Stephen Berman - President and CEO Danny Sung - SVP, Finance.
Steph Wissink - Jefferies Gerrick Johnson - BMO Capital Markets Linda Bolton-Weiser - D.A. Davidson.
Good morning and welcome to JAKKS Pacific Fourth Quarter 2017 Earnings Conference Call with management, who will review financial results for the quarter ending December 31st, 2017. JAKKS 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 Investors section. This presentation includes videos showing some of our key products.
On the call this morning are Stephen Berman, Chairman and Chief Executive Officer; and Danny Sung, Senior Vice President of Finance. Mr. Berman will first provide an overview of the quarter and provide highlights of product lines and current business trends. Then Mr.
Sung will provide detailed comments regarding JAKKS Pacific's financial and operational results, prior to opening the call for your 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/or EBITDA growth in 2017 as well as any other forward-looking statements concerning 2018 and beyond, are subject to 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' 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 now like to turn the call over to Stephen Berman..
Good morning everyone and thank you for joining us today for our fourth quarter and year end 2017 earnings call.
In our call today, we'll discuss industry dynamics during the fourth quarter including significant customer shifts, the performance of our key brands, factors impacting our costs, and more importantly, the products we expect will drive our business in 2018 and beyond.
Consistent with our announcement on September 20th, 2017, following the bankruptcy filing by Toys 'R' Us, our fourth quarter sales declined year-over-year approximately 18%. This brought full year sales to $613 million, 13%. The bankruptcy of Toys 'R' Us was one of the biggest factors contributing to the decline.
Among those decline or did not perform well were Frozen, Star Wars, Tsum Tsum. Additionally, total international sales were down in the quarter as we look to transition from distributors to direct shipping. We made progress in reaching our long-term strategic goals.
In our evergreen product properties, we saw strong increases in sales of seasonal products including ride-ons and ball pits, large-scale toddler dolls, particularly, with Disney Moana and DC toddler dolls. Disney licensed products, especially, those tied to Moana and Disney Princess including Styling Collection.
In fact the total sales of Disney Girls products which include dolls, playsets, mini figures across multiple licenses were up in the quarter and have seen very strong POS increases despite the continued decline of Frozen.
Our Halloween business which includes Disney Princess, Nintendo characters, Minecraft, PJ Mask, LEGO Ninjago, Descendants 2 to name a few is doing very well in sell-through thanks to Amazon's Pay by Click and Deal of the Day programs. Our strategy of building our own IP has also paid off in the fourth quarter.
Some of the biggest contributors were from Real Workin' Buddies, Squish-Dee-Lish, Unicone Rainbow Swirl Maker, Chocolate Egg Surprise, and Pull My Finger, all of which are poised to carry forward and have a great 2018.
In addition to these new JAKKS owned IP products, our goal of entering new product categories saw progress with the initial shipments of C'est Moi which we will talk more about later in the call. And we continue to build our animated content IP through our joint venture Studio JP and Meisheng.
On January 2nd, we announced that Jared Wolfson was rejoined in JAKKS as a Senior Vice President of Digital Marketing and Studio JP and we look forward to expanding our library of animated content as well as our global digital footprint. We continue to make progress in our goal of growing our online sales.
Total online sales grew last year both in dollar terms and as well as a percentage of total sales. Our sales to Amazon saw tremendous growth in 2017. We continue to work closely with our brick-and-mortar customers as they evolve to build their e-commerce businesses.
Developing products specifically for their alternative channels has proven a success with customers in the U.S. such as dollar stores, drug and grocery channels, specialty stores, such as Bed Bath & Beyond, GameStop, TJMaxx just to name a few.
Before I turn the call over to Danny Sung who will go over our financial performance in greater details, I would like to personally thank Joel Bennett for his over 22 years of service as our CFO. Joel has been with the company right from the beginning and key to our successful integration of more than 20 acquisitions over the years.
We wish him all the best..
Thank you, Stephen, and good morning everyone. Net sales for the fourth quarter were $136.6 million compared to $167 million last year. The reported net loss for the quarter was $30.4 million or $1.33 per diluted share compared to a net loss of $7.6 million $0.47 per diluted share in the same quarter of last year.
Adjusted EBITDA for the fourth quarter was negative $6.8 million compared to positive $4.0 million in the fourth quarter of 2016. The sales drivers in the quarter by category were as follows.
Sales of Dolls, Role Playing, dress up, plush, and activity products in our Girls category amounted to $85.2 million for the quarter compared to $101.4 million in 2016, driven by Dolls and Role Play toys featuring Disney Princess, Moana, Frozen and the launch of Squish-Dee-Lish slow-rise foam collectibles.
However, Tsum Tsum, Frozen, Elena of Avalor and Gift 'ems were down year-over-year as expected. Sales of action figures, vehicles, role play, and electronics products in our Boys and Other category for the fourth quarter were $21.1 million compared to $25.5 million last year, driven by Nintendo, Black & Decker, Stanley, and Real Workin' Buddies Mr.
Dusty. However, we experienced year-over-year declines in Star Wars, Power Rangers, WWE, and Smurfs. Sales of seasonal products, including licensed Ride-ons, ball pits, kids' furniture, and Maui outdoor activity products were $22.5 million in Q4 2017, down from $25.5 million in 2016.
Sales in our Halloween category which is also one of our business segments totaled $5.7 million in the fourth quarter of 2017, up from $5 million in 2016.
Sales of baby doll accessories, figures and plush in our preschool category were $2.1 million, down from $9.7 million for Q4 2016, driven by products featuring Daniel Tiger's Neighborhood and our entry into the board game category. The overall decline was driven by a decrease in Greco braded baby doll accessories.
Looking at sales by business segments, U.S. and Canada sales for the fourth quarter were $111.3 million compared to the $128.3 million in the prior year quarter, driven by Disney Princess, Moana, Frozen, Squish-Dee-Lish, Black & Decker, and Nintendo.
International sales for the fourth quarter were $19.6 million compared to $33.8 million in 2016 with largely the same drivers as North America. And we already mentioned Halloween in the category breakdown.
Gross margin in the fourth quarter was 22.1%, down from 31.2% last year, due primarily to increased royalty expense resulting from minimum guarantee shortfalls and inventory impairment charges. We're focused on managing the business to minimize headwinds that royalties and inventory going forward.
SG&A expenses in the fourth quarter of 2017 was $56.7 million or 41.5% of net sales compared to $54.5 million or 32.6% of net sales in 2016. The increase in SG&A includes $2.5 million of restructuring charges and bad debt expense that we believe are non-recurring.
Operating margin was negative 19.5%, down from negative 1.4% last year, predominantly due to a lower gross margin in 2017. Income tax expense for the fourth quarter of 2017 was $0.7 million compared to $1.9 million for Q4 last year.
The variability of the tax provision is based on changes in taxable income levels in the various tax jurisdictions in which we operate.
Consistent with the seasonality of our business, net cash provided from operating activity of $17.2 million for the fourth quarter of 2017 compared to $37.4 million in the same quarter of 2016 with free cash flow of $12.8 million and $33.9 million respectively. The decline in cash flow from operating activities is largely due to lower sales.
As of December 31st, 2017, our working capital was $146.9 million including cash and cash equivalents of approximately $65 million. This compares to working capital of $236.6 million in the prior year.
The decrease is due in part to the 2017 repurchases of convertible senior notes, using cash in the aggregate amount of $35.6 million, offset in part by the $19.3 million in cash received in connection with the issuance of common stock to our China joint venture partner during the second quarter.
As for the remaining 2018 convertible notes, their retirement remains a priority for the company as we continue to improve the capital structure.
Accounts receivable as of December 31st, 2017 were $142.5 million, down from $173.6 million at the end of the fourth quarter of 2016 due to lower shipments during the quarter, resulting in DSOs in 2017 of 96 days, the same as for the prior year quarter.
Inventory as of December 31st, 2017 was $58.4 million versus $75.4 million in 2016, resulting in DSIs in 2017 of 68 days compared to 79 days in 2016. The reduction in DSIs was due in part to increased inventory reserves. We are continuing our efforts to convert inventory and manage working capital to seasonally lower amounts.
Capital expenditures during the quarter were $4.5 million compared to $3.5 million in the fourth quarter of 2016 for a total of $14.9 million for the full year.
The diluted EPS calculation in the fourth quarter includes an average of 22.8 million common shares outstanding during the quarter and excludes 21.2 million shares underlying the convertible notes. And with that, I will turn the call over to Stephen Berman..
Thank you, Danny. So, to close out our thoughts on last year, we have proactively taken charges for minimum royalty guarantees, inventory impairments, severances, the exposure to Toys 'R' Us, and several other areas as we put ourselves in the best position for 2018 and beyond.
With these steps, we believe we can look forward to growth in 2018 and return to profitability.
This year JAKKS Pacific will reach new heights across many of its key categories with terrific evergreen and licensed properties already in place, JAKKS is able to expand and explore new initiatives and growth opportunities within our Girls and preschool line.
Building off success of our collectibles, we are excited to launch a variety of new collectible brands as well as expand the highly successful Squish-Dee-Lish assortment of non-licensed product as well as licensed and new licensed products.
Additionally, we'll be launching new dolls, Dress Up, and Roleplay items with licensee partners such as Disney, Nickelodeon, Chico to name a few.
This year we'll amplify our Boys division across all aisles; Action, Outdoor, Role Play, and Wheels, with new lines and licensee partners with Disney, Incredibles 2, Nickelodeon Slime!, Stanley Black & Decker, and Mega Man.
For Incredibles 2, which hits theaters on June 15th, we have a Global Master Toy license covering such categories as figures, playsets, die cast vehicles, and collectibles, role play, and costumes. It's one the broadest worldwide film licenses we have with Disney and we are looking forward to it contributing to our 2018 growth.
We are thrilled to enter and expand into multiple new categories in games, capitalizing on the trend of gross humor with the launch of two new items, and in sports with MorfBoard and FAN HEADS. The MorfBoard is one of our most innovative products to-date. It's a cross between a skateboard, a scooter and a balance board.
Its unique design allows different parts and accessories to be changed quickly and easily and it offers many challenging and fun ways for tweens, teens, and young adults to experience the fun of multiple action sports.
Continuing with our evergreen seasonal division, dominating ride-ons, ball pits, foot-to-floor, and play furniture, this year we are excited to expand the division with Fly Wheels, JAKKS own 10-inch and 15-inch tri-cruisers, tents, which will continue to allow us to build on our perennial successful Maui brand.
Disguise, JAKKS Halloween division, is in place to have a great year, thanks in part to a full portfolio of brands, including Transformers, Shopkins and a new license for us L.O.L.
Surprise! Additionally, our licenses continue to grow with the addition of hot properties such as Blizzard's Overwatch, Disney's Vampirina, Incredibles 2, Nightmare Before Christmas 25th Anniversary, and Disney's Zombies for tweens and teens. Internationally, our geographic expansion continues to help fuel our growth prospects.
We will continue to ship from our two warehouses in the U.K. and Germany, and we look to add a third warehouse later this year. We're excited to have signed a new distribution agreement in Spain, where we will partner with a local Spanish manufacturer to sell and receive orders, which JAKKS will warehouse and deliver from its German D.C.
Developing products specifically for the alternative channels has proven its success with customers internationally, such as Vente, Relay & Front, Relay & Front, Alvin Ward, and Tank & Rast in German, and TJ Morris and Toy Masters in the UK, to name a few which we're moving along strongly today. And finally, Disguise is now in almost all markets.
Our seasonal division has signed new ride-on licenses and ball pit licenses as a result of our local offices. And C'est Moi was the result of our Singapore distributor selling their business in France to JAKKS. Studio JP is making solid progress. The teams in the U.S.
and in China are currently working with the best-in-class designers, producers, and creators, including Greg Page, the creator of the Wiggles, to develop a diverse new franchise with innovative and exciting toy lines across all categories.
We are creating original animated content specifically for network and digital distribution, both in long form and short form. Studio JP is also localizing and distributing one of Meisheng Studio's number one hits in China called Constellation High.
The recent launch of our proprietary C'est Moi line of skincare and cosmetic products for tweens is already off to a great start with its direct-to-consumer e-commerce initiative and a cohesive digital and influencer program will support our direct-to-consumer activations.
As I have said before, we're excited about this new category introduction, as it's a high growth, high margin category and we believe we have truly a special differentiated product lines that will resonate with tweens.
After going through a challenging retail environment over the last couple of years, we are looking forward to a healthy environment in 2018. We are broadening and growing through our current and new alternative sales channels, building off our core categories with strong licensing partners.
We are growing into higher gross margin categories and product lines. We will continue to expand our own IP, building off of our current successes. We will expand our private label and exclusive programs and enter new licenses in current and broader categories.
We will expand directly internationally through our direct-to-consumer format and we will leverage our content development with our joint venture partner Meisheng. Now, some comments about our outlook for 2018. We expect modest growth in sales and a strong return to positive EBITDA and EPS in 2018.
Before we move into Q&A, I want to make a brief comment about the letter we recently received from Meisheng, expressing an interest in buying additional shares to bring its holdings to 51% of our shares. We have no new details to share at this point.
A committee of independent members of our Board of Directors has been formed and has recently engaged an independent legal counsel and investment banking firm. They are evaluating Meisheng's expression of interest as well as other possible interests.
I wanted to say that we've had a great experience working with Meisheng for well over more than 10 years. Studio JP is an exciting joint venture we formed with Meisheng in 2016 and we have a great relationship working with Meisheng on a manufacturing basis and a separate joint venture for a collaborative effort in distribution for the Chinese market.
Whatever the outcome is of this process, we look forward to working with Meisheng and its management for many years to come. With that, we will now take questions.
Operator?.
Thank you. [Operator Instructions] And our first question comes from Steph Wissink from Jefferies..
Hi, good morning, everyone..
Good morning Steph..
Stephen, just a bigger picture question for you about kind of the global market and the toy space. You have a good perspective on what's happening, particularly on the manufacturing and the networking side.
So, I'm just curious if you can give us some insights coming out of the cycle of tradeshows, feedback from the trade on just the overall industry health, if you could maybe start there.
And then as a follow-up to that, your confidence in growth in 2018, could you maybe give us some insights into how the tradeshows and the indications of interest are around your core portfolio for this year?.
Perfect. Thank you, Steph. The industry itself is, as on a retail perspective is majority strong worldwide. Growth is coming in many of the call it Western European territories and Eastern European territories. What you're seeing now is a weakness in several manufacturers in the industry because of what's happened at retail over the past few years.
That being said, that weakness has been a very positive outcome for other manufacturers, such as JAKKS and the likes of Lego and Hasbro and so on and Spin Master. It's allowing us to have more shelf space by having less manufacturers being able to produce for the retailers.
That being said, retailers themselves around the globe are looking at private label. And it's been an area that we've been very strong in. And that private label business that we've grown for JAKKS is allowing us to do further business with retailers around the world.
So, while other manufacturers have been having a difficult time over the last few years and I think the difficulties are getting easier now, the shelf space a retail is opening up because there's less manufacturers. Retailers themselves want to deal with less vendors versus deal with many vendors for products.
So, it bodes very well for JAKKS going into 2018 and beyond. So, that's how we see the industry to-date so far. On the confidence of our prospects of growth and profitability, over the last two years, we've taken a lot of hits and changes due to the retail environment which occurred in 2016. We walked away from a large U.S. retailer.
In 2017, we had the bankruptcy of Toys 'R' Us and several other bankruptcies, Pinnacle and a few other ones in our online distribution. At the same time, we are growing our alternative sales, our further distribution to differentiating retailers, such as Dick's Sporting Goods, TJMaxx and so on.
So, while we're losing some of the retail environment of what we're used to as mass, there is rapid growth with online sales and alternative distribution. So, we're extremely diverse where we sit today with our various segmentations of our business. So, that being said, we have our IP. We have the great licenses and evergreen categories.
And we've signed up several new licenses, some of which are blockbusters, as the Incredibles. But on the reverse side, we have very strong licenses, like Nintendo and Princess that give us real strong evergreen strength. So, we see next -- this year and next year exciting for us as JAKKS and for the toy industry..
Okay. Two really quick follow ups. Just one on the SG&A. It looks like, excluding some of the adjustments, the dollars were relatively flat. So, good controls there, even with some variability in your sales. I'm curious around fixed versus variable expenses.
How should we be thinking about going forward, given the restructuring that you've done? What is that run rate of that SG&A line or maybe the G&A component of that line? And then, Stephen, you mentioned C'est Moi. But I'd love to dig into that a little bit more.
How should we think about the rollout of that brand at retail, partnerships, merchandizing, some of the marketing that you're doing, graduating that from an online-only business into the retail marketplace?.
Okay. I'll have Danny answer the first one on the finance portion, and I'll go through the C'est Moi. So, Danny, please..
Yes, on the SG&A, I think we're -- believe that we're appropriately sized currently. The restructuring that happened, happened at the end of last year. So, some of those benefits were rolled through 2018.
In terms of the size of the operating costs versus our sales forecast, I think we believe that it'll be -- SG&A will be relatively stable and appropriately sized for what we have projected..
Did that answer your question Steph?.
Yes, that's very helpful. Thank you..
So, on the C'est Moi, we're extremely excited with the initial launch, which went live on January 21st on target.com. Since then, we're seeing double-digit growth trend every week. And we have a full strong year of social and digital campaigns that we're rolling out.
C'est Moi e-commerce, which is cestmoi.com, is shipping customers daily and is actually -- is growing. The percentages are extremely strong because it's a brand new initiative. So, that is full steam ahead and we are working with Target for in-store launch in the second quarter of this year.
And there's expected launches at some of the large, call it, health and beauty areas as Alta and Kohl's and [Indiscernible]. So, there's a very strong rollout in the U.S. and there's a lot of planned social and digital campaigns, some of which will be coming with announcements. So, we're not going to go into grave detail about it..
Thanks. Sounds good. Appreciate it..
Thank you..
Thank you. And next we have Gerrick Johnson from BMO Capital Markets..
Hey, good morning..
Good morning Gerrick..
Hi Stephen. So, on preschool segment, it looks like the Greco business is down significantly.
Did you guys lose that license or what happened there? You talk a little bit about Mega Man, kind of, slip that one in there, what you have for Mega Man and how long you have that? And then what specifically were some of the write-downs? I mean I understand it was inventory and minimum guarantees, but if you could be a little bit more specific as to what products there might have been? Thank you..
Okay. Thank you. So, on the Greco business we shipped last year and we are entering into a new license which was Chico and that is what we launched this year. So, we transitioned from the Greco to Chico which gave us a much broader category and diversified portfolio of the preschool and we launched that this year.
The second part was Mega Man which we have the Master worldwide rights and the -- we will be launching it in the late third, fourth quarter of this year.
And it's Mega Man 30th anniversary and there's a very strong rollout with Dentsu the company and the GameStop -- the diversification with the different retailers and placement that just normal boys action figures at retail. So, we have a really strong plan with the Master Toy license worldwide.
And then you want to talk about the inventory or excuse me some of the markdowns. I'll put that over to Danny..
Yes, we don't break down the charges we take on minimum guarantee shortfalls by specific products. I'll just say in general we've gone through a detailed review of all our licenses and have taken a conservative approach and we feel like we're appropriately reserved and well-positioned not to have the same level of charges for 2013 and beyond..
Okay. Thank you for that. And then lastly on Studio JP that IP -- when are we going to hear more about that, like specifically what we have coming out? Thank you..
You'll hear within the next months of some exciting new initiatives with some of the content in which we've talked about in the past. But they will be rolling out as soon as some of these initiatives and deals are completed, but very exciting..
Okay. Thank you Steve..
Thank you, Gerrick..
Thank you. [Operator Instructions] Our next question comes from Linda Bolton-Weiser from D.A. Davidson.
Hello..
Good morning Linda..
Hi. I was just curious about just diagnosing the Gift 'ems product line because that seemed to be pretty clever and when goes along with the unboxing trend in the industry.
What happened to that? And why can't that be sustainable? And then secondly, I was curious about the [Indiscernible] line that was mentioned and launched in 2017, is that continuing in 2018? Thanks..
Okay. So, on the Gift 'ems, it actually is -- we've had it in the market for over three years and there's a trend when things grow and have a strong presence and what we've done is while it started trending down, we have a new initiative in the Gift 'ems area that we relaunched during the second half of this year.
So, it's a refreshed version of it inclusive of what you just mentioned about the unboxing. It has a kind of flair to the unboxing trend. So, it has done extremely well and that it started slowing down. At the same time we're relaunching a new initiative in that same area.
On the [Indiscernible], we have launched it with short-form content and we launch it first with one retailer and now we're expanding [Indiscernible] during the third and fourth quarter this year.
So, it was that initial launch was short-form content last year which carried through the first half of this year with one retailer and it goes to all retailers at the second half of this year..
Thanks. And then just another question on C'est Moi.
With the launch on target.com, is there price-positioned in the prestige, that's what I thought it was? Or is it more of a mass or midpoints price point positioning for C'est Moi?.
It's a mid-price point to almost prestige, but it's a mid-price point if you want to take the way that it is marketed and it's called -- the way that it's reconsider, its masstige [ph]. So, -- and that's the way that retailers are looking at it and the way that the consumer looks at it.
So, it's a really kind of new initiative that's been taken over in a word that's been utilized and the growth aspects of this is extremely exciting. We just don't want to get too excited about it, but the receptiveness from major retailers that we've met with is there.
We just want to make sure the rollout is correct and we want to make sure the SKUs that are performing are the right ones..
Okay. And then can I ask you, given the news that we're hearing pertinent with Toys 'R' Us, what are you -- what approach are you taking toward that? I would assume that any shipment you makes at Toys 'R' Us at this point you could be at risk of not being paid.
So, are you still shipping to Toys 'R' Us here in the first quarter of 2018?.
Yes, we are still shipping with Toys 'R' Us currently and we're also being very cautious working with them. On the reverse side, part of the critical vendor status, that's part of we do need to ship them. It's part of the dip financing that they have.
But at the same time, we're working closely with them and different facilities to look at making sure that we're coverage of the best we can. The sell-throughs to-date that we have looking at them as a retailer and self is doing quite well.
So, looking year-over-year, they call it the store traffic is there, except, everyone knows that they're going through the different negotiations with different parts of their restructuring and organizing. So, right now it's business as usual. But just watching him and being cautious as best we can..
Okay. Thank you very much..
Thank you. We have no further questions at this time. I will now turn the call back to Stephen Berman for closing comments..
I'd like to say thank you again for joining us this morning. We look forward to speaking with everybody again when we report our first quarter results in April. And we're excited to put 2017 behind us and looking forward to 2018, 2019, and beyond. So, thank you everybody..
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. And you may now disconnect..