Q3 2021 JAKKS Pacific Inc Earnings Call

October 27, 2021

Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

Yeah.

Good afternoon, everyone welcome to the JAKKS Pacific third quarter 2021 earnings Conference call with management will review financial results for the quarter ended September 32031 2021.

JAKKS issued its earnings press release earlier today, the earnings release and presentation slides for today's call are available on the company's website in investors 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 along with highlights of product lines and current business trends then Mr. Campbell will provide detailed comments regarding JAKKS pacific's financial and operational results.

Mr. Berman with every time with additional comments and some 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 a question. Please press Star then one on your telephone keypad.

Before we begin the company would like to point out that any comments made about JAKKS pacific's future performance events and circumstances, including the estimates of sales and adjusted EBITDA in 2021 as well at any other point looking statements concerning 2021 and beyond are subject to safe Harbor protection under that.

Real security laws.

These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward looking statements.

For details concerning these and other such risks and uncertainties you should consult JAKKS. Most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time.

In addition, today's comments by management will refer to 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 measures within the company's earnings press release issued today or previously.

As a reminder, this conference is being recorded and with that I would like to turn the call over to Stephen Berman you may begin.

Thank you and good afternoon, everyone and thank you for joining us today.

Before we start I'd like to take a moment to express how sad we were to learn of Brian Goldner is patchy.

Those are the investment world might not realize what a close can be the toy industry is we may work in different cities at different companies, but there's a continuity over the decades built on passing through the same airports headed to the same tradeshows leading to conversations that although perhaps infrequent are nonetheless very personal.

I'm curious given the shared experience and journey.

First met Brian many years ago and that Jax, we have always had a strong relationship with Hasbro since our founding.

Although we know Brian has been fighting for as held for some time is lost Bill comes as a shock and I just wanted to make a point that we do more on his passing and are thinking of his personal and professional family. During this difficult time.

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As many of you know Jackson started as an applebee's business, where we sell the product to our customers and larger quantities usually at the port in Asia and from there they bring their product to their home markets leveraging their own supply chain infrastructure.

We continue to do over 50% of ourselves that way today.

This way of doing business has benefited us all year inclusive of Q3, leveraging the supply chain strength and scale of the major global retailers to pull our products through to the retail shelf and.

In addition, we have accelerated our importation of domestic inventory to support sales in the U S and internationally for the holiday season, as we get ready for 2022.

The teams around the world have been working literally around the clock to help customers secure products they've ordered as efficiently as possible.

Continue to do so as we get deeper into the holiday season, we appreciate the attention being paid to the challenges at the various larger ports around the world and are hopeful that the backlog can start clearing in the weeks and months ahead, we have been working hand in hand, with all rerouting product to smaller less congested ports and more aggressive.

Really pick it up product at the plants to minimize bottlenecks, while customers work through the lack of ocean transit capacity in the middle of Q3, while our customers goods, we're stuck at our factories awaiting vessel space. Our logistics teams began working with our trusted supply chain partners to root our domestic inventory after Shanghai.

Hi, and store goods at bonded warehouses. This release pressure on our factories of the backlog of goods over women their floor space and in turn allowed them to continue to produce goods.

At the same time moving the goods away from the port of yen T. N. We were able to secure vessel capacity for domestic goods through lower volume ports in Shanghai, the extra transportation and short term storage costs did not materially affect our domestic supply chain costs and more importantly, they reduced the potential of transit time delays due to the challenges.

The MTN.

Although we ultimately saw sales declined 2% in the quarter versus the year ago quarter. We remain pleased that on a year to date basis towards the consumer product sales are up 9% plus on a costume business is up 21% plus leaving us at 12% plus year to date for global company.

Getting into more of the details our year to date operating income is over $35 million its highest level since 2015.

Our adjusted year to date EBITDA of $44 2 million is up over 80% compared to the first three quarters of last year, our adjusted EBITDA for the quarter was $41 7 million or $1 $1 million less than the prior year.

And not to be overlooked during the quarter. We retired the remainder of our senior convertible notes, leaving us with an improved balance sheet and reduced interest expense going forward. Our worldwide teams continue to execute extremely well doing the things, we do best and doing both the business at hand today, while building new and exciting initiatives.

And products for the coming years, our net sales decline in the quarter as our orders outpaced our customers' ability to secure <unk> patches or inbound product delays kept us from fulfilling orders before the end of the quarter and our toy segment. Our sales were down approximately 8%. This decline was mostly due to logistic challenges.

Rather than less demand for any particular line of product.

As we hoped we've seen strong Pos in our costume business as the days of Halloween ticked down we have shipped $64 million worth of costumes in the quarter, representing a 16% increase to the prior year. Many of our online only customers increased their annual buys by 30% plus this year, but some of our larger customers.

<unk>, who make their commitments back in Q1, we're more conservative supply chain impacted this business lesson toys as the team worked to accelerated shipments as customers would take them earlier to avoid logjam that are now impacting the holiday sell it given the strong sell through performance along with new licenses coming online in 2000.

22, Halloween 2021 is turning out great, which bodes extremely well for next year on the toy side of the business strong performance from the first half of the year continue to do well in the quarter, but we're also seeing some new things happening that were excited to share today.

This past quarter, we launched a new <unk> program in the U S at target branded Disney EV Forever. It's a fashion forward line of 18 installs and related accessories inspired by classic Disney stories and characters, including Minnie Mouse Tinker Bell Stitch, Ariel Alta <unk> and more initial consumer.

<unk> has been tremendous and we are really proud of how the program has come together in collaboration with Disney and target. Some other things that we're excited about as we recap Q3, our core businesses around Disney Princess Nintendo and Sonic continue to sell in and sell through well Nintendo inventory at retail remains down despite our broader product.

Line as the demand continues to pull product through we're particularly pleased with the supermicro deluxe Bowser airship placed at this fall and are seeing great. Early Pos results. The Sonic Jai AG men robot Battle said, it's the largest sonic figure JAKKS has brought to market and early Fannie reaction also appears really strong our Disney and console.

<unk> represents one of the broadest product ranges, we have ever brought to market for a Disney Thanksgiving theatrical release, we love the product and can't wait for Disney fans to meet the characters and enjoyed the magic of this film our private label business continues to grow double digits and we hope to have more to say about that segment of business in the quarters to come.

Our timeless holiday item, the black and Decker workbench is represented well with retail exclusives at all the major U S accounts and this fall we're launching our indoor trampoline line with Paw patrol and Disney's Minnie Mouse Skus. We are pleased with how well some of these new products are being received and the momentum they take into the <unk>.

Quarter. We also saw the acceleration of retail Pos in the quarter top three U S accounts toy Pos were up over 10%, while our ending inventory was down nearly 5% that increases our related year to date toy Pos number to over 9% in line with overall shipments for the year John will now review.

The financials and I'll return with some thoughts around how were thinking as we head into 2022, John Thank you Steven and good afternoon, everyone net sales for the 2021 third quarter were $237 million down.

Down, 2% compared to $242 $3 million last year third quarter sales in our tourist consumer products segment were down 8% to $173 million globally.

North America was down 8%, while international was down 7% primarily attributable to the supply chain issues already discussed as both domestic and <unk> sales were impacted.

Through the first three quarters of the year sales were $334 $4 million up over 9% from $306 1 million versus the prior year.

Also on a year to date basis, North America, <unk>, plus 10% and international <unk> plus 8%.

And our doll dress up nurturing play division net sales were $112 million in Q3 down 13% compared to $129 3 million in the prior year Disney Princess and style collection performed well in the third quarter offset by lower sales from frozen two as it approaches the two year anniversary of the theatrical release.

Perfectly cute also continues to perform very well at retail.

In the first three quarters of 2021, the total business is up 2% to $206 $5 million versus $202 2 million.

And our action plan and collectibles Division net sales were $37 $6 million up 12% compared to $33 $6 million last year 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 or.

Our holiday advent calendars also generated positive growth versus prior year.

Year to date this business with net sales of $73 $6 million was up 36% compared to $54 million in the first nine months of 2020.

In our outdoor seasonal division of ball pits play structures activity tables foot to floor ride ons skateboards and other spring summer inspired toys net sales were $23 $4 million in the quarter down 4% from $24 $4 million in the third quarter of 2020.

And the first nine months outdoor seasonal net sales were $54 3 million versus $50 million up 9% year to date net.

Net sales in our costume segment, the skies were up 16% at $64 million in the third quarter. Some of the big performance for US. This year in this segment were Harry Potter Pokemon, Minecraft toy story and the Nightmare before Christmas.

Stephen pointed out we remain excited about a bigger and better Halloween season. This year with disguise on a year to date basis. Our costume segment is up 21% to $98 $8 million compared to $81 $5 million in the first nine months of 2020 moving down the P&L gross margin in the 2021 third quarter was $74 $9 million at <unk>.

31, 6% of net sales and 82 basis point improvement over the 38% of Q3 last year.

Product Cogs for the third quarter were 53, 2% of net sales an increase of 262 basis points from 56% in the third quarter of 2020.

This increase was due to increased ocean freight costs and some unfavorable product mix.

The overall improvement in gross margin for the third quarter was the result of a 338 basis point improvement in the royalty line, which was $32 $3 million versus $41 $2 million in the third quarter of 2020.

The lower royalty rate for the quarter was driven partly by a reduction in expected royalty guarantee shortfalls due to higher shipping levels from the relevant licenses.

Despite the higher ocean freight costs, we were pleased to see further improvement in gross margin rate as the <unk>.

Technical matter it is worth noting that higher freight costs incurred to import our domestic product are capitalized into inventory and only expense when the product is sold to customers. As a result, we anticipate seeing some lag effect in terms of higher freight costs working their way through the P&L, even as we work past peak shipping season, and ideally see a reduction in these charges in the quarters to follow.

Anticipated increases in our media and marketing spend were offset by a reduction in co op advertising and timing of other selling related expenses in the quarter overall direct selling costs were $10 7 million or four 5% of net sales compared to $13 5 million or five 6% of net sales in the third quarter of 2020, our 2021.

Third quarter, G&A, including product development and testing, but excluding depreciation and amortization expense was $26 8 million or 11, 3% of net sales up from $23 million or 95% of net sales in the third quarter of 2020, when austerity related spending reductions were in place.

These results combined to generate a third quarter operating profit of $36 $7 million slightly lower than the operating profit of 37, and a half million dollars achieved in the third quarter of 2020.

As anticipated during the quarter the balance of our senior convertible notes converted into common stock.

In addition, during the quarter the company received confirmation from the SBA that our application for PPP debt forgiveness had been approved.

Also during the quarter the company made its first scheduled payments against the term loan secured in June.

With all these activities taken into account as of September 32021, the company's debt at face value was $98 $8 million all owed under the term loan due June 2027.

As of quarter close we had no draw on our credit line we.

We did have $9 $7 million in letters of credit.

As of September 30, our availability under the line was $43 $1 million.

Our year to date interest expense was $11 9 million compared to $16 7 million in the first nine months of 2020.

With greater certainty around our refinance balance sheet, we can share that we're currently projecting full year 2020 to interest expense of $9 $1 million a meaningful improvement over 2020 in 2021, when full year interest expense was $21 6 million and a projected $14 $1 million in 'twenty one.

As a reminder, the derivative liability attributed to our preferred stock is mark to market quarterly with noncash gains or losses dependent upon the valuation exercise in the third quarter of 2021 that valuation resulted in a loss of less than $100000.

Capital expenditures during the third quarter of 2021 were $2 $7 million compared to $1 $8 million in the third quarter of 2020, depreciation and amortization for the third quarter of 'twenty, one was $4 $3 million compared to $4 $5 million in the third quarter of 2020.

In summary, Q3 net income attributable to common stockholders in the quarter was $36 million or $3 97 per diluted share compared to a net income attributable to common stockholders of $32 1 million or $3 19 per diluted share in Q3 of 2020.

Excluding the impact of the noncash valuation adjustments stock compensation expense and the one time gain associated with our PPP loan forgiveness. Our adjusted net income attributable to common stockholders in the third quarter of 2021 was $34 2 million or $3 76 per diluted share compared to our adjusted net.

Income attributable to common stockholders of $32 6 million or $3 56 per diluted share reported in the third quarter of 2020.

Accounts receivable as of September 32021 were $209 2 million up from $166 $8 million as of September 32020.

Dsos for the 2021 third quarter increased to 81 days from 63 days reported in the 2023rd quarter, primarily due to a change in approach in working capital management.

Inventory as of September 32021 was $89 8 million versus $54 6 million at September 32020.

The significant increase is a result of over $40 million worth of product that has left the plants in Asia, but are taking a very long time on the journey to our warehouses in southern California and Western Europe.

DSI is in the 2021 third quarter were 51 days compared to 30 days in the 2023rd quarter.

Our adjusted EBITDA for the quarter was $41 7 million compared to adjusted EBITDA of $42 $7 million in 2020 that brings our trailing 12 month adjusted EBITDA to $48 $1 million, representing eight 6% of our trailing 12 month net sales.

The diluted income per share calculation for the third quarter of 2021 was based on a weighted average of nine point O 7 million common shares outstanding down from $9 three 1 million in the third quarter of 2020.

This reflects the impact of our reverse stock split in July 2020, as well as the aforementioned convertible senior note conversions and.

And with that I will pass the microphone back to Steven.

Thank you John as we head into 2022, and our 27th year since inception of Jack specific a lot of things may have changed in our industry, but I believe we remain true to many of the core themes. Jack Freeman I had will be founded JAKKS. All those years ago. We built this company around the idea of working with the best partners, we could find.

Retailers factories, and brand owners and bringing them together to deliver great toys for kids and their families centered around timeless toy categories and play patterns.

As the supply chain is a dominant topic today I'll remind people that this business always has challenges and you work through them and Thats just part of how things are when you are in the world of business, it's always something whether its product cost or foreign exchange or a chip shortage as we navigate forward. If you think about our <unk>.

There are four key elements that define who we are and maybe more importantly, who we are not these elements are one innovation within categories to maintain freshness and relevance to addition of relevant brand, new and existing IP and licensor relationships three.

Geographic expansion to reach a rapidly expanding global toy market and for migration into adjacent categories to fulfill the needs of consumers and our retail buyers.

All of these growth opportunities are layered on the foundation of evergreen product categories brands and properties that we have steadily built over what is now nearly 27 years quarter. After quarter. We update you with results about our performance, but ultimately it's a recap of how are we progressing on the mission outlined above during the pandemic.

We expanded into new product categories, like skateboards related accessories, scooters and Trampolines, we've re imagined our Disney Princess business with style collection, bringing together Disney's classic Princess characters and stories with contemporary play an innovative approach to product design, we have steadily expanded and extended our Intel.

Endo Super Mario business and separately, our Sonic business, which has received a boost with the February 2020 release of the Sonic the Hedgehog film and is poised to benefit from its secret released in April 2022, we've prudently, but steadily expanded our sales capabilities in France, Spain, Italy and Mexico.

Opening direct sales channels of distribution to flow through our ever expanding product line, while leveraging our existing staff and fulfillment infrastructure. Despite the pandemic lasting presence our European toy business is up over 10% year to date and our Latin America business is up over 20% during the same period.

I'm incredibly excited to talk about the expansion of our Disney disguise costume business into Europe in 2022, although we often short hand. This business is Halloween. The reality is that it's a year round costume dress up business and the addition of the Disney properties will accelerate our disguise international expansion for the past 12.

Only 5% of our disguise business was done outside of North America, and although we previously had a number of international licenses, we could be more excited to add Disney it's an iconic characters to the mix, which has allowed us to invest further and dedicated international staff to support this growth.

From a north American point of view, we have been communicating over the past several weeks and months the significant number of additional relationships, we have been adding to the disguise business Universal brand development with franchises like Jurassic World Minions child's play Sony with the timeless IP like Ghostbusters and Cobra Kai.

And last but not least Netflix where stranger things Ada twist money heist and more were added to our lineup for 2021, we have more in store for 2022 and beyond for disguise taken advantage of the excitement around what has proven to be a record setting U S. Halloween market. This year for the National retail Federation.

If nothing else. The pandemic has repeatedly reminded us that a lot can change in a short period of time and growing to comfortable and confident in what lies ahead is a recipe for disappointment as we sit here in late October we have excellent consumer and customer demand for our product and the challenge before us is to fulfill that demand in time for the half.

They season, we're looking forward to a brighter 2022 and reaping the benefits of the hard work that the teams have been divested over the past 18 to 24 months and adjusting to a leaner organization and expanding upon the commercial successes in our core businesses as always I want to thank our people around the world for their relentless.

Part of the business as we work towards the end of the year. We remain excited about what lies ahead and it's our staff that makes Jackson, a unique entrepreneurial hands on toy and consumer products company that we are thank you.

Operator.

Ladies and gentlemen, as a reminder.

To ask a question you will need to press Star then one.

To withdraw your question press the pound key.

Again, Thats star one to ask the question.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Matthew Kaplan with Jefferies. Your line is open.

Hi, everyone. It's not here filling in for stuff today, I hope everybody. Good afternoon, Matt and thank you for taking the time.

Thank you good afternoon to you guys.

So.

Supply chain, obviously is a concern on the bite of many investors right now would it be possible to provide some further insights into how you're navigating and do you see foresee any margin pressure in the fourth quarter.

Thank you Matthew.

So far we are extremely excited for the sector.

The last quarter of this year, we've mitigated a lot of the constraints with as I mentioned in my prerecorded statements, but for US we are almost.

Month of October we will have shipped over half of our fourth quarter internal projections.

It's been what we've been focusing on the lap of what occurred in the third quarter was just due to the majority of the F&B customers not getting the containers out at the time that was needed to achieve it in the quarter.

That being said if we see we have almost doubled the amount of inventory on our books that we have brought in debt is primarily majority of them are at the port getting through for our domestic part of our backup of inventory worldwide. So we're extremely comfortable with this year of achieving our internal forecast with growth, but we don't see any erosion in the.

The gross margin from doing so we've been mitigating that process and we've achieved increased prices where necessary, where we had the cost increase. So overall, we're extremely confident and strong and bullish for the remainder part of this year and going into 2022.

Awesome. Thank you.

And then another question from us.

So costumes looks like it's off to a great start any early feedback on Halloween sales.

Selling really well.

Yeah overall, I would say almost everything in Halloween not just firstly for our costume business that we are on track for one of the cleanest Halloween seasons, we've ever had which bodes extremely well for 'twenty two as we have an abundance of new licenses that we have announced and we bought up on this call as well as some new licenses to be announced.

And because of the sell throughs that had been extremely strong both with the major retailers and online retailers that just bodes extremely well for them being confident going into 'twenty, two with a stronger feeling of commitment and the 'twenty two thus with expansion projects internationally on the costume cause play in Halloween kind of.

All business that will help us increase our sales internationally for Halloween and then North America, we have abundance of current great licenses and new licenses that we believe we will see stronger growth in 'twenty, two and 'twenty one was a terrific year versus 29 2020.

That's super last one from us so looking forward into 'twenty two.

How does your license portfolio look like right now and are there any businesses that you expect to see outsized growth.

Well, we definitely see growth, where we sit here today and we've discussed this.

Internally.

Our next three to five year plan and we see next year, becoming very strong in the majority of our categories. Our private label business, we see growth we see growth in our core Disney business is with the current licenses that we have within concho, the new categories in which we're developing with Disney the style collection as I mentioned Halloween, we see that growth.

And then in our seasonal business as we have a plethora of new licenses that go into the ball pits. The 10 environment play environment, the outdoor furniture the foot to floor ride ons.

And we have the new additions as I mentioned, the indoor trampoline license trampoline businesses with some top licenses or redo skateboards, which are a terrific that we're getting more deeper presence at retail and we're launching licensed redo skateboards into 2022.

And there is a.

Throw of new movies coming out from Sonic the Hedgehog Fantastic B Jurassic World transform those minions.

Yes, Avatar Theres, a lot of new content coming out and this year there wasn't a major release of content until and Copco comes out in mid November. So besides that we see next year being a very solid growth year for us.

Thank you very much.

All from US. Thank you so much for the time. Thank you.

Thank you.

As a reminder, ladies and gentlemen, Thats star one to ask a question.

Our next question comes from the line of Tristan Thomas with BMO capital markets. Your line is open.

But it's true.

On for Derek.

Hi, how are you.

Okay first question.

Back on the supply chain could you maybe quantify how much longer things are taking over from China, I think Hasbro called out up to 50 days extra so im curious what youre seeing.

Well it really depends on the ports and where the goods are coming whether they're coming to North America and Europe, whether its rotterdam. So it really depends on that and it depends on the port that it leans, if you're leaving it empty and it's taking longer but if you go to other ports and Shanghai.

Wanted to become a little bit looser and a sense of the.

Clog effect at the actual port in Asia. So as we said earlier, we opened up a bonded warehouses in Shanghai, which now has allowed us to move the goods from our factories, which is allowing them to build for spring.

Spring inventory pre Chinese new year, and its coming down at Hasbro's accurate probably for them in somewhat for us, but it's coming down less and less so it can be anywhere from 35 to 45 days, we've seen it it's gotten worse in the third quarter, but it's becoming.

The lesser now going forward.

See it becoming that way even today the goods that are coming through the port itself. There has been that we're in obviously, Los Angeles and the container ships have been anchoring and sitting outside but now they are flowing in a little bit better than they were two weeks ago because of the 24 hour shifts.

And things are getting a little bit less congested.

Big thing is that we've worked through is actually the labor of unloading of containers once they get to our warehouses because theres an abundance of labor that's needed, which our team our distribution logistics teams have done a wonderful job, but thats been a clog that has happened in the past that's starting to relieve itself. So it's definitely getting.

Smoother, but it's just not there yet or not it won't be back to the norms until second half of first half of next year.

Alright.

So just maybe.

Another question on that.

Thing is produced in the factory in China Tomorrow, how likely is it to get on retailer shelves before the holidays.

So.

I think right now, it's where it let's call. It November one things that are being produced now are more than likely are going to be for spring as for us. So the good that we have already shipped fob to our retailers are primarily for this seasons holiday and the majority of all the other.

Inventory that will be used worldwide will be on a domestic basis. So for anyone that doesn't have the majority of the goods shipped by now.

From Asia, they're more than likely won't get on the shelf just due to the timing it takes to get to the port to get through the ports to get through the distribution centers and.

Internally and then go into the actual retailer distribution centers, which are around the world Youre getting very late so maybe you have one week to two at the most if youre lucky but.

But I'd say unless you've planned and have the goods on the boat now those goods will be for spring.

And which is what we have planned for spring versus Chinese new year coming as well.

Okay that makes sense.

Just one more question how are retailers approaching this holiday season relative to last year, and then relative to 2019.

Oh relative Theyre, just I would say definitely more aggressive in getting goods, we have seen and we've been able to achieve some white space available from other manufacturers in the toy industry that could not get product out to retail so theres been opportunistic areas for companies that have inventory in the right inventory.

Everyone has been spooked because of the news and the commitments that you've seen in the consumables that there is a lack of inventory even things that are domestically manufactured so the retailers know that one of the key drivers during the holiday season, obviously toys, which brings in the consumer which buys other products. Besides toy. So I think there has been a key focus.

<unk> on making sure that they had an abundance of toys to make sure. This Christmas.

And excitable, one and they are doing their best and as I mentioned at the start of our call.

He founded JAKKS, we founded it as primarily an fob business and over 50% of our business is it still an fob business, which has bode well with us to have these major retailers that have a lot of cloud and have gotten shifts in containers on their own to pick up the goods in Asia, which has benefited Jack's.

Materially at the same time, we've worked on bringing the domestic goods in earlier as I mentioned, our inventory is up over double for that reason. So the ones that are planned well are doing well and our retailers are very aggressive still looking for goods today seen that when manufacturers are promising goods, they're not coming in they are looking to make sure that their shell.

<unk> are not FDA and if it's not an item that was purchased by one manufacturer. They are actually willing to make space for other goods to make sure that their shelves are filled for the holiday season.

Okay, great. Thank you.

Thank you thank.

Thank you.

I'm showing no further questions in the queue.

Everybody. Thank you for the call today, we have several many calls throughout today and tomorrow and we appreciate the time and happy holidays to everybody. Thank you.

Yes.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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Yes.

Okay.

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Hum.

Yes.

[music].

Good afternoon, everyone welcome to the JAKKS Pacific third quarter 2021 earnings Conference call with management, who will review financial results for the quarter ended September 32031 2021.

JAKKS issued its earnings press release earlier today, the earnings release and presentation slides for today's call are available on the company's website in the investors section.

On the call. This afternoon are Stephen Berman, Chairman, and Chief Executive Officer, and John Kimble, Chief Financial Officer.

Mr. Berman with every time with additional comments and some 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 a question. Please press Star then one on your telephone keypad.

Before we begin the company would like to point out that any comments made about JAKKS pacific's future performance events and circumstances, including the estimates of sales and adjusted EBITDA in 2021 as well if any other port looking statements concerning 2021 and beyond are subject to safe Harbor protection under.

Federal security laws.

In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA.

Less stated otherwise the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measures within the company's earnings press release issued today or previously.

As a reminder, this conference is being recorded and with that I would like to turn the call over to Stephen Berman you may begin.

Thank you and good afternoon, everyone and thank you for joining us today.

Before we start I'd like to take a moment to express how sad we were to learn of Brian Goldner is passing.

Those are the investment world might not realize what a close community. The toy industry is we may work in different cities are different companies, but there's a continuity over the decades built on passing through the same airports headed to the same trade shows leading to conversations that although perhaps infrequent.

Nonetheless, very personal insurance given the shared experience and journey I first met Brian many years ago and that Jax, we have always had a strong relationship with Hasbro since our founding.

The only know Brian has been fighting for as held for some time is lost Bill comes as a shock and I just wanted to make a point that we do more on his passing and are thinking of his personal and professional family. During this difficult time. Thank you.

As many of you know Jackson started as an F O b business, where we sell the product to our customers in larger quantities, usually at the port in Asia and from there they bring their product to their home markets leveraging their own supply chain infrastructure. We can do you need to do over 50% of ourselves that way today.

This way of doing business has benefited us all year inclusive of Q3, leveraging the supply chain strength and scale of the major global retailers to pull our products through to the retail shelf.

In addition, we have accelerated our importation of domestic inventory to support sales in the U S and internationally for the holiday season, as we get ready for 2022.

The teams around the world have been working literally around the clock to help customers secure products they've ordered as efficiently as possible.

To do so as we get deeper into the holiday season, we appreciate the attention being paid to the challenges at the various larger ports around the world and are hopeful that the backlog can start clearing in the weeks and months ahead, we have been working hand in hand, with all rerouting product to smaller less congested ports and more aggressively.

Pick it up product at the plants to minimize bottlenecks, while customers worked through the lack of ocean transit capacity in the middle of Q3, while our customers goods. We're stuck at our factories are waiting the vessel space. Our logistics teams began working with our trusted supply chain partners to root our domestic inventory up to Shanghai.

Store goods at bonded warehouses. This release pressure on their factories of the backlog of goods over women their floor space and in turn allow them to continue to produce goods.

At the same time moving the goods away from the Port of Yadkin, we were able to secure a vessel capacity for domestic goods through lower volume ports in Shanghai, the extra transportation and short term storage costs did not materially affect our domestic supply chain costs and more importantly, they reduced the potential of transit time delays due to the challenges.

The NTN.

Although we ultimately saw sales declined 2% in the quarter versus the year ago quarter. We remain pleased that on a year to date basis towards a consumer product sales are up 9% plus on a costume business is up 21% plus leaving us at 12% plus year to date for global company.

Getting into more of the details our year to date operating income is over $35 million its highest level since 2015.

Our adjusted year to date EBITDA of $44 2 million is up over 80% compared to the first three quarters of last year, our adjusted EBITDA for the quarter was $41 7 million or $1 1 million less than the prior year.

Our gross margins remained strong in part supported by the amount of inventory, we managed to bring in early in the year, our retail Pos at the top customers is up 9% year to date with cleaner sell through further benefiting gross margins and.

And products for the coming years, our net sales decline in the quarter as our orders outpaced our customers' ability to secure ocean patches or inbound product delays kept us from fulfilling orders before the end of the quarter and our toy segment. Our sales were down approximately 8%. This decline was mostly due to logistics challenges.

Rather than less demand for any particular line of product.

<unk>, who make their commitments back in Q1, we're more conservative supply chain impacted this business less and toys as the team worked through accelerated shipments as customers would take them earlier to avoid logjam that are now impacting the holiday sell it given the strong sell through performance along with new licenses coming online in two.

<unk> branded Disney Ely Forever, It's a fashion forward line of 18 installs and related accessories inspired by classic Disney stories and characters, including Minnie Mouse Tinker Bell Stitch, Ariel re ponzo and more initial consumer reaction has been tremendous and we are really proud of how the program has come.

Together in collaboration with Disney and target. Some other things that we're excited about as we recap Q3, our core businesses around Disney Princess Nintendo and Sonic continue to sell in and sell through well Nintendo inventory at retail remains down despite our broader product line as the demand continues to pull product through were particularly.

We're pleased with the Supermicro deluxe Bowser airship placed at this fall and are seeing great. Early Pos results. The Sonic Jai AG men robot battles set as the largest sonic disfigured JAKKS has brought to market and early fan reaction also appears really strong our Disney and condo line represents one of the broadest product ranges we have ever.

Brought to market for a Disney Thanksgiving theatrical release, we love the product and can't wait for Disney fans to meet the characters and enjoyed the magic of this film our private label business continues to grow double digits and we hope to have more to say about that segment of business in the quarters to come our timeless holiday item, the black and Decker workbench.

As represented well with retail exclusives at all the major U S accounts and this fall we're launching our indoor trampoline line with Paw patrol and Disney's Minnie Mouse Skus. We are pleased with how well some of these new products are being received and the momentum they take into the fourth quarter. We also saw the acceleration of retail.

Pos in the quarter top three U S accounts toy Pos were up over 10%, while our ending inventory was down nearly 5% that increases our related year to date toy Pos number to over 9% in line with overall shipments for the year, John will now review financials, and I will return with some thoughts around how were thinking.

As we head into 2022, John Thank you Steven and good afternoon, everyone net sales for the 2021 third quarter were $237 million down, 2% compared to $242 $3 million last year.

Third quarter sales in our tourist consumer products segment were down 8% to $173 million globally compared to $187 3 million in the third quarter of last year.

North America was down 8%, while international was down 7% primarily attributable to the supply chain issues already discussed as both domestic and <unk> sales were impacted.

Through the first three quarters of the year sales were $334 $4 million up over 9% from $306 $1 million versus the prior year.

Also on a year to date basis, North America, <unk> is plus 10% and international to ICP is plus 8%.

And our doll dress up nurturing play division net sales were $112 million in Q3 down 13% compared to $129 $3 million in the prior year Disney Princess style collection performed well in the third quarter offset by lower sales from frozen two as it approaches the two year anniversary of the theatrical release.

Perfectly cute also continues to perform very well at retail.

And the first three quarters of 2021, the total business is up 2% to $206 $5 million versus $202 $2 million.

In our action plan and collectibles Division net sales were $37 $6 million up 12% compared to $33 $6 million last year 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.

Our holiday advent calendars also generated positive growth versus prior year.

Year to date this business with net sales of $73 $6 million was up 36% compared to $54 million in the first nine months of 2020.

In our outdoor seasonal division of ball pits play structures activity tables foot to floor ride ons skateboards and other spring summer inspired towards net sales were $23 $4 million in the quarter down 4% from $24 $4 million in the third quarter of 2020.

And the first nine months outdoor seasonal net sales were $54 3 million versus $50 million up 9% year to date net.

Net sales in our costume segment, the skies were up 16% at $64 million in the third quarter. Some of the big performance for US. This year in this segment were Harry Potter and Pokemon Minecraft toy story and the Nightmare before Christmas.

Stephen pointed out we remain excited about a bigger and better Halloween season. This year with disguise on a year to date basis. Our costume segment is up 21% to $98 $8 million compared to 81 and a half million dollars in the first nine months of 2020 moving down the P&L gross margin in the 2021 third quarter was $74 $9 million at <unk>.

31, 6% of net sales and 82 basis point improvement over the 38% of Q3 last year.

Product Cogs for the third quarter were 53, 2% of net sales an increase of 262 basis points from 56% in the third quarter of 2020.

This increase was due to increased ocean freight costs and some unfavorable product mix.

The lower royalty rate for the quarter was driven partly by a reduction in expected royalty guarantees shortfalls due to higher shipping levels from the relevant licenses.

Despite the higher ocean freight costs, we were pleased to see further improvement in gross margin rate as a technical matter. It is worth noting that higher freight costs incurred to import our domestic product are capitalized into inventory and only expense when the product is sold to customers. As a result, we anticipate seeing some lag effect in terms of higher freight costs working their way through the P&L.

Even as we work past peak shipping season, and ideally see a reduction in these charges in the quarters to follow.

G&A, including product development and testing, but excluding depreciation and amortization expense was $26 8 million or 11, 3% of net sales up from $23 million or 95% of net sales in the third quarter of 2020, when austerity related spending reductions were in place.

These results combined to generate a third quarter operating profit of $36 $7 million slightly lower than the operating profit of 37, and a half million dollars achieved in the third quarter of 2020.

As anticipated during the quarter the balance of our senior convertible notes converted into common stock.

In addition, during the quarter the company received confirmation from the SBA that our application for PPP debt forgiveness had been approved.

Also during the quarter the company made its first scheduled payments against the term loan secured in June.

With all these activities taken into account as of September 32021, the company's debt at face value was $98 $8 million all owed under the term loan due June 2027.

As of quarter close we had no draw on our credit line we.

We did have $9 $7 million in letters of credit.

As of September 30, our availability under the line was $43 $1 million.

Our year to date interest expense was $11 9 million compared to $16 7 million in the first nine months of 2020.

With greater certainty around our refinance balance sheet, we can share that we're currently projecting full year 2020 to interest expense of $9 $1 million a meaningful improvement over 2020 in 2021, when full year interest expense was $21 $6 million and a projected $14 $1 million in 'twenty, one as a re.

Minder, the derivative liability attributed to our preferred stock is marked to market quarterly with noncash gains or losses, depending upon the valuation exercise in the third quarter of 2021 that valuation resulted in a loss of less than $100000.

Capital expenditures during the third quarter of 2021 were $2 $7 million compared to $1 8 million in the third quarter of 2020.

Depreciation and amortization for the third quarter of 'twenty, one was $4 $3 million compared to $4 $5 million in the third quarter of 2020.

Okay.

Of $32 6 million or $3 56 per diluted share reported in the third quarter of 2020.

Accounts receivable as of September 32021 were $209 $2 million up from $166 $8 million as of September 32020 DSO.

Dsos for the 2021 third quarter increased to 81 days from 63 days reported in the 2023rd quarter, primarily due to a change in approach in working capital management.

Inventory as of September 32021 was $89 $8 million versus $54 6 million at September 32020.

DSO is in the 2021 third quarter were 51 days compared to 30 days in the 2023rd quarter.

Our adjusted EBITDA for the quarter was $41 7 million compared to adjusted EBITDA of $42 $7 million in 2020.

<unk> brings our trailing 12 month, adjusted EBITDA to $48 $1 million, representing eight 6% of our trailing 12 month net sales.

The diluted income per share calculation for the third quarter of 2021 was based on a weighted average of nine point O 7 million common shares outstanding down from 931 million in the third quarter of 2020.

This reflects the impact of a reverse stock split in July 2020, as well as the aforementioned convertible senior note conversions and.

And with that I will pass the microphone.

The phone back to Steven Thank.

Thank you John as we head into 2022, and our 27th year since inception of Jack specific a lot of things may have changed in our industry, but I believe we remain true to many of the core themes Jack Friedman I had will be founded JAKKS. All those years ago. We built this company around the idea of working with the best partners, we could find.

Retailers factories, and brand owners and bringing them together to deliver great toys for kids and their families centered around timeless toy categories and play patterns.

The supply chain is a dominant topic today I'll remind people that this business always has challenges and you've worked through them and Thats just part of how things are when you are in the world of business, it's always something whether its product cost or foreign exchange or a chip shortage as we navigate forward. If we think about our <unk>.

There are four key elements that define who we are and maybe more importantly, who we are not these elements are one innovation within categories to maintain freshness and relevance to addition of relevant brands, new and existing IP and licensor relationships three D.

Graphic expansion to reach a rapidly expanding global toy market and for migration into adjacent categories to fulfill the needs of consumers and our retail buyers.

All of these growth opportunities are layered on the foundation of evergreen product categories brands and properties that we have steadily built over what is now nearly 27 years quarter. After quarter. We update you with results about our performance, but ultimately it's a recap of how we are progressing on the mission outlined above during the pandemic.

Operator.

Ladies and gentlemen, as a reminder.

Ask the question you will need to press Star then one.

To withdraw your question press the pound key.

Again, Thats star one to ask the question.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Matthew Kaplan with Jefferies. Your line is open.

Hi, everyone. It's not here filling in for stuff today I hope everybody. Thank you, Matt and thank you for taking the time.

Thank you good afternoon to you guys.

So.

Thank you Matthew.

So far we are extremely excited for the sector.

The last quarter of this year, we've mitigated a lot of the constraints with as I mentioned in my prerecorded statements, but for US we are almost.

Lots of October will have shipped over half of our fourth quarter internal projections.

It's been what we've been focusing on the lap of what occurred in the third quarter was just due to the majority of the F O b customers not getting the containers out at the time that was needed to achieve it in the quarter.

See any erosion in the AR.

Awesome. Thank you.

Then another question from us.

So costumes it looks like it's off to a great start any early feedback on Halloween sales and what's selling really well.

Overall, I would say almost everything in Halloween not just firstly for our costume business that we are on track for one of the cleanest Halloween seasons, we've ever had which bodes extremely well for 'twenty two as we have an abundance of new licenses that we have announced and we bought up on this call as well as some new licenses to be announced.

Because of the sell throughs that have been extremely strong both with the major retailers and online retailers that just bodes extremely well for them being confident going into 'twenty, two with a stronger feeling of commitment and the 'twenty two thus with expansion projects internationally on the costume cause play in Halloween Carnival.

That will help us increase our sales internationally.

Internationally for Halloween and then North America, we have abundance of current great licenses and new licenses that we believe we will see stronger growth in 'twenty, two and 'twenty one was a terrific year versus 29 2020.

That's super.

Last one from us so looking forward into 'twenty two.

How does your license portfolio look like right now and are there any businesses that you expect to see outsized growth.

Well, we definitely see growth, where we sit here today and we've discussed this.

Internally.

Our next three to five year plan and we see next year, becoming very strong in the majority of our categories. Our private label business, we see growth, we see growth in our core Disney business as was the current licenses that we have with.

Can't do the new categories in which we're developing with Disney the style collection as I mentioned Halloween, we see that growth.

And then in our seasonal business as we have a plethora of new licenses that go into the ball pits. The 10 environment play environment, the outdoor furniture the foot to floor ride ons.

And we have the new additions as I mentioned, the indoor trampoline license trampoline businesses with some top licenses a redo skateboards, which are a terrific that we're getting more deeper presence at retail and we're largely in licensed redo skateboards into 2022.

And there is a plethora of new movies coming out from Sonic the Hedgehog Fantastic beasts Jurassic World Transformers minions.

Avatar Theres, a lot of new content coming out and this year there wasn't a major release of content until <unk> comes out in mid November. So besides that we see next year being a very solid growth year for us.

Yeah.

Thank you very much.

It's all from US. Thank you so much for the time. Thank you.

Thank you.

As a reminder, ladies and gentlemen, Thats star one to ask the question.

Our next question comes from the line of Tristan Thomas with BMO capital markets. Your line is open.

Hi, it's Jason on for Derek.

Hi, how are you.

Sure.

Good first question kind of back on the supply chain could you maybe quantify how much longer things were taking over from China, I think Hasbro called out up to 50 days extra.

I'm curious what you are saying.

Well it really depends on the ports and where the goods are coming in whether they're coming to North America and <unk>.

Europe, whether its Rotterdam, so it really depends on that and it depends on the port that it leans you, leaving it empty and it's taking longer but if you go to other ports and Shanghai.

Wanted to become a little bit looser and a sense of the.

Clog effect as the actual port in Asia. So as we said earlier, we opened up a bonded warehouses in Shanghai, which now has allowed us to move the goods from our factories, which is allowing them to build for spring.

Spring inventory pre Chinese new year, and its coming down at Hasbro's accurate probably for them in somewhat for us, but it's coming down less and less so it can be anywhere from 35 to 45 days, we've seen it it has gotten worse in the third quarter, but it's becoming.

The lesser now going forward.

See it becoming that way even today the goods that are coming through the port itself. There has been obviously, Los Angeles and the container ships have been anchoring and sitting outside but now they are flowing in a little bit better than they were two weeks ago because of the 24 hour shifts.

And things are getting a little bit less congested.

Big thing is that we've worked through is actually the labor of unloading of containers once they get to our warehouses because theres an abundance of labor that's needed, which our team our distributions CEVA logistics teams have done a wonderful job, but that's been a clog that has happened in the past that's starting to relieve itself. So it's definitely getting.

Smoother, but it's just not there yet or not it won't be back to the norms until second half of first half of next year.

Alright.

So just maybe.

Another question on that.

Thing is produced in the factory in China Tomorrow, how likely is it to get on retailer shelves for the holidays.

So.

I think right now thats, where it let's call. It November one things that are being produced now are more than likely are going to be for spring as for us. So the goods that we have already shipped F. O b to our retailers are primarily for this seasons holiday and the majority of all the other.

Inventory that will be used worldwide will be on a domestic basis. So for anyone that doesn't have the majority of the goods shipped by now.

From Asia more than likely won't get on the shelf just due to the timing it takes to get to the port to get through the ports to get through the distribution centers and.

Internally and then go into the actual retailer distribution centers, which are around the world.

Getting very late so maybe you have one week to two at the most if youre lucky.

But I'd say unless you've planned and have the goods on the boat now those goods will be for spring.

And which is what we had planned for spring versus Chinese new year coming as well.

Okay that makes sense.

Just one more question how are retailers approaching this holiday season relative to last year, and then relative to 2019.

Think everyone has been spooked because of the news and the commitments that you've seen in the consumables that there is a lack of inventory even things that are domestically manufactured so the retailers know that one of the key drivers during the holiday season, obviously toys, which brings in the consumer which buys other products. Besides toy. So I think there has been a key <unk>.

<unk> on making sure that they had an abundance of toys to make sure. This Christmas.

And excitable, one and Theyre doing their best and as I mentioned at the start of our call.

We founded JAKKS, we founded it as primarily an fob business and over 50% of our business is it still an fob business, which has bode well with us to have these major retailers that have a lot of cloud and have gotten shifts in containers on their own to pick up the goods in Asia, which has benefited Jack's.

And at the same time, we worked on bringing the domestic goods in earlier as I mentioned, our inventory is up over double for that reason. So the ones that are planned well are doing well and our retailers are very aggressive still looking for goods today seen that when manufacturers are promising goods, they're not coming in they are looking to make sure that their shelves.

Not empty and if it's not an item that was purchased by one manufacturer. They are actually willing to make a space for other goods to make sure that their shelves are filled for the holiday season.

Yes.

Okay, great. Thank you.

Thank you.

I'm showing no further questions in the queue.

Everybody. Thank you for the call today, we have several many calls throughout today and tomorrow and we appreciate the time and happy holidays to everybody. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Q3 2021 JAKKS Pacific Inc Earnings Call

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