a stable of strong brands with global reach. And a solid global distribution network.

We remain committed to maximizing the value of our portfolio with customers and consumers around the world. We are already working hard on our Spring 2017 product line which we are showing now to customers worldwide and are confident in the remainder of this year and in 2017 and beyond. That concludes prepared portion of the call.

And we'll open up the call to questions. Thank you very much. .

Thank you. [Operator Instructions] And our first question comes from Piper Jaffray, question is from Steph Wissink. Your line is open..

Thank you. Good morning, everyone. Thanks gentlemen for all of the detail. A lot of detail in your prepared remarks and I hope I was keeping up with everything but the one thing I didn't hear you talk about was the specific product in the specific international market that may have led to a bit of slight difference in the revenue line.

Can you talk a little bit more about that? And then Joel specifically on the remaining buy-back, how should we think about the Board's potential to authorize incremental capital for that plan for the balance of the year?.

Good morning, Steph. Thank you. The drop in the international market was really just two different product lines that we couldn't anniversary which were two different Frozen high end items. One which was Sing-A-Long Elsa and the dress up, the actual dress.

So those two items were so strong that in the prior year quarter they just did an anniversary in the first quarter which was expected. And that's why we came out with the numbers in the range in which we did. So those were just two product lines that really just slowdown but the overall Frozen business is still extremely strong.

And then to answer the other question. I'll answer on the buy-back, we got an extension received an extension from Wells Fargo which -- Wells acquired the GE Capital division. And we had an extension for our buy-back for another three months so that we can continue to finish the buy-back whether it is the common shares and/or the converts.

And upon that being completed we will then again have another meeting internally with the specific committee which is a capital allocation committee to review the capital needs whether acquisitions, whether it's licensing initiatives, distribution deals and/or future buy backs. .

Thanks, Stephen. And then just two follow up with respect to kind of the portfolio health. It seems like there is a lot of initiative across the lot of thing.

And I am curious if you can just kind of force rank for us how you are thinking about the next 12 to 24 months in terms of the segments? The role play and then kind of the core classic toy products? And then separately, just as we look at the P&L, again nice drawn margin in the quarter, should we continue to think about the business benefiting from lower cost over time as you do more of strategic engineering around some of your input?.

Okay. So to go our basic evergreen business which we've been building over I guess 20 years with the acquisitions.

I think 22 or 23 acquisitions that are all now combined in the strategic divisions which gives us a real healthy revenue stream through the year are really been built up now one as I mentioned the seasonal division which has three different components which is the foot-to- floor-ride- on, ball pits, outdoor furniture and seasonal product such as Maui.

Those areas are now being built with innovative product, new licenses and expansion in the distribution both in the US and internationally. And the same goes for the Sky. The Sky has a healthy portfolio, again we announced earlier the first official Lego costume, Alice Through the Looking Glass which did extremely well years ago.

The previous Alice, Shopkins, Powerpuff Girls and other licenses that we have not announced. And the Sky itself is going to other seasonal categories. And as the seasonal make up we are looking to do different things during Christmas, Easter and summer with the Sky. So all of the divisions that we have are really expanding amongst the core group.

A good example is Disney. Our division of Disney, we've gone into kids' make up and other role play activities. We are aggressively rebuilding our core role play business. We are also strategically pushing into the small doll and collectable market by expanding Tsum Tsum and launching other brands as well.

So the international component is now building extremely well because our license agreement have expanded internationally in a lot of different areas. We've opened up offices in Germany and Mexico and soon to be Italy. And our own our IT works extremely well on international division.

That being said we then pick up new areas of business such as Moana which is tadpole movie for Disney in November. Elena of Avalor which is a TV show launching which we are excited for which will go into 2017. Tsum Tsum, the success of it is truly been a dream. We are launching in the UK starting in June.

And because of our distribution platform, we are now becoming a distributor for other companies that don't have the capital and actually the strength to be able to sell and market product which we will be announcing going forward some really spectacular product line with licenses.

And then the digital initiatives are really pushing our products that we put together with Giftems, Action Shot, Real Construction at the Disney Magic Timer, so there is a lot to go through. I am missing a quite a few which is the master write of the worlds of Warcraft, a Warcraft movie. Master Toys writes for Sofia internationally.

There is -- I've never seen a portfolio again I co-founded JAKKS in the last 22 years. I don't think I've ever seen a broader portfolio of product amongst broader categories. So we are not really aligning to just one license in one area. So we are really proud of the initiatives that we have this year.

And we just started our Spring Toy Fair for 2017 and the receipt of this has been nothing but really stellar. The other question Steph, I am sorry. .

Was just on the margin structure, nice gross margin improvement in the quarter.

I am just curious if that something we should be thinking about kind of over the next couple of years a continuation of your product cost engineering effort?.

Yes. With the product cost, we worked on our legacy products which are really tough to do. We can't increase retail prices so we worked on reducing our legacy items by creatively working on packaging and products to bring down the actual cost to good. So to increase our margin so we always will have a cost initiative to increase our margin.

So our goal is to increase it for the next two three years. But it will be a steady growth. It won't be a rapid one because of the amount of SKUs in which we have. .

Thank you. And our next question comes from Drew Crum of Stifel. Your line is open..

Okay. Thanks. Good morning, everyone.

Stephen when you guys lapse the tough Frozen comparison, when should we start to see that dissipate in the numbers and also interested if you are seeing any change at retail amid the doll license transition? Is that impacting your business in anyway?.

I'd say Disney overall Princess business which actually includes now Elsa and Anna, so it is now a comprised business of it call Princess with Frozen combined. From the affordness to stableness, we've seen it now stabilize and actually we've created a dramatic new amount of product in the Frozen area as well as in the Disney Princess area.

So it continues to be strong and we will continue to see some further growth. So I think it's stabilized over the last say six months. And all but call it tertiary or peripheral components of the license that really become strong. Those have dissipated and really the core areas of the Frozen business are doing very well.

So we have some key drivers going into fall. Two new TV drivers in the Frozen area so we still are excited.

It's a great business for not just JAKKS other companies and the doll line which I think you mentioned --and which has grow -- has launched, is doing extremely well tha they launch and it only benefits us as there are just two different categories in which they sell.

They are in the fashion doll business and we are in call the more of the toddler doll and role play area. So what we are seeing now is they are focusing extremely well on Frozen. So you are seeing much more of dominant presence of Frozen the product line. So it only enhances our sales of our products. .

Okay. That's helpful. Thank you. And then shifting gears to Star Wars, one of your competitors have suggested that their business could be on par with last year's performance.

As you think about the cadence for 2016, what do you assuming in your guidance? Will the Force Awakens be a tough comp for you guys in the second half or can that be overcome with the launch of your Rogue One product?.

I believe the overall Star Wars business which is not just the movie. We've the classic is still steadily strong and we are always cautiously optimistic when movies come out.

We feel very good with Star Wars sell through and Rogue One which is December 16, we are excited about and not just both in North America but we have almost global rights in many different parts of our Star Wars business.

So the growth in China, EMEA, Germany with our new office and Mexico, I think the comps will be comparable and could be better but we are just cautious because it was such a good year last year in Star Wars. We are just cautiously optimistic but it should be extremely strong. .

Okay. And then just last question for me. Joel, the direct selling expense or marketing expense obviously up in the quarter.

Given the timing of Easter should we expect that to normalize in the second quarter so in other words more modest increase in the first half of this year versus the first half last year? Just trying to get a sense as to what marketing spend are going to look like in the first half year-on-year and then if you can extend that for the entire year what we should assume?.

Yes. So correct the first half will be comparable in that respect. The bigger increase occurs in the back half when we are really pushing sell through in the holiday season. So that part of it is very much seasonal. And interestingly enough Easter switches next year to the middle of April, so we will give more color on that in later call.

But it is something that we have to address each year. .

Thank you. And our next question comes from Linda Bolton Weiser from B. Riley. Your line is open..

Yes, hi. So you had mention that one of the things that helped the gross margin in the quarter was lower royalty expense.

Is that something that is a comparison that all be true for the whole year or does it somehow change in the back half of the year when you are shipping in things for holiday? Is that lower royalty still expected for the whole year sort of thing? Thank you..

Linda, it is primarily due to product mix and during first quarter we have seasonal products some of which does not have licenses in our Maui area or in certain areas of our business. So it really will determine the product mix throughout the year. So in first quarter we have Funnoodle and more Maui.

So it was as part of the lower royalty due to those reasons. And also our legacy pricing that we've been working on that helped to increase some margin..

Okay. Thanks. That's helpful. And then in terms of also on the gross margin there have been a couple of instances where we see a quarter where you have some gross margin impact for minimal license guarantee shortfall.

Is that something that you kind of look at the end of the year and kind of true up or something at the end of the year in the fourth quarter or is that something that is reviewed each quarter and it is something that you have to -- that may or may not affect the gross margin on quarter-by-quarter basis? Or is it a year end type thing? Thank you..

Yes. We look at each quarter. We assess our development plans and may have write off licenses here and there. But ultimately things do get trued up at the end of the year but it is an ongoing thing and it impacts the gross margin each quarter. .

Okay. And then just in terms of your sales performance. I mean you hit your EBITDA right on the nose in terms of your guidance and what you came out with for the quarter.

But your sales were little bit it was more towards the low end of the guidance range and if you had to say why you didn't get more to the middle or the high end of the range in the quarter, what were the factors that may be prevented you from doing a little better on the sale line in the quarter? Thanks..

It is primarily just due to two items that was in international market that were difficult to comp. But we -- again forecasting, I think we did a great job within very tight range. So it was nominal in the amount that we missed on. But it was really just two items that we couldn't duplicate and that was pretty much it for the difference.

And that was the nominal amount. .

Thank you. And our next question comes from Ed Woo of Ascendiant Capital. Your line is open..

Yes. Thank you. I had a question about the Tsum Tsum license.

Can you clarify what exactly the license you have for that and for what geographies?.

We have the very broad line of collectable products which are collectable figures to which I said we get from blind packs to a whole broad array of collectable line which deals with waves and distribution, three packs, nine packs, blind pack.

We also have a broad array of stationery that is really focused beautifully well in the Tsum Tsum call it characters. In addition, we are launching this quarter the first launch of the Marvel Tsum Tsum characters.

But it's a real broad focused collectable line that has extremely intense waves, extremely intense metrics of how collectable line work so we ship wave one and two.

Currently we will probably up to -- by the end of the year are wave six and we are also launching in the UK in June in the second half of the year as then immediately after that Latin America and going forward in different territories.

But it's a broad array of collectables and it is hard to describe because the collectable line is a collectable line with accessories and figures. .

Is it a global license?.

It is a North American license currently and we are launching an international territory started in June. And it goes into specific ones that as I mentioned in UK, in Latin America and then we'll roll forward throughout this year and next year with Tsum Tsum.

It is a long term collectable line and I'll tell you it is -- the sell throughs are truly staggering. .

That sounds good.

And is it include I guess distribution and as well as especially retailers?.

Yes. It's full distribution and with the unique part of do in collectable line you do full distribution and at a certain level you top with each series. So as soon as that series is sold in we stop it and go to the next series. So it create that crave for the collectability. .

That sounds good. Yes, definitely hearing chatter about how popular it is so congratulation on that line. .

Thank you. The team internally at JAKKS has done a great job with it. .

That's great. And then you mentioned earlier on the call about how you guys were possibly adding to your portfolio of license properties.

Obviously, you are not going to disclose which you are working on but in terms of magnitude or scale should we anticipate more selling type licenses or do you anticipate possibly some game changers in there?.

So the best way to do it, it goes by division and so for Halloween we have again the first official Lego lines of products for both Halloween as well as everyday role play. Secret Life of Pets would be at Halloween, Shopkins, Powerpuff Girls and then you go into seasonal.

We have Blaze which is in ball pits, Pate the Pig, Shimmer and Shine and Paw Patrol that go into our kind of seasonal business of Moose Mountain and Kids ONLY. So the licenses go in this specific categories and it could become broader. Tsum Tsum is a license and a category that is really figure and collectable basis.

And we have quite a few new licenses that we are launching throughout the year in different areas. But in some soon to be announced but they really break out either by category as they -- a lot of these licenses go throughout all of our categories and some are just in specific categories like the Sky. .

Thank you. [Operator Instructions] And we have question from Mike Hughes from SGF Capital. Your line is open..

Good morning. Thank you for taking my questions.

I think last quarter you provided some quarterly guidance and I understand that was associated with the Easter shift that you wanted to call out, but are you comfortable with the second quarter numbers out there which I think the revenues gone $135 million and EBITDA of about $2.5 million and $3 million? Is that a range you are comfortable with?.

The firstly we normally always announce in our annual guidance first quarter just because it's a lowest quarter. And it really depends on where Easter lie and marketing spend come into play more marketing was attributed in the first quarter because of Easter being in first quarter versus next year.

There will be a change in the marketing spend be in more April because of the Easter time. On our full year guidance, we are extremely comfortable with on -- I would say the second quarter guidance if that's the-- I have not looked at what the consensus average is but I expect that we are comfortable with that number.

But I have not looked at all the average guidance that is out there. And we do not give quarterly guidance outside of first quarter. But I expect with that -- at that number we are comfortable. .

Thank you. And if we have no further questions. .

Again everybody thank you for joining the call this early in the morning. And we are excited to get on to our next quarter call as soon as second quarter is done and the rest of the year. And appreciate your time. Thank you very much. .

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