Q2 2023 JAKKS Pacific Inc Earnings Call
Okay.
Good afternoon, everyone welcome to the JAKKS Pacific Second quarter 2023 earnings conference call with management, who were.
With your financial results for the quarter ended June 30th 2023.
<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.
Stephen will first provide an overview of the quarter along with the highlights of product lines and current business trends then John will provide some additional editorial around JAKKS Pacific's financial and operational results.
Mr. Berman will then return with additional comments for closing remarks prior to opening up the call for questions.
Your lines will be placed on mute for the first portion of the call.
If you would like to be placed in the queue to ask a question. Please press star 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 adjusted EBITDA in 2023 as well as any other forward looking statements concerning 2023 and beyond are subject to the safe Hot.
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 they'll start to chase you should consult JAKKS. Most recent 10-K and 10-Q filings with the FCC as well as the company's other reports that we file with the SEC from time to time.
In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share.
Unless stated otherwise the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measures with the company's earning press release issued today or previously.
As a reminder, this conference is being recorded.
With that I'll now like to turn the call over to Stephen Berman, Sir you may begin.
Okay.
Good afternoon, and thank you for joining us today.
As we cross into the second half of the year, we're happy with our performance to date and our outlook for the balance of the year. We feel were lined up for another very very good year here at JAKKS.
In the second quarter, we marked a number of meaningful positive milestones that are foundational to achieving our 2023 objectives.
As we have previously disclosed in early June we retired the balance of our long term debt several years prior to its scheduled maturity.
Our tighter working capital management and projections for the balance of the year gave us confidence we can make that decision at access cheaper financing as needed in the short term.
We're always looking for ways to improve our bottom line results and given this higher interest rate environment. This is a good opportunity for JAKKS.
We consider this a remarkable accomplishment given the high leverage of our recapitalized 2019 balance sheet.
Over the last three and a half years. The company has spent over $35 million in cash interest expense, we look forward to any future borrowings being on a more favorable terms and it'll be done more strategically.
Turning to the more operational side of our business. The two major films were supported in the first half of the year about the toy in costume businesses are paying dividends the Super Mario Brothers movie worldwide box office is now in excess of $1 3 billion and as expected is driving demand for both our classic ever.
Agreement tender product line as well as the new product range aspired by the film.
The fire breathing Bowser has already shipped over 300000 units and it's one of our most prolific must have toys in recent years.
We are extremely proud of the team's success in taking such an iconic character and transforming him in just such a memorable wild toys.
Separately, the just eat little Mermaid film has generated over a half billion dollars at the global box office, we've seen great reaction to our aerial dress under the sea exploring aerial feature doll with lights and music and our singing seashells necklace that are all inspired by the film.
And our evergreen Disney Princess business is also benefiting outperforming last year in terms of sell through at the top three U S accounts.
Accordingly, we saw toy consumer products Pos at the top U S accounts accelerate in the quarter from Q1, reaching high single digits in total our action play a collectible business was up 20 plus percent and our Dol role play and dress up segment was slightly positive. Despite a robust Q2 last.
Sure.
In line with what we're hearing about transit retail we finished Q2 with around 10% to 15% less inventory on hand, and those accounts compared to the end of Q1 their inventory levels are down even more from this time last year. If you set aside carryover from our big holiday 2021 film release.
We are continuing to see retail take a cautious attitude towards inventory, both now and as they project the holiday season.
This approach is important in context at evaluating our Q2 sales results as a reminder, last year's market had a remarkable number of customers buying product early in the year to avoid out of stocks and adapt for the longer supply chain. They saw in 2021.
At 2023, nearly all customers to varying degree are being conservative with their buys now and they're looking towards the back half retailers are carefully watching the margins and being more comfortable with the prospect of running out of stock then rescue and being a deep inventory.
We are fortunate though to have once again some of the hottest businesses. In addition to our proven evergreen lineup in this environment.
We continue to work closely with smaller customers, who are seeing it as an opportunity to gain market share.
This year, we shipped $167 million in the quarter down 24% from the record set in Q2 last year Nonetheless.
Nonetheless as expected we saw a continuation of overall strong first half performance compared to our historical trends.
We attribute these results to a combination of strong first half entertainment properties this year and last as well as our continued focus on the F O B business model encouraging customers to buy for the second half at the ports in Asia to leverage their larger and efficient supply chains for.
For the total company in the first half of the year, we are down 24% in North America and up 10% internationally led by a near doubling of our business in Latin America.
The exceptional growth of our action play a collectible division to $52 6 billion in the quarter up 41% was not enough to overcome the drop in our dolls role play dress up division, which nonetheless ship $59 million this quarter down from an astronomical 102 million. This time last year.
It's worth noting that this year's doll division performance represents a 21% increase over the same quarter in 2021.
Our outdoor seasonal business continues to face some challenges ranging from retailers moving away from large cube items in store as well as the degree of overhang from Covid stockpiling on many of these items. This business was down 34% year to date and we are looking on a range of different initiatives to enhance and grow this division.
Which we're excited about and we'll be able to share more about later this year.
And our costs are as a business we were down 32% in the quarter late in the quarter. We found more customers purchase shifts eight into July as our confidence builds around fastest supply chains.
Overall, we still are anticipating our costume business to be slightly lower than last year, which was a record high.
I will now pass it over to John for some further comments after which I will come back with some additional material about where we are focusing in the second half John .
Thank you Steven and Hello, everyone.
<unk> been busy over the past few weeks reviewing the quarter and first half results trying to figure out what's gone. According to plan, what's been better than we would have hoped in what areas have been a bit lacking.
And overall as Stephen pointed out we're pretty happy with where we are is it's roughly where we hoped we would be we knew we had an extremely difficult revenue comparison due to the massive topline growth we've achieved in recent years.
But we also had a degree of confidence that gross margin percentages could improve and that we could hold the line on SG&A spending reasonably well to mitigate the revenue downside.
And broadly speaking, that's where we've ended up so now we're onto the back half and we'll try to stay on that path.
So.
The first half headlines.
<unk> was down 20% for the first half and we continue to see a more front weighted year compared to recent years as Steven noted as an additional reference point there although down year over year. Our first half sales results are 40% higher than the comparable period in 2021.
We're happy to see second quarter product margins expand at 48, 4% up 370 basis points from 44, 7% in prior year for the first half we're at 47.4% product margin, which is 420 basis point improvement from 2022.
This improvement mitigated our gross profit dollar decline of 16% in the quarter and 9% for the first half.
The first half gross margin of $82 $6 million is the second highest number since 2009 14 years ago.
It's also the first time, our quarterly gross margin percentage exceeded 30% since Q3 2021.
Moving on to SG&A similar to last quarter, we see some expense areas running higher than prior year and are exploring operationally to recalibrate where appropriate or.
We're always manage to keep the net dollar growth to $4 million year to date across direct selling and G&A, excluding depreciation and amortization.
Operating margin in the quarter dropped to nine 9% from 10, 7% in the year ago period.
As the year progresses, we're continuing to evaluate spending decisions prioritizing improvements to our infrastructure and processes as well as demand creation for key product lines. It is normal course of business for us to be in a constant state of looking to reduce or eliminate more legacy costs that has historically been a bit more fixed within our cost structure to sky.
Fund those initiatives as much as we can it.
It was that logic and part which motivated our early term loan payoff is eliminating unnecessary interest expense frees up cash and spending for more productive uses.
The payoff triggers and other onetime prepayment fee this time of $300000 as well as triggering a write off of deferred financing costs of around $700000, which we reflect as a loss on debt extinguishment.
But netting out the prepayment fee as well as some estimate of potential short term borrowing costs for the balance of the year. We're still confident this transaction allows us to avoid around $2 million in cash interest payments, we otherwise would have been obligated to pay in 2023.
For clarity sake, it's not necessarily our intention to run the company debt free we continue to monitor the debt markets and talk to people about scenarios and ideas to increase our liquidity, particularly with a lower cost of capital than what we've enjoyed in recent years.
But as of now the combination of our short to medium term plans in the current rate environment leads us to what you see today.
We plan to maximize the day to day and rebuild our cash balances.
<unk>, we're continuing our efforts to improve our working capital management, you'll notice our owned inventories at $65 $1 million, which was the lowest Q2 level since Q2 of 2021.
That number somewhat masks that we're increasingly holding more inventory in Europe as we build out our direct sales capabilities in those markets, although to be clear we remain in F. O B first company rather than one that is kind of build back up inventory on the prospect of a possible sale down the road.
Another noteworthy element of this quarters financials is the increase in the marking to market valuation of our preferred stock derivative liability the reduction in our cost of capital with the elimination of our term loan increased liabilities valuation to $27 $8 million generating a noncash loss of $6 million in the quarter.
As is customary we adjust that amount out of our non-GAAP results.
You also might note a write off as an adjustments in this quarter as we continue to wind down some older joint ventures to refocus our energies on our core business.
Our adjusted EBITDA for the quarter was $27 million compared to $27 $1 million in the same period last year, our trailing 12 month, adjusted EBITDA was $66 $9 million.
Adjusted EPS for the quarter was $1 26, and 90 cents for the first half of the year those numbers are down from $2 10, and $1 85, respectively from 2022.
Finally, we wanted to acknowledge our recent inclusion in the Russell index for the first time in several years, we're happy to be back in the club as we see an increased trading volume since being added which is great.
And now I'll pass the call back to Steve for some additional comments.
Thank you John during.
During the past quarter, our resolve strengthen that we were set up to have an extremely good year and we took additional actions to make the most of it at the same time, we're not going to ignore what we're seeing happening out in the market.
As we talked about last quarter and are reiterating now we remain extremely mindful of our customers' inventory levels as well as our own and we will work to finish the year as clean as we can.
Among our most significant financial goals here is to constantly generate yearly cash flow from operations and an aggressive but importantly, not reckless manner.
It's with that mindset that we look forward to the second half and work on developing our 2024 and 2025 plans.
We have a wide assortment of new key drivers launch it in the second half of the year designed for the holiday gift, giving season I don't want to take the opportunity to highlight a few of them.
Excited with JAKKS Disney portfolio. The Disney 100 celebration is ongoing the Disney Princess brand is the focus for the month of August and we have created retail exclusives items to ally with major customers promotional efforts the Disney Princess brand remains a top priority for our company and we're excited.
To see our largest customer is viewing the brand the same way as we head into the fall planted Graham said.
Our lead amazing item in the Disney Princess is our style collection fresh prep gourmet kitchen. This amazing kitchen has tons of interactive features for kids to enjoy including an all new steam feature for realistic stovetop cooking experience.
It comes complete with five interactive appliances, it stovetop burner lights up and recognizes part in frying Pan with boiling it says the special effects and a virtual steam feature with over 35 pretend play accessories Theres a ton of play value and exciting role play opportunities for kids age three enough.
This fall is also the 10th anniversary of the theatrical release of Disney's frozen.
Our Disney frozen product line is another exceptional important business for us and we are excited to be launching the ice and snow also feature played $8 to commemorate the occasion the Dol things, let it go while also showcasing her ice powers and a fun magical way.
We will continue to support our little Mermaid product lines into the fall.
With the additional of Ursula mystical collagen.
Inspired by the sea, which from Disney's Little Mermaid movie pretend to cast spells like personal again and again with two feature play modes for both water and non water play plus a spellbook with recipes for homemade potions. This.
This call is also motion activated wave your hands over the counter and to activate light music and real water Bubbling feature. It also plays <unk> song poor unfortunate souls and it comes with color changing aerial figure potion bottles batten disease and more potion, making access.
Theories out.
This quarter marks the second year anniversary of our first launching of elite forever.
A completely new line of 18 inch dolls fashion and accessories, leveraging the latest fashion trends and girls favorite Disney characters and stories, we launched it exclusively at target in the U S and it's been a consistent on shelf presence ever since.
Beginning this quarter, we are expanding aligned to include fashion doll scale and play both at target, but also adding Walmart and Amazon distribution.
We are planning a full 360 paid media campaigns supporting new items, including digital social PR and trade support.
The campaign's focus will be on awareness building, a new ATM styles as well as the fashion doll launch in addition to the new thematic accessories and play patterns.
Changing aisles, while we chased demand from the Super Mario Brothers film wave two of the movie specific product is also coming to retail, including five inch figures micro figures, the Bowser Castle playset, and a donkey Kong Arena Playset, our Super Mario Evergreen product line is highlighted by the law.
Of the vouchers battle place it.
People look out for the TV commercials, highlighting these items in the weeks to come.
Part of our team was at the San Diego comic Con this past week, where we introduced some of those items for the first time.
We are also very excited about the sonic prime products, which will start hitting retail shelves in August anchored by the Sonic Prime ships in the two and a half inch figure scale, our all new five inch figure scale add all the details and articulation of the Sonic Prime shadow versus characters and being a very well received by fans of all ages.
And our depth a place it remains the cornerstone of our ever popular Sonic Classic line.
Disguise, our Halloween Division will continue to lead with licensed costumes. This year, adding new gaming Reits, such as poppy Playtime Piggy and Sonic crime, while continually costumes based on strong 2023 film releases like Paw patrol movie to Transformers rise of the beef.
Dungeons and Dragons minions and trolls to name a few.
Our international expansion will continue with new Disney brands launching in Europe to support a strong holiday. This fall overall retail conservatism on the year has already been built into our annual plan, especially coming off such a significant level of growth last year.
We're feeling very positive about the business this year and we have initiatives to expand the portfolio and footprint in the coming years.
And just a few more items, which are not massive launches, but we think our fun. So we'd like to draw some attention to them. During this call. We're expanding our distribution for army armies in the second half of the year and looking ahead to spring 2024 look for them in the U S at Macy's and Joanne and in the U K exclusively SaaS varies.
And more accounts to be announced soon.
We're happy to adding peanuts to our successful lineup of advent calendars this year and shelf talkers, expanding our talking plus holiday characters, which started with Buddy the L and Clark Griswold into a second year round collector opportunity. The light features characters from Coke classic movies, and TV shows as well as fan favorite <unk>.
Comedies voicing their most memorable quotable lines looking for characters from Beavis and Butthead, the Big Lebowski National Lampoon's Animal House, Superbad AG Cobra Kai amongst others.
We have many more initiatives at various stages of development and we will have a lot more exciting things to discuss during the second half of the year, we will stop there and open up for Q&A.
You again for your support and interest operator.
Thank you, ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait to announce to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A Rob.
Okay.
Our first question comes from the line of Andrew <unk> with Jefferies. Your line is open.
Hey, Thanks, John and Stephen can you.
Just a couple of questions I guess the first one.
You kind of touched on it in your in your prepared remarks, Stephen but just kind of double click on the idea of how costumes how retailers are feeling about costumes. This fall.
And in light of our consumers and then you kind of just touch on.
Consumer buying habits for costumes relative to toy segments.
Good afternoon, Andrew So on Halloween, we're actually having a very strong year with the sell in right now and currently very second and third quarter are the primary manufacturing in sell in periods. When we had this time last year, we had a bunch of retailers that were worried about not getting the goods due to the shipment delays and primarily majority of that business is nine.
Percent F O b. So this year due to the shipping delays that are kind of have gone to the wayside and ship it as somewhat back to normal people are taking the normal goods on hand.
At the appropriate time and not rushing to get early so that was really the shifted quarter. It wasn't that it was changed in our year forecast for it at this and then an additional last year, we had one retailer that part and very big and the Halloween business that cut back this year outside of that we are having a very strong solid Halloween business very diverse.
Distribution, our second big year internationally that is actually we're seeing a really nice growth.
And we have going into this year and going into next year or more so we have a lot of new IP in properties that we'll be announcing shortly so overall the Halloween business is really solid it was just more shifted in the quarter and we had our biggest Halloween last year.
We would not expect to have this year, but we were having a very strong Halloween as it stands today and then when it comes to the consumer buying patterns.
I would say very proud of our company and are proud of what we've developed internally on our divisional segments, because our segments are really what's strong and then while we have these segments. We have the right IP within the segment. So for instance, our boy segmentation, we had really strong IP with the Nintendo Classic Super Mario.
The movie we are Sonic classic Sonic movie Sonic Prime.
We have apex legends, we have a plethora of content and some new that will be announcing shortly so that's really strong and we're category strength is really performing well worldwide in those categories. Disney segmentation you know we're in a cot preschool pre cool is really what we call our Disney.
So while we're hearing you a really nice things about the Barbie movie our Disney business does not get affected primarily because we're not in that same category of 11 have install.
So we're much at a younger period before I really have a child with by a barbie they're buying or.
<unk> products at a younger age who are really in a great area of business. So overall, we're seeing.
Slowness in retail, but for JAKKS, our sell throughs have been strong our inventory levels are lower both at retail and in our distribution centers. So we've been managing this process for over a year and look at how things are lining up and we're just managing the business I think extremely well and strong and looking at not trying to be a hero.
In this environment to be strong and profitability as you can see that as we paid down our debt and looking at healthy revenue sales and profitable sales versus just sales to get sales.
Got it that's Super helpful. And then just kind of just kind of digging in a couple of our segments action play in collectibles seem to be going really strong obviously a lot of that's probably driven by March supervisory brothers movie in your toy line, there, but has there been any halo effect, where sonic as maybe outperforming because it's kind of in that game segment as well.
It's interesting so super Mario movie product is doing extremely well and Nintendo classic is doing well and what we've seen what we are expecting of a possibility has seen a slight slowdown of possibly sonic but at the same time, it's not happening or Sonic sales are extremely strong. So we're not getting we're not.
Trading dollars for one property to another.
It's happening at retail that it's affecting other boys properties, but what we're seeing we're doing extremely well our penetration is getting deeper and deeper at various other retailers from value change to specialty stores to mass. So we're really in a good spot we have registered checkout lane products that are selling exceptionally well in sonic is still doing.
Really strong with Nintendo another check named products overall.
For us we're not trading dollars. It is affecting other licensed boys IP, but not in our segmentation got it.
That's helpful. Thank you and then just kind of like an industry question, because I know you've done this for a while.
When when you say retail wants to run lean inventory does that mean.
Fewer skus are.
Where they maybe have normal inventory levels for the best performing toys or is that just kind of lean across.
All toy segments, all toy lines, regardless of how successful they are.
It's a good question Andrea so well lets call across retail themself theyre looking for overall inventory levels to be lower not just in our toy segmentation outside of grocery.
I caught the Alt a hard goods electronics the in vehicle at the home entertainment areas Theyre trying to keep a lower inventory, but as it has during the first half of the areas. As you know Ajay toy sales are really non holiday there more gift, giving or whether it's in Easter a birthday or that type of.
Process going into the second half retailers art, garnishing getting more inventory and make sure. They have the right product I think what's changing now is they don't need to buy everything from everyone Theyre focusing on the right companies that have the right product for their needs and doing more with less companies and thankfully, where one of those companies that we.
Spanned across so many various buyers at retail that a retailer can do a lot more with JAKKS and many of their segments versus other toy related company. So they are looking cautious.
For their inventory, but it's across the board, but remember Andrew they still need call it market drivers.
Areas that they can promote and bringing customers. So they continue the traffic during the holiday. So they do want the hard things for the holidays.
That's helpful. And then last question I had.
Pay down your debt.
<unk> always been on offense here, but it looks like you could probably put your foot on the pedal how are you thinking about international and growing that over the next several years.
So just say right now everyone knows the U S. North America market is in a mature market. So the only way we can grow International's got more ancillary distribution more shelf space and then continuing of more IP or more products within our categories. That's North America internationally as we mentioned I think in first quarter.
Then I'm delighted at the same time sad because he is very close to me in the company and very strong in our company, but our COO Jack Mcgrath is moving internationally because he can handle the growth that we expect he understands the DNA of JAKKS. He can make decisions immediately he understands that he has been with US 25 years. So we won't be moving him all the way.
Overseas, unless we believe materially in the growth and we've already made rapid changes immediately we have a new warehouse that opens up.
Next month in August we have a new staff and our additional staff in Italy, We grew Latin America. This year, so Jack working with myself and the team will be able to expand that growth, let's say would take five years six years to do it we can get that growth in two years and.
And yearly growth. So we're really excited about international in fact are going again with him August we're going to get into October there is a lot of growth opportunity and we're getting a lot more licenses and categories. Because people are having issues worldwide. So we're benefiting from you know.
On an offensive internationally not defenses, where people are coming to us to actually distribute their product internationally, because they don't want to build the overhead which we've already built so we're excited.
Really really internationally as well as just in total for the company.
Got it. Thank you guys really appreciate the time.
Thank you Andrew.
Thank you, ladies and gentlemen, those are for the Q&A.
Q&A, we have calls they're all growing throughout today and this evening. We appreciate everyone on the call. Thank you for joining we're going to have a lot more to hopefully talk about during our Q3 conference call and beyond Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
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Okay.
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