Q2 2020 JAKKS Pacific Inc Earnings Call
Good afternoon, everyone.
Welcome to the Jack specific second quarter earnings Conference call with management, who will review financial results for the quarter ended June Thirtyth 2020.
That's issued its earnings press release early today.
The earnings release, a presentation slides for today's call are available on the company's website in the western section.
On the call this afternoon, or Stephen Berman, Chairman, and Chief Executive Officer, and John Campbell, Chief Financial Officer.
Mr. Berman will first provide an overview of the order along with highlights a product lines and card business trends and the discussion of the impact of Cobot 19.
Then mr. Campbell will provide detailed comments regarding that specific financial and operational results.
Mr. Obama would then car return with additional comments some closing remarks are opening up the call for questions.
Your line will be placed on mute for the first fortune another call.
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Before we begin the company will like to point out, but any comments made about Jack specific future performance events or circumstances, including estimates.
Sales and adjusted EBITDA in 2020, as well as any other forward looking statements concerning 2020 and beyond our 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 statement.
Details concerning these and other such risks and uncertainties you should contact jacks. Most recent TNK and thank you filings with the FCC as well as the company. Other support subsequently filed with the FCC from time to time.
In addition, today's comments my management will refer to non-GAAP financial measures such as adjusted EBITDA.
Unless stated otherwise the most directly comparable GAAP financial metric has been we can sale to the associated non-GAAP financial measures, what the Companys, our new press release issued today and what previously.
As a reminder, this conference is being recorded.
With that I would now like to turn the call over the Stephen Berman.
Thank you and good afternoon, everyone and thank you for joining us today.
We're pleased with the results we were able to post second quarter and not just because they were better than we had expected internally, but because I believe underneath the reported numbers. There are very promising signs that we believe point to better performance in the future.
Like almost every company in the World, we face considerable challenges in the quarter from the ongoing pandemic.
These channel just started in the first quarter, but in some ways. They were different from the ones we faced in the first quarter.
Our priority remains a health and safety of our employees and their families our customers and our suppliers.
Some ways our business is back to normal and in other ways. It's still has a way to go.
We continue to operate with limited stuff coming into the offices worldwide and many if not most of our employees are working from home.
Our manufacturing partners are back online, but they're facing production challenges that are limiting access to some of our products are selling very well.
Our major retail partner stayed open for the most of the worst days and I picked up a lot of the slack from those that were closed but many of our smaller retail partners continue to struggle.
Sales through online channels have thrived this time and continue to grow.
We're slowly opening our facilities following federal and state guideline in an attempt to resume full and normal operations.
Our reported sales in the second quarter were down 17% from the results we posted a year ago, but we are encouraged by the composition of those sales.
And our toys segment, our sales were down approximately 4%.
This was due to the fact that we consciously exited certain low growth low margin lines of business, notably fun noodles at the end of 2019.
Excluding the discontinuation of fund noodles, our toy segment sales were actually up approximately 3% compared to last year and roughly flat for the first half of the year.
The main driver the sales declined with disguise Halloween division, but even there we think the story is better than it looks.
I will go over the details in his section, but the main point as last year disguises unusually strong this year were being more cautious and who we shipped to even as retailers are being more cautious regarding their Halloween expectation.
Other words, we don't just want sales, we want sales that are profitable and where we see sustainable growth potential and are more willing to sacrifice volume in the name of increasing profitability.
We're very encouraged by our retail Pos and a retail inventory levels through the ended June U.S. at our top three customers was up mid single digits and retail inventory at these retailers is down mid to high teens.
We're pleased with this position as we move into the second half.
We know we have some difficult comps in Q4 against the launch of frozen too, but we're satisfied with how clean or inventory levels are at retail.
Even more encouraging them to sales trends and Pos is how much we have reduced cost compared to last year and the year before we have been diligently working to reduce our fixed costs, taking a dramatic steps to reduce costs in both 2019 and earlier this year.
John will review shortly but we have taken millions of dollars in expenses out of our cost structure such that despite the reduction in sales aren't EBITDA loss is actually considered to be lower.
These cost reductions lower our breakeven and leave us better positioned to leverage our costs and higher volume quarters.
So we're pleased with how results are in the quarter reflect our efforts to be more discipline and more focused on profits I look forward to reaping the benefits of these efforts.
John will now review financials, and I will return to discuss what we see for the rest of the year John.
Thank you Steven and good afternoon, everyone because I discuss our results for the second quarter of 2020. Please note that the company executed a one for 10 reverse stock split after the close of treating on July the night and all per share figures discussed here reflects that reverse split.
Net sales for the 2022nd quarter were $78.8 million down, 17% compared to $95.2 million last year.
Reported net loss attributable to common stockholders for the second quarter was $23.6 million or $7.70 per basic and diluted share compared to a net loss of $22.5 million or $9.55 per basic and diluted share in the second quarter of last year.
As a reminder, certain elements of our capital structure, our mark to market quarterly based on a few factors inclusive of our share price.
The net loss in Q2 2020 includes non cash charges totaling $7.7 million, reflecting changes in the fair value of our convertible senior notes and the derivative liability associated with our preferred stock.
By comparison these charges in Q2 2019 totaled zero point $1 million.
The second quarter 2020 also included restructuring charges encoded pandemic related charges of $1.9 million compared to a negligible amount in Q2 of last year for restructuring charges.
Conversely, Q2 of last year included two and a half million dollars, an acquisition and recapitalization related expenses compared to no comparable spending in Q2 of this year.
Excluding the impact of such charges as well as stock compensation expense or adjusted net loss attributable to common stock holders in the second quarter of 2020 was $13.4 million were $4.38 per basic and diluted share compared to a loss of $19.5 million worth $8.27 per basic and diluted share.
In the second quarter, 2019, and improvement of $3.89 per share.
Adjusted EBITDA for the 2022nd quarter was negative $4.6 million compared to a negative $11.5 million in the second quarter of 29 team our girls targeted business and showed growth for the quarter inclusive of dolls role play and dress up towards preschool plush as well as same walk cosmetics girls products were 32 point.
$8 million in Q2.
5% compared to $31.3 million in the second quarter of last year.
As was the case in the fourth quarter of 2019 in the first quarter of this year. The big driver was frozen to which was released in theaters late in Q4 2019.
Other products that contributed to growth for Disney Princess perfectly Q baby or exclusive baby doll line with targets and couldn't kept Fay our own aspiration will doll and collectible world of Cafe inspired surprises, which continued to build nicely during the quarter.
These sales more than offset some of the anticipated declines and various other product lines, particularly those related to older Entertainment properties, such as disease Aladdin the original frozen squished dilution of sorted other older lines.
Sales of action figures vehicles role, playing electronic products and our boys category for the 2022nd quarter were $10.7 million up 2% compared to $10.5 million last year positive contributions from our Flywheels line of proprietary action vehicles, Sonic the Hedgehog and intend to Super Mario toys, and Black <unk> Decker role play more than offset declines in entered.
Payments different properties, such as Godzilla, Incredibles, too and Harry Potter.
Sales of seasonal products, including license ball pits and its plate structures were $12.7 million in the 2022nd quarter down 26% from $17.1 million in the second quarter 2019, primarily due to our discontinuation of fundamentals low margin product line, we exited last year and referenced in Q4 when.
We took an impairment charge against the intangibles associated with that acquisition.
Strong sales of many miles in frozen to ride ons as well as sales of our redo skateboards offset declines in more Ford broadly speaking, we're seeing strong retail sell through with our activity tables put the floor ride ons and skateboards, but had been production constrained to react given the lingering impact of the extended Chinese new year shutdowns and this unanticipated spike in consumer demand.
Sales in our Halloween segment disguise decreased 38% to 22 and a half million dollars in the second quarter 2020, compared to $36.4 million last year and the second quarter of last year, a strong slate of licenses, including toy story, four and frozen too as well as a shifting some shipments from Q1 to Q2 led to unusually strong sales growth in the SEC.
Quarter. This year not only do we not have the same entertainment lineup for the timing shift, but the pandemic is clearly cutting into some of our sales.
This business else disproportionately to smaller specialty retailers and some of them are struggling.
In addition, we have been more cautious and disciplined in our shipments not wanting to turn good inventory into bad debt.
And even the healthiest retailers are uncertain as to how the ongoing pandemic will affect demand for Halloween products, even though Halloween falls on a Saturday this year, which often leads to higher than normal sales.
Looking at sales by business segment sales in our toys consumer products segment, which includes all markets around the world were down 4% to $56.2 million compared to $58.8 million in the second quarter of last year. The decrease was driven by the same factors noted above in the product discussion Latin American Australia, New Zealand were up year over year.
The U.S., Canada, Europe Asia in the Middle Eastern Africa were lower.
As we already noted above our Halloween segment was down 30%.
Looking at the rest of the TNL reported gross margin in the 2022nd quarter was 21.3% compared to 18.6% and the 2019 second quarter steady improvements in our product margins and lower obsolescence expense outpaced higher royalty charges incurred in the quarter.
The increase in royalty expenses as a percentage of sales was driven partly by a mix shift towards products with higher royalty rates, but also reflects a more disciplined approach to accruing for royalty costs earlier in the products selling cycle.
Sharply lower spend for SGN expenses, including direct selling expenses depreciation and amortization in the 2022nd quarter totaled $24.7 million were 31.3% of net sales compared to $33.9 million were 35.6% of net sales in the second quarter of 29 team.
Our interest expense in Q2 of this year was $5.5 million compared to $2.9 million last year, reflecting higher borrowings under our term loan in a higher average interest rate.
Net cash provided by operating activities was $7 million for the second quarter 2020, compared to a net cash used in operating activities of $7 million in the second quarter of 2019, primarily due to cost savings measures.
Free cash flow was positive $4.2 million in the 2022nd quarter and negative $9.7 million and the 2019 second quarter.
As of June Thirtyth, 2020, or cash and cash equivalents, including restricted cash totaled $52.7 million compared to $66.3 million at the end between 18 and $37 million as of June Thirtyth 2019.
Accounts receivable as of June Thirtyth, 2020 were $69 million down from $117.9 million as of December 30, Onest 2019.
And $85.1 million as of June Thirtyth 2090.
Yes. It was for the 2022nd quarter decreased to 80 days from 81 days reported in the 2019 second quarter.
Inventory as of June 30, 2020 was $57.7 million versus $54.3 million at December 31st 2019, and $53.5 million as of June Thirtyth 2019.
Yes eyes in the 2022nd quarter were 85 days compared to 80 days in the 2019 second quarter and looking at DS eyes on a trailing 12 month basis. We were at 62 days for 2020 and 63 days for 2019.
During the quarter the company applied for in was granted a paycheck protection program for P. P. P loan under the federal cares Akt program those proceeds of $6.2 million will be utilized cash flow payroll and rent payments over the next six months as per the programs attention.
At the end of the time period, a lot of to utilize the funds that as the company's attention to file for forgiveness for a portion of the debt.
The absence of knowing whether any funds will be forgiven in how the program may change as the year continues the company has taken a conservative approach and presumably to your loan period with interest beginning to accrue in December of 20 to 20 as a result, we now reflect an additional $1.8 million in short term at $4.4 million and long term debt on our balance sheet.
As a result as of June 30, 2020, the company's debt at face value included a 6.2 million dollar PPP loan due June 20, $20 million to $30.4 million of recapitalize convertible senior notes due July 2023, and $134.8 million owed under our term loan due February 2023.
During the quarter $7.1 million of the July 2020, Threerd convertible senior notes were converted to common shares at one dollar per share.
The $1.9 million worth of 4.875% convertible senior notes was paid off during Q2 on schedule. We currently have no outstanding balance under our credit facility.
Capital expenditures during the second quarter, 2020 were $2.8 million compared to $2.7 million in the second quarter 2019.
The diluted loss per share calculation for the second quarter 2020 was based on a weighted average of 3.6 million common shares outstanding up from 2.36 million in the second quarter 2019. This number reflects the impact of a reverse stock split as well as the aforementioned convertible note conversions.
And with that I will now hand, the call back over to Steven for some additional remarks.
Thank you John.
Right now we are usually at the peak of our hollowing shipping season.
Halloween falls on a Saturday this year and in a normal year, we would expect to get a lift from that timing.
As is typically leads to more trick or treaters and people dressing up for parties.
But this is not a normal year.
We know that kids and adults fans of Halloween will want to celebrate in some form but we are expecting covert to have a negative impact on sales of Halloween merchandise this year even.
Even the healthiest retailers are taking a more cautious approach to their overall Halloween buying with orders down double digits for most of them.
That's healthy retailers of course are more worried.
And so are we would these retailers and we're taking a more prudent approach to credit risk by turning down some orders if we feel there's too much risk for Jack.
We do not want to turn good inventory into bad debt.
We recognize that cobot has caused a near complete shut down the buybacks in film production and caused films that were completed to have their theatrical debuts delayed because theaters are closed this will affect not only jack but any company, making products tied to films that were expected to come out this year.
One example that affects US is disease move line, which is posted open and fall and they got pushed to next March and now has no current scheduled release date for this year.
Another is right and the last Dragon, which was moved from November 2020 to March 2021.
But we still have expectations that some of our girl product lines will do well and will benefit us this year.
Rosen to continue to be a big contributor and for the holidays, we expect our animatronic magic in motion Elsa doll, and our Playdate nup water horse to sell very well.
We have two products in the disease style collection that we believe will perform well what is a gourmet smart kitchen side and there is a lined up and style Vanity both are proven play patterns and benefit from being part of the strong disease sub segment.
Hidden cafe, which is based on our own internal IP has been selling very well and we expect that to continue in the second half with new exciting releases.
Our acute girls hairstyle product line, which is based on the number one haired channel on Youtube with more than 5.5 million subscribers and over 13 million video views per month shows girls had to make elaborate hairstyles at home.
Perfect the acute our baby doll line sold exclusively at target continues to be a very solid seller and we expect good sales in the second half.
And our boys Division, we have several strong launches in addition to the strong evergreen base of business of some of our existing strong brands.
Our toys based on video games continue to sell very well, including Sonic Hedgehog and Nintendo.
For the holiday season, we'll be launching its a me Mario and oversize feature action figure was integrated voice and sounds.
This is the first time in the history of Nintendo that talking Mario toy has been introduced into the market.
Another new video game related line. We're launching this fall is based on apex legend highly successful batter while video game from electronic Arts.
We have broad rights for apex toys and are optimistic our product line will sell well given the continued success of the game.
Also in boys were following up with the success of last year's extreme powered dozer with this years introduction of extreme powered dump truck. This do release has a powerful drive mechanism that allows users to haul push and pull all types of items with a beautifully designed construction play toy.
Redo, our very cool proprietary line of Skateboards has performed well for us this year and we expect continued success going into the holiday with our current customer base and the expansive reach into new retail distribution channels and.
And we are re launching a re imagined version of the I clubs, a powerful new toyed that allows kids to explore the unseen world around them with high back deprecation imagery that can be captured and shared for use in both indoor and outdoor settings.
This is just some of the products, we expect to do well this holiday season.
Before we finish up I would like to talk more broadly about expectations for the industry and how we all need to evolve and adapt to these changes being caused by cobot 19, some of which may last well into the future.
We in the toy industry have often pointed out that toy sales hold up relatively well in recessions and during times of uncertainty and this has been mostly true.
People like to give their children toys, even if they can't take vacations buying new car dine out and various other restrictions during the early phase of the pandemic. We saw the added boost that retail toy sales got from the fact that kids were stuck at home and parents are looking for something to keep their kids occupied activity.
He's puzzles games role play plus indoor environments sold very well.
We're not sure that this demand surge will sustain schools remain closed there will still be kids at home needing to be occupied but they may already have purchased the activity toys and games in the not need to purchase more when unemployment benefits run out or greatly diminished there is going to be some impact on consumer spending.
Consumers have accelerated their shift to online shopping.
Most probably already had Amazon accounts, but those consumers, who shopped at target Dot com, a Walmart dot com to name a few for the first time have now set up accounts and they continue to buy on those sites more than they did before.
Entertainment landscape may also be altered for some time.
We're already seeing a reduction in frequency of events like birthday parties or other gift, giving occasions, where people get together.
What will the holidays looks like this year will fewer family members get together and not seen nieces and nephews reduce the need to purchase gifts oral family members still spend on gifts, but just have them said.
With all this in mind, we are expecting consumers to be cautious this holiday season.
Jack our plan is to focus on making basic evergreen toys with proven appeal and proven play patterns selling them through our strong retail networks around the globe and keeping our operational costs lower as we prepare for when the effects of the pandemic our reduced this bodes well for Jack continue its focus on.
Growth and profitability now and for the future.
In closing I want to thank our incredible team for all their hard work in the challenging environment. We have today, we continue to take steps needed to position the company for profitability growth and we couldn't do without the dedicated team with that we will now take questions.
Thank you.
Good question at this time. Please press Star then one on your telephone.
Withdraw your question please press the pound King.
First question comes from the line of Steph Wissink with Jefferies. Your line is now open.
Sure noon, everyone. A few questions for you both of you actually Stephen Dunn for the first one even into your.
Including your remarks, you're talking about this pretty direct ship to online and sounds like you expect some of that can be permanent.
How have you adjusted your marketing programs or digital assets.
For a particularly your owned brands to ensure that youre landing on pages for consumers when they're searching that your easily found individual environment relative to the physical experience side, we've seen in the past.
Hello, Steph Everything's well for you and everything is healthy and safe for Jack what we've been working on and its bode well for this.
Called environment is we've been working on doing videos internally with all of our products that go online. So you actually have we believe actually a better experience. When you go online to search for a product because you're actually looking at three d. renderings, you're looking at videos and you're getting a much more descriptive overview of the product I'm sure really much more.
In Gulf did they actually the product when you see it online. In addition that all the online customers that we mentioned in some of which we Havent mentioned in the call we'd do it specific advertising on their online.
Sites, and we drive them to their online sites Terry with regards to certain advertising commitments, we have with each retailer. So some of the digital marketing.
Initiatives are done specifically to the retailer itself.
And then we drive it ourselves with our own.
Social media platforms and initiatives through Instagram, Facebook and we drive that more online than in store. In addition to our TV advertising that does explain both our in store both available online at major retailers. So what's happening now is.
Having media a lot less expensive digitally than what we do.
TV, we're getting a little bit more benefit out of our own dollar spent for digital advertising versus the traditional TV advertising, but that being said during the second half of their traditional TV advertising is one of the strong catapults for us worldwide and throughout the North American coal western and eastern territories.
That it actually benefits us to do it more TV based at the second half of the year.
Okay. That's helpful. And then just a second question on the decide business.
Recognizing that cobot is hopefully transitory.
You're one of the wealth, but for this and and well positioned the brand vendors in that space, but not all of your peers are is well positioned and even thing one of your largest peers. Good go through a bankruptcy process the talk a little bit about the opportunity to actually enhance an upsize that business out for 2020, but into the future years, where you could actually be.
I'm, even a larger player within Halloween role, playing costumes and even maybe some cod play area.
So that is a case one of our probably our real competitor has actually went into chapter 11, and we'll see what goes on with that process that being said we've also during the l. fate for that right that manufacture we have it in the process of obtaining.
New licenses in many new licenses going into 2021 for the Halloween period, which is a good sign because Halloween next year will be on Sunday.
Which actually gives us the most benefit of a lift normally not in a non pandemic year.
But with our major retailers, we have been very very close with them working methodically and meticulously on.
Correct cut back of the unknown, what Halloween will be the share that just doesn't mean that costumes will be purchased and the different way this year, but it means candy home decoration indoor and outdoor is gonna be a change because retailers saw east you're having a big low down year over year and back to school starting.
Not that way as well so for US we haven't garnished the majority of the top video game licenses. So we're the leader in video game Bisons costumes, we have a plethora of new licenses that we will look forward to announce shortly going into 2020 and with things getting back to somewhat of a normal.
Lifestyle next year, the healthiness of people missing some of the Halloween This you're not knowing what it will be will just be more exciting for 2021, I think people will be having a pent up.
Timeline to spend more and do more in 2021, so that will bode, we think exceptionally well for us going into 2021.
All right that's written and just the last one is on the breakeven point I think I'm your script you mentioned.
And it doesn't really to reduce the overall sales level to breakeven on your cost I'm wondering if you can just articulate what you see is your whether its monthly or quarterly.
Sales level, because really cover your cost structure and as we look out into the next couple of years.
See a pathway towards really starting to generate incrementality in your overall operating margin structure.
Yes, I don't know, it's a breakeven point of view if that was something that was in my part or Stephens part, but I think to be fair you know consistent with what we've been talking about the past several months you you see our.
Specific focus on bringing gionee down too.
With a smaller level.
Same time or try to attack gross margins as well so I was hoping to specifics as to where we're going to go.
The balance here, we're happy with what ended up happening with Q2 results perspective.
We're mindful about the challenges of year as we've kind of talked about pass and talked about today.
Looking at Halloween in particular.
And our hoping to be able to end the year with not going backwards on that front in terms of looking at cost as a percentage of sales so.
Certainly when it comes areas like DNA, there's always a degree of unexpected activity impacting that line, but some of the changes we've been making in the front half of the year are intended to be kind of changes for long term.
Okay. That's great. Thank a lot guys. Thank you.
Thank you. Our next question comes on the line of Derrick Johnson with BMO capital markets. Your line is now open.
Thank you good afternoon.
Hello, guys. So I hope you're good how have your discussions that we've been going with retailers.
You know what are their expectations in terms of monogram, some and set the to they still you know.
When they're supposed to be are we thinking about pushing back and then maybe part b of that is are you.
Fully able to hit all those states are you still think some lingering issues anywhere from any of your manufacturing partners. Thanks.
So on the manufacturing side, we are pretty well.
Working with the joined the manufacturers both in China in the southern part and the northern part the southern part was hit the hardest and we had problems in the first quarter getting plush some of the can so done which was in Shenzhen, but we're all back to normal production in different areas that Cambodia and India.
In Indonesia, it's back to normal business now so I believe the majority of the platforms in manufacturing assuming there's no major pandemic.
We'll.
Go extremely well to share some nothing extremely goes out of the control. In addition, the plan to grams and the set dates are being set I believe it's a week. After next for the call North American retailers. The first second week of August in fact, I'm going out.
Later this week next week to some retailers to to meet with them and also walk some of the plan O grams or just some of the retail outlets because what we're hearing there are some companies manufacture wise that are having difficult times to ship. During this period due to weather its financial issues or how impacted they were from Cowen.
So for Jack says, we've been very nimble and entrepreneurial throughout our inception, we're looking at the garner some of that shelf space now and for the future. So I believe the retailers are keeping the set dates for the majority ones that we spoke to the big mass retailers.
Not shifting their date, so so far everything that we see on the set dates and what we're shipping for these set dates as we need to have product exactly on a set set dates in order.
For us to make sure that we have the line occurring for the rest of year have not changed they were up in the air up until about six weeks ago, but everything has been settled in it looks like it's the first week of August 2nd week of August. So we have some media plan behind those initial set dates on some of our product lines.
Great. Thank you very much Steven call have thanks. Thank you got.
Thank you we have no further questions in the queue at this time I would now like to turn the call back the Stephen I'm for closing remarks.
Thank you everybody. We appreciate the time today for everyone on the call and look forward to having a follow up calls later today and tomorrow as scheduled thank you and I would say healthy all the best.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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