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

Stephanie Wissink - Piper Jaffray Linda Bolton Weiser - B. Riley Ed Woo - Ascendiant Capital Jeffrey Thomison - Hilliard.

Presentation:.

Good morning. And welcome to the JAKKS Pacific Second Quarter 2016 Earnings Conference Call with management who will review financial results for the quarter ending June 30, 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; and 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 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. Net sales for the second quarter of 2016 were $141 million compared to $131.1 million reported in 2015. The net loss for the second quarter was $4.4 million, or $0.27 per diluted share compared to a net loss for 2015 of $5.7 million, or $0.30 per diluted share.

Adjusted EBITDA for the second quarter was $4 million, compared to $1.5 million in 2015. Net sales for the first six months of 2016 were $236.8 million compared to $245.3 million reported in 2015.

The net loss for the six month period was $21.8 million, or $1.30 per diluted share, compared to a net loss for 2015 of $13.3 million, or $0.69 per diluted share. Adjusted EBITDA for the first six months was negative $5.1 million, compared to positive $600,000 in 2015.

Worldwide sales of products in our traditional toys and electronic segment were $62.6 million for the second quarter of 2016 compared to $63.4 million in 2015. Sales in this segment in second quarter were led by Disney Princess and Frozen toddler dolls, 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 to $78.4 million in the second quarter of 2016 from $67.7 million in 2015. The increases in our Tsum Tsum collectible figure line were offset in part by a decrease due to timing in our Disguise Halloween costumes.

Included in the category numbers are international sales of approximately $25.8 million for the second quarter of 2016 compared to $28.7 million in 2015. Disney Frozen and Princess Dolls while continuing to make strong contributions were lower in 2016 as anticipated.

Gross margin for the second quarter of 2016 and 2015 were 31.8% and 30% of net sales respectively. And for the six months periods 32.1% and 30.4% respectively. The 180 and 170 basis points increase in gross margin in 2016 are due to lower product cost and lower royalties as we continue our margin expansion initiatives.

And this keeps on track to achieve our full year forecasted gross margin of 32%. SG&A expenses for Q2 2016 were $45.9 million or 32.6% of net sales as compared to $42.3 million or 32.3% of net sales in 2015.

SG&A expenses for the first six months of 2016 were $90.9 million, or 38.4% of net sales as compared to 81.9 million, or 33.4% of net sales in 2015.

The increase in SG&A dollars in 2016 was due to higher marketing expenses and resulted in increases as a percent of net sales on higher net sales in 2016 for the second quarter and lower net sales in 2016 for the six months period.

Depreciation and amortization was approximately $4.7 million in the second quarter of 2016, compared to $4.1 million in 2015. Capital expenditures were $6.8 million for the second quarter of 2016, compared to $8.1 million for the second quarter of 2015. For the full year, we continue to expect capital expenditures of approximately $12 million.

Consistent with the seasonality of our business and on higher sequential quarterly sales and lower year-over-year accounts receivable at year end, operations used cash of $11.2 million for the second quarter of 2016, compared to providing cash of $11.5 million in 2015 resulting in free cash flow of negative $18 million and positive $3.4 million respectively.

And at quarter end, the company's working capital was $216.8 million (sic) [$216.5 million] including cash and equivalent and restricted cash of $96.6 million compared to working capital of $232 million as of June 30, 2015.

Accounts receivable at quarter end were $132.9 million up from the $117.1 million in 2015 due to higher sales in 2016 resulting in DSOs in 2016 of 85 days, a modest increase of four days from the 81 days in 2015.

Inventory as of June 30, 2016 was $71.5 million, down 22% from $91.9 million in the second quarter of 2015 due to ongoing working capital management and forecasting efforts resulting in DSIs of 86 days down 27 days from 113 days as of June 30, 2015.

Under the current authorization to repurchase up to $30 million worth of the company's common stock and/or convertible notes through the end of the second quarter, approximately 3.1 million shares of common stock have been repurchased at a cost of $25.2 million for an average of $8.02 per share, $2 million principal amount of our 2020 convertible notes at a cost of $1.9 million and $695,000 of 2018 convertible notes at a cost of $586,000 have been repurchased.

Since June 30, 2016, we've acquired an additional approximately 103,000 shares of our common stock at a cost of about $875,000 which leaves $1.3 million available for future 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 in 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. Along with the theme when it is currently the number one movie in 2016 in the worldwide box office, you can choose your side with the high performance radio controlled vehicle and flip, back and forth motion between Captain America and Iron Man.

Sales of this innovative radio controlled vehicle will continue to ramp up through the holiday season. For girls, we just launched Gift'ems, a collectible line of mini dolls blind-pack in a gift box.

Time to International Friendship Day this month, girls will be surprised with a new friend from one of 84 different cities when girls open up the gift box to reveal the mini dolls name, city and country. The gift box is transformed to showcases of iconic scenes from the dolls hometown, as well as an image of her country's flag.

Each Gift'ems doll is marked on rarity scale as common, rare, special edition and limited edition and has four main component to that girls can mix and match for endless fun.

The introduction of the Gift'ems brand will be supported with a fully integrated marketing campaign featuring traditional and digital media wise, PR, social media and promotional activities.

At launch, all toys at stores chain wide will have a 2 foot in-store display of a full line of Gift'ems and a product line will be available at all major, mass and value and grocery and drug channels. Plus with the mini dolls there will be two play sets that will be available at launch.

In addition, we are excited to launch the Gift'ems app, an interactive puzzle game app where girls can collect and connect Gift'ems characters based on their favorite Gift'ems friend. The Gift'ems app is free to download and available on Android and IOS and will feature in app purchases to unlock additional Gift'ems characters.

Our seasonal division comprised of licensed wheel good inflatable ball pit, kids' furniture and games continues on an upward trend posting a high single digit increase in second quarter sell-in as compared to last year.

Wheels good, outdoor kids' furniture and games are driving this activity play segment with strong retail placement and introduction of new trend right brand.

License products inspired by Disney's Finding Dory, Marvel's Avengers and Teenage Mutant Ninja Turtles specifically boosted our license big wheels business, like this activity tables and license patio chairs business.

This momentum will continue into the back half of the year with the seasonal division strategic direction to add lower price point within the wheels good and inflatable ball pit categories which will widen penetration across the value, grocery and mass channels of retail.

Our Maui product lines featuring Funnoodle, hoops, jump rope, sky ball and bouncers also showed nice increases over last year with incremental feature pellet drops and lower transactional price points driving the business.

Also exciting is that our seasonal division will leverage early Fall 2016 ship opportunities of newly signed North American licenses deals for Paw Patrol and Peppa the Pig-ride-ons to all major customers, translating into increased share within the category.

We will continue to drive sales in the second half in the inflatable ball pit and kids' furniture categories and we leverage the DVD releases of Disney's Finding Dory, Marvel's Avengers and Teenage Mutant Ninja Turtles.

In the Fall, we have the rights of these two categories for the theatrical releases of Disney/Pixar's Moana and Dreamworks' Trolls movies. In second quarter, our Disguise Halloween division had a solid sell-in for several new key drivers for Halloween 2016.

We are excited to launch this year for the first time ever LEGO's Ninjago and LEGO's Nexo Knight costumes. JAKKS, our retailers and consumers are excited about these LEGO products. We are also looking forward to launching our new WWE costumes and accessories for this Halloween.

In addition, we are looking forward to have some new and fun licenses for this Halloween such as the Secret Life of Pets based on the Universal's animated film and PJ Mask based on the hit TV show for preschoolers.

We are excited for the broad line of Halloween products from Disney Princess and Frozen as well as cute characters from the highly successful movie Finding Dory. We are confident that we will have a terrific Halloween season with our robust catalogue of costumes this year.

In closing, we are very optimistic about our entire portfolio and remain confident and upbeat that our consumer market initiatives for 2016 are working and positioning JAKKS well for the second half and as well as maximizing the value of our vast portfolio with customers and consumers worldwide.

We are looking forward to meeting with our customers from around the world in a couple of months to show our new initiatives for Fall 2017 which includes a vast variety of evergreen products, new product lines and we'll have more exciting news for 2017 and beyond during this period. That concludes the prepared portion of the call.

And we will now open the call to questions. Thank you very much..

[Operator Instructions] And our first is question from Stephanie Wissink from Piper Jaffray..

Thanks. Good morning, everyone. And thanks guys for the incremental detail in your prepared remarks. Just a couple of questions. So, first if could you just talk a little bit about gross margin, that's actually been a nice course of profit improvement over the last couple of years.

If you can just give us an insight in Q, how much of that is mix related or some of your costing initiative. How we should think about that going forward? And then just the second part of the question related to kind of your overall model structure. You guys have done a really great job responding to opportunities in the market as they arrive.

So talk a little bit about the nimbleness and agility that you have that allows you to take advantage of some of the things that you are seeing real time..

Sure. On the marketing question, Steph, you know as we've been indicated over last couple of years on our legacy products which provides a large solid base of day in and day out revenue through re-costing and also cost reduction initiatives on those items we continue to drive margin. Our goal for the year is 32% which were well on track for.

In particular this quarter a small amount was mix with the little bit lower sales from disguise year-over-year which generally has lower margin in some of other divisions. But through attrition we continue to gain some ground because the new product have more stringent margin criteria.

So one we are covering more incremental marketing which we had indicated in our forecast this year. In addition some slightly higher royalty rates. But overall well on track and we still have some more -- we are going for the higher hanging fruits at this point..

And Steph, this is Stephen; you asked why we are so quick to market. The number one reason is our corporate culture. Every part of our company has a yes we can attitude. So from the factories and the customers we work with, they know that we are now dealing with JAKKS, there is no bureaucracy.

It's where we can get it done, we will get it done and we will get it done quickly. That's pretty much the culture we've had since inception..

Thanks, Stephen. And then just final question for you. Just given that you have come out of a board meeting cycle, talk a little bit about cash priorities. How we should balance our assumptions around potential buyback or incremental buybacks and maybe business development activities..

So on the capital allocation, call it part of our business , we have a Capital Allocation Committee and the Board of Directors and we meet quite often and believe the number one priority is to invest in the business where we see opportunities for good returns and for strategic expansion.

And, Steph, as you know, since inception we also have a constantly been looking for acquisition opportunities in areas of key business expansion that would be accretive to the company and strategically beneficial for the company and our shareholders.

One other thing is that we continuing to believe in our stock is very attractive and stand ready move opportunistically. Our main objective is to determine what the best use of cash at any particular time and this is a subject that we constantly evaluate on a quite often basis, not just in board meetings but on board phone calls..

Our next question is from Linda Bolton Weiser from B. Riley & Co..

Hi. So I was trying to look at more closely why your operating cash flow was not improved year-over-year in the quarter and your inventory were certainly down and your receivables were up but I think only about 13% or so.

So what is in that working capital area that holding back the cash flow performance?.

On interim quarters there is lot of volatility we call it within working capital. One of the things to note is for the quarter sales were up $45 million which is almost 50% sequentially. For the full year cash flow from operations was $21 million.

So coming of off the frenetic pace of Frozen in 2014 where receivable and inventory levels were extremely high, 2015 benefited from that. In general, we are well on track to achieve our stated guidance.

And I wanted to also reiterate that our forecast for free cash flow $39 million is a conservative estimate since we are using EBITDA as a proxy for cash flow from operations which historically trends anywhere from $15 million to $20 million less than what actual free cash flow is.

So we try to provide as much transparency but given the fluid nature of some of the balances and the timing of sales within the quarter, it is a very difficult item to forecast and model. But we are, as I said we are well on track to achieve our stated guidance..

Thank you. That's helpful. And then so I mean it's clear that you could do a little better than that projection for free cash flow. But still the free cash flow growth in 2016 is much below the EBITDA growth. And the key reason for that is working capital.

So is that something that the board like how connected is that to the board's decision about additional share repurchase.

I mean do you need to kind of make more progress on working capital in order for the board to feel comfortable about more share repurchase or can you just talk about how they are thinking about that?.

Yes. Certainly one of the parameters that they consider is one, the actual excess cash at any given time, what the cash use is might be as Steven mentioned it could be from acquisitions into new areas that might have more promise in terms of growth or margin. Certainly we've been active in the market with the buyback.

But there are a vast number of things that are considered not the least of which is liquidity in the stock. How many shares we have outstanding, so it is a complex thing that it is just not matter of cash flow equals buyback..

Okay. Thanks. And then can I just ask I know you are the Nintendo licensee and those products have been doing well for you. But just to clarify I mean your license does not include Pokemon figures and plush.

Is that correct?.

Correct. That's a separate company Pokemon and we have no rights in the Pokemon. We have the master rights for all Nintendo characters..

Our next question is from Ed Woo from Ascendiant Capital..

Great. Thank you. And congratulation on the quarter.

And just a housekeeping item, Joel, would you -- what should we use for fully diluted share for the year?.

40,500,000..

Great.

And then the other question I have generally is what do you see out there in the regional environment both in domestic as well as international especially as we are heading into this holiday season?.

Actually just recently came back from a pretty long trip throughout Asia and worldwide trip of the international markets of Western European markets.

And both I'd say North America and abroad the retail environment seems extremely strong and if I would say five years ago was a much different feeling for the toy industry but the toy industry itself is having I think terrific year worldwide as they did last year.

I think retailers in all facets are looking for excitement and are looking for enhancement to bring consumers in and one of the enhancement is having fun and having toys in the retail aisle and expanding on toys is part of I believe the DNA of many of the retailers going forward.

And they are seeing it help bring customers in and so they are expanding in the toy call it kids consumer area..

Great. Every year there seems to be some issue in terms of either manufacturing or distribution, port issues. But we don't really seem to hear anything about that this year.

Do you see anything that could possibly derail until which is expected to be a pretty positive holiday season?.

Yes. There are always concerns of shipping, factory issues with regard to the health of factories, health of retail around the world. But nothing that we foresee right now as you mentioned when we had the port issues.

Do we see anything as headwinds? There is always something that could happen that we have no control but as we sit here today just besides a normal business and normal day-to-day issues, we don't see something that major ahead of us so far..

Our next question is from Jeffrey Thomison from Hilliard Lyons..

Thanks. Good morning. And congratulation on the quarter guys. Hey, Joel, quick question on the guidance share count that you gave answered my first question.

What is that imply about the interest add back on a fully diluted basis?.

It's $1,750,000 net of tax per quarter..

Okay. Per quarter..

Yes..

Okay. And then Stephen I guess in past calls maybe past years might be a better description. There has been a lot of talk about the dream play joint venture and the possibilities that has and things have been relatively quite on that front at least on the calls here.

I just was curious if you had an update on that technology and the implementation and just kind of where things stand on that..

Yes. Great. I think we actually stop just using the work dream play and we are continuing with dream play in our whole interactive area. But we primarily kept using the word dream play for so long. Now it has been, it's kind of enacting inside of our company so the Gift'ems app which went live is part of the dream play initiative.

And I am not sure if you've seen the Disney magic timer which we are working with Procter & Gamble. So that's been a continuous initiative for the last two and half years. We just didn't update with Finding Dory characters and stickers. And I think to date we have over 2 million downloads on that app. So that's been an ongoing initiative.

Our real construction called the dream play augmented reality app is something that still focused on. Our miWorld Mall app is continued to update. All right, so we have a bunch of initiatives and what we've done now, it is a very good question Geoffrey is lot of the initiatives we are working on have a component of a digital experience.

And what we've seen is the adoption is part and parcel of physical to digital. So when we are doing something physical there seems like the future of where everyone kids are going. I am not talking just adult kids, there needs to be some type of digital experience.

And that's a great example, if you download of our Gift'ems app which is -- it already went live which has -- it is premium model and it goes into a purchase model. So we have a quite few initiatives that will be showing in October. But it's alive and well.

We call it more of a digital initiative because some of it is using dream play technology and some of it is not using dream play technology. It's more of the digital aspect of things. But that as you can see kind of the way that the Pokemon Go has taken over literally the world.

There is a different avenue that we are working on in various segments of our business that has a digital aspect of it. So it's really more digital, we call them just dream play because it is using various technologies..

So they remain active development with that pipeline of products and ideas to come..

Yes. Oh very much..

Right. And then lastly I don't expect you to give a concrete answer on this but just thought I would throw it out there. Any assumptions that you would make regarding a full length Frozen sequel in terms of perhaps even what calendar year that might happen..

No. That would really have to come from Disney not JAKKS. Great question, Geoffrey but that definitely needs to come from Disney..

Well, in closing, we appreciate everybody that has been on the call. We had a very good attendance on the call, very happy with our quarter and looking forward to a continued great year for JAKKS and our industry. Thank you very much..

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