Q2 2021 JAKKS Pacific Inc Earnings Call
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Good afternoon, everyone welcome to the JAK Pacific.
Quarter 2021 of the earnings conference call with management.
Financial results for the quarter ended June 30 of 2020.1.
<unk> issued its.
Press release earlier today, the earnings release and presentation slides for today's call are available on the company's website in the investor of section.
On the call. This afternoon are Stephen Berman, Chairman, and Chief Executive Officer, and John Kimble, Chief Financial Officer.
Mr. Berman will first provide an overview of the quarter of them all with highlights of product line and current business.
Ernie can limit the chemical about detailed comment it.
Regarding JAKKS Pacific financial and operational results. Mr. Berman will then return with additional comments at the closing remarks prior to opening the call for questions.
Your line will be placed on mute for the first portion of the call.
If you would like to be placed in the queue to ask the question. Please press star.
This trend when the telephone keypad.
Before we begin the company would like to point out that any comments made about JAKKS Pacific future performance events or circumstances, including the estimate of sales and our adjusted EBITDA in 2021 as well as any other forward looking statements concerning 2000.
In 'twenty, 1 and beyond are subject to safe Harbor protection on a federal security laws.
The statements reflected the company's best judgment 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 the forward looking statements.
For detailed concern concerning these and other such risks and uncertainties you should consult JAKKS. Most recent 10-K and <unk> filing with the SEC.
As well as the company's other reports subsequently filed in the SEC from time to time. In addition, today's comments on management of refer to non-GAAP financial measures.
Such as adjusted EBITDA on.
Unless stated otherwise the most directly comparable GAAP financial measures have been reconciled to the associate of non-GAAP financial measure with the company's earning press release issued today or previously.
As a reminder of this conference is being recorded with that I would now like turn the call over to Mr. Berman.
Good afternoon, and thank you for joining us as we review our performance for the second quarter of 2021.
Our second quarter results exceeded our internal projections and position us for a strong back half of 2021.
I'll begin with an overview of our second quarter performance with John covering our financial.
Sales in more detail and then I'll explain why we are excited about what's in store for the back half of the year.
Looking at the quarter, we are very pleased with our performance as we reported second quarter of positive operating margin for the first time in many years, our bottom line has increased materially over the last 18.
18 months and we continue to push the business forward on the stronger Foundation.
Our adjusted EBITDA in the quarter was $5 million, our first profitable second quarter since 2016.
Our performance was driven by strong sales across the core business categories as we continue to.
<unk> on the priorities, we've previously discussed expanding gross margins improving profitability by reducing costs and driving down debt.
JAKKS business has been built over the years by identifying acquiring and are building product expertise, where it can be a.
The leader, we are confident consumer demand will be timeless and we can provide compelling brands product design and innovation to meet our margin criteria.
This past quarter demonstrates how that formula works for us and differentiates us from other companies in and around the kids consumer space.
This was.
Another quarter of steady growth not due to an opportunistic pop in 1 segment or product line, but due to strong demand across the whole company.
Our evergreen businesses continue to perform well, we deliver higher gross margins for the sixth consecutive quarter with improved product margins and lower royalty expense.
And importantly, we refinance our long term debt and credit facility, extending its terms and lowering our borrowing costs.
We are very pleased to have delivered these results. Despite 1 of the most chaotic first half of the year in memory.
Many we've been dealing with the lack of containers and ocean freight capacity.
Expense and found surcharges increased the ship product, we're seeing the extensive port delays and in some cases closures, we're seeing the rolling power blackouts, leading to reduced production time and the continuous moving of customer shipping windows.
Lastly, chip shortages are impacting key items planned for the holiday.
And when.
All of these factors were in play in second quarter and will continue into the back half of the year.
That being said Q2, our nature as a hands on entrepreneurial firm, though we are literally working around the clock in collaboration with our longstanding partners in achieving solutions, where we.
Day season.
It's a meaningful challenge to our normal course of operations and the team is rallying and having success, but it presents an ongoing range of issues with the narrative often challenging daily.
We are working hard to stay ahead of these events and we increased our inventory level for the quarter to $60 million.
We can't slightly ahead of our historical June 30 levels.
And we've been addressing the smaller things as well like dealing with pallets. There was a meaningful pallet shortages nationwide driven by higher lumber prices reduction in logging Selma issues and the downstream disruptions, we are all experiencing across industries due.
And demick.
Pallets are literally foundational to our ability to ship product to customers whether for transit or in store display months ago. The team recognize this as a growing issue and began working with local suppliers to ensure we had access to the right quantities to stay on track this year the.
The result to date.
<unk> have been gratifying from a sales perspective, we saw double digit sales growth across both our girls boys and costume businesses with outdoor seasonal sales coming in flat compared to last year on.
Our second quarter girl shipments were led by the continuation of strong Pos for the Disney Princess.
Due to the <unk>, which is up over 30% year over year. We're also continue to see great reaction to a perfectly cute baby range.
Sales growth in voice continues to be driven by Nintendo and Sonic the Hedgehog, we added to our Nintendo SKU count at Walmart in the U S. And in addition to see international growth for the businesses.
<unk>, particularly in Europe.
Nintendo's core line has sold very well across the entire line of figures play sets and plush Sonics SKU count also increased at many retailers and will continue for the fall of.
Our disguise costume business was up 37% compared to Q2.2020.
The brand understandably, we're in a much better place with Halloween planning in 2021 than we were this time last year.
We have seen strength across the board, particularly in Disney Princess and frozen, but also of gaming properties like Minecraft.
As the economic opening continues we are gradually.
<unk> seen improvements in retail traffic and audience returning to theaters streaming dominated during the pandemic and production filming is ramping up to meet the rising demand for content across new and established channels. We feel we're well positioned with the timeless brands be delivered directly into the households via streaming and gaming.
<unk> platforms, while still working with all of the leading content creators.
I will now pass the call to John to review, our financial performance after which I will return with more commentary on our expectations for the remainder of the year.
John.
Thank you Stephen and good afternoon, everyone.
Net sales for the 20.
21, second quarter were $112.4 million up 43% compared to $78.8 million last year.
As Stephen mentioned, we saw great results across the board on both our toy consumer products and costumes segments.
And our girls and preschool targeted businesses, primarily dolls dress up role play towards plush and other consumer products.
Net sales were $49.3 million in Q2 up 50% compared to $32.8 million in the prior year.
The big driver of the growth was the strong sales of Disney Princess and Ryan merchandize slightly offset by lower sales of frozen on.
Perfectly cute range has continued to positively contribute to the girls division and our boys.
Products Division of action figures vehicles role play towards on other electronics products net sales were $19.6 million up 83% compared to $10.7 million last year sales.
Sales for our video game related toys, Nintendo and Sonic delivered the majority of the growth, while we still see our black and Decker role play line strongly contributing we are continuing to see the growth on the.
The boys business from both the U S and internationally with more points of distribution and broader product ranges.
In our outdoor seasonal division of ball pits play structures activity tables foot to floor ride on skateboards and other spring summer inspired toys net sales were $12.6 million from the quarter flat versus the second quarter of 2020. This division certainly benefited.
<unk> from a lot of online purchases last year and our activity table business in particular continues to sell through about as fast as we can sell them.
When you add those pieces together second quarter sales on our toys consumer products segment were up 45% to $81.5 million globally compared to $56.2 million on the second quarter of last year gross.
Gross came from North America up 42%, while international also grew by 60% with the opening of retail stores throughout Europe.
Net sales on our costume segment, the skies were up 37% at $38 million in the second quarter as Stephen pointed out we remain excited for a bigger and better Halloween season this year with.
With the skies.
Moving down the P&L gross margin in the 2021 second quarter was $31.9 million at 28, 4% of net sales of 710 basis point improvement over the 21, 3% of Q2 of last year.
Cogs for the second quarter were 54, 7% of net.
A decrease of 410 basis points from 58, 8% in the second quarter of 2020, the balance of improved gross margin for the second quarter was the result of of 270 basis point improvement in the royalty line the lower royalty rate for the quarter was driven partly by of volume shift, but also of more favorable portfolio of of licensing agreements.
Despite higher ocean freight costs, we were really pleased to see these increases in gross margin rate. The teams continue to work diligently to mitigate these cost increases throughout the balance of 2021, but there clearly of real issue and something we know will be problematic on a couple of fronts.
Our second quarter of direct selling costs were $6.3 million or 5.6% of net sales compared to 3.
$9 million or 5 per cent of net sales in the second quarter of 2020.
Our 2021 second quarter, G&A, including product development and testing, but excluding depreciation and amortization expense was $23.2 million or 21% of net sales up $21.8 million or 28%.
<unk> of net sales in the second quarter of 2020.
These results combined to generate of second quarter operating profit of $1.8 million compared to an operating loss of $9.7 million in the second quarter of 2020.
Our year to date interest expense is $9.2 million compared to $11.1 million in the first half of 2020.
Reflecting the beginning of the lower borrowing costs as well as an overall lower level of debt.
As a reminder, certain elements of our capital structure, specifically, our convertible senior notes and preferred stock derivative liability are marked to market quarterly with noncash gains or losses, depending upon a number of factors inclusive of market debt rates current.
The price and the time to maturity of the notes in the second quarter of 2021, the combined impact of those valuations resulted in the loss of $5.3 million.
Also uniquely this quarter of the refinancing of our debt resulted in write downs of costs associated with our 2019 recapitalization. These refinancing elements offset our improved.
<unk> operating performance to create a net loss attributable to common stockholders in the quarter of $15.4 million or $2.48 per basic and diluted share compared to a net loss attributable to common stockholders of $23.6 million or $7.70 per basic and diluted share in Q2 of 2020.
Excluding the impact of the noncash valuation adjustments debt extinguishment related expenses as well as stock compensation expense, our adjusted net loss attributable to common stockholders in the second quarter of 2021 was $2.3 million or <unk> 38 per basic and diluted share compared to a loss of $13.4 million or $4.30.
<unk> 38 per basic and diluted share reported in the second quarter of 2020.
Our adjusted EBITDA for the quarter was $5 million. The first positive second quarter adjusted EBITDA since 2016 compared to a loss of $4.6 million in 2020.
That brings our trailing 12 month of adjusted EBITDA of $49.1 million.
Its highest dollar level in the past 4 years, representing 8.7% of our trailing 12 month net sales.
Accounts receivable as of June 32021 were $107.9 million up from $69 million as of June 32020, Dsos for the 2021 second quarter increased to 87 days from.
Days reported in the 2022nd quarter.
Inventory as of June 32021 was $66 million versus $57.7 million at June 32020, DSO is on the 2021 second quarter were 90 days compared to 85 days in the 2022nd quarter.
As we have previously disclosed.
Last month, we refinanced our long term debt into a longer duration with lower borrowing costs. This refinancing triggered an acceleration of the maturity of our convertible senior notes to mature in early September 2021.
In the event that any notes are not converted prior to that time of the company has the option of redeeming the notes at par value to.
To prepare for that possible scenario.
So of the company arrange for a drawdown of provision as part of its long term debt financing to be utilized if additional cash was necessary to redeem notes at this time of the company has no way of knowing whether that drawdown will be utilized 1 way or in other this issue will be resolved by the end of Q3.
In addition, we secured a new $67.5 million credit line, which leverages.
As more of our asset base to increase the company's overall liquidity. We currently have no outstanding balance under that credit facility aside from $11 million on letters of credit as of June 30 also as of June 30 of our availability under the line is $53.4 million.
During the second quarter of the company applied for forgiveness of its PTP debt of $6.2 million.
As of waiting feedback and the absence of knowing whether any funds will be forgiven. The company presumed the 2 year loan period with interest beginning to accrue in June 2020 payments would begin in September 2021, However of PPP debt repayment is suspended while the forgiveness application is pending.
As of June 32021 of the companies.
At face value was $119.3 million, including the aforementioned $6.2 million PPP loans due June 2020 to $14.1 million of recapitalized convertible senior notes due September 2021, inclusive of pick interest and $99 million owed under our term loan due June.
These data 27 capital expenditures during the second quarter of 2021 were $2.3 million compared to $2.8 million in the second quarter of 2020.
Depreciation and amortization for the second quarter of 2021 was $2.8 million compared to $2.6 million in the second quarter of 2020.
The basic and diluted income per share calculation for the.
The second quarter of 2021 was based on a weighted average of $6..2 2 million common shares outstanding up from 3 point O..6 4 million in the second quarter of 2020. This number reflects the impact of our reverse stock split July 2020, as well as the aforementioned convertible senior note conversions and with that I will now hand, the call back over to Stephen.
20 of additional remarks.
Thank you John.
It is truly exciting to be able to sit here today and talk about that strong first half results, but part of that enthusiasm as being aware of some of the great things we have in the works for the back half of the year.
I'd now like to discuss some of what we feel will be the highlights.
For some of US we've worked through the balance of 2021.
We are extremely excited about Disney's ultimate prints of celebration, a 15 month global program celebrating all of the Disney Princess characters true themes of courage and kind of via content products and experiences.
The campaign.
Launched in April of 'twenty, 1 and continues into 2022 retail.
The retail Activations will kick off next month during the first ever World Princess week, and we anticipate continued strong performance at retail resulting from this global campaign.
We see continued demand for our Disney Princess style collection with.
Great royalty items, including our suitcase phone totes and Vanity new distribution at Walmart, including play day dolls core dresses and low price dress up the accessories will also contribute to year over year gains.
We're also anticipating great performance from our cross category.
The right product line celebrating Walt Disney Animation studios upcoming all new original film and condo scheduled to hit theaters this coming November.
And our seasonal division our heart supply of skateboarding line has recently launched as we will continue to grow the presence of our radio skateboard brand both brands.
<unk> are expected to perform well as we expand points of distribution.
With our disguise costume segment, along with our retail partners, we are expecting strong demand for Halloween 2021.
As you know Halloween is on a Sunday this year, which should generate more excitement and by extending performance of both decor.
And more importantly to us costume and accessory sales JAKKS.
Jackson's prepared to meet the strong demand, which has been reaffirmed by of great Easter for retailers, which is really the opposite of what we had last year.
This should drive strong sales growth across our entire portfolio.
Our gross in the size comes from many areas.
It's just new license acquisitions, including 2 new studio portfolios between Universal and Sony.
And new content volume will be driven by the return of big movies like the Paw patrol movie Jurassic World Minions and Ghostbusters.
Our evergreen core business.
This is continued to be strong staples with Disney Hasbro and Harry Potter, all contributing and we have strong growth in gaming costumes as kids and gamers continue content with their favorite gaming properties.
Collectively gaming costumes are up 43%.
International expansion.
<unk> is currently up 20% for the year and we anticipate strong additional orders for the remainder of the year, we have been increasing our efforts this year to drive international growth for the skies. This will enable a more balanced year round business encompassing several holidays like Carnival book week and everyday dress up we are hiring.
And expanding our team of costume experts around the world and look forward to sharing more news about our plans in the future quarters.
We are hopeful that the world is on path to return to a pre pandemic norms, but whenever that time line may prove to be we expect that the core of basic play patterns will continue.
As we know many experiences.
More home life in the past 18 months, we've never before we intend to continue to meet demand by offering the fund engaging products with brands that our consumers love and importantly, we continue to work on new brand and category of initiatives for 2022 and beyond.
We have remained disciplined and agile.
<unk> management of the pandemic effects on our businesses, we work closely with our retail partners to mitigate logistic setbacks.
And secured domestic goods early on we are confident in our ability to deliver product in the second half of the year as well as our media and promotional plans to support that product at retail our work.
Force has started to return to the office traveling is picking up and in person sales meetings are beginning to return to the calendar as a result, we expect to see some modest cost increases in the back half of this year. These changes shouldn't be surprising given the developments of the past year and in fact are in line with our budget of expectations setback.
And our men and the early first quarter.
Overall I'm extremely proud of how we've managed business initiatives in the first half of the year overcoming supply chain challenges to deliver such a strong second quarter is of great achievement for us and we're continuing to focus on improving our cost structure strengthening our balance sheet and.
Back day driving shareholder value the.
Amazing team, we have in place is well positioned our company for a strong remainder of the year and I want to thank everyone for their fantastic effort around the world with that we will now take questions. Thank you.
Thank you again, ladies and gentlemen, if you like the ask a question.
And the ultimate.
And then 1 on you touched on the telephone.
Again ask the question. Please press Star then 1 while I'm on my far far question.
Our first question Beth lifting of Jefferies. Your line is open.
Thanks, Good afternoon, everyone. Stephen This first question is for you just as an observation I mean, it is very strong.
Across almost all of the segments of the business is actually all of them I think maybe share a little bit about how the business has changed from being somewhat hit driven in the past to just a real strong diversified portfolio of drivers.
Great. Thank you Stephen Hopewell as well.
Firstly, the divisional segmentation that we have been building over the years.
Income from some of it has been through acquisition some of them internally now has really matured and what we all we need to do on these segmentation from the seasonal areas to our growth Division. Our boys Division is amped up licensing content to the categories in which are extremely strong for us. So for instance, our basic core seasonal business.
Very strong foothold in the far right on.
<unk> pay environments tense ball pits.
And so on and we own those categories.
The category leaders and all we're doing now is achieving new licenses to grow those categories and buildup of them, while introducing new businesses such as the outdoor seasonal.
The old skateboard line of redo the heart of line that we launched with target.
The actual of fold up and chair of segmentation of our business has grown materially. So the strong demand continues and we're just building up that it's been something that we've had to work through we have been from the Ww days to the head of Montana's to.
Of the frozen 1 we have the benefit of achieving some great homerun licenses and properties, but then afterwards its hard to parlay that business continuing forward. So we've put a huge effort over the last 3 or 4 years to build out these really strong platforms and grow off this platform is by brick and brick so and a set of singles and doubles.
And then when a home run their grandson comes like whether it's in the condo or in other property that we have next year that will just be part and parcel of all of our business, but we don't need that business for us to grow our margin and grow revenue. So really the basic core business like the Halloween business. We've now expanded materially in the international territories, we've picked.
<unk> Juruti of the rights that we have now international that will really come to fruition for US next year and those are euphoric businesses sort of really stable businesses that we just get to continue year in and year out, but because of the leaders in those categories. So what we've put under place and the merger criteria that we've put in place has really performed over the last few.
The really shows this year.
All of the fruits of what we've put together.
Alright, Thats, great and Stephen and other 1 for you is just as you step back and think about the biggest opportunity for the second half maybe not even relative to 2020, but even over the last couple of years do you do you think it's the skies more so or the core toy business.
Here's that of respect the.
The greater amount of outperformance potential if it plays out.
As your as your calls might suggest.
Firstly, I would say across the board, but the 2 areas I see.
Really strong growth as the skies because the Sky has also had a halloween in cash.
On the ball and those holidays.
Where do you go we're really hurt last year because of the pandemic. So that itself just sort of that side of the business because people weren't going out. So now a return back to somewhat of a norm we have that.
Offset of growth, but we also have a tremendous lineup of new properties and current properties that are just doing really really strong in the skies and then in our growth.
Today as all of our Disney Girl line were up 30% in sales overall.
We actually have a lot of new things that we're launching our new line of launching August 1, which is <unk>, which is where it will talk about it more on third quarter, we have.
Just a tremendous lineup with our Disney style.
The victory, that's doing really really well and it's just with the Disney backing it up for the first time with the new 18 months of there.
The Princess.
Initiative Theres, just a lot of strong power behind the evergreen categories. So it doesn't necessarily have to have you.
Q4 growth, but we're getting.
Collateral of double digit growth in many areas like Nintendo the black and Decker all of the main core categories are growing well, but the euphoric side would be really disguise the Disney girls segmentation.
Okay. That's great John I have a couple of quick ones for you I just wanted to clarify on the 60 million $60.6 million of inventory on the balance.
<unk>.
I think Stephen had mentioned that you had pulled in some inventory a bit early I'm. Just wondering if you can help us contextualize, how much of that $60 million might have been a pull ahead.
Yes, I think the number of that if you look at recent years, it's a little bit higher than where we've been but I don't know that we can I can grab of highlighter and can tell you. It's 5.
5 or $10 million higher.
As you know we kind of finished pretty lean December 31.
Felt really good about that in terms of turning the inventory into cash and felt that we would have to pull stuff.
The build stuff back up again, a little bit.
I think where.
Or are we just really 1 of the highlight is the fact.
<unk> there are a lot of problems with the the supply chain.
The team is really working through all of that.
And between inventory that we have in hand for our domestic replenishment as well as we didn't really speak to it so much on the and the narrative, but our retail inventory is.
Continue to be down.
<unk> year over year. So I think it is just sort of sets us up real well for additional sell in on the back half of the year.
Okay. That's great and then last 1 from me is on gross margin just wanted to think through on the margin has taken such on significant step up over the last couple of years from the.
On the low to mid Twenty's now into.
To the mid to high 20%, even 30% plus so maybe just share with us a little bit about.
Margin levels today, where could those margins ultimately progress to over the course of the next few years.
Yes, that's kind of a good 1.
It's been quite of bit of time trying to get a strong feel for that I think.
The royalty line.
We've had some good improvements over the past year, or so and I think we're sort of approaching the end of that short of if we have something kind of pop on the owned IP side of things the.
Net.
Wouldn't necessarily be royalty bearing but on the flip side, then we would end up having the.
The best part of it a bit more on the.
Marketing and promotion.
On the product margin side its fortunate that the initiatives has seen the spoken to that we've put in place of couple of years ago, because it is helping to buffer us a little bit against some of the freight costs, which everybody has been talking about.
I would like to think that we can still grind out.
Some more points in that area.
And get us to be a little bit more comfortably in the low thirty's, but.
We're still kind of working working hard towards that and then assuming.
Assuming we can get to the there then we can talk about like does that feel about right or is there still more upside from there but.
I think it's going to be the more of the product margin and our.
The mix of subcategories.
Brands.
And being disciplined about margin performance, rather than chasing top line, which is going to help.
The drive the gross margin story.
Okay, that's great I'll pass it on thank you.
Thank you Scott.
Okay.
Thank you.
I am showing no further questions at this time, ladies and gentlemen that concludes the conference. Thank you for participating you may now disconnect.
Okay.
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