Q1 2022 JAKKS Pacific Inc Earnings Call

Ladies and gentlemen, thank you for standing by your conference call I'll say it again not materially again. Thank you for standing by your conference call will begin momentarily. Thank you.

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Good afternoon, everyone welcome to JAKKS Pacific first quarter 2022 earnings conference call with management, who.

I'll review financial results for the first quarter ended March 31 2022.

<unk> 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 provide an overview of the quarter, along with highlights of product lines and current business trends.

Mr. Kimball will provide detailed comedy comments regarding JAKKS Pacific's financial and operational adult Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions.

Your line will be placed on mute for the portion of the call if.

If he would 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 Jack.

Specific future performance events or circumstances, including the estimates.

Net sales and adjusted EBITDA in 2022 as well as any other forward looking statements concerning 2022 and beyond are subject to safe Harbor protection under federal security laws.

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

For details concerning these and other such risks and uncertainties you should consult JAKKS. Most recent 10-K and 10-Q filed with the SEC.

As long 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.

Adjusted EBITDA and adjusted earnings per share.

Unless stated otherwise the most directly comparable GAAP financial metric has been we can sell to the associated non-GAAP financial measure where the company's earnings press release issued today or previously.

This conference call is being recorded.

With that I would now like to call on the call over to Mr. Bartlett Stephen Berman, Sir you made.

Good afternoon, and thank you for joining us as we discuss our latest performance and current plans going forward.

He has been an exciting first quarter for JAKKS as we ship more product than any Q1 since 2008, our net sales for the quarter were $120 9 million, a 44% increase compared to the prior year.

On the toy consumer products side sales can be thought of in terms of three key drivers our evergreen business of toys and consumer products solidly performed in the quarter growing single digits almost across all divisions and categories over the prior year Disney Princess Nintendo Super Mario perfectly.

Cute black and Decker all contributed to improved results.

We continue to see fantastic demand for on condo Disney products retail inventory been concho at our top three U S accounts at the end of the quarter was only 4 million. The team has been laser focused on fulfilling the existing demand and broadening the product line with some great new items in time for this half.

Today season.

There also has been great excitement for our Sonic the Hedgehog two movie related products since it hit shelves at the end of February we were thrilled to see fans rushed to the theaters when the movie released earlier this month.

Over its first two weeks the worldwide Global box office has exceeded $230 million the movie and our product line Appeals to those new just sonic as well as those of US who have loved the world of Sonic for over 30 years now.

Point of sale at our top three U S customers increased over 40% in Q1 compared to last year well their retail inventory levels started to catch up from recent quarters, finishing at plus 54%.

We feel really good about the cooperation we are getting from customers working to stay ahead of the supply chain constraints and ensure that everyone has the product or consumers want throughout the year.

In total our toy consumer products segment was up 39% in the quarter with North America up 37% and international up 52%.

Although the pandemic continues to impact local economies in different ways. We are beginning to see solid progress in expanding our international footprint.

Over the past two years, we've gone direct in more western European markets as well as the Mexico.

Those transitions are often challenging and the best of times and we have erred on the side of caution to not over invest but as we closed Q1, we see signs of solid progress, particularly as European retailers had more locked down a year ago and our team in Mexico opens more doors more and more.

As the weeks go by our top five direct toy markets outside of North America, where the U K, Germany, Mexico, France, and Italy, and that group aggregated grew over 80% in Q1 versus the prior year.

Q1 is a small quarter for our costume business, but nonetheless also performed extremely well, we shipped $9 8 million in the quarter.

Nearly one and a half times increase versus the prior year.

As we've discussed on recent calls our costume business in Europe is ramping up along with our toy growth and we began shipping Disney costumes across Europe in April .

From a margin perspective container costs and stretch delivery times continue to be a challenge as we had anticipated.

The team in Hong Kong, and China are working closely with our counterparts in the U S Europe and southeast Asia to ensure that we are moving products into our warehouses as efficiently and cost effectively as possible, but the situation remains volatile impart given the wide range of product, we offer particularly some of our outdoor.

Seasonal item, which remains subject to tariffs are now further disadvantaged given the relative size and the simple math of how many units fit and a now more expensive container. We're factoring in all of these issues as we plan our year going forward.

Increasing cost pressures remain a hot topic everywhere, we continue to leverage our long term vendor relationships to collaborate and developing products that will be market competitive while dealing with increasing manufacturing costs and above and beyond the aforementioned supply chain challenges.

Towards the end of first quarter, we returned to on premise operations in our southern California offices.

As much as the teams have done a remarkable job and collaborated a new and different ways remotely it's been energizing to be able to walk the halls again have more spontaneous conversations both on a professional and personal fronts.

We are also starting to see business traveler return and are eager to see more cross office collaborations for the months to come in addition to spending more in person time with customers and licensed stores.

As each quarter passes our balance sheet gets stronger and stronger we are taking advantage of the low shipping season to import our 2022 inventory needs as early as we can as we did last year and managing our cash currently to fuel our future growth the first quarter and a company like ours.

It was really just a warm up for the rest of the year. So we're all aware that there's a lot of hard work ahead of us, but when I think back in all the challenges the company and the team has had to work through over the past several years I couldn't be more excited about where we find ourselves today and the prospects going forward in 2022 and beyond.

I will now pass the call over to John for some further discussions around our financials after which I will come back with some more thoughts about the rest of 2022 John .

Thank you Steven and hybrid and.

In the spirit of it being a new year and trying new things we've extended the data and calculations provided in the exhibits in our earnings release to cover the material that is historically recapped in my section of the narrative as a result, I'm not going to reiterate all of that data here.

We'd like to take the opportunity to go a bit deeper into a few areas that I feel are noteworthy in reviewing the quarter.

First off margin.

As we discussed last quarter, we're seeing meaningful increases in input costs when it comes to importing product.

So that's getting products from the factory to the Port Ocean passage getting product out of the receiving ports in a timely manner and then transporting to our warehouses in the U S and Europe .

We absorbed a lot higher costs in the back half of 2021 in this area a portion of which flowed through the P&L when that product was sold in Q1. It has been in recent years and continues to be our practice to contract for a certain amount of ocean transport to the U S to give us a degree of cost certainty, we secure the balance of our capacity on the spot market.

As much as the spot market continues to whipsaw around early this year, we know that the retrospectively attractive contractual rate. We enjoyed in 2021 will soon be gone and we will be absorbing higher contractual costs. This year. This.

This is not new news in the context of what we shared last quarter, but it is a bit more explicit about our confidence in projecting how we expect that cost to behave in the calendar year.

It is the case that the front part of the year as lower volume at the ports and by extension less challenging than what we saw in the back half of 2021, but that doesn't change that unfavorable year over year perspective on a container basis with the contractual rate resetting in Q2.

Of course, the simple way to reduce spending in ocean freight is to import less product.

However, as you can see in recent quarters results. We're currently enjoying fantastic demand for our products. So we're having to be judicious about meeting that demand while realizing we're suffering on the margin side given the current macro events.

To that end our March 31 inventory remains high at $85 million, which is $49 million more this time prior year.

Of the $85 million $15 million in transit, where last year that number was $5 million you can think of that $85 million in at least four different ways a view towards our short to medium term needs for 2022 sales more in transit given the longer supply chain.

<unk>, the higher supply chain cost of product value and doing what we can to pull necessary 2022 inventory forward into our distribution centers and ahead of the second half.

As to how all that plays out in the quarters to come is not something we're going to speculate on the on making the observation that we're happy to be in a place where there's a lot of demand for our current product line.

Moving down the P&L and building on what Stephen said about cost pressures as the businesses retrench during the pandemic, we have taken the opportunity to reset a bit as it relates to SG&A spending there are elements in the direct selling section, which have a variable volume attribute and its also subject to timing of certain expenditures that can move around during the year tracking G&A on a person.

A net sales basis is a bigger metric for us not in terms of absolute dollars necessarily but making sure. We're at a minimum maintaining scale and that more fixed portion of the P&L certainly benefiting from our strong Q1 top line, we've seen nice margin improvements in both areas versus prior year with G&A the larger of the two buckets improving by over 400 basis points, which is green.

That certainly helps offset some of the aforementioned gross margin squeeze and leads to our closing the quarter just under 1% operating loss, which represents very strong performance for Q1 and a toy company.

Our refinanced capital structure brought interest expense down from $4 $9 million last year to $2 $2 million this year and the marking to market of our preferred stock liability resulted in a noncash loss of $645000.

We backed out loss out of our non-GAAP calculations of adjusted EBITDA and adjusted EPS.

In aggregate, our adjusted EBITDA for the quarter was a positive $1 9 million.

Versus a negative $2 $4 million last year, our trailing 12 month adjusted EBITDA is now $53 6 million or eight 1% of net sales, which was $39 5 million and seven 4% of net sales at this time in 2021 now I want to pivot to talk about cash in the balance sheet.

As of March 31, our total debt was $95 4 million, we had no draw on the credit line with the trailing 12 months adjusted EBITDA that calculates a leverage ratio of one eight.

You know our cash tends to have seasonal ups and downs given the seasonality of the business.

You have to calculate a trailing 12 month view of cash to get $36 $8 million, whether you want to use that number or our cash balances at March 31 to $39 $2 million you get a net leverage ratio in the range of one point to 1.1.

Our trailing 12 months net sales is now at $658 million compared to our recent loan of $516 million at the end of 2020.

Given that our debt level has decreased from $161 7 million to $95 $4 million over the same time period, we've been rolling forward the results of improved profitability and to reduce debt and increased working capital to drive higher sales.

It's our intention to continue to follow that script deploy cash to secured expanded agreement brands and categories of business steadily improve our balance sheet and explore on strategy acquisition opportunities as appropriate.

And with that I'll now hand, the call back over to Stephen for some additional remarks. Thank.

Thank you John .

As I said at the beginning it's a very exciting time here at Jack's we're focusing on controlling the areas in which we can have been extremely focused on the areas that become problematic depending on various economic factors.

That translates to a few distinct themes as we look ahead.

We clearly have a tremendous opportunity this year with both in condo and Sonic in a world, where we are focused on singles and doubles their position to be more than that in 2022 and beyond the sonic to excitement was clear as soon as the movie product hit shelf and is also pulling through more volume of our evergreen.

Classic Sonic line as well, we have doubled tool key items in these ranges and are talking to customers about additional shelf space for the newly added Skus. This fall.

Getting this done is not easy as insurance, a usual development cycle to something closer to half the time, but this ability is one of the things that makes jacks unique and retailers are equally excited about consumer reaction to these distinct two businesses. We will chase this business in the U S internationally, while at the same time carefully.

Monitoring Pos and talking to our partners.

As we touched upon back in February we are still locked into our singles and doubles core focus and have a lot of great refreshes innovations extensions of lines and categories and expansions planned across businesses like Disney Princess style collection and perfectly cute in the dolls and role.

Play aisles, and Super Mario Black and Decker apex legends and action and play collectable aisles.

We see all of these businesses growing in North America, and many of them growing even more internationally.

In addition.

We are anticipating a tremendous year in our costume business the skies.

Last year, the many customers wishing they had bought a bit more and that they had shipped a bit sooner.

We are leaning into that to ship more and ship sooner again looking to minimize the second half crunch and also to make sure that the retailers are setting as early as they can something which didn't always happened in 2021.

When you combine those dynamics with our ever strengthening licensing portfolio in the U S and international we are extremely excited for growth this year.

And finally, I want to point out that our diligent focus of growing our overall business unit categories of the approach singles and doubles doesn't mean, we're out of surprises with some thoughtful and unexpected launches of new categories or products. This year, We've recently announced a new Jack's product line of I'm afraid.

<unk> remote control vehicles called Eric Heiden, our first to market for this line comes in partnership with Universal brand development.

Eric Titan Jurassic World massive attack T. Rex RC is coming to online retail. This spring ahead of the theatrical release of Jurassic World Dominion in June 2022.

This constant air and playable RC prehistoric beef is over six feet long and fully inflates and approximately 20 seconds. We also recently introduced a distribution partnership in the U S and Asia Pac with Wild stuff, a European based toy innovation company for <unk>.

Two new product lines. The first is movie mates launching first with the blockbuster franchise Jurassic world or a range of collectible highly detailed and articulated acura figures mounted on a non removable film rig that comes with a free movie made app.

Using the figures our figures.

And the stop motion App kids and Kidult.

Can recreate movie scenes or make new ones have their own <unk>.

Dart, making movies within 60 seconds is the premise with the easy to use toys and app.

The second item from our Wow stuff relationship and Jurassic World Real FX Baby Blue featured a life like feel and movements. The real FX Baby Blue comes alive with easy one handed controls moved the head and neck to protect and battle or lunch get close and pet.

Blue to activate touch sensors on the head and the body activates over 'twenty movie sound effects. The verbal description of all three of these items really don't do them Justice. The team is putting the finishing touches on the promotional sizzles. So keep an eye out on our website to see how fun all these new introductions and innovation.

Saar.

And we're thinking the global teams and partners for their continued focus and commitment and our investment community for their support and patience as we execute against our plans to continue to deliver greater products profitability and greater results.

With that we will now take questions. Thank you.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone again to ask a question. Please press Star then one.

Our first question comes from Steph Wissink of Jefferies. Your line is open.

Thank you good afternoon, everyone. We had a couple of questions. Maybe one for you Stephen just to start I think you mentioned distribution I understand youre, bringing back some of your international distributors ships in house. It let me talk a little bit about some of the new retail wins.

Higher distribution is changing in the U S and internationally and how that's playing out as kind of the growth numbers that youre putting up currently.

Sure Hello, Stefan Thank you yes.

Besides our main large partnerships with Amazon Walmart target the clubs Sam's Tesco Carrefour in France. All these major ones. We've started about four years ago five years ago, a three tiered development product development cycle to make sure that we get all classes of trade. So you have the math yet.

The secondary accounts you have the dollar trade and we've seen the penetration really come to fruition over the last 18 months from going into the retailer like sleep farm Cvs Walgreens Macy's Burlington Barnes <unk> noble those are just to name, but a few to five below the dollar trade. So.

Our distribution.

As has been really penetrated through all the different categories and based off the trade of of currency of which the <unk>.

Consumer goes in so we go from high end to low end and it's really enhanced our increase in sales and enhance our distribution platform.

If you see what we've mentioned earlier in the call our inventory being high. This is all planned as we ended the year with high inventory to make sure. We can achieve the numbers that we did this first quarter, it's no different than going forward, we're managing the manufacturing by doubled to lean in and bringing goods in a few different various ports.

To make sure that we have the product and then we have our <unk> side of the business that really benefits a lot of the main retailers and then on the dollar trade and some of the other ones. Those are domestic backup inventory. So we're really getting great penetration both in North America and in EMEA.

Okay. That's helpful. And then I just want to clarify in the release you mentioned that your core business was up mid single digits.

But your reported revenue was up quite a bit more so are you attributing the overage to and content and sonic or is there a way to dimensionalize.

What the lift was above the core business, maybe you can help us think through how much of that is durable versus what was maybe more one time related to entertainment.

It's a good question so.

We mentioned and our our release that disguise was up.

Over double from where it was last year and it's actually the bookings and where we stand with the skies are very similar to going into Q2.

The lack of.

The cost impact of the seasonal business the foot to floor right on the tables did decrease because of the cost to ship those in our excess of based off the carrying cost of the containers, but all of the Nintendo the black a decade the style collection Princess Princess in General has all growing mid single digits and then they enhancement grew.

Our growth was in Cocteau Sonic.

And the skies and John if you'd like to elaborate on that because we're in different spots. Please do so.

Yeah, No I think I think you said I've got that right Steven.

We're trying to communicate is certainly we had a lot of great success with both Sonic and Comped up in the quarter on the toy side, but even if you set those aside we are still up mid single digits with the balance of the business.

Okay. That's very helpful. Last one hopefully just a quick one is just understanding a little bit more on the decision to pull inventory in early is that.

Our risk mitigation strategy, just given the volatility in the supply chain or are your retailer.

Asking for inventory earlier, as well and maybe talk about the sky separately from the core toy business. If you would.

So we worked really strong with the retailers around the world and it's not that they're asking for it they need it based off P O S.

Our Pos has been exceptionally strong almost across the board in every division almost in every category. So based off of the logistic issues that are happening with bringing goods in.

In the U S and in Europe .

Then on the <unk> side for even the retailers to get their containers and then when you hear about the lockdowns in the different parts of congestion in China, It's just mitigating and managing this really micromanage. It from all of our teams ensuring that we have the goods appropriately and really making sure that the mix of the <unk> divestiture managed.

Well internally.

But the other side of things, we are managing inventory very very strong and tight.

We have some really strong successes currently.

Even without the.

The formidable and Cocteau and Sonic, but we are going to make sure that we manage it correctly, we don't have too much inventory, it's always better to keep it low as you see we had only $4 million of inventory of retail condo during at the end of the quarter.

And we have doubled tool triple till the right Skus. So it's really just micro managing and making sure. We have the right product that is available for the retail and we're working really really particularly with each retailer on the plans by week the inventories required in each of their dcs much more than in the last 10 year.

I think we are this is as important as that is developing hot product, it's developing the right way to be able to ensure that the retailers have the right inventory and not have too much inventory and that we have the right manufacturing I know, we're not utilizing capital to build inventory were not needed.

Very helpful. Thank you I'll jump back in queue.

Thank you thanks, Doug.

Thank you. Our next question comes from Gerrick Johnson of BMO capital. Your line is open.

Hey, good afternoon I guess.

Hi, sorry, Steven I was kind of curious how you're feeling about the consumer the state of the consumer here on out.

Lapsing stimulus inflation impact on the budget et cetera. So how are you feeling about the consumer.

So.

For the Halo guard, so for where we stand and we do a tremendous amount of time with our retailers and not just pairing how our industry is doing it's kind of how the consumer is doing you know just the traffic retailers don't just get traffic from toy manufacturers and retailers get it from the various.

Bundles of different categories, which are and so if their consumers that healthy they may not come in.

To the retailer and have many different purchases or whether their purchases online, but what we see today and then speaking of retailers.

Both holiday in North America, and EMEA, It's just strong consumer and Theres a lot of concern with inflation. You know everyone is talking about it but where we've seen it in 27 years co founded JAKKS and prior to that was THQ.

It's very strong and if you're in the correct categories Youre doing well I would tell you if you're in a category that is.

Just there that's where it's difficult there are several other toy manufacturers that have just general products or do you have products that are really resonating with children and.

And we call it to adults that are tweens.

We are very excited even without this continuing.

This pattern of sell throughs, and where we stand with our our forward looking numbers in our categories as I did mention earlier in the call that our foot to floor right onto our table and share all the bulk items are getting hurt.

The cost of shipping, but we expect that to be offset next year.

Hopefully in a much stronger platform and we also are having great success across the board. So we see in speaking we have right now currently in Santa Monica retailers here with major retailers that clubs are here, the dollar trade and thereby quite aggressive for the fall and looking into spring, our spring toy fair and they're looking to be.

Focus do many do much more with one manufacturer then with money.

And we have had one of the best call.

Call it.

Fall spring fall 'twenty, two follow ups and spring 'twenty three toy fairs in the history of Jack So so far what we're hearing is solid this where there's good product and where theres not then there's issues.

Okay, great. Thank you.

You know I was wondering you've given us a breakdown in the past, but your business between basics role play items everyday kind of stuff and then what's more hits driven.

Including but not limited to entertainment. So how would you how would you break out your business your percent wise between basics and has driven.

So it's a good question Garik I don't have the fund, but I could give you a kind of categories I don't have the percentages that we could do it offline when we have the call, but our basic evergreen business policy Black and Decker Princess style collection to perfectly cute Amy.

<unk>, which is exclusive at AR.

At target.

All of that the 10, Dow just a general Nintendo business, our scape four area of business that are call. It trampolines and ball pits all are growing very nicely and our strong I don't have the breakout in which I think are requesting correctly I don't want to.

Give approximate but we could do that afterwards, but then you have on top of those nice successes that we're having are our everyday core product line you have the enhancement of the condo the Sonic classic the Sonic movie, we have the new Air Titans, which is launching which is really and I know that you've been in the toy.

Forever, It's one of the punished twice I've seen in a long time and that we have that we have.

The movie bites, we are a lot of fun things that are really just resonating right now with consumers and the breakout is core is doing great and I have to break out the categories in which whether its role play at Halloween and so on and then the excitement that's going great with the licenses are being caught doing all the different categories and with Sonic and all the different categories.

Okay.

Let me ask just one more thing do you think you can grow next year on top of.

All of the.

<unk> had this year.

It's a great question, we there's a few things when I look at next year, we have some exciting new properties, which we have talked about what their discussed you see that Nintendo yesterday move their movie until April which is very exciting for us because it's a much better time for a manufacturer when it was coming out in December the kids would not be able to.

Get to resonate with that content, but now that's going into April .

Tenda has grown double digits, almost every year that having that in April .

Great New strong movie.

For fall next year and the other licenses that we haven't come out with so I'm not sure. If we're going to be able I can't tell you where growth is this year because it's really early on but I do believe we will have growth and profitability.

Possibly sales I, just it's way too early to see where we stand today in April and we just don't know where the whole year, but we do have exciting things. This year, we have exciting things next year and some of which we can't discuss but we have a great platform going into 'twenty four.

Okay, Alright, great. Thank you Steve.

Thank you Kurt.

Thank you I'm showing no further questions at this time like to turn the call back over to Mr. Stephen Berman for any closing remarks.

Great. Thank you everyone for taking the call with US today. We're excited this is definitely the slowest quarter of the year and we had a great quarter and we're looking forward to a terrific year going forward and we appreciate everyone's time and we look forward to see people at the licensing show during toy fair and either the next call. Thank you very much.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.

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