Stephen Berman - Chairman and CEO Joel Bennett - EVP and CFO.

Stephenie Wissink - Piper Jaffray Linda Bolton Weiser - B. Riley Gerrick Johnson - BMO Capital.

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

Presentation slides containing information covered in both today's earnings press 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.

Berman will first provide an overview of the quarter and then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with the highlights of the product lines and current business trends prior to opening up the call for your questions.

[Operator Instructions] Before we begin, the company would like to point out that any comments made by 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 risks and uncertainties you should consult JAKKS' 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. As a reminder, this conference is being recorded. With that, I would like to turn the call over to Stephen Berman..

Good morning everyone and thank you for joining us today. This morning we are going to review our performance during the fourth quarter and recap the full year, review our go-forward strategy and give an update on initiatives and goals of transforming JAKKS Pacific from a toy company to a kid's consumer products company.

As you know we announced on December 16 that our fourth quarter sales were coming in below our expectations. Weak performance of a couple of our key licensed products in a challenging retail environment led to the shortfall as we noted in mid-December. Since then we have learned we're not alone.

It is now apparent that the strong retail momentum the industry carried into the fourth quarter suddenly turned down after the Thanksgiving weekend. NPD has reported that industry sales were sharply negative for the first three weeks of December before turning back up in the last week of the year resulting in a much weaker fourth quarter.

And some categories which had been among the strongest growing categories through October actually wind up being some of the weakest by the time December was over. Our sales in fourth quarter were up slightly compared to last year resulting in a decrease of about 5% for the year. We're obviously not satisfied with that.

And while the retail backdrop was challenging, it is our job to grow JAKKS and shareholder value whatever the environment. You'll notice we are giving more detailed product sales information so that investors and analysts will have a better understanding of the key drivers and cost that impact on our business.

We will also provide this information in our quarterly updates and going forward. Now I'd like to give you an overview of some of our broader goals, what we've been able to do well, what we need to do better and where we see the opportunities for near and long-term. Over the past 22 years we have demonstrated that we do several things very well.

First our speed to market as fast is the most of our big competitors. We have consistently been shrinking the amount of time from conceptualization to commercialization, our team doing it in weeks or months when it takes our competitors over a year to do.

This is not only good for our sales but makes us more attractive to the licensor and both brick-and-mortar and online retailers. A good example is Tsum Tsum which we went from concept to on-shelf in less than eight months.

Second, we work closely with our global licensing partners not only to create great products at attractive prices for consumers but also to innovate and create new categories, a broad array of retail exclusives which offer consumer choices and additional ways for our licensors to capitalize on their properties.

A great example of this is BIG-FIGS, a category which didn't exist before we created it. Again this not only added sales to JAKKS but it created added benefits by making JAKKS a go-to licensee.

Third, we have a good eye for finding companies and product lines that we could add to our solid base of recurring revenue and expand our roster - intellectual properties.

We have an average of more than one acquisition the year over the past 20 years and some core product lines such as Moose Mountain Ride-On and Ball Pits, Maui Outdoor Toys, Funnoodle pool toys, [indiscernible] accessories, the girls Halloween costumes, CBI Role Play Dress-Up and others with a result of strategic and opportunistic acquisitions.

We will continue to rely on these competitive advantages as you look for new sources of growth. Let's review the key components of our underlying strategy to grow JAKKS Pacific into a world-class producer of consumer products for kids.

For years our strategy has been to build up a base of evergreen revenue, some of which is based on licenses, some on owned IP. In addition we augment that with original and license promotional products that have the potential to break out to be hits, even if we don't expect them to become evergreens.

On top of that, we seek to enter new categories through acquisitions and internal development to keep building our own revenue base. In addition we look to broaden our geographic reach by setting up operations in a growing number of countries which gives us greater profit and access to more licenses with our partner.

And finally, we have aggressively over the past few years focused a great amount of attention to the shift to online retailing. Over the past 18 months we have concentrated on creating digital experiences for the online shoppers such as videos, 360 degree product images, and enhanced webpages.

In addition to a dedicated staff, last year we are able to grow our online sales by double-digit. So to repeat core evergreen base, opportunistic promotional products, addition of owned IP, internally and through acquisitions geographic expansion, and writing this shift to online distribution. In 2016 we made some strong progress in all these fronts.

Core product lines such as basic Disney Princess, and Black & Decker performed well over the holidays and we're set up well for 2017. Our XPV vehicle line had a nice increase on the strength of skateboarding Mikey. We had a great global launch for Tsum Tsum and Moana which are license brands, Gift 'ems which is a proprietary brand.

We established Studio JP, a joint venture with Beijing to create new animated content that will help propel our brands which can be monetized down the road. We acquired C'est Moi, an innovative brand of healthy and performance makeup and skin care products for kids tend to one of the fastest growing consumer product categories.

We opened up sales offices in France and Germany last year further expanding our global reach and our sales online accounts grew 12% year-over-year. This year we're going to do things differently. For starters we are changing the nature of guidance we offer to investors and analysts.

Due to the variability inherent in forecasting with the backdrop of ever-changing retail and global economic landscapes, we will no longer publicize specific revenue and profit projections. This is a move that some of our public competitors made years ago.

We will of course continue to have internal budgets and targets and will manage against those but we've taken ourselves out of the forecasting business and we believe this approach allows us to focus on running the business and the investment committee to focus on those aspects of the business more in our control.

In lieu of specific revenue and EPS guidance, we will be providing additional details on our sources of revenue and the relative profitability of those sources. Joel will provide these details in his comments. We believe these new enhanced disclosures will help investors and analysts as they build and refine their models.

We will provide this information in our quarterly updates. We are expecting 2017 revenue to be down somewhat as some of the factors that led to the fourth quarter shortfall will continue to pressure our sales.

These include the impact of the strong dollar on our prices in key international markets, high levels of overall retailer inventory across the industry, constricted open to buy among retailers and weakness in some key licensed products.

At the same time I spent in 2017 will be similarly conservative and because we're adopting this much more conservative stance at the outset of the year, we believe we are less likely to be negatively surprised.

Joel will go over the expense outlook in further detail but we expect to have higher profit margins in 2017 compared to 2016 because of the tight spending controls and conservative assumptions, and we expect that overall our profits will be higher.

On the financial side as you have seen in recent weeks we are working to clean up our balance sheet through a series of transactions exchanging cash and stock for outstanding 2018 convertible notes in an accretive way.

I will now turn over the call to Joel Bennett our CFO so he can review our fourth quarter and full-year performance, discuss our expense assumptions and our capital allocation.

Joel?.

Thank you, Steven and good morning everyone. Ahead of our latest guidance net sales for the fourth quarter of 2016 were $167 million compared to $163.4 million in 2015 with a net loss of $7.6 million or $0.47 per diluted share versus a loss of $9.3 million or $0.50 per diluted share in the year ago quarter.

And also ahead of guidance adjusted EBITDA for the fourth quarter was $4 million compared to negative $2.1 million in the fourth quarter of 2015.

Now moving on to our sales performance, by category sales of dolls, role play, and dress up, plus in activity product in our growth category amounted to $103.3 million for the quarter compared to $89 million in 2015.

This was driven by dolls and role play toys featuring Disney Princess, Frozen and Moana, Tsum Tsum and Gift 'ems collectible figures and accessories and private label products.

Sales and action figures vehicles role-play in electronics, as well as our sales of pet products in our boys and other category for the fourth quarter were $25.1 million compared to $38.8 million last year. This was driven by Nintendo, Star Wars and WWE in 2016 though Star Wars declined year-over-year.

Sales of our seasonal products including license ride on, ball pits, kids furniture and Maui outdoor activity products were $25 million in 2016 compared to $27.1 million in 2015. Off season sales over Halloween products which is also one of our business segments totaled $5 million in the fourth quarter of 2016 compared to $3.2 million in 2015.

Sales of baby doll accessories figures and plush in our preschool category were $8.1 million compared to $5.3 million for Q4 2015. This category was driven by Graco baby doll accessories and products featuring Daniel Tiger's neighborhood.

In the accompanying presentation we show how gross margins in each of these product categories compared to our overall average corporate gross margin. Looking at sales by business segment, North America sales for the fourth quarter were $128.3 million comparable to the $127.9 million in the year ago period.

This segment was driven by Disney Princess, Frozen, Moana and Elena of Avalor, as well as Tsum Tsum collectible figures. International sales for the fourth quarter were $33.8 million compared to $32.3 million in 2015 driven by North America drivers plus Sofia the First and Star Wars and we already mentioned Halloween in the category breakdown.

Gross margin in the fourth quarter was 31.2% up from 30.3% last year due to lower product cost as a result of continuing margin expansion efforts and lower royalties offset in part by higher tooling amortization.

SG&A expenses in the fourth quarter of 2016 were $54.5 million or 32.6% of net sales compared to $56.5 million or 34.6% of net sales in 2015.

SG&A in dollars was down in 2016 due to ongoing cost containment efforts offset in part by higher product development costs in support of the robust product flow and a decrease as a percentage of net sales is due to lower expenses on slightly higher sales.

Operating margin was negative 1.4% improved from negative 4.2% last year due to the improved margins on slightly higher sales in 2016. Adjusted EBITDA for the fourth quarter was $4 million compared to negative $2.1 million in the year ago quarter.

The $6.1 million increase is due primarily to the higher-margins on increased sales and lower SG&A expenses. Consistent with the seasonality of our business, operations provided cash of $38 million for the fourth quarter of 2016 compared to $56.9 million in the same quarter of 2015.

The decrease is due in part to lower year-over-year third quarter sales which drive Q4 cash generation and the planned higher year-end inventory levels in 2016, due to the timing of the Chinese New Year factory closures and the Easter holiday in 2017.

As of December 31, 2016 our working capital was $236.6 million including cash and cash equivalents of approximately $86.1 million. This compares to working capital of $255 million in the same quarter of 2015. The decrease is due in part to the 2016 repurchases of stock and convertible notes in the aggregate amount of $21.5 million.

Accounts receivable as of December 31, 2016 were $173.6 million up from the $163.4 million at the end of the fourth quarter of 2015 due in part to higher Q4 sales in 2016 resulting in DSOs in 2016 of 96 days up from 92 days in 2015.

Inventory as of December 31, 2016 was $75.4 million versus $60.5 million at the end of 2015 resulting in DSIs in 2016 of 79 days compared to 64 days in 2015 due to the planned higher inventory levels in preparation for earlier Chinese New Year factory closures and Easter holiday selling.

Capital expenditures during the quarter were $3.5 million comparable to the fourth quarter of 2015 bringing the total for the year to $14.8 million in line with expectations. Income tax expense for the fourth quarter of 2016 was $1.9 million compared to $300,000 for Q4 last year.

The increases in dollars and the effective tax rate in 2016 were due in part to [AMT] [ph] triggered by shift in taxable income to the U.S. that was offset by NOLs.

The diluted EPS calculation in the fourth quarter includes an average of $16.1 million common shares outstanding during the quarter and excludes 23.1 million shares assuming the conversion of the convertible debentures.

During the fourth quarter we repurchased $5.4 million principal amount of our 2018 convertible senior notes at a cost of $5.4 million which resulted in a reduction in the number of shares underlying these converts by 622,000 shares.

In addition after year-end during January and February 2017, we exchanged a total of $39.1 million principal amount of the 2018 notes for 2.9 million shares of common stock and $24.1 million in cash.

After these exchanges the remaining balance of the 2018 notes was reduced to $54.7 million, there was a net reduction in the number of diluted shares outstanding of approximately 1.6 million shares and annualized interest expense was reduced by $1.7 million. Now to our 2017 outlook.

For 2017 the company expects higher net income, higher earnings per share and higher adjusted EBITDA on lower net sales compared to 2016.

This expected improvement to profitability as a result of our continued focus on building our base of evergreen brands and categories, as well as entering new categories, creating a strong portfolio of new and existing licenses and developing owned IP and content in concert with our ongoing margin expansion and cost containment efforts.

And with that, I will return the call back to Steven..

Thank you, Joel. Before opening the call for questions, I want to talk more about what we will doing in 2017 to further our drive to become a world-class producer of consumer products for kids. As always, our core business will benefit from existing evergreen brands and licenses, plus new licenses.

Among the important new licenses we have for 2017 on Marvel's Guardians of the Galaxy 2, Beauty and the Beast based on the live action move, Disney Pixar cars, DC Superhero Girls, Power Rangers of movie, the LEGO Batman movie, and Microsoft's Minecraft.

We expect these licenses to be important specific contributors to the sales in our seasonal division, our girl doll division, our Halloween costume division and specific areas at our boys divisions. In terms of our own brands, we expect our successful launch of Gift 'ems to have a solid second year.

We carefully manage the product mix at retail in a way that would enhance collectability and keep the consumer engaged in collecting. Consistent with one of our primary goals, Gift 'ems is an owned IP which means case high margins and we have greater control over what we do with the brand and where we can distribute it.

Later this year, we're excited to introduce a key promotional item that capitalizes on the popular global trend of the Chocolate Egg Surprise. The JAKKS branded Chocolate Egg Surprise maker is a fun activity toy that gives kids the ability to make their own Chocolate Surprise gifts.

Tsum Tsum a Disney license brand also had a solid global rollout in 2016. We will follow up this year with new figures and accessories. Our core Disney Princess products were up in 2016 despite Frozen being down. However Frozen remains important to our portfolio.

We expect the line to benefit later this year from an animated 22 minute short film Olaf's Frozen Adventure, a holiday TV special in Q4. Elena of Avalor which airs daily on the Disney Channel performed ahead of our expectations for us.

Our rights expand to include large dolls in fall 2017 and we will have innovative new role play items shipping later this year. Disney 1 had a terrific box office debut in November. It was also a nice contributor in December sales for us and that is expected to increase in 2017 with the DVD and streaming release in March.

The live action release of Disney's Beauty and the Beast next month should be a great catalyst to boost overall Disney Princess sales. Our Belle Tea Cart item did extremely well last year and remember the two key characters in the story are tea cups. So we expect it to do well again this year with the release of the new movie.

We also have a broader ray of product based on the movie Beauty and the Beast. On the boys side we again have a mix of license products and proprietary IP.

Consumer interest in Nintendo's characters is getting a big boost from their move to mobile games, as well as their upcoming launch of the new gaming platform then tend to switch in addition to figurines on Nintendo Switch.

In addition to figurines, our Nintendo business in 2017 should benefit from Splatoon, our plush in toy that perfectly ties into the game play of the popular Nintendo game of the same name.

And our Power Ranger Big Figs dress up and accessories inspired by the upcoming new Power Ranger movie should also see a nice lift when the movie theaters in March. Real Workin' Buddies Dusty, a special feature vehicle is a great example of us bringing innovation to the industry with their owned IP.

We're optimistic it will do well this year and carry forward into next year, much as we got several years out of our Max Tow line, another proprietary brand we launched a few years ago. Regarding international expansion, last year we opened new sales offices in Germany and in France.

In 2017 we will have direct sales offices in the U.K., France, Germany and Mexico plus a joint venture in China expanded our footprint and it supported our efforts in this market. The international expansion is expected to grow our sales, our profit margins and our access to attract licenses.

As I alluded to earlier, the joint venture we have with Beijing allows JAKKS to have a greater presence in a very important and rapidly growing market. We're also looking to broaden our retail distribution.

Part of that effort is entering categories with the national distribution channels are adjacent to our historical channels and part of that is making sure we're following the traffic. The mantra in retail has always been location, location, location. While that remains the case, these days location increasing means online.

As I mentioned earlier, we have seen growth in our online sales which includes sales to online only retailers such as Amazon, but also the e-commerce sites of major brick-and-mortar retailers such as Walmart, Toys"R"Us, Target, Costco and others. For 2017 we have significantly improved our ability to work with these retailers.

The online retail experience is different from the in-store experience. So much more it happened after we ship the product. Brand have to have a strong presentation on the retailer site with product information, photos, videos, consumer reviews et cetera.

The brick-and-mortar retailers use different buyers for their online business so we have sales specific individuals dedicated to online channels. We will continue to nurture these increasingly important channels. In 2017 we were making investments in several new initiatives that we talked about late last year.

These initiatives are designed to get us into faster growth product segment with higher margin with our own IP. While we are making the investments this year, we don't expect a meaningful revenue impact until 2018 and beyond but let's review some of these. As you know last year we had announced we had acquired C'est Moi French for It's me.

This innovative brand of performance helped makeup and skin care products for kids generally sold in retail channels outside of where we typically sell toys, and we believe we can grow in sales in those channels, as well as our existing channels. According to NPD in 2016, the makeup category once again experienced a greatest sales growth in the U.S.

prestige beauty industry which grew 6% and reached $17 billion in sales. We are gearing up to launch the product line broadly this fall. In 2017 you'll see a number of product from JAKKS focusing on kids health and wellness.

This includes a branded line of Kid's fitness products, Little Mighty Gym which features the Mighty Runner, a gaming system designed to get kids more active in their play. And next year we will launch MorfBoard's, an innovated modular fitness system that combines skateboarding, bounce training, resistance training and other elements of cross fit.

Last year we also announced our joint venture with China based Meisheng Culture and creative which also is our distribution partner in China. The joint venture called Studio JP will give JAKKS access to Meisheng state-of-the-art animation capabilities which we are currently using to create proprietary animation content.

This content will initially be used to enhance the sales of some of our brands, starting with cup teas but we envision being able to monetize the content itself down the road. In the pipeline is content for Gift 'ems, Creepy Crawlers and Animal Tracks just to name a few.

We are very excited about how our partnership with Meisheng could help us grow and apparently so if Meisheng as they recently announced that they had purchased almost 7% of our outstanding stock in the open market. To wrap up our strategy remains on growing our core evergreen products with licenses and innovative IP.

To augment this with promotional products that have the potential to [convince] [ph]. Whether they are licensed or original IP on top of that we are focused on growing margin and profitability and we will continue to enter new product categories.

We will also continue to expand our geographic footprint by opening new international offices and have a special focus on efforts to maximize the online channels. This ends the prepared portion of the call. We will now open it up to questions and answers. Thank you..

[Operator Instructions] Our first question comes from Steph Wissink from Piper Jaffray. Please go ahead..

Hi, good morning everyone, and thanks for taking our questions.

Just the couple, one for you Stephen, just to figure thought around positioning yourself as the children's product company outside of just toys, maybe tell us a little bit about how that has been in process, I know you mentioned a lot of the acquisition but as you think about the next kind of three to five years are there clear adjacency opportunities that you think can help further pivot the business and then what are the margin implications of that.

And then Joe one for you just on the gross margins in particular as you do move more towards your owned IP and some of the online initiatives, can you talk a little bit about the margin trajectory and some of the drivers of the margin overall. Thank you..

I'm sorry can you hear us?.

Yes, now we can..

I'm sorry. Thank you, Steph, so with regards to staying within the kids consumer products industry, things have changed over the last several years to where we all know that the toy compression of age groups and categories has shifted younger and younger and a tendency of brands to stay strong has changed and the retail environment has changed.

But with that being said there are many areas within the kids consumers products business that are growing, one of which is the health and beauty area for kids years ago it was taboo for children to wear make-up and skincare but nowadays some of the youngest kids from five up are wearing performance make-up and skincare and it is because of the YouTube influencers and the way that kids are looking at social media and it's acceptable.

So that is one of the reasons we got into this category, it was companies been around over 10 years and it is real focus category that really involves children at a young age, teaches them to right way to put on health and beauty and the name C’est Moi which means it allows children to be of any race, creed, religion, size and it makes them beautiful themselves and that is why we like the products so well and it's truly diversifying into other retail environment and isles at retail.

So that is one initiative, the other initiative has been our health and wellness focus one of the strong areas in the industry is health and wellness and fitness.

So we entered into two new areas of business one of which is called Mighty Gym that actually is a gamification for children to actually track and have fun and be active at the same time which gives them a great experience and the line gets deeper and stronger as we go forward.

And we've made a long-term deal with the company called Maui, which has experience with regards to health and wellness for kids and health and wellness for adults as kids like to roleplay with their families. So those are three areas that we have moved into.

In addition we moved into the content world with regards to content form base IP that we've acquired over 23 years.

So there is a lot of new initiatives that we’re undertaking, but still keeping in mind our own evergreen categories of businesses that are extremely strong and have a very basic revenue base and those will continue to grow based of some new content from our licensing partners and the majority of the categories which is Disney category, Halloween category which is the sky, our seasonal category, our voice category and pet.

So that areas continuing to grow and then lastly is the international expansion with these areas of business we’ve obtained more rights than we've add over the years, we’ve opened up offices, so now we're going to wrack and the platform that we have to bring in our existing categories and new categories is really leading us to expand in all the right areas and when one area as a weakness like last year there was a strong weakness in the boys so its actual figure business but it will be offset by different categories that were in.

So really are diversifying for the ups and downs in our industry, as well as retail..

Now regarding margins just to dovetail on what Stephen had indicated with the international growth, in going direct to retail we're picking up higher margins by eliminating distributors in many cases. That said I think your question was in particular to the owned IP. Owned IP we don't have the royalties, in owned IP we control our own destiny.

We don't need licenses to distribute it through throughout the world.

Regarding online as you know there's real time adjustments, real time competition, so margins are a little bit tighter in that channel, but we expect overall sales increase to increase profit dollars, plus we've always been very nimble in creating exclusive items for each of these channels.

So we kind of use this similar to that where you know when the warehouse stores came on, line we gave special SKUs to the more traditional retailers, so you don't have the ability to price compare. So in general we're seeing consistent margins with some upswing as we continue our general ongoing recasting and cost reducing on our legacy items.

So overall we're looking at modest tailwinds on gross margin..

Thanks guys, really helpful. Appreciate it..

Thank you. Our next question comes from line of Bolton Weiser from B. Riley. Please go ahead..

Hi, thank you. Sorry if I missed it with all the numbers, but can you provide an operating cash flow number for the quarter or the full year 2016..

Yes for the quarter it was $38 million in 2016 compared to $56.9 million last year. For the full year it was $17 million versus $65 million last year. Note that 2015 was the - call it a collection year on the big frozen year that we had in 2014.

And in 2016, the Q4 number was impacted by the higher inventory that we were holding because of the earlier Chinese New Year factory closures, and also Easter. In addition, sales were up modestly, so AR was up year-over-year for the quarter..

Thanks. And then you've mentioned the tailwinds, modest tailwinds on your growth margin for 2017.

And the overhead SG&A ratio, with your sales decline expected for the year, would we expect then to be some sort of negative leverage there so you’d see an increase in the SG&A ratio or do you have some cost cutting initiatives that would offset the deleverage from the sales decline?.

One we have in general, ongoing cost-containment initiatives we look to improve profitability even in good years. That said had we forecasted last year at the level that we round up, we would have not committed as much the things as media buys.

So essentially, we're living within our means, and are able to actually achieve increased EBITDA on the lower sales. That said, and I think Steven mentioned it in his call, are sort of the way that we're running the business, we’re actually pushing for much greater sales or increased leverage.

So one, we don't expect deleverage because we're - as I said, living within our means, but hope to leverage based on a higher sales..

Okay. And then both Mattel and Hasbro actually made some comments at their recent meetings that they did expect sales to be down in the first quarter.

Is that safe that to think about that for you as well or do you think that Beauty and the Beast movie related toys would actually give you a lift in the first quarter?.

We have our drivers for the quarter, but we were not giving specific guidance and that would include more specific color on the quarters..

Okay. And then, can I just ask you about the same outline in the Kids cosmetics? I think when you were talking about it when you acquired it, you had talked about the launch being towards the end of calendar 2017, and that you did have some idea of some prestige or specialty beauty retailers who may carry it in 2017.

Do you have any more details you can give us about the expected launch, the retailers, maybe the breadth of the lines, how many skews there might be? Is there anything like that?.

So, Linda, this is Stephen. And also congratulations on the merge of your company with other company. So the live presentation to retail is in March. The ecommerce bill goes from March through September.

The initial production of the product lines which will consist over 30 SKUs will start in September and the shift to a two specific customers will be in November-December. We will not be going to those customers because there's a very large PR back into it, and there is an e-commerce launch to it.

There is strong, I’ll call it influencers that will be behind it. And there will be two strong retailers that are very much involved that we've been working hand-in-hand with..

Thanks. And then finally, can I just ask you, you had talked a lot about the ecommerce and the effort you're making there, and some growth rate.

What percentage of your total sales are ecommerce sales currently?.

It would be anywhere it's in the - of 12% to 17%..

Okay. Thank you very much..

Thank you. Our next question comes from Gerrick Johnson from BMO Capital. Please go ahead..

Hi, good morning. So with the weak December, how are retailers thinking about ordering for 2017? I'm not just talking about quantities, but also how they get fulfilled FOB verse domestic..

Well, it would be easier to talk kind of North America and Western Europe because it will be hard to talk worldwide retail is vastly different. There has been a strongest shift on FOB basis which is great for us because JAKKS has been set up as an FOB company from inception.

But there has been a big turn for an FOB business which will allow the retailer to actually make a higher margin buying on FOB basis because they add their own loads, own cost of capital.

So that is one of the big initiatives that are happening, there is still a component to some good being on a domestic basis things that are call it evergreen products things that are ongoing that I will use Foot-to-Floor Ride On that we have inventory on not really seasonal business.

So stuff that is everyday business there is a domestic component of it and/or TV advertising but what is really I think has affected retail is just the strong discounting and that has trained the consumer's minds around the world or more Western Europe and the U.S.

that discounting is a very big component to lead to not only in the toy industry but to lead into getting traffic into the specific retailers versus online which is the different component.

So I think you will see discounting continues because that's where you get the foot traffic in but you will see retailers probably making a little bit better margins because they are ordering more on an FOB basis and looking at them managing their loads and their cost of capital differently than the past..

Okay.

So are any of these retailers saying let's just be little bit more cautious and take a lesson in 2017?.

It is such a broad question of some retailers are taking a conservative approach, some retailers had inventory overall, I'm not specifically talking to it but if we talk they had some inventory overall from just the actual marketplace but it's so still early in the year, we are not seeing that right now, we're seeing I've seen - we are seeing steady sell throughs which is terrific this time of year versus this time of year last year.

So if we base things of the sell throughs and they continue as they are, we are off to a really great start in 2017 in our Disney business, our POS is up 30% in the top three accounts and Moana continues to sell through well. Elena has strong POS and themselves, it is a mix..

Okay..

That answered your question, okay? I'm sorry..

Yes that is a great answer, thank you, Stephen.

So Toy Fair, I don’t know if it's event for you to have your call after Toy Fair when you get to talk to a lot of people but, it seems that those companies that ship primarily FOB actually came through December, okay they had strong years and clear their inventory in that last week which is very strong and traditionally you guys have been in FOB shop, has that changed were you much more oriented towards domestic in the fourth quarter?.

No, we are pretty much actually in the fourth quarter of this year, we expected a little bit more on the domestic basis because there is more just in time retail reaction but we are actually increasing the FOB business it has been around 55, 60 now it is becoming 60, 65 on an FOB basis because we are also going deeper in effect of distribution around the world but we are primarily FOB the reason for the inventory pick up on our side is Chinese New Year is early and Easter is later at least Easter I think is mid-April, so we needed to build inventory to get through that period of time.

So we built the inventory in the November and December that would help us get through the first quarter needs of retailers.

So number one, Nintendo, Maui, Black & Decker those ones are the ones that we were building inventory on that are the evergreen areas of business that we are not worried that if inventory stayed with us for an extra month or so, this is inventory that we do daily..

Okay. And I have just one more again, again referencing Toy Fair, well actually first, in the past you'd mentioned suspending shipments to certain retailers so when I was at Toy Fair I couldn’t find anyone else who did the same.

So in 2017 do you think you are going be resuming shipping to this retailer because it seems like they took product in and paid everybody this year. Thanks..

For the U.S. retailer that will be staying consistent with our decision that was things in the passive call backs on payment and so on. So we think it’s the better interest with JAKKS to continue with the position that we took and it allow us just to feel more comfortable and not take risks..

Okay, great thank Steven..

[Operator Instructions] Our next question comes from [indiscernible]. Please go ahead..

Good morning. I wanted to better understand the bridge on revenues…..

Sorry, can you speak up a little bit just because…..

Yes, the bridge on revenues from 2016 to 2017 just want to make sure I understand the drivers there. I guess the growth would come from your geographic expansion, the makeup line, the Studio JP, maybe some health and fitness I am not sure but what are sort of the headwinds in 2017 versus 2016.

Is it just the general retail environment or is it certain licenses such as Star Wars.

I am just trying to understand the delta as I think about 2017 versus 2016?.

So if we go - if we’re looking into 2017 what we’re doing is we’re taking a conservative approach just due to the retail environment which was inherently unpredictable last year.

We are managing really strong internal targets and our focus is to take a conservative approach while making sure that we continue on building on profitability and both profit EBITDA and EPS.

And we have an extremely strong base business and our base business is that I know you’ve seen which is our core categories that Disney growth category, our Halloween disguise, our Girls itself which consists of DC Superhero and so on, our seasonal in boys but we have a lot great new things that are being launched this year with movie properties on top what we already have.

So for instance in our Disney area we have Beauty and the Beast. We have Rupensil the TV show called the Tangle Series. We got the momentum of Elena that’s just in our Disney. In Halloween we have the new movie Power Rangers. We just signed with Minecraft with LEGO Batman, LEGO costumes in our Girls division.

We have DC Super Heroes, DC Toddler Dolls and our Chocolate Egg Makers. In our Boys we've got Power Rangers, we got The Master of Smurf and Nintendo we’re expect really strong efforts of the Nintendo in marketing and the reaction has been fantastic.

We have the rights to stand the tools, so when you take our existing business which is solid and you add a lot of these new initiatives and/or new licenses we do expect nice sales but what happened last year is some of the property that we had high expectations for did not perform and that was primarily we mentioned earlier it was Frozen and we said there were two big properties and they were in the Boys category but this year we’re not betting on one thing that actual will really need us to make the year.

We have such a broad array of products, a broad array distribution on brick-and-mortar and online initiatives that we implemented about 18 months ago that took us to do the videos and so on is picking up dramatically again for the online specific retailers and to the brick-and-mortar online.

So we had a tough year last year in the sense what we went through and we plan not having that stuff here this year..

Okay. I mean what I was trying to get at was just understand a little bit of like 2017 I guess you guys were guiding for a decline in revenues.

So just trying to understand that versus 2016 because it sounds like there a lot of positive developments so I am trying to understand what’s some of the negative developments are other sort of the retail environment and maybe the channel having a little too much inventory. So that's sort of I was driving at.

If any comments on that that would be helpful..

I primarily say says it’s really just the unpredictability at retail and taking a much more conservative approach to forecasting.

Again we went through what we did last year and you learn from it and the industry has been going through changes and so we decided to take that conservative approach and that's the reason for not giving the guidance just because of the unpredictability.

We have the predictability of understanding our cost structure, understanding every bit of our overhead so in the areas that we control we're extremely strong and we actually can build and grow that’s why we’re diversifying but we also want to make sure that we do what’s right for the shareholders and for the company.

I just want to make one clarification. Our online business is approximately it’s in the double-digit it’s not as high as 17% of our sales. I just want to make sure, we discussed the numbers..

Okay. And then on the balance sheet I guess two questions. One I thought I saw about $10 million of short-term debt. I'm assuming that's a draw on the revolver. Just kind of wondering why you do that with $86 million of cash balance sheets. And then secondly I want to understand the strategy for the 2018 maturities.

It seems silly to me to be issuing stock with the stock down where it is. So just trying to understand like why we wouldn't just use cash to pay down debt as opposed to issuing share at low dollar rate..

Sure, as far as the short term draw is was to effect the transaction for the notes in Q4. Basically the line is meant to help us manage the imbalance between where the cash is domiciled and just mechanically it’s generally a 30-day LIBOR so even though we only may need it for a couple of weeks we have it out for at least 30 days.

So over the course of the year and generally based off of the way the cash flows we’re able to pay down by the end follow-up the quarter if we ever needed it. But essentially that's what it is there for. As far as the 2018 the capital allocation committee is looking at a number of different manners in which to reduce the outstanding.

Given that we do have cash but the cash needs vary pretty dramatically from quarter to quarter. That said it’s much more effective using a combination while it’s not optimal to use cash.

As example we had $93 million at the end of last year, it would take us $90 million to take it all down but we were able to you know with the combination and lowering the overall dilution we think it was a prudent way to handle it. And the allocation committee is considering a number of different ways of doing it..

Yes, okay, I mean I'm not totally sure, I understand whey you’d be issuing stock at $5 or whatever it is. So I could call you guys offline and try and understand..

You can call offline we could go through it in more details if you prefer..

Okay. Thanks guys..

Everybody, thank you very much for taking the time for the call today..