Q4 2021 JAKKS Pacific Inc Earnings Call
Good afternoon, everyone.
Welcome to the JAKKS Pacific fourth quarter 2021 earnings Conference call with management, who will review financial results for the quarter and fiscal year ended December 31 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 will first provide an overview of the quarter along with highlights of product lines and current business trends then Mr. Kimble will provide detailed comments regarding JAKKS pacific's financial and operational results.
Mr. Berman will then return 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'd like to be placed in the queue to ask a question. Please press star 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 or circumstances, including the estimates of sales margins and our adjusted EBITDA in 2022 as well as any other forward looking statements concerning 2022 and beyond are subject to safe Harbor protection under Federal Securities 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, some of today's comments by management will refer to non-GAAP financial measures such as adjusted earnings per share or adjusted EBITDA.
Unless otherwise stated the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously.
As a reminder, this conference is being recorded.
With that I would now like to turn the call over to Stephen Berman.
Thank you and good afternoon, everyone and thank you for joining us today.
We're extremely proud to say that Jack's team rally together to complete a tremendous quarter and a tremendous year fulfilling customer demand to a level of 188 million in fourth quarter sales. This was a 47% increase versus prior year and our largest fourth quarter in seven years. Despite skyrocket.
Ocean freight costs poor congestion and a shortage of trucking resources.
That brought our full year net sales of 621 million, a 20% increase to 2020 and our highest annual sales level since 2016.
As expressed last quarter, we exited Q3, having missed some sales in the quarter due to logistic challenges and with higher than average inventories.
Although a meaningful amount still in transit.
And that pulling forward of inventory enabled us to achieve this quarter's performance. We plan knowing factory workers were leaving earlier than normal for Chinese new year due to the various COVID-19 restrictions rolling power outages at factories in different provinces as well as the ongoing freight and logistical issues we.
I also plan Accordingly to finished Q4 with higher inventory levels of $84 million, including $24 million in transit as a reference point last year, we had $4 million in transit at this time.
Point of sales at our top three U S customers increased 10% in Q4 outpacing the increase in their retail inventory levels, which grew by 8%.
On a full year basis, the top three customer Pos was up 10% to 12.
131 inventory levels were in line with prior year not accounting for retail inventory that was still in transit.
At the end of January we see retail inventories more in line with 12, 31 19 levels as customers Q4, <unk> orders reached store shelves.
A full year basis, our toys consumer product sales were up 20% and our core costume business was up 21%, bringing us plus 20% for full year total company.
I would like to get into more details.
Alright, the spike and freight costs, we delivered more gross margin dollars and fourth quarter than any year since 2016.
Our full year operating income was $38 8 million its highest level in over 10 years.
Our full year adjusted EBITDA was $49 2 million up 75% compared to last year and our highest level since 2015.
Our full year gross margins remained strong at 29, 5%.
The basis point improvement over 2020.
We were able to deliver these results this year by sticking to the same themes, we discussed in recent quarters.
A focus on timeless brands and categories, including constantly exploring appropriate portfolio additions, while ensuring freshness and innovation within our evergreen product lines.
Disciplined cost containment up and down the P&L.
Our steadily improving balance sheet.
A hands on approach whenever the topic both across the entire company as we collaborate with our customers license awards and other business partners.
And one more of which we don't talk about a lot, but our success is anchored by our ability to retain a top tier reliable trusted senior team around the world, which has provided a critical level of leadership stability and commitment, especially during these past two years.
Last quarter, we talked about the launch of a new <unk> program in the U S at target branded Disney Ely Forever.
<unk> forward line of 18, installs and related accessories inspired by the classic Disney stories and characters.
I'm happy to update the program did extremely well in the quarter was the first five doll introduced selling through 90% to 100% levels.
We saw more of its sales online.
We usually see at this time as fast search for these dolls as awareness and enthusiasm steadily build.
Led by the innovated style collection line, our combined Disney Princess and frozen business delivered another strong year.
Princess collection, Vanity and the magic in motion <unk> Harris Daily Dol, both saw terrific sell throughs, among our holiday 2021 product introductions.
Also talked about our Sonic giant eggman robot battles set and Super Mario Deluxe Bowser airship place at toys last quarter and both of them also performed extremely well selling over 300000 units in total.
The Air ship was also nominated for places of the year by the Toy Association.
As additional stock hits the shelves in January we continue to see these toys move creating great environment for additional figure play.
In total added together the choice of various gaming brands and properties, we brought to market in 2021, we saw an 83% growth versus 2020 as total sales almost reached 100 billion for the first time for that segment.
Perfectly cute had its biggest year ever growing 24% over 2020.
Our skateboard related brands in our seasonal divisions grew by 140% led by the strength in our redo Skateboards line, coupled with the introduction of the heart supply branded skateboards.
And last but certainly not least we are thrilled with the excitement around disease and condos.
Last year at this time, we were talking about the potential of disease investment in the streaming space and today, we can talk about the results rather than the potential.
Although several of our pre holiday on shelf presence was impacted by logistic delays, we have seen tremendous velocity since the film debuted on Disney plus on Christmas Eve.
As you've no doubt heard the films music setting all sorts of records for Disney soundtrack success.
On Billboard charts. The soundtrack reached number one bumping the Dell and the single we did not talk about Bruno hit number one on Billboard's Hot 100 list fans are embracing the music across a wide range of social media, we are seeing great sell through across all accounts of the months of January and the U S and Europe and are locked in.
Maximize the opportunity throughout 2022 and beyond more to come on account, though.
We are seeing the benefit of what we set out to do several years ago repositioning each division and category of business Standalone and grow with evergreen licenses and innovation of products instead of being totally reliant on a hot property or properties.
With this approach when they hit license our licenses come product our products line occurs it only further enhances the growth and profitability of the company.
John will discuss the financials in a bit more detail and I will then return with some additional comments about 2022.
John Thank you Steven and good afternoon, everyone.
As Stephen highlighted great quarter for sales, finishing a great year, North America toy CPE was up 49% in the quarter, while international <unk> was up 42% on full year basis, North America Toy CP was plus 21% International toy CP was plus 18% and the costumes were plus 21% and our.
<unk> dress up nurturing play division net sales were $116 $9 million in Q4 up 60% compared to $73 million in the prior year.
Disney's newest theatrical release and country.
The incremental shipping and as already mentioned perfectly cute continues to perform very well.
Fiscal year net sales in the division were up 18% to $323 4 million versus $275 2 million continued strengthen our Disney Princess and Star collection lines, coupled with new Disney releases from riot in the last Dragon Uli and encounter led the growth for the year.
And our action play in Collectibles Division net sales were $41 $2 million in the quarter up 55% compared to $26 $6 million last year.
As you would expect in the tenders Super Mario and Sonic delivered most of the growth full year net sales for the division were up over 42% to $114 8 million compared.
Compared to $80 6 million in 2020.
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 $21 $1 million in the quarter down about $400000 from the fourth quarter of 2020.
Fiscal year outdoor seasonal net sales were $75 4 million versus $71 4 million up 6% for the year.
Net sales in our costume division disguise were up 22% at $8 8 million in the fourth quarter. Some of the big performance for US. This year. In this segment were inspired by video games properties like Pokemon and Minecraft.
Costume segment was up 21% to $107 6 million for fiscal year 2021, compared to $88 7 million in 2020.
Turning to margins as we highlighted in our release gross margins in the quarter were punished by increased expenses related to ocean freight inbound trucking and charges associated with bottlenecks at the ports are.
Our Q4 gross margin in the 2021 fourth quarter was 26, 6% of net sales of 620 basis point decrease from the 32, 8% of Q4 last year.
The freight related impacts for the quarter was over 950 basis points offset by a 300 plus basis points improvement in our underlying product margins compared to prior year.
Also saw a modest increase in our royalty expense as a percentage of sales, which can be partially attributable to the amount of music and our product line in the quarter.
Despite higher freight costs, we saw full year 2021 gross margins improved to 29, 5% of net sales an increase of 50 basis points from full year 2020 gross margin of 29 zero percent.
As we mentioned in Q3, but as a reminder, as freight costs are incurred to import our domestic product. They are capitalized into inventory and only expense. When the product is sold to customers. This was clearly a meaningful drag on Q4, which is not projected to go away in the short term our average projected container costs will certainly face unfavorable year over year comparisons well into the second half.
For the year based upon what we know today.
As mentioned in our release, we are implementing a second half domestic price increase to offset some of these higher costs. In addition, the team continues to explore a wide range of options to mitigate that negative margin impact as much as possible.
Direct selling costs inclusive of media marketing outbound freight and warehousing were $19 3 million or 10, 2% of net sales compared to $15 7 million or 12, 2% of net sales in the fourth quarter of 2020.
Our 2021 fourth quarter, G&A, including product development and testing, but excluding depreciation and amortization expense was $27 3 million or 14, 5% of net sales up from $24 6 million or 19, 2% of net sales in the fourth quarter of 2020.
On a full year basis, Thats 15, 9% of net sales a 160 plus basis point improvement from calendar year 2020.
These results combined to generate our fourth quarter operating profit of $2 9 million slightly better than the operating profit of $1 1 million achieved in the fourth quarter of 2020.
Full year operating profit as noted in the release was $38 8 million or six 2% of net sales.
For 2021 interest expense was $14 1 million compared to $21 $6 million in 2020, we continue to project full year 2020 to interest expense in the $9 million to $10 million range due to our lower debt level and effective interest rate as a reminder, the derivative liability attributed to our preferred stock as mark to market quarterly with noncash gains or law.
Losses dependent upon the valuation exercise.
In the fourth quarter of 2021 that valuation resulted in a loss of $4 2 million.
With Q4 as accrued preferred pik dividend the par value of our preferred shares was $23 1 million.
In the event of a change of control liquidation event.
You would increase to $34 $7 million.
Capital expenditures during the fourth quarter of 2021 were $1 8 million compared to $2 1 million in the fourth quarter of 2020 on a full year basis, our capex was $8 $2 million versus $8 $3 million in 2020.
Depreciation and amortization for the fourth quarter of 2021 was $1 4 million compared to $1 $9 million in the fourth quarter of 2020.
In summary, as it relates to our common stockholders Q4 had a net loss of $3 5 million or <unk> 37 per diluted share compared to a net loss of $11 $7 million or $2 55 per diluted share in Q4 of 2020.
Excluding the impact of the noncash valuation adjustments and stock compensation expense as it relates to common stockholders are adjusted net income in the fourth quarter of 2021 was $1 3 million or <unk> 14 per diluted share compared to an adjusted net loss of $3 $6 million or <unk> 80 per diluted share report.
And in the fourth quarter of 2020.
On a full year basis as it relates to common stockholders. The company reported adjusted net income of $23 6 million or $2 59 per diluted share versus an adjusted net loss of $6 3 million or $1 72 per diluted share in 2020.
Accounts receivable as of December 31, 2021 were $147 4 million up from $102 3 million as of December 31, 2020 attributable to our significant increase in Q4 sales.
<unk> were relatively flat decreasing to 72 days from 73 days in the 2024th quarter.
Inventory as of December 31, 2021 was $84 million versus $38 6 million on December 31, 2020.
As Stephen pointed out a plus $20 million increase in freight and transit is a big year over year driver here DSI is in the 2021 fourth quarter were 56 days compared to 41 days in the 2024th quarter, but on an annualized basis. The metric is more in line.
A lag in our cash conversion cycle, given supply chain delays, but fortunately, it's not a demand driven lag.
As of 12 31, the company's long term debt was $93 $4 million down from $154 million in the year ago period.
$2 1 million in short term debt, reflecting the scheduled amortization of our term loan.
Based on among other factors our changes in working capital at the end of 2021, we do not have a payment due under our term loans ECF sweep provision.
As of quarter close we had no draw on our credit line. We did have $9 8 million in letters of credit as of December 31, our availability under the line was $56 7 million.
Our adjusted EBITDA for the quarter was $5 million compared to adjusted EBITDA of $3 $9 million in 2020 that brings our full year adjusted EBITDA to $49 2 million.
Representing seven 9% of our full year net sales.
The basic and diluted income per share calculation for the fourth quarter of 2021 was based on a weighted average of 951 million common shares outstanding up from $4 five 8 million in the fourth quarter of 2020.
The full year adjusted net income attributable to common stockholders EPS calculation was based on 976 million common shares as of today, we have nine $5 7 million common shares outstanding.
And with that I will now pass the microphone back over to Steven.
Thank you John as discussed in the opening we have a tremendous amount to be excited about as we head into a new year.
Seeing great consumer reaction to our major brands, which in turn is leading to an expanded worldwide retail presence.
We've rebuilt our business over several years as a series of singles and doubles, rather than riding the wave of a massive entertainment release.
At the same time, we've always said we wanted to be positioned to take advantage of those occasions, where new entertainment provides additional pop to our lineup and Concho is a great example of that idea in practice.
1022, we'll be extending the product line to build under fan favorite scenes as well as incorporating even more music in the toys, which we'll be bringing to market later this year.
And we are understandably excited by the theatrical release of the Sonic the Hedgehog two movie in April with New film specific product debuted on shelf at the store near you later this month.
The Sonic business has really been great for us going back to the boost it received from the first film. So this is nothing but good news for us.
In 2021 without a film we shipped over 3 million Sonic figures just to give you some sense of consumer passion for this brand.
We will of course keep you posted as other pieces of news can be shared on this front.
Our Disney Princess business benefited greatly from Disney Princess collection.
And its continuing forward with year, two and 2022.
One of the new Princess product lines. We're excited about is a new segment of large dolls celebrating the stories of children's favorite Princess and Disney's frozen characters.
All dollars will include the characters iconic songs up to 12 phrases and other accessories to further enhance the storytelling play. We're also introducing a fund travel things segment as part of the style collection anchored by a roleplay suitcase in backpack.
Our Disney Elyse segment will be featured at target throughout 2022.
We have four new dolls and development aspired by Cruella Snow White belt, and Aurora, along with new items inspired by Minnie mouse and aerial coming later this year and outside the U S. We're already have commitments to bring the product lines into 12, new markets. This year with born the worse.
Within our outdoor seasonal segment, a few elements are creating some volatility or activity table product line has been a fast sellers throughout the whole pandemic, but the size and shape of the items are problematic given the rise in inbound freight costs.
At the same time, our trampoline business and redo skateboards lines of products continued to build momentum.
We are working with all of our customers to balance our consumer demand on these items with our large footprint in transit and in stores expanded E. Commerce focus will be a part of the solution.
Our Nintendo Super Mario business had another great year in 2021 shipping over 11 million figures and we expect continued growth in 2022.
International expansion is happening for this business in a major way, but we're also going to benefit from the expanded U S retail space.
Our disguise costume business is looking to build on its 2021 rebound.
In the U S. We talked about several new licenses coming onboard in recent quarters building on that news, we're happy to share today, they are adding even more new offerings in 2022.
From Coco Mellon to squid games with Stranger things and Sonic two movie costumes just to name a few.
And on an international front, we will beginning shipping Disney in Europe in the second quarter, which is a big step forward for our costume business internationally.
Pivoting to a few comments about specific product innovations.
A rock and roller skate feature doll was a late arrival at retail this holiday season, but it has support in this new year.
Positive indicator was QVC selling through their entire inventory order and one airing during Q4, which we feel validates our thinking that this is a great toy we want to get into more homes in 2022.
This year, we will also be launching our air Titans product line with a toy time to a major summer movie release.
The six foot long inflatable RC vehicle is really unlike anything you've ever seen and we are already adding new licenses to line for future introductions.
Although we have our work ahead of us in managing the supply chain. This year, starting with the challenges our manufacturers are working through and the flowing of product all the way to our warehouses. It is great to be in the position of racing to keep up with demand.
Thank the team for their continued focus and commitment and our investment community for their support and patience as we execute against our plans to continue to improve our financial Foundation.
With that we will now take questions. Thank you.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Our first question comes from Steph Wissink with Jefferies.
Thank you good afternoon, everyone. Stephen I wanted to just circle back or maybe John you can answer this as well and just sync up your comments on trade inventory inventory in transit sounded like your end of January inventory is consistent with where you would have been at the end of January 2019.
I just want to make sure we're hearing you correctly.
It sounds like what you're saying.
Yeah. Thanks Steph.
2019 comment was actually related to December of 2019.
But.
To specifically answer your point, but I think seemingly can elaborate but.
We're really seeing such great momentum in terms of what's happened through the holiday.
And with everything we line that have lined up in the first half of the year.
Okay. They are not high in the context of what we sort of expect to happen.
And I'll add to that.
We planned early on knowing what was happening throughout China with regards to the Corona virus and the Beijing Olympics.
Factory at it outages of the rolling blackouts that we actually planned well in advance of producing product and put it on the water to ensure that we had enough goods, which I hope we do we were seeing some really really strong sell through so we brought in a tremendous amount.
Knowing that our believing that it was going to be where we're at today and the sell throughs are there in the inventory is there and we're still working on.
Additional inventory, making additional tooling capacity working unlimited <unk> limited Asbury condo, Sonic and Nintendo and some of the areas that are really moving extremely strong and stronger than we expected. So we planned accordingly, and we're still planning as we sit here today.
Okay. That's really helpful. And then I wanted to go back to your comments on shipping, but I think you provided a bit more detail maybe than some of your peers around just a burden.
That that cost and maybe Steven you could talk a little bit about what youre doing to try to mitigate some of the financial pressure, but also what youre doing tactically to try to smooth out any sort of disruption in the flow of goods from some of the incremental shipping headwinds.
So what we've got into one thing about Jack said.
And we've been built on it has been very quick to market.
Very entrepreneurial and we've been working directly with the factory owners and factories, we've been working with the shipping companies themself.
Different freight forwarders that we utilized so we've been working really methodically have been moving the products on a domestic basis remember one thing. We are were primarily on an fob basis. So at 60% ish of jacks is on and that will be basis, and we are working toward increasing that F. O b part of our business with our.
Our major retailers, which helps us in the sense of not having to worry about the freight as much as a lot of the other domestic companies and it benefits the retailers that have their own cost of capital and margin criteria by then picking them up overseas. So what we've done is we've worked with different ports throughout China different parts throughout.
In the U S from Oregon.
To Canada too.
Parts of Los Angeles ports to <unk>.
These goods and what we've done also is bring goods directly from China to our distribution center to eliminate the demurrage cost at the ports versus us having to deal with bringing the goods from the port into our warehouse. So it's a constant daily process of our logistics teams both domestically in the U S. Europe .
And in Asia or constantly on it as we have you seen last year I think.
We achieved.
A tremendous amount of benefit that bring the goods in but we did have an impact of cost and we've worked negotiations with the freight forwarders now and with toy show, which is a.
Affiliation with the toy industry.
And as well as we're hopefully and looking at insight for the second half of the year have it somewhat ease up but we're not planning on it but it looks like that's the case.
Okay. That's very helpful. And then two really quick ones.
John This is for you is on the costing side, if you could just give us some sense of.
What kind of cost of goods inflation youre seeing for taking away shipping, but just looking at the raw cost of goods and I know you run on a bit of a tighter margin and maybe some of your peers just talk a little bit about cost inflation and then Stephen I'd like to hear from you one more time on Sonic and Nintendo because.
I think what you're explaining about.
Your business being a bit more predictable a little bit less hit driven maybe talk a little bit about the Tam of those two brands relative to some of your other brand properties do you see those stretching up into tweens teens, and adults and so you get a bit better pricing power amongst some of those gaming based brands. Thank you.
Yes, so on the cost inflation side as you know like the planning for the business is so far ahead, there is a little bit of a lag effect and.
In terms of.
Kind of factor costs rolling through.
Into.
What we're seeing given that we have pre negotiated prices with the vendors.
Yes.
The big place, where its really manifesting itself is obviously the different all the different types of freight elements I would say, it's the U S dollar moving against the Chinese currency has probably been asked.
Much of a driver of creating cost pressures with the factories.
More so than than resin for us.
And then I think as it relates kind of building upon your other point and building upon what Steven said.
As we did mentioned we are looking to take some pricing action in the back half of the year to help mitigate some of these incremental costs its not like we can price for all of it.
But they are obviously material we wanted to make sure we're being kind of transparent about it and as Stephen pointed out given the scale of the bigger guys.
There's really kind of a win for all parties the more they.
To bring the product in earlier in the year.
And run it through their supply chain. So that's one of the big levers we're looking at.
He brings up some of the attention that the current environment is creating.
And then to your second question regarding the.
A video game IP in the toy related merchandise as well as we have Halloween related merchandize Sonic we launched approximately three years ago, and we had one movie that was launched during that period of time, which actually help jumpstart the awareness to it and in a year that we had no content, we did extremely well in business last year.
And having the content come out this year again, we will actually enhance the distribution and enhance the growth of this segment, which we see tremendous growth not only in just the toy products for both kids and the collectors, but also in Halloween is.
That goes for both kids and adult at the same time Nintendo.
Any color.
Related content.
The switch games that they have has built this brand extensively and we are seeing growth year. After year after year, we're getting additional retail distribution both domestically.
All of our shelf space and more internationally as well, which has grown both in toy and all related merchandise that we both have master toy rights on both the Sonic Sonic moving Nintendo.
And we also have the Halloween rights, which actually expanded it allows us to do a lot of different creative merchandising.
Structures at retail and also we have apex legends, which is from electronic arts with as a growing game.
Game in itself, it's a growing brand at retail, we just launched it a year or so ago and its actually picked up and getting additional distribution and on top of that we have Halloween, which about 30% plus of the Halloween sales of last year were related IP to video games, such as Halo and Minecraft Nintendo Pokemon.
Just to name a few so we have a real breath of video game content, both in toy and as well as in Halloween and we have some exciting news coming later on in this area of business that we're going to hopefully be able to discuss with people in the future, but a lot of the evergreen product that we have such as black and Decker Disney Princess Disney style collect.
<unk> is really performing well and getting tremendous amount of growth that we see last year and in addition, this year and then we have some really exciting things that which we don't know where it will take us but in condo.
Music rights that we have with Macondo, the music success of and condo.
Identical or even better than what we had with frozen the streaming has increased dramatically on Disney plus it is now picking up dramatically in Europe and the only thing that's holding us back on a condo now is more so of manufacturing and we're looking at Limiters and different <unk> applications for us to grow this business, but.
You may have the same type of situation that happens a sonic window movie comes but again as I've mentioned for the last several years.
This is not what we grow our business on our business has grown by our divisions are singles and doubles methodology and we'll be happy to get something that's strong were extremely strong we will benefit from it but that is just a benefit to us and our shareholders and our retailers and consumers, but our business is growing without those successes of these large successful hits.
<unk> of content.
Thank you Bob.
Thanks Steph.
So.
So that is it for the Q&A, we actually have scheduled calls throughout the day and we appreciate everybody on this call for being there with us today and.
Wishing everybody a great start to the new year. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Okay.
Sure.
[music].
[music].
Good afternoon, everyone welcome to the JAKKS Pacific fourth quarter 2021 earnings Conference call with management, who will review financial results for the quarter and fiscal year ended December 31st 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 will first provide an overview of the quarter along with highlights of product lines and current business trends then Mr. Kimble will provide detailed comments regarding JAKKS pacific's financial and operational results.
Mr. Berman will then return 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'd like to be placed in the queue to ask a question. Please press star 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 or circumstances, including the estimates of sales margins and our adjusted EBITDA in 2022 as well as any other forward looking statements concerning 2022 and beyond are subject to safe Harbor protection under Federal Securities laws. These.
Payments 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, some of today's comments by management will refer to non-GAAP financial measures such as adjusted earnings per share or adjusted EBITDA.
Unless otherwise stated the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously.
As a reminder, this conference is being recorded.
With that I would now like to turn the call over to Stephen Berman.
Thank you and good afternoon, everyone and thank you for joining us today.
I'm extremely proud to say that Jack's team rallied together to complete a tremendous quarter and a tremendous year fulfilling customer demand to a level of 188 million in fourth quarter sales. This was a 47% increase versus prior year and our largest fourth quarter in seven years. Despite skyros.
Ocean freight cost port congestion and a shortage of trucking resources.
That brought our full year net sales to 621 million, a 20% increase to 2020 and our highest annual sales level since 2016.
As expressed last quarter, we exited Q3, having missed some sales in the quarter due to logistic challenges and with higher than average inventories inclusive of a meaningful amount still in transit that pulling forward of inventory enabled us to achieve this quarter's performance we plan knowing factory workers.
I'll leave it earlier than normal for Chinese new year due to the various COVID-19 restrictions rolling power outages at factories in different provinces as well as the ongoing freight and logistical issues.
We also plan accordingly to finished Q4 with higher inventory levels of 84 million, including $24 million in transit.
A reference point last year, we had $4 million in transit at this time.
Point of sales at our top three U S customers increased 10% in Q4 outpacing the increase in their retail inventory levels, which grew by 8%.
On a full year basis, the top three customer Pos was up 10%.
12, 31 inventory levels were in line with prior year not accounting for retail inventory that were still in transit.
At the end of January we see retail inventories more in line with 12, 31 19 levels as customers Q4, Fob orders reached store shelves.
On a full year basis, our toys consumer product sales were up 20% and our core costume business was up 21%, bringing us plus 20% for full year total company.
I would like to get into more details.
Despite the spike in freight costs, we delivered more gross margin dollars and fourth quarter than any year since 2016.
Our full year operating income was $38 8 million its highest level in over 10 years.
Our full year adjusted EBITDA was $49 2 million up 75% compared to last year and our highest level since 2015.
Our full year gross margins remained strong at 29, 5%, a 50 basis point improvement over 2020.
We were able to deliver these results this year by sticking to the same themes we've discussed in recent quarters.
A focus on timeless brands and categories, including constantly exploring appropriate portfolio additions, while ensuring freshness and innovation within our evergreen product lines.
Disciplined cost containment up and down the P&L.
A steadily improving balance sheet.
A hands on approach whatever the topic most across the entire company as we collaborate with our customers licensed stores and other business partners.
And one more which we don't talk about a lot, but our success is anchored by our ability to retain a top tier reliable trusted senior team around the world, which has provided a critical level of leadership stability and commitment, especially during these past two years.
Last quarter, we talked about the launch of a new <unk> program in the U S at target branded Disney Ely Forever, a fashion forward line of 18 installs and related accessories inspired by the classic Disney stories and characters.
I'm happy to update the program did extremely well in the quarter was the first five doll introduced selling through 90% to 100% levels you saw more of its sales online than what we usually see at this time as fast search for these dolls is awareness and enthusiasm steadily build.
Led by the innovated style collection line, our combined Disney Princess and frozen business delivered another strong year, the ultimate Princess collection, Vanity and the magic in motion <unk> Harris Daily Dol, both saw terrific sell throughs, among our holiday 2021 product introductions.
We also talked about our Sonic giant egg men robot battles set and Super Mario Deluxe Bowser airship place at toys last quarter and both of them also performed extremely well selling at over 300000 units in total.
The Air ship was also nominated for place out of the year by the Toy Association.
As additional stock hits the shelves in January we continue to see these toys move creating great environment for additional figure play.
In total added together as a choice of a various gaming brands and properties. We brought to market in 2021, we saw at 83% growth versus 2020 as total sales almost reached 100 million for the first time for that segment.
Perfectly cute had its biggest year ever growing 24% over 2020.
Our skateboard related brands in our seasonal division grew by 140% led by the strength in our redo Skateboards line, coupled with the introduction of the heart supply branded skateboards.
And last but certainly not least we are thrilled with the excitement around disease and condo.
Last year at this time, we were talking about the potential of disease investment in the streaming space and today, we can talk about the results rather than the potential.
Although several of our pre holiday on shelf presence was impacted by logistic delays, we have seen tremendous velocity since the film debuted on Disney plus on Christmas Eve.
As you've no doubt heard the films music setting all sorts of records for Disney soundtrack success.
On Billboard charts. The soundtrack reached number one bumping the Dell and the single we did not talk about Bruno hit number one on Billboard's Hot 100 list fans are embracing the music across a wide range of social media, we are seeing great sell through across all accounts of the months of January and the U S and Europe and are locked in.
Maximize the opportunity throughout 2022 and beyond more to come on in count though.
We are seeing the benefit of what we set out to do several years ago repositioning each division and category of business Standalone and grow with evergreen licenses and innovation of products instead of being totally reliant on a hot property or properties.
With this approach when they hit license our licenses come products. Our products line occurs it only further enhances the growth and profitability of the company.
John will discuss the financials in a bit more detail.
I will then return with some additional comments about 2022.
John Thank you Steven and good afternoon, everyone Steve.
As Stephen highlighted great quarter for sales, finishing a great year North America toy was up 49% in the quarter, while international <unk> was up 42% on a full year basis, North America Toy CP was plus 21% International toy CP was plus 18% and the costumes were plus 21% and our.
<unk> dress up nurturing play Division net sales were $116 9 million in Q4 up 60% compared to $73 million in the prior year.
Disney's newest theatrical release and can't.
Provided incremental shipping and as already mentioned perfectly cute continues to perform very well fiscal.
Fiscal year net sales in the division were up 18% to $323 4 million versus $275 2 million continued strengthen our Disney Princess and Star collection lines, coupled with new Disney releases from Orion and the last Dragon Uli and encounter led the growth for the year.
And our action play in Collectibles Division net sales were $41 $2 million in the quarter up 55% compared to $26 $6 million last year.
As you would expect independent Super Mario and Sonic delivered most of the growth full year net sales for the division were up over 42% to $114 8 million compared.
Compared to $80 6 million in 2020.
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 $21 1 million in the quarter down about $400000 from the fourth quarter of 2020.
Fiscal year outdoor seasonal net sales were $75 4 million.
Versus $71 4 million up 6% for the year.
Net sales in our costume division disguise were up 22% and at $8 8 million in the fourth quarter. Some of the big performance for US. This year. In this segment were inspired by video games properties like Pokemon and Minecraft costumes.
Costume segment was up 21% to $107 6 million for fiscal year 2021, compared to $88 7 million in 2020.
Turning to margins as we highlighted in our release gross margins in the quarter were punished by increased expenses related to ocean freight inbound trucking and charges associated with bottlenecks at the ports.
Our Q4 gross margin in the 2021 fourth quarter was 26, 6% of net sales of 620 basis point decrease from the 32, 8% of Q4 last year.
The freight related impacts for the quarter was over 950 basis points offset by a 300 plus basis point improvement in our underlying product margins compared to prior year.
We also saw a modest increase in our royalty expense as a percentage of sales, which can be partially attributable to the amount of music and our product line in the quarter.
Despite higher freight costs, we saw full year 2021 gross margins improved to 29, 5% of net sales an increase of 50 basis points from full year 2020 gross margin of 29 zero percent.
As we mentioned in Q3, but as a reminder, as freight costs are incurred to import our domestic product. They are capitalized into inventory and only expense from the product is sold to customers. This was clearly a meaningful drag on Q4, which is not projected to go away in the short term.
Our average projected container cost will certainly face unfavorable year over year comparisons well into the second half of the year based upon what we know today.
As mentioned in our release, we are implementing a second half domestic price increase to offset some of these higher costs. In addition, the team continues to explore a wide range of options to mitigate that negative margin impact as much as possible.
Direct selling costs inclusive of media marketing outbound freight and warehousing were $19 3 million or 10, 2% of net sales compared to $15 7 million or 12, 2% of net sales in the fourth quarter of 2020.
Our 2021 fourth quarter, G&A, including product development and testing, but excluding depreciation and amortization expense.
Was $27 $3 million.
Or 14, 5% of net sales up from $24 6 million or 19, 2% of net sales in the fourth quarter of 2020.
On a full year basis at 15, 9% of net sales a 160 plus basis point improvement from calendar year 2020.
These results combined to generate a fourth quarter operating profit of $2 $9 million slightly better than the operating profit of $1 1 million achieved in the fourth quarter of 2020.
Full year operating profit as noted in the release was $38 8 million or six 2% of net sales.
Our 2021 interest expense was $14 $1 million compared to $21 6 million in 2020, we continue to project a full year 2020 to interest expense in the $9 million to $10 million range due to our lower debt level and effective interest rates as a reminder, the derivative liability attributed to our preferred stock as mark to market quarterly with noncash gains or.
Losses dependent upon the valuation exercise.
In the fourth quarter of 2021 that valuation resulted in a loss of $4 2 million.
With Q4 as accrued preferred pik dividend the par value of our preferred shares was $23 1 million in the event of a change of control liquidation event.
<unk> increased to $34 $7 million.
Capital expenditures during the fourth quarter of 2021 were $1 8 million compared to $2 1 million in the fourth quarter of 2020 on a full year basis, our capex was $8 $2 million versus $8 $3 million in 2020.
Depreciation and amortization for the fourth quarter of 2021 was $1 4 million compared to $1 9 million in the fourth quarter of 2020.
In summary, as it relates to our common stockholders Q4 had a net loss of $3 5 million or <unk> 37 per diluted share compared to a net loss of $11 7 million.
We're $2 55 per diluted share in Q4 of 2020.
Excluding the impact of the noncash valuation adjustments and stock compensation expense as it relates to common stockholders are adjusted net income in the fourth quarter of 2021 was $1 3 million or <unk> 14 per diluted share compared to an adjusted net loss of $3 $6 million or <unk> 80 per diluted share reported.
And in the fourth quarter of 2020.
On a full year basis as it relates to common stockholders. The company reported adjusted net income of $23 6 million or $2 59 per diluted share versus an adjusted net loss of $6 3 million or $1 72 per diluted share in 2020.
Accounts receivable as of December 31, 2021 were $147 4 million up from $102 3 million as of December 31, 2020 attributable to a significant increase in Q4 sales.
<unk> were relatively flat decreasing to 72 days from 73 days in the 2024th quarter.
Inventory as of December 31, 2021 was $84 million versus $38 6 million on December 31, 2020 as.
As Stephen pointed out a plus $20 million increase in freight and transit is a big year over year driver here DSI is in the 2021 fourth quarter were 56 days compared to 41 days in the 2024th quarter, but on an annualized basis. The metric is more in line with certainly a lag in our cash conversion cycle given supply chain delays, but fortunately, it's not a demand driven lag.
As of 12 31, the company's long term debt was $93 $4 million down from $150 4 million in the year ago period.
$2 1 million in short term debt, reflecting the scheduled amortization of our term loan.
Based on among other factors our changes in working capital at the end of 2021, we do not have a payment due under our term loans ECF sweep provision.
As of quarter close we had no draw on our credit line. We did have $9 8 million in letters of credit as of December 31, our availability under the line was $56 7 million.
Our adjusted EBITDA for the quarter was $5 million compared to adjusted EBITDA of $3 9 million in 2020 that brings our full year adjusted EBITDA to $49 2 million.
Representing seven 9% of our full year net sales.
The basic and diluted income per share calculation for the fourth quarter of 2021 was based on a weighted average of 951 million common shares outstanding up from $4 five 8 million in the fourth quarter of 2020.
Our full year adjusted net income attributable to common stockholders EPS calculation was based on 976 million common shares as of today, we have $9 $5 7 million common shares outstanding.
And with that I will now pass the microphone back over to Steven.
Thank you John as discussed in the opening we have a tremendous amount to be excited about as we head into a new year, we're seeing great consumer reaction to our major brands, which in turn is leading to an expanded worldwide retail presence.
We've rebuilt our business over several years as a series of singles and doubles, rather than riding the wave of a massive entertainment release.
At the same time, we've always said we wanted to be positioned to take advantage of those occasions, where new entertainment provides an additional pop to our lineup and at Concho is a great example of that idea and practice in 2022, we will be extending the product line to build under fan favorite scenes as well as incorporating even more.
And music and the toys, which we'll be bringing to market later this year.
And we are understandably excited by the theatrical release of the Sonic the Hedgehog two movie in April with New film specific product debuted on shelf at the store near you later this month.
The Sonic business has really been great for us going back to the boost it received from the first film. So this is nothing but good news for us.
In 2021 without a film we shipped over 3 million Sonic figures just to give you some sense of consumer passion for this brand.
We will of course keep you posted as other pieces of news can be shared on this front.
Our Disney Princess business benefited greatly from Disney Princess collection.
And its continuing forward with year, two and 2022.
One of the new Princess product lines. We're excited about is a new segment of large dolls celebrating the stories of children's favorite Princess and Disney's frozen characters.
All dollars will include the characters iconic songs up to 12 phrases and other accessories to further enhance the storytelling play. We're also introducing a fund travel things segment as part of the style collection anchored by a roleplay suitcase in backpack.
Our Disney Italy segment will be featured at target throughout 2022.
We have four new dolls and development inspired by Cruella Snow White belt, and Aurora, along with new items inspired by Minnie mouse and aerials coming later this year and outside the U S. We're already have commitments to bring the product lines into 12, new markets. This year with more in the works.
Within our outdoor seasonal segment, a few elements are creating some volatility or activity table product line has been a fast sellers throughout the whole pandemic, but the size and shape of the items are problematic given the rise in inbound freight costs.
At the same time, our trampoline business and redo skateboards lines of products continue to build momentum.
We are working with all of our customers to balance our consumer demand on these items with our large footprint in transit and in stores expanded E. Commerce focus will be a part of the solution.
100, <unk> Super Mario business had another great year in 2021 shipping over 11 million figures and we expect continued growth in 2022.
International expansion is happening for this business in a major way, but we're also going to benefit from the expanded U S retail space.
Our disguise costume business is looking to build on its 2021 rebound.
In the U S. We talked about several new licenses coming on board in recent quarters.
Building on that news, we're happy to share today, they are adding even more new offerings in 2022.
From Coco Mellon to squid games with Stranger things and Sonic two movie costumes just to name a few.
And on an international front, we will beginning shipping Disney in Europe in the second quarter, which is a big step forward for our costume business internationally.
Pivoting to a few comments about specific product innovations.
A rock and roller skates feature doll was a late arrival at retail this holiday season, but it has support in this new year.
A positive indicator was QVC selling through their entire inventory order and one airing during Q4, which we feel validates our thinking that this is a great toy we want to get into more homes in 2022.
This year, we will also be launching our air Titans product line with a toy time to a major summer movie release.
The six foot long inflatable RC vehicle is really unlike anything you've ever seen and we're already adding new licenses to line for future introductions.
Although we have our work ahead of us in managing the supply chain. This year, starting with the challenges our manufacturers are working through and the flowing of product all the way to our warehouses. It is great to be in the position of racing to keep up with demand I. Thank the team for their continued focus and commitment and our investment community for their <unk>.
Support and patients as we execute against our plan to continue to improve our financial Foundation.
With that we will now take questions. Thank you.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Our first question comes from Steph Wissink with Jefferies.
Thank you good afternoon, everyone. Stephen I wanted to just circle back or maybe John you can answer this as well and just sync up your comments on trade inventory inventory in transit sounded like your end of January inventory is consistent with where you would've been at the end of January 2019.
I just want to make sure. We're hearing you correctly that that's essentially what youre, saying.
Yeah. Thanks Steph.
The 2019 comment was actually related to December of 2019.
But.
To.
Specifically answer your point, but I think Steve can elaborate but.
We're really seeing such great momentum in terms of what's happened through the holiday.
Yes.
With everything when you align that have lined up in the first half of the year as much as these inventory levels seem high.
Not high in the context of what we sort of expect to happen.
And I'll add to that.
We've planned early on knowing what was happening throughout China with regards to the Corona virus and the Beijing Olympics.
The factory at it outages of the <unk>.
Raleigh blackouts that we actually planned well in advance of producing product and put it on the water to ensure that we had enough goods, which I.
Hope we do we were seeing some really really strong sell through so we brought in a tremendous amount.
Knowing that or believing that it was going to be where we're at today and the sell throughs are there in the inventory is there and we're still working on.
Additional inventory, making additional tooling capacity working unlimited <unk> limit to Asbury condo, Sonic and Nintendo and some of the areas that are really moving extremely strong and stronger than we expected. So we planned accordingly, and we're still planning as we sit here today.
Okay. That's really helpful. And then I wanted to go back to your comments on shipping because I think you provided a bit more detail maybe than some of your peers around just a burden.
That that cost and maybe Steven you could talk a little bit about what youre doing to try to mitigate some of the financial pressure, but also what youre doing tactically to try to smooth out any sort of disruption in the flow of goods from some of the incremental shipping headwinds.
So we've got it and one thing about Jack said.
And we've been built on it has been very quick to market.
Hey, entrepreneurial and we've been working directly with the factory owners and factories, we've been working with the shipping companies themselves.
The different freight forwarders that we utilized so we've been working really methodically have been moving the products on a domestic basis remember one thing. We are were primarily on an fob basis. So at 60% ish of jacks is on and that will be basis, and we are working toward increasing that F. O b part of our bid.
With our major retailers, which helps us in the sense of not having to worry about the freight as much as a lot of the other domestic companies and it benefits the retailers that have their own cost of capital and margin criteria by then picking them up overseas. So what we've done is we've worked with different ports throughout China different.
Throughout the U S from or again.
To Canada too.
Parts of Los Angeles ports.
These goods and what we've done also is bring goods directly from China to our distribution center to eliminate the demurrage cost at the ports versus us having to deal with bringing the goods from the port into our warehouse. So it's a constant daily process.
Logistics team as both domestically in the us Europe and in Asia or constantly on it as we have you seen last year I think.
We achieved.
A tremendous amount of benefit that bring the goods in but we did have an impact of cost and we've worked negotiations with the freight forwarders now and with toy show, which is a.
Affiliation with the toy industry.
And as well as we're hopefully looking at insight for the second half of the year have it somewhat ease up but we're not planning on it but it looks like that's the case.
Okay. That's very helpful. And then two really quick ones. John . This is for you is on the costing side. If you could just give us some sense of.
What kind of cost of goods inflation youre seeing for taking away shipping, but just looking at the raw cost of goods and I know you run on a bit of a tighter margin and maybe some of your peers just talk a little bit about cost inflation and then Stephen I'd like to hear from you one more time on Sonic and Nintendo because.
I think what you're explaining about.
Your business being a bit more predictable a little bit less hit driven maybe talk a little bit about the Tam of those two brands relative to some of your other brand properties do you see those stretching up into tweens teens, and adults and so you get a bit better pricing power amongst some of those gaming base brands. Thank you.
Yes, so on the cost inflation side as you know like the planning for the business is so far ahead, there is a little bit of a lag effect and.
In terms of.
Kind of factor costs rolling through.
Into.
What we're seeing given that we have pre negotiated prices with the vendors.
Okay.
The big place, where its really manifesting itself is obviously the different all the different types of freight elements I would say, it's the U S dollar moving against the Chinese currency has probably been asked.
Much of a driver of creating cost pressures with the factories.
More so than than resin for us.
And then I think as it relates kind of building upon your other point and building upon what Steven said.
As we did mentioned we are looking to take some pricing action in the back half of the year to help mitigate some of these incremental costs its not like we can price for all of it.
But they are obviously material we wanted to make sure we're being kind of transparent about it and as Stephen pointed out given the scale of the bigger guys.
There's really kind of a win for all parties the more they.
To bring the product in earlier in the year.
And run it through their supply chain. So that's one of the big levers we're looking at.
In terms of some of the attention that the current environment is creating.
And then to your second question regarding the.
A video game IP in the toy related merchandise as well as we have Halloween related merchandize Sonic we launched approximately three years ago, and we had one movie that was launched during that period of time, which actually help jumpstart the awareness to it and in a year that we had no content, we did extremely well in business last year.
And having the content come out this year again, we will actually enhance the distribution and enhance the growth of the segment, which we see tremendous growth not only in just the toy products for both kids and the collectors, but also in Halloween is.
That goes for both kids and adult at the same time Nintendo.
Without any call it.
Related content.
The switch games that they have has built this brand extensively we're seeing growth year after year after year, we're getting additional retail distribution both domestically.
This show more shelf space and more internationally as well, which has grown both in toy and all related merchandise that we both have master toy rights on both the Sonic Sonic moving Nintendo.
And we also have the Halloween rights, which actually expanded it allows us to do a lot of different creative merchandising structures at retail and also we have apex legends, which is from electronic arts with as a growing game.
Game in itself, it's a growing brand at retail, we just launched it a year or so ago and its actually picked up and getting additional distribution and on top of that we have Halloween, which about 30% plus of the Halloween sales of last year were related to video games, such as Halo and Minecraft Nintendo Pokemon.
Just to name a few so we have a real breath of video game content, both in toy and as well as in Halloween and we have some exciting news coming later on in this area of business that we're going to hopefully be able to discuss with people in the future, but a lot of the evergreen product that we have such as black and Decker Disney Princess Disney style collect.
<unk> is really performing well and getting tremendous amount of growth that we see last year and in addition, this year and then we have some really exciting things that which we don't know where it will take us but in condo.
Music rights that we have with Macondo, the music success of and condo.
Identical or even better than what we had with frozen the streaming has increased dramatically on Disney plus it is now picking up dramatically in Europe and the only thing that's holding us back on a concept now is more so of manufacturing and we're looking at Limiters and different <unk> applications for us to grow this business, but.
You may have the same type of situation that happens with Sonic window movie comes but again as I have mentioned for the last several years.
This is not what we grow our business on our business has grown by our divisions are singles and doubles methodology and we'll be happy to get something that's strong were extremely strong we will benefit from it but that is just a benefit to us and our shareholders and our retailers and consumers, but our business is growing without those successes of these large successful hits.
<unk> of content.
Thank you boss.
Thanks Steph.
Yes.
So that.
So that is it for the Q&A, we actually have scheduled calls throughout the day and we appreciate everybody on this call for being there with us today and.
Wishing everybody a great start to the new year. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.