Q4 2019 Earnings Call
Good morning, everyone welcome to the Jack specific fourth quarter and full year 2019 earnings Conference call with management, who will review financial results for the quarter ended December 31st 2019, and the full year ending December 31st 2019.
Jack issued its earnings press release earlier today, our earnings release and presentation slides for today's call are available on our website and the Investor section.
On the call. This morning, our Stephen Berman, Chairman and Chief Executive Officer, and John Campbell, Chief Financial Officer.
Mr. Berman, well provide well first provide an overview of the quarter along with highlights all product lines and current business track.
I'm not sure Campbell will provide detailed comments regarding tax specific financial and operational results.
Mr Bourbon, well that return with additional comments and some closing remarks prior to opening up the call for questions.
Your line will be placed on mute for the first portion of the call.
If you will like to be placed in the queue to ask a question. Please press star one on your telephone keypad.
Before we began the company will like to point out that any comments made about tax specifics future performance events or circumstances, including the estimates upsells and or adjusted EBITDA and 2020 as well as any other forward looking statements concerning 2020 and beyond our subject to.
Safe Harbor protection under Federal Securities laws.
These statements reflect the Companys, that's judgment based on current market trends and conditions today.
And are subject to certain risks and uncertainties, which could cause actual results could differ materially from does protect that in forward looking statements.
More details concerning these and other such risks and they start to teach you should consult tax most recent 10-K and 10-Q filings with the FCC I suppose the Companys. Other reports subsequently filed with the FCC from time to time.
In addition, today's comments my management will refer to the non-GAAP financial measures such as adjusted EBITDA.
Unless stated otherwise the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the Companys earnings press release issued today or previously.
Hi reminder, this conference is being recorded.
With that I would like to turn the call over to Stephen Berman.
Thank you and good morning, everyone and thank you for joining us today.
For more than 20 years Jaxa sought to create a revenue base that consist of mostly evergreen product categories that are enhanced my continue refreshing a relevant licenses while at the same time pursuing opportunities with promotional products.
I'm proud to say that our results in 2019 show successful execution of this strategy I liked to start today's conversation with an overview of the great progress Jack specific made in 2019, and the strategic focus innovator creativity unfettered determination.
To accomplishing our stated goals and growing both sales and margin.
After John's comments on our financial performance. How are you turn with some brief comments about our major product categories and what we're doing the 2020.
During the quarter, we exceeded our internal expectations for topline and adjusted EBITDA.
As you both the fourth quarter and the full year with positive adjusted EBITDA.
We grew total sales by 15% over the fourth quarter of last year and our full year sales were up by 5%.
Sales in our international segment were strongest fourth quarter and up more than 40% year over year.
We did exceptionally well with grows into which contributed strongly to our total growth and helped us grow our girls sales by over 35%.
We continue to have a solid base of evergreen products and categories, where we are the industry leader, which helped us grow the seasonal category by over 50% over fourth quarter last year, and we have seen nice increase in our sales online retailers.
In addition to the increase in sales, we also tightly manage our operating expenses cutting overhead significantly compared to fourth quarter of last year.
As a result, we were able to produce better financial results for the fourth quarter and for the year than we had expected.
As John will detail shortly our gross margin in fourth quarter was up over 30% and posted a positive adjusted EBITDA for both the corridor and the full year.
2019 was a strong rebuilding year for Jack.
We've experienced positive results with both evergreen brands and great licenses and remain committed to delivering maximum value to our consumers and our shareholders in the short medium and long term.
So let me provide greater details on the most significant and meaningful activities and guiding principles Jack's leverage this past fiscal year.
As many you May know MPD recently reported that U.S. retail toy sales were down for the fourth quarter and down 4% for the full year.
This decline came on top of the declines from last year. It was not generally expected.
We're quite pleased that we were able to post our second consecutive quarter of double digit sales in the fourth quarter and that we were able to grow our full year sales for the first time since 2014.
Experts will debate the many reasons for the industry's decline last year, including the Thanksgiving shift changes in consumer buying behavior.
The strength of movie properties earlier in the year et cetera.
But the reasons for our growth are simple.
We had several products and categories that were very strong.
And they were able to more than offset the weakness of other products as well as the overall retail sales decline and toys.
The improvements we saw were directly attributed to our anticipation of the interested why sales challenge and steps that we have actively been taking to reduce our costs.
Due to significant improvements in our operating cost structure.
Excuse me a number of nonrecurring charges. Our total S. You need costs were down significantly compared to last year for both the fourth quarter and the full year.
Our inventories at year end were down as a percent of sales and our accounts receivable were both down in dollars and as a percent of sales.
We maximized and nurture a strong platform of evergreen brands and properties.
And fourth quarter, we had strong sales of several new or recently launched products led by frozen to Nintendo extreme power dozer.
Hi, wheels, and Princess style collection.
Our seasonal business thrived in 2019, the strong performances from our ride ons ball pits.
Okay.
Hits furniture, and our new skateboard brand redo, which had strong placement in late fourth quarter at both Walmart and target.
Evergreen brand such as Disney Princess Power Rangers PJ masks, Microsoft Halo, and then 10 Doe performed very well for our disguise business.
Some of this positive sales contribution was offset by the decline in several entertainment properties that had previously contributing significant sales in fourth quarter 2018, but had an absence of new content in 2019, including Incredibles too.
Antsy, Nancy Mona and Harry Potter. Additionally, we saw as expected continued declines in squished, English, which we launch in the second half of 2017.
Jack says manage a broad product portfolio for optimal leverage opportunities and greatest risk diversification.
We're nimble agile and opportunistic by actively orchestrating programs with existing licenses, new licensing partnerships private label businesses and the creation and launch of original IP.
Yeah, its own brands, such as perfectly acute kitten cafe Flywheels extreme power dozer creepy crawlers reduce skateboards and others have established a stable long term foundation opening opportunities for Jack's to expand its retail footprint across more aisles and two more category.
Trees as well as opening the door to incremental licensing and retailer partnership opportunities.
We bought a culture spirit that fosters innovation and creativity across the company employees are empowered to bring forward ideas related to any core function. This desire to make a difference shine through in our products and then the passion our people are great. The many operations across the company.
We believe this makes a meaningful difference both internally with employees as well as externally with licensed stores.
Retail partners consumers and more brands like Flywheels Cafe extreme power dozer toilet paper plasters and more among others are driven by our internal passionate innovators and they have full company support.
In a recent study we identified the approximately 25% of the Jack's employee base has been with the company for more than five years and that approximately 64% of these employees have been with Jack's for more than 10 years seven across a broad range of cross functional divisions and departments.
We remain committed to seek it out the most effective and efficient ways to reach our highly fragmented multi segment consumer base, we employ strategies and tactics designed not only to maximize awareness for our and product user the kids, but also to stimulate purchase convergence amongst those with purchasing power.
Our including parents collectors and gift givers.
2019 was a pivotal year as Jack's devoted resources to wide range, reaching BD activities as well as a highly targeted campaigns that allowed for meaningful opportunities to test learn and to optimize.
Marketing is an ever changing landscape driving awareness with kids via traditional cable television digital streaming video in gaming and social media apps and related Bull Influencer partners, while driving purchase conversions, both in store and online with paid social media digital media and.
Sponsored search related activities.
We're always going to look out for opportunities to improve margins and profitability without reducing product quality or sacrificing internal culture. In 2019, we successfully implemented the following.
The consolidation of our Canadian operations into Jack's U.S. distribution center substantially reducing overhead costs.
Implementation of new European distribution hub in Rotterdam, driving greater efficiencies in Europe, when fully functional and second quarter 2020.
The Finalization of our service agreement with a bonded threepl warehouse and yet the in China, which will provide inventory stocking solutions to quickly shift key items to meet international customer demands.
Jacks is committed to improving its position as a top 10 global toy manufacturer.
We firmly believe we're positioned for growth in 2020 and beyond with a strong long term outlook and a bright future with that I will turn the call over to John.
Thank you Steven and good morning, everyone net sales for 2019 fourth quarter were $152.5 million up 15% compared to 132.3 million last year reported net loss attributable to common stockholders for the fourth quarter was 20.6 million for 70 cents per diluted share compared to an.
Loss of $3.2 million or 14 cents in the fourth quarter of last year.
The net loss in Q4 2019 includes a number of non cash charges of $10.7 million, such as intangibles impairment tooling disposal and the change in fair value of the derivative liability associated with our preferred stock.
Adjusted EBITDA for the 2019 fourth quarter was $3.3 million compared to a negative $1.6 million in the fourth quarter 2018.
Adjusted net loss attributable to common stockholders for the fourth quarter was 26 cents per diluted share and improvement of 11 cents over the same period last year.
For the full year 2019, net sales were $598.6 million.
5% compared to 567.8 million in the prior year.
Reported net loss attributable to common stockholders for 2019 fiscal year was $56 million or $2.16 per diluted share compared to a net loss of $42.4 million or $1.83 in 2018.
Included in the 2019 full year losses, or 13.2 million dollar loss on extinguishment of debt associated with the recapitalization. We completed in Q3, 2019 and $10.7 million associated with the aforementioned charges and change in fair value recognized in Q4 2019.
Adjusted EBITDA for the full year, 2019 was $18.9 million compared to $2.3 million for the full year 2018.
Adjusted net loss attributable to common stockholders for the full year 2019 was 73 cents per diluted share an improvement of 52 cents over 2018.
Our girls targeted businesses was the biggest driver of growth in both Q4 and for the full year inclusive of Dol role play address of toys, we achieved $99.6 million in Q4 up 37% compared to the comparable quarter last year.
As one might expect the release of frozen to provide a both the lift for our existing frozen product as well as an opportunity for new product tied to the film.
Those sales more than offset some of the anticipated declines in various older product lines related to properties, such as fancy Nancy marijuana and squished dealers.
For the full year girls toys were up 14% to $301.7 million and 29 team compared to $263.6 million in 2018, largely attributable to the aforementioned drivers.
Sales of action figures vehicles role play and electronics products in our boys category for the 2019 fourth quarter were $22.9 million down 20% compared to 28.8 million last year.
Positive contributions from our Nintendo products. In addition to launches of our Flywheels extreme power brands, we're not enough to compensate for downsides and a mix of entertainment properties, such as Incredibles to Harry Potter and some non entertainment properties, such as Stanley Black <unk> Decker and RTP Blaster Brown.
For the full year boys toys were down 29% to $79.2 million in 2019 compared to $111 million in 2018.
The decline in critical to with somewhat mitigated by upsides during the year for properties like Godzilla and Sonic Sonic remains an ongoing program for us in 2020.
Sales of seasonal products, including license ride ons ball pits play structures kids' furniture, and more boards were $23.1 million in the 2019 fourth quarter.
16% from 19.9 million in 2018, and strong sales of ride ons offset declines in more forwards in Maui outdoor toys.
For the full year seasonal products were up 10% to $90 million in 2019 compared to $81.9 million into 18, but the same factors that drove Q4 sales also driving full year results.
We opened our Halloween category decreased $3 million in the fourth quarter 2019.
However, when it comes to the very seasonal nature Halloween, we're much more focused on full year performance.
Full year 2019, the Halloween segment was up 18% to $119.6 million.
Sales of baby doll accessories figures plus some games in our preschool and activity category were $3.1 million in the fourth quarter of 29 team down from 3.9 million in 2018.
The decrease was driven primarily by lower sales of Daniel Tigers neighborhood as most declines in our pull my finger game.
Our 2019 launch of gigantic Tesoros contributed positively for both the quarter and full year.
For the full year preschool and activity products were down 16% to $8.1 million in 2019 compared to $9.7 million in 2018.
Looking at sales by business segment, USA, and Canada net sales for the fourth quarter were 13% up to $113.6 million compared to $100.9 million in the prior year quarter driven by the same factors described earlier in the product group descriptions.
International sales for the 2019 fourth quarter were stronger at $35.2 million up 43% compared to $24.6 million than the 2018 fourth quarter driven by strength in Australia Asia in Europe.
For the full year net sales of our international segment were 94, and a half million dollars compared to 101.9 million in 2018, representing a decrease of $7.4 million or 7%.
The decrease in net sales was primarily driven by lower sales of Incredibles to Disney Princess products, and squished delicious, partially offset by higher sales of frozen to which was not sold in the prior year period.
We already mentioned Halloween sales in the category breakdown earlier.
Moving down the piano reported gross margin in the 2019 fourth quarter was 30.4% down slightly compared to 30.6% in the 2018 fourth quarter gross margin for the full year was 26.6% compared to 27.4% in 2018 with the decrease driven by product mix toward lower margin products earlier.
And your higher royalty expense as a percentage of sales.
Yes, G and H expenses, including direct selling expenses and depreciation and amortization and the 2019 fourth quarter totaled $57.2 million were 37.5% of net sales compared to $44.9 million or 33.9% of net sales in 2018.
For the full year SGN expenses in 2019 totaled $177.1 million for 29.6% of net sales compared to $187.9 million were 33.1% of net sales a dollar reduction of 5.7%.
Net cash used in operating activities was $4.3 million for the fourth quarter of 2019.
Up when compared to net cash used in operating activities of $3.2 million in the fourth quarter 2018, primarily due to an increase in royalty advances for the full year 2019, net cash provided by operating activities was $21.8 million up when compared to net cash used in operating activities of $624000 into.
Many 18.
Free cash flow was a negative $6.1 million in the 2019 fourth quarter and a negative $5.4 million into 2018 fourth quarter.
For the full year 2019 free cash flow was positive $12.4 million compared to a negative $12.4 million in 2018.
As of December 31, 2019, our cash and cash equivalents, including restricted cash totaled $66.3 million compared to $58.2 million at the end of 2018, we continue to focus on improving the company's liquidity position, while also balancing the need to invest in the business and new license opportunities.
Accounts receivable as of December 30, Onest 2019 were $117.9 million down from $122.3 million as of December 30, Onest only 18.
Dsos improved in the fourth quarter 271 days from 85 days reported in the 2018 fourth quarter.
Inventory as of December 30, Onest 2019 was up only slightly to $54.3 million versus $53.9 million at the end of the fourth quarter 2018. The aside from the 2019 fourth quarter were 62 days down from 70 days in between 18 fourth quarter.
As of December 30, Onest 2019, the company's debt includes $1.9 million of convertible senior notes due June 2020, $37.6 million of recapitalized convertible senior notes due in July 2023, and $134.8 million owed under our term loan due February 2023.
We currently have no outstanding balance under our credit facility.
Capital expenditures during the fourth quarter, 2019 were $1.8 million compared to $2.2 million in the fourth quarter 2018 for the full year 2019, Capex was $9.4 million compared with $11.8 million in 2018.
The diluted loss per share calculation for the fourth quarter 2019 was based on a weighted average of 29.6 million common shares outstanding.
For the full year 2019, the diluted loss per share calculation was based on a weighted average of 26 million shares.
And with that I will now hand, the call back over to Steven for some additional remarks.
Thank you John.
As I said earlier in each of our major product categories. We have a mixture of evergreen products continually refreshed licenses and opportunistic promotional products.
Our base of evergreen products reliably produces strong year over year consistent revenues and we augment this with innovative and creative promotional products and lines based on our current licenses.
And our girls Division for 2020, among our new products, we have kit cafe, a line of preschool products based on kittens, and which is our own IP and acute girls hairstyles, which is a hairstyle. The line based on a popular social media channel.
A broad line of our Disney Princess Dow collection.
Frozen too with the new spring line of lower priced products and a broader new fall line with new products interactive singing Elsa doll.
In addition, our many mass lines, which will have broader distribution for this year and Daniel the Tiger and gigantic stores.
Also continuing for preschoolers with broader distribution.
In addition, we hope there will be editor licenses that we should be able to talk about soon.
And our boys Division, we continue to see growth and Nintendo and we will have broader global distribution of this line during 2020 and beyond.
Our Sega product lines, notably Sonic the Hedgehog has seen nice sell through and should get a nice boost for the successful release of the movie last weekend.
We will also be launching Atlanta toys based on the popular book series last kids under.
In addition, we are expecting strong sales from our relaunch of Flywheels, which was one of the most successful proprietary products Jackson has ever had.
And our seasonal division, we will benefit from having a full year of sales of our line of license indoor play tents and our innovative reduce skateboards and the relaunch of microbes.
Finally, we're looking forward to a number of strong licenses and our disguised costume segment, including trials to.
Frozen to Harry Potter Wizard of the World Zombies to move on Bakugan, and others, and we're especially excited to be announcing today, we'll be bringing out costumes based on the five time Grammy Award winner Billy Irish one of the hottest new recording artist.
All time.
Let me Additionally, add that we've got to do to see broader global rights for many of these license products. These are universal play patterns and the licenses translate very well and we will continue to get the rights and more and more countries. In addition, we have a new partnership in Europe with morph costumes.
Which is expanding our reach and sales opportunities.
In summary, we have made a lot of progress and while we know we have a lot more to do we believe we have made tremendous strides we're operating in a consistently fluctuating retail and consumer marketplace and we are prepared to address changes with both speed and agility. We know we still have improvements debate.
But as a company we're gratified to have achieved good growth at a time when industry sales remain challenge with that in mine I firmly believe that we are positioned for global success, and we will drive to deliver meaningful contributions to our partners consumers and all key stakeholders.
Before I open the call to questions I'd like to comment on the Corona virus now it's affected us and what we are doing.
Our thoughts and prayers go out to those affected by the outbreak.
Any company with sourcing products from China has to be flexible during this period of disruption we have been adjusted work shifts and are working with our suppliers to minimize the disruption.
All of that said, we're not in a position to know how this will affect our prior to production suppliers and various segments and our manufacturers and therefore, our sales we think it's reasonable to expect industrywide delays in terms of production and deliveries around the world.
We are rescheduling any China based direct import shipments and production loss during the past week and we are monitoring the situation closely to determine how quickly our manufacturing partners can resume full production levels and catch up on missed activity.
While this is normally a slower production period for us revealing to making tooling capacities product procurement production and flow of goods going forward into the Halloween season and beyond.
While we have been moving product manufacturing to other countries and are producing products in Vietnam, Cambodia and India. The majority of our current production comes out of China will update you on this when we report first quarter results in April.
With that we will now take questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one using your Touchtone phone.
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We have a question from Stephanie Wissink from Jefferies.
Good morning. This is actually held ends on for stuff. Thanks for taking your question.
Started work on that.
Turning to start on the current Iris where are your factory partners in terms of having personnel back and capacity online today, and then where do you expect them to be in the next two to four week.
So based on throughout China, there's there's so many variations with provenance isn't different segments of manufacturing. So for instance are cutting so our major cut and sew supplier, which is located how Joe and the outskirts upon Joe and starting to get up and running almost a full capacity.
Because that they only have had to affected people in that pravin. So they are able to get much more labor, but it really depends on the actual manufacturing capabilities and the segments in which are located from should then the Guangdong to how Joe.
So it really depends on the actual area. So at this point in time.
The flow of labor is covenant to specific manufacturers and then there are no flows of labor going the other manufacturers.
But right now with where we stand I'm on the phone.
Each evening on a we chat call with each manufacturer that our major components and it's a really day by day process, they're hoping to have more labors come in and cross borders by next week, but it really just depends.
Where are the they are located.
No.
Actually the amount of labor that they need during this off season. After season period. So it's really by manufacturer or by factory is how it works.
Okay, great. Thank you and then if I could just squeeze in one more on payable.
In the quarter were up 15% in line with sales, but when we look at the returns and allowances on the balance sheet. They were up 30% how should we think about this gap.
Yeah, Hey, Ashley it's John I'll take a stab at that one.
That is in line I think with our last quarter's results as well and it's something we are kind of keeping an eye on in terms of getting.
Top of mind I've, a couple of different thoughts as to why that's happening, but we'll probably have to take it offline to give you something which is all that more fact based rather than got based.
Okay.
We can take it offline. Thanks, so much but how are you guys actually.
I think to answer your question, we don't see it as a temporary sort of blip in terms of how the balance sheet is trending we think thats probably more in line with.
Our current mix.
And where that.
Where the businesses heading.
Next year.
Okay.
Okay, great. Thanks, guys.
Thank you.
We have a question from Gary Johnson from BMO capital markets.
Great. Thank you good morning.
One of your of a million.
Stephen was 11 million dollar impairment in tooling write down what does that relate to.
The 11 as John again, the 11 million isn't tooling per se. It was a mix of three different things.
Tooling that we ended up writing down faster than we normally with depreciate was a little bit less than a million dollars of that.
Most of that was a trip attributable to some incredible to stuff, which we thought.
It was essentially at end of life faster than we would have normally expected it to be and some tooling that was put in place chasing tsum tsum back in early 18.
The big piece of that was was nine plus million dollars of intangible.
Impairment off the PL relating to the acquisition of Maui, There was done back in.
2012.
As the company kind of reviews, the product line and a greater level of detail. It looks for you know are we are investing our resources and the right places.
And maximizing margin as I think you might know the company exited the fundamental business last year along with.
At the same time evaluating how that business is doing and what the prospects of war although.
Along with having some leadership changes in that business over the past several months in kind of looking at it carefully in terms of where it is and where we think it's going.
During the quarter it it made sense to revisit that intangible value and essentially going and write it down.
So that was the majority of that Q4 Q4 write down.
Theres also a piece to associated with.
The derivative element of our preferred stock, which is something we have to mark to market every quarter.
Okay got it thank you and Steven.
Talk a lot about consistent revenue building out stable evergreen businesses. So I guess the obvious question here is how much of your growth in a quarter came from frozen and.
Frozen to particular, and then do you still think that frozen two will be as big in 2020 for you as it was in 2019.
Okay. So first thing we don't breakout actually the actual property revenue, but frozen obviously frozen to as a strong property for us and this year last year at the set the same time our print the sales held extremely strong throughout the frozen.
For you as an add on Fourq death. So previously in 2013 14, Princess slow down well frozen picked up we had a good benefit of Princess doing extremely well not just the basic.
But our new style collection, so going forward, we have a broad array of our Princess line that is expanding and we are ahead of frozen and Thats a product development. The first time around we didnt have a spring line because we didn't have the success.
This time around we have a very nice spring line, which is at lower price points, which is really set up across a broad across the board at us and international customers and then we have which was our number one SK you was a single on Elsa doll, which we had a 2014 that we are launching for fall 2000.
20. So in addition to frozen being strong last year, we see it strongly this year, we will have a.
A.
Disguise frozen to line much more broader than we did in.
2019, as the movie came in October and no one really knew about frozen too.
In.
And to over 31st last year.
Okay. So it sounds like you're very confident improves and two in 2020, but do you think it will be contribute as much to piano and 22019, I would say it won't contribute as much or possibly can but we're excited for the DVD launch I think I believe it's at the end of this month and.
The streaming launch.
But that being said our princess sales are growing so the actual area of business itself is extremely stable and growth and in addition, we actually have a very strong tentpole movie launch property, which is called right, which is disease November animated film, which was pretty much more wanda happened years ago.
Go frozen and we're looking forward to the launch of rail, which will be in November and we have a broad array of products very similar to what we did in and frozen frozen too.
Okay, Great and one more for me, so Dsos superior down 14 days.
Yet international was up over 40% compared to the us what over 13% so.
With the shift to international shouldn't Dsos have expanded so what explains the better collection this year.
Yes, that's a good question.
We have been.
Now to be honest I don't think we have an answer for you off the cuff on that we are mindful that as we expand the international business the.
Though.
The DSO metric usually doesn't necessarily work in our favor, but we were happy to sort of see where we were at the end of the quarter and.
Okay are moving onto their here.
Alright, alright.
Keep going retail Pos and inventory.
Right right now retail Pia I'm sorry.
In regard to channel, yes, retail inventory channel, we is actually extremely I'd say low for the normal period of time versus last year.
We.
Hi, good Fortune, we ended the year pretty clean at retail we didnt have any major issues across both board both us and internationally.
And there has been other companies that had some major issue. So we're looking going into the 2020 pretty lean that retail inventories.
Right.
Good Pos in the quarter.
I don't have that off off the top of my hand, I'm, sorry, we could do that offline, okay, alright picky.
Well that is it for the conference call today, we appreciate everybody I've been on the call and we're looking forward to have it our first quarter conference call at April and talking more about 2020 and beyond thank you very much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.