Q4 2022 JAKKS Pacific Inc Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.
Good afternoon, everyone welcome to JAKKS Pacific fourth quarter 2022, its conference call with management, who will review financial results for the quarter ended December 31st 2020 to 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 southern Stephen Berman, Chairman, and Chief Executive Officer, and John Kimble, Chief Financial Officer, Stephen will first provide an overview of the quarter and full year, along with highlights of the product lines and current business trends then John will provide some comments regarding JAKKS Pacific's financial and.
<unk> results Stephen 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 first portion of the call if you'd like to be placed in the queue to ask a question. Please press star one 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 2023 as well as any other forward looking statements concerning 2023 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 filing with the SEC as well as the company's other reports subsequently filed with the FCC from time to time. In addition, today's comments by management will refer to a non-GAAP financial measures such as <unk>.
<unk> EBITDA and adjusted earnings per share unless stated otherwise most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measures within the company's earnings press release issued today or previously as.
As a reminder, this conference is being recorded with that I would now like to turn the call over to Stephen Berman.
Thank you good afternoon, everyone and thank you for joining us today, as we recap the quarter and year and share our thoughts about what we're seeing in the months and quarters ahead.
Our fourth quarter sales ended up slightly exceeding our expectations. Despite our exceptionally strong results early in the year.
Our fourth quarter net sales totaled 131 $49 million, bringing our full year net sales to $796 2 million the highest annual results since 2014.
As we anticipated sales were down 30% in the quarter compared to the same quarter last year largely attributable to our prioritizing F O b selling early in 2022 and the related changes in seasonality of our business.
Our full year growth was driven by a combination of key skus across our major brands and our Nintendo business, both our Mario Kart 24 volt right on razor and let's go Yoshi interactive actually figure had great launches are sonic movie to speed, our C had a tremendous year.
Our Disney Princess style collection kitchen, and suitcase continuing to deliver in addition, we had two strong entertainment led product lines for Disney is a condo and Sega Sonic the Hedgehog I'm happy to report that in total seven of our top largest toy consumer products segments grew.
In calendar year 2022.
We had a very strong holiday season led by T. S skus across our major brands.
And our disease in Khartoum magical cockpit magical we've discussed before but it's worth bringing up again, it's been such a great item for us.
And as we stated on our call 2022 was our largest selling year with the sky since the acquisition in 2008.
We finished the year at $148 9 million in net sales a 38% increase over 2021.
In reviewing the year customers clearly changed the Halloween holiday and a couple of cases, a bit too much which merits a bit of recalibrating in 2023.
That said this business has never been better with our brand assortment of popular licenses and the steady build a capture of the international opportunity we think exists.
Last year at this time, we were deep in the chaos of inbound shipping delays.
With nearly 30% or approximately $20 million worth of our owned inventory in transit to one of our warehouses rather than being ready to ship.
I'm happy to say that we closed 2022 with only $4 9 million in transit to our warehouses and our overall owned inventory was down to $80 6 billion heading into the new year.
As we have stated in recent quarters and really going back to our 2019 recapitalization, it's been a priority to reduce the overall leverage and interest expense.
Although our 2021 refinancing was a positive step in that direction. The rise in market interest rates in the past few quarters has increased the overall rate of our term loan above 10% per year.
With that in mind, we have been extremely focused on freed up cash where we can.
Our exceptional performance in 2022 in combination with our unusually heavy first half seasonality combined to generate over 86 million in operating cash flow in 2022 as reported in recent quarters, we allocated $27 5 billion to the optional term loan pay downs in 2022.
In addition, we're reporting today that we've made an additional optional payment earlier this quarter a $15 million.
5 billion of which incurred a 3% prepayment fee.
The ACF sweep provision of our term loan also required us to make an additional mandatory pay down of $23 1 million without any prepayment fees.
When we tally up these additional payments the current payoff level of our term loan as of today is just $30 8 million.
We are beyond proud of these improvements to our balance sheet. We are following our roadmap of lowering our borrowing costs and evaluating the broader array of options afforded to us as we increasingly engaged the market from a position of financial strength.
As you have often heard me say on these calls.
When you're in the industry like ours, it's imperative to be resilient and stay attentive to always the changing dynamics of the world in which we live in.
We were not immune from the issues of other companies in our space experienced last year as it relates to help customers track consumer demand and planned for the holiday season slowing customer demand in our seasonal business in the second half bargain on our supply chain generate in excess of costs associated with warehousing and reputation of product. Despite.
Lower container spot rates in the second half of the year. This year at the productivity of our warehousing operations and <unk> taken some aggressive actions as it relates to Valerie of our own inventory.
Our toy and kids consumer products point of sale rebate up double digits in Q4 at our top three accounts and we think we've performed better in this area than our peer groups. Nonetheless, our provisions for sales allowance in Q4 were unfavorable to our 2021 results like many in the industry.
These factors were the primary drivers of our fourth quarter gross margin, finishing at 21, 7% compared to the 26, 6% reported in Q4 of 2021.
John will go through the math and a bit more detail when I hand over the phone to him, but I wanted to highlight this is a clear area for improvement in 2023.
With that said the year ended up pretty much where we thought it would be and planned it to be since our last call.
Most of US have been in this business a long time, so forgive me for a recap in one more time on the full year highlights.
Full year net sales of $796 2 million, a 28% increase over 2021, and a 54% increase over our pandemic low.
$515 9 million in 2020.
Full year operating income of 61 million and operating margin of seven 7%.
140 basis point improvement over 2020, 163%.
Full year, adjusted EBITDA of $76 4 million up 55% compared to last year and our highest level since 2010.
At Jack's, we're thankful and appreciative of all of our success as we know how challenging this business can be.
We intend to continue to focus on timeless brands and categories are singles and doubles that might not be exciting for everyone, but represents the foundation of which our business was built.
We continue to actively pursue the most ravelin IP rights for our model with the knowledge that sometimes passed it on an opportunity as more prudent than chasing new business at any cost.
In 2023, we will continue to expand our north American distribution footprint beyond the major customers.
In addition, as you know we have been methodically going deeper into the largest international markets with both toy kids consumer products and costume businesses and we intend to continue that in 2023 as well.
Top here I'll, let John go a bit deeper into some of the financials and they will come back to talk more about 2023 and beyond John .
Thank you Steven and hi, everybody.
Regular listeners know theres, a greater level of granular detail included in our release today, but I'm going to be selective in what I highlight here towards what I think merits, they're focused attention.
We're pretty happy with how the year ended from a shipping perspective, delivering the 20 plus percent top line growth, we talked about last quarter and doing so for the second year in a row.
Steven alluded to we saw similar trends as others in the industry as it relates to consumer sell through at retail inclusive of a bit more of the traditional rush in the last couple of weeks the shelves could have been a bit more empty on 12 31, we don't think we've distinguished ourselves to the negative on that front, which is helpful. From a big picture point of view gross margin is clearly an area, where we were experiencing more challenges.
Being proactive as it relates to cleaning up inventory is something you pay for here, especially in the smaller shipping quarter.
Royalties continue to run a bit higher as expected our tooling amortization is trending up a bit we've talked about capex being up a bit this year as we've duplicated tools on some lines to chase demand one of the bigger expense areas here is from lack of warehouse productivity to geek out on it briefly inbound freight and a portion of warehousing is capitalized a product in that math.
Driven in part by how much we've spent on warehousing during the year and also how much product. We're importing during the year. When you consider how we've been trying to work down inventory since the beginning of last year, and we experienced higher warehousing expense. This year dealing with the supply chain backing up a bit and are needing to secure incremental space that math doesn't work in our favor.
We have more cost than you'd like and less product to spread the cost over the result, then flows through your P&L.
Everything wasn't bad here, we did have some improvements in landed cost margin year over year, and we are lapping the access of container cost of last year, but when you add it all up gross margin for the quarter was 21, 7% or 490 basis points worse than Q4 of last year.
Full year gross margin ends up at 26, 5% or 300 basis points below 2021.
For 2022 gross margin percentage, however is not adjusted for the portion of co op advertising, which we moved into sales allowances at the beginning of 2022 historically that number is in the 200 to 250 basis point range. So you can adjust that out if you want a more accurate year over year comparison here as you ponder what might be feasible in 2023.
Direct selling in the quarter was roughly in line with our expectations aside from the aforementioned higher warehousing expenses the year over year number is negative on the P&L is that co op advertising element is now recorded above net sales.
G&A inclusive of product development, and testing and depreciation and amortization was $31 1 million up from $27 $9 million in Q4 2021.
On a full year basis that number was $116 7 million a 15% increase over 2021.
The main driver there has been are adding back positions post pandemic to support the expansion of the business over the past couple of years.
Our non comp related G&A inclusive of stock comp expense grew high single digits on a full year basis, which feels reasonable as we think about 2022 being more return to office in pre COVID-19 norms for us.
As well as they are being a bit of variable spend in that number.
We have been working on a bottoms up review of spending as we started new year to ensure that we're minimizing and optimizing our expenditures.
On a full year basis, our operating margin of seven 7% was as high as that number has been since 2008.
Closing the books this year required a lot more time and effort as it relates to our tax provision shout out to the tax team. We've concluded a 382 analysis on both the federal and state levels to refine the level of net operating losses or Nols, we expect to utilize in the years to come in light of a couple of impairments that we have identified is taking place in 2019 and 2021.
Longer recap on this topic will be included in our 10-K filing.
As part of that exercise and in conjunction with our financial projections as part of this quarter's close we're releasing a valuation allowance against a portion of those historical Nols.
This release generates a one time noncash gain of $52 $6 million as part of this quarter's P&L.
Which we have adjusted out of our adjusted EBITDA adjusted net income and adjusted EPS calculations.
Looking forward, we would anticipate being around 21% as an effective tax rate in 2023.
Although Steven walked you through it I wanted to revisit the current state of our debt.
As part of our annual close process, we generated full year operating cash flow of $86 $1 million when adjusting for Capex and optional Paydowns. We made during the year. Our term loan has a mandatory paydown provision, which calls for a payment of half of that amount and as a result, we have moved that dollar amount $23 $1 million to short term debt as part of our 12 31.
On balance sheet.
We have in fact gone ahead and made that payment as our numbers finalized in.
In addition, we made an optional pay down in January of $15 million. The last 5 million of which included a 3% prepayment fee of $150000.
When you add those two amounts together for total payments of $38 $1 million to date in 2023 that reduces our current term loan payoff amount to $30.8 million.
The carrying amount is slightly lower given unamortized loan fees, but that will be addressed as part of our Q1 close process.
As of March 3rd our unrestricted cash balance was $37 $9 million net of those loan Paydowns and we currently have no draw on our ABL.
This is the time of the year, where our liquidity tends to get tight as we are building product for second half consumer demand, but we're comfortable based upon our projections that we can navigate towards the second half of the year leaning on our ABL line if needed.
Relevant interest rate on our loan is around 11, 2% in Q1.
The drastically reduced balance the associated interest expense as less of a drag on our results acknowledging that drawing on our ABL is also more expensive. These days given the higher fed funds rate.
In any case currently job number one remains executing against this year's operating plan. We clearly had an AE typically robust revenue line last year, driven by a couple of hits.
Lot of great initiatives. This year as Stephen will soon highlight but how those two ultimately bounce out is inevitably hard to project. If one is being honest we.
We have clear opportunities to improve gross margins and then the challenge becomes what sort of scale can we get out of our fixed cost base.
With a lower interest expense projection for the balance of the year, we plan to be opportunistic in evaluating where the refinancing our remaining debt is the right course of action or whether we should let the quarters ahead to play themselves out, particularly given the range of opinions about where interest rates and market liquidity might be 12 months from now.
Elsewhere on the balance sheet and reviewing our preferred stock derivative liability, primarily due to higher market discount rates. This quarter, we recorded a lower valuation of the liability generating a noncash gain of $1 $4 million, we back that market adjustment out of our non-GAAP calculations of adjusted EBITDA adjusted net income and adjusted EPS.
Our adjusted diluted EPS for the quarter is a loss of $1 44 down from a gain of 14 cents from Q4 2021 full year adjusted diluted EPS was $4 28 compared to $2 59 for full year 2021 quarterly EPS is calculated based on a basic share count of $9 seven.
Year to date EPS is calculated based on a diluted share count of $10 2 million.
And in aggregate, our adjusted EBITDA for the quarter was a loss of $12 1 million versus a gain of $5 million last year, our full year, adjusted EBITDA was $76 $4 million or nine 6% of net sales compared to $49 2 million and seven 9% of net sales in 2021.
And now back to Stephen for some additional remarks.
Thank you John .
I want to turn now to talk about some of the key areas. We are focusing on this year.
Interaction figure at collectible business, we are extremely excited about the new Super Mario Brothers movie from illumination and Nintendo launch it in theaters April 5th the team has created the entirely new fiber build scale with greater articulation in conjunction with the movie along with micro figures and play sets.
And a seven inch fire breathing bowser, all that product and Morris hitting shelves now we are extremely excited for France to see the movie and the product and if our experience with Sonic the Hedgehog is any indication the entertainment will break new fans into the franchise to discover both are moving product as well as our deep.
Catalogued our Super Mario Toys, we've been building for several recent years, we are expecting some great things with Nintendo this year.
That's not to say we have forgotten about sonic in the slide is the new Sonic Prime episodic programing started on Netflix in December and has been a great success, we have related products launching this fall coordinated with additional drop of content.
We were really pleased with the solid performance in Q4, and how the product line will continue to expand this year supported by new content development and this team in particular is always aggressively looking out for new opportunities, which at this point would be 2024 and beyond but watch this space for more news here.
Our dolls role play and dress up segment is coming off a massive year led by growth in disease, and condo Disney Princess dress up and the Disney Princess style collection for those of you that know the business, we have some difficult comps year over year in this area, but there are many new initiatives, bringing new news.
News and energy to these Isles at retail.
In Q1, we partnered with Walmart to exclusively launch our latest new IP Ami armies and huge collectible plush line that inspired by the trend of yarn and crocheting. This is a broad collection of soft and cozy characters that personify all of collectors favorite things ever.
Every collectible has a sweet little personality that is described on their hang tag and found in their product details.
Our factor of this product is really off the charts and we've been hiding it from the world into our release last month.
Its distribution will began to go wider in the second half of this year and we are eager to see the reaction to what the team has put together over the past year.
Our Disney business is working on to support Disney 100 celebrated 100 years of the Walt Disney Company. This 18 month celebration commenced December 26 and runs through June 2020 for each.
Each month Disney will celebrate a key franchise every months. This is an condo was a focus in February we have created exclusive Disney 100 products for top U S customers as part of their respective programs to celebrate this milestone.
We will be sharing more about the existing 100 celebration throughout the year and are obviously extremely proud to be part of such a large cultural event.
As we mentioned last quarter, we have new product lines, launching and supportive to Disney theatrical releases this year.
In may at disease, the little Mermaid live action retailing, the beloved animated story.
Leveraging the new art styles icons and designs from the movie we have dress up role play toys and large dolls inspired by the film we are extremely excited and thanksgiving's release window as Disney's animations wish exploring how the iconic Wishy star came to be.
As Disney's 100, immersive fans around the world and the magic of Disney All year. This is a great foundational cornerstone relief launching during the holiday season.
Our Disney Illy large dollar remains on end cap at target in the U S and continues to get great reaction and the 18 install space.
International expansion of this line continues in 2023 and later this year, we're bringing the brand to fashion doll scale. So stay tuned for more details about that launch.
The effect of the supply chain disruptions and freight cost increases of late 2021, and 2022 impacted the seasonal business, particularly more in 2020 to the input cost of bulk size products.
And resulting freight cost of activity tables ball pits and ride ons electric price increases to consumers with slowdown Pos and contribute to the overall shipments being down year over year.
With freight costs closer to pre pandemic levels were looking to stabilize the seasonal visits in these core segments as well as grow the redo skateboards visits and expand action sports with inline roller skates.
Moving onto our disguise costume business Q1 marks the first full year of holding the Disney license in Europe , and we are really pleased with how the business is developing.
He knows rights has provided us with more scale, enabling greater investment in local resources to tailor our product offerings to the local tastes and requirements and also provide the right level of service and attention to costume buyers back in North America. Some of our customers got a bit ahead of themselves.
In 2020 to say at a high hurdle for this year, but overall the trajectory of this global business looks great.
From a seasonality perspective, certainly there is a lot of talk about the economy retail inventories in the mindset of the consumer.
We are extremely comfortable with where we are with respect to our peers and are looking forward to the highlights I just mentioned and pushing forward. Some other initiatives that we have in the works would you agree that 2023 will return the toy industry to its more normal traditional heavy second half focus than what we've experienced the past few.
Yes.
We had tremendous pass through the first half of last year as we chase demand on a couple of our larger businesses.
For me at a higher level than one would reasonably planned for.
As it remained very much F&B first company, we still expect the first half of the year to be material for us, although it's a new year, we continue to focus on the basics of our business.
Working closely with our factories to ensure we are securing the best prices and on time deliveries.
Working with our customers and licensing partners to develop the right promotional programs to generate robust sell throughs for this year's products. While we simultaneously develop next years and lastly, we're always talking to everyone. All the time about brand new product line extensions and opportunities to continue to layer on the <unk>.
Munis and excitement that our business requires we look forward to updating you during the year about our progress and appreciate your continued support and interest.
One final point before we move on to questions. Our company is focused on expanding its global distribution network. We have been methodically building out our international structure and teams for long term growth in both mature and underdeveloped markets.
This has been rewarded with steady increases in our international sales over the past several years.
In order to further that growth I am extremely pleased to announce that effective January one 2024, our chief operating officer, Jack Mcgrath will move full time to our U K office and assumed the role of President of European operations. We anticipate that this will augment the coordination of our U S and international.
Initiatives and help us achieve our fullest market potential.
We are confident that Jack will use his many years of experience with our U S operations to take advantage of the opportunities for appropriate expansion of our international footprint.
This restructuring has been the works for some time as we have plans to reassign. His current responsibilities to the appropriate leaders of other departments. There is no intention to backfill the corporate CLO position at this time.
With that we will now take questions operator.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.
I would now like to turn the conference back.
Back to CEO , Stephen Berman for closing remarks.
Thank you, ladies and gentlemen, we have a lineup of calls after this once we appreciate everyone that we're on the call today and who will be speaking do after this call and we look to forward to talking to you. After our first quarter is completed and during our first quarter earnings. Thank you again.
And this concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly.
Lower Johan during Q&A, you can dial star one one.
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Okay.
Yes.
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