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Edited Transcript of JAKK earnings conference call or presentation 26-Oct-17 1:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 JAKKS Pacific Inc Earnings Call

MALIBU Oct 31, 2017 (Thomson StreetEvents) -- Edited Transcript of JAKKS Pacific Inc earnings conference call or presentation Thursday, October 26, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joel M. Bennett

JAKKS Pacific, Inc. - CFO and EVP

* Stephen G. Berman

JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary

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Conference Call Participants

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* Andrew E. Crum

Stifel, Nicolaus & Company, Incorporated, Research Division - VP

* Gerrick Luke Johnson

BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst

* Kirk Ludtke

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

* Stephen Puckowitz

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Presentation

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Operator [1]

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Good morning, and welcome to JAKKS Pacific Third Quarter 2017 Earnings Conference Call with management, who will review financial results for the quarter ending September 30, 2017. JAKKS issued its earnings press release earlier this morning. Presentation slides containing information covered in both today's earnings press release and call are available on our website in the Investors section. On the call this morning are Stephen Berman, Chairman and Chief Executive Officer; and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter and provide highlights of product lines and current business trends, then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results prior to opening up the call for your questions. (Operator Instructions) 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 and/or EBITDA growth in 2017 as well as any other forward-looking statements concerning 2017 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. As a reminder, this conference is being recorded.

With that, I would now like to turn the call over to Stephen Berman.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [2]

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Good morning, everyone, and thank you for joining us today. The third quarter of 2017 came in below our expectations. Total sales in the quarter were down year-over-year approximately 13%. On September 20, we announced that the bankruptcy of Toys"R"Us was having an adverse impact on our sales in the third and fourth quarters. We slowed shipments in the quarter and then we briefly halted shipments as we better understood the situation. We are now working closely with Toys"R"Us' management on critical vendor status as well as working closely with them on planning for the holiday selling season and a long list of 2018 initiatives.

After having many conversations and meetings with the management, going forward, 2018 and beyond, Toys"R"Us' business will be a healthier worldwide toy retailer.

In addition, the U.K. had lower-than-expected sales. And partly as a result of the declines in the products expected to ship to Toys"R"Us, we have taken cash charges related to minimum royalty guarantees and bad debt and noncash charges related to the impairment of certain assets, including goodwill from acquisitions. Joel will discuss these charges in more detail later on the call.

The lower-than-expected shipments at Toys"R"Us was one of the biggest factors in the decline, but as usually is the case, the quarter saw a number of products that grew and/or newly introduced and others that declined or did not perform to expectations. Among those that were positive in sales were Moana, Tangled, seasonal business units, Moose and Disguise, DC Superhero Girls, Real Workin' Buddies Mr. Dusty and Squish-Dee-lish, just to name a few. Among those that declined or did not perform well were Star Wars BIG FIGS, Tsum Tsum, Sofia the First preschool products and Whisker Haven various preschool products and dolls.

Our point-of-sale results during the quarter were encouraging with overall our POS up strongly compared to a year ago. We are also currently seeing a strong uptick in sales of our new line of Tsum Tsum product offerings. Four of our 5 major product categories saw sell-through that was better than our sell-in. Indicating that our retail inventory levels are in good shape. We have made more progress in reaching our long-term strategic goals. We are looking to build our evergreen properties, and we saw strong increases in sales of seasonal products, including ride-ons and ball pits, large-scale toddler dolls, particularly with Disney's Moana and the DC toddler dolls. We are seeing strong sales of several Disney licensed products, especially those tied to Moana following the streaming and DVD releases. From what we are currently seeing at retail, our Moana products are selling better than the competitive products.

Exciting news are the total sales of our Disney girl products, which include dolls, play sets and mini figures across multiple licenses were up in the quarter and have seen very strong POS increases despite the continued decline of Frozen. Our Halloween business, which includes Disney Princess, Nintendo characters, Minecraft and new licenses such as PJ Masks, Lego Ninjago, Power Rangers, Descendants 2, just to name a few, are doing well in sell-throughs at retail to date.

The strategies that we've been working on are now starting to pay off. Our efforts to build our own IP were some of the biggest contributors to third quarter sales were from Mr. Dusty, a truck in our Real Workin' Buddies line. The success of Mr. Dusty has allowed us to extend that line with new offerings planned for next year. Squish-Dee-lish, an on trend, slow-rise foam collectible product; and Unicone Rainbow Swirl Maker, A Chocolate Egg Surprise, both food activities. Our efforts to enter new categories are bearing fruit. We are on the cusp of launching our proprietary C'est Moi line of skin care and cosmetic products for tweens. We have reformulated the product line and are in the middle of production for their official launch in January 2018. The first phase of our consumer-facing website is now live. The next phase will kick off the first half of 2018 with a strong direct-to-consumer e-commerce initiative. Additionally, a cohesive digital and influencer program will support our direct-to-consumer activations. In December, we expect to see initial shipments of C'est Moi. We have a number of retailers lined up, and we continue to work out the details for broadening the distribution next year. As I have said before, we are excited about this new category introduction as it's high-growth and high-margin category, and we believe we have a differentiated product that will resonate with tweens.

Our geographic expansion continues to help fuel our growth prospects. Total international sales were down in the quarter, but 2 of our strongest new product launches, Mr. Dusty and Squish-Dee-lish, are just launching in the international markets now. Our strategy to grow our online sales is proving to be right on point. We are working closely with our brick-and-mortar customers as they evolve to build their e-commerce businesses. Our sales to Amazon saw tremendous growth in the quarter. Through the first 9 months, total sales to online retailers are up modestly despite a decline in overall sales. We continue to strive to increase online sales as a percentage of our total business.

Developing products specifically for the alternative channels has proven a success with customers in the U.S. such as the dollar stores, drug and grocery channels, and specialty stores such as Bed Bath & Beyond, GameStop and T.J.Maxx, just to name a few. In addition, internationally, the alternative channels, such as Vente and Relay in France; Elbenwald Tank & Rast in Germany; and TJ Morris and Toymaster in the U.K., to name a few, are moving along strong today, and we are looking forward to even a stronger 2018.

Looking to 2018, we're expecting several licensed brands to be drivers, such as the global launch of Disney's Incredibles 2, in conjunction with the movie; Moana; Tangled, The Series; DC Superheroes; the new Star Wars movie; and Nintendo products. We also have a few new deals in the works that we hope to announce by the end of the year.

Consistent with our strategy to grow our own IP, in 2018, we expect to see very strong sales next year from a wide range of our own proprietary products. Squish-Dee-lish will roll out to new territories. In addition to Squish-Dee-lish, we have our co-branded Squish-Dee-lish with strong licenses, such as Shopkins, Nintendo and Disney Tsum Tsum.

Our Real Workin' Buddies line will see Mr. Dusty, the trash truck joined by Mr. Hosey, the fire engine, and possibly other new products in that line. We're also excited about Morf, a non-toy sports action product that combines the features of skateboards, scooters and balance balls, which is expected to be in full distribution early 2018. A new category of entry for us, Pull My Finger game is being launched during the late fourth quarter this year and will roll out to all customers in spring 2018. And Master A Million: think of fidget spinner meets Fitbit in a ball with a social app to connect players. Studio JP is making solid progress. The team in the U.S. and in China is currently in development of new franchises slated for fall 2018, comprised of original animated content created specifically for network and digital distribution, both in long form and short form. These investments take time to maximize the payoff, and we'll be patient as we build out the products, the content and the distribution models we need to make them work.

They are an acknowledgment that to build on our core business plus diversify and transform our company, we need to continue to develop our strong base business with a broad diversified customer base, in addition add new sources of high-margin revenue and profits. We will continue to look for new avenues of growth even as we continue to build our traditional toy offerings, with our strong licensing partners, category leadership, as well as our own IP.

So in closing, after going through a challenging retail environment over the year, we are looking forward to a healthier environment in 2018 and beyond; Toys"R"Us being a healthier retailer in 2018; our continued partnerships with our large retail partners such as Walmart, Target, Costco, Tesco, Amazon, just to name a few; broadening and growing through our current and new alternative sales channels; building off our core categories with strong licensing partners; building higher gross margin categories and product lines by continuing to build our own IP off of our current successes; continue to build our customer private label and exclusive product programs; enter new licenses in current and broader categories; expand directly internationally through our direct to consumer format; enter into higher gross margin businesses like C'est Moi with new distribution channels; and build up our current content development with our joint venture partner, Meisheng.

Joel will now review our financial performance in the quarter. Joel?

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [3]

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Thank you, Stephen, and good morning, everyone. Consistent with our recently revised general outlook, which also reflected the impact of shipping delays in anticipation of and on account of TRU's bankruptcy filing, net sales for the third quarter were $262.4 million compared to $302.8 million last year.

The reported net loss for the quarter was $17.6 million or $0.77 per diluted share, which includes one-time noncash charges totaling $24.9 million related to the impairment of goodwill and other intangible and nonoperating assets of $19.5 million and inventory of $4.4 million resulting from expected market disruptions. And other significant and unusual charges totaling $19.4 million, which include minimum guarantee shortfalls of $11.9 million, reserves for potential TRU bad debt of $7.3 million and other restructuring charges of $200,000.

This compares to net income of $30.6 million or $0.82 per diluted share in the year-ago period. And adjusted EBITDA for the third quarter was $38.6 million compared to $42.8 million in the third quarter of 2016.

Excluding the charges in 2017, net income attributable to JAKKS Pacific would have been $19.6 million or $0.53 per diluted share. The sales drivers in the quarter by category were as follows. Sales of dolls, Role Play and Dress Up, Plush and activity products in our girls category amounted to $132.8 million for the quarter compared to $149 million in 2016. This was driven by dolls and role-play toys featuring Disney Princess, Moana, Elena, Beauty and the Beast and Frozen, Tsum Tsum collectible figures and accessories and DC Superhero Girls and the launch of Squish-Dee-lish slow-rise foam collectibles, though Frozen, Tsum Tsum, Sofia the First and certain private label products are down year-over-year as expected.

Sales of Action Figures, Vehicles, Role Play and Electronics products in our Boys and Other category for the third quarter were $34.2 million compared to $59.1 million last year, driven by Nintendo, Black & Decker, Real Workin' Buddies Mr. Dusty, the launch of Power Rippers and BIG FIGS. And absent some catalyst, XPV, Turtles, RC and Star Wars declined year-over-year as well as Max Tow and Black & Decker.

Sales of seasonal products, including licensed ride-ons, ball pits, kids furniture and Maui outdoor activity products were $34.9 million in Q3 2017, up from $30,300,000 in 2016. As expected, the decline experienced in the kids furniture, absent the blitz promotion we had in 2016, was more than offset by increases in Moose Mountain ride-on and ball pit categories.

Sales in our Halloween category, which is also one of our business segments, totaled $58.2 million in the third quarter of 2017, up from $57.1 million in 2016. Sales of baby doll accessories, figures and plush in our preschool category were $2.3 million, down from $7.3 million for Q3 2016, driven by products featuring Daniel Tiger's Neighborhood, though down year-over-year along with Graco-branded baby doll accessories.

Looking at sales by business segment, u.S. and Canada sales for the third quarter were $154.1 million compared to the $188.4 million in the year-ago period, driven by Disney Princess, Frozen, Moana, Elena of Avalor and Tsum Tsum collectible figures. International sales for the third quarter were $50.1 million compared to $57.3 million in 2016 with the same drivers as the North America. And we already mentioned Halloween in the category breakdown.

Gross margin in the third quarter was 23.5%, down from 31.4% last year, due primarily to increased royalty expense resulting from minimum guarantee shortfalls and inventory impairment charges. Excluding the related charges, gross margin would have been 29.7%, with the decline due to a higher proportion of closeout sales in the quarter. We're focused on managing the business to minimize headwinds affecting royalties and inventory going forward.

Excluding the incremental noncash and unusual charges, SG&A expenses in the third quarter of 2017 decreased year-over-year to $48.5 million or 18.5% of net sales compared to $60.5 million or 20% of net sales in 2016. SG&A in dollars was down significantly as planned in 2017 and decreased as a percentage of net sales due to a smaller decline in sales in 2017. Excluding goodwill and intangible asset impairment and bad debt charges, operating income was 5.1%, down from 11.4% last year due to the lower gross margin in 2017.

Income tax expense for the third quarter of 2017 was $918,000 compared to $1.1 million for the third quarter of last year. The variability of the tax provision is based on changes in taxable income levels in the various tax jurisdictions in which we operate.

Consistent with the seasonality of our business, operations used cash of $19.4 million for the third quarter of 2017 compared to using cash of $39.4 million in the same quarter of 2016, with free cash flow of negative $22.3 million and negative $44.5 million, respectively. The decline in cash usage is due in part to lower accounts receivable on lower sales.

As of September 30, 2017, our working capital was $160.6 million, including cash and cash equivalents and restricted cash of approximately $48.8 million. This compares to working capital of $247.6 million in the same quarter of 2016. The decrease is due in part to the 2017 exchanges of convertible senior notes using cash in the aggregate amount of $35.6 million, offset in part by the $19.3 million in cash received in connection with the issuance of common stock to our joint venture partner during the second quarter.

As for the remaining 2018 convertible notes, their retirement remains a priority for the company as we continue to improve the capital structure.

Accounts receivable as of September 30, 2017 were $224.1 million, down from $272.3 million at the end of the third quarter of 2016 due to lower shipments during the quarter, which resulted in DSOs in 2017 of 79 days, down from 83 days in 2016. Inventory as of the end of the quarter was $80.1 million versus $75.1 million at the end of Q3 2016, resulting in seasonal low DSIs in 2017 of 50 days compared to 43 days in 2016. We are continuing our efforts to convert inventory and manage working capital to seasonally lower amounts by year-end.

Capital expenditures during the quarter were $2.9 million compared to $5.1 million in the third quarter of 2016, with an estimate for the full year of $13 million to $14 million. The diluted EPS calculation in the third quarter includes an average of $22.8 million common shares outstanding during the quarter and excludes 16.6 million shares, underlying the convertible notes.

Lastly, as we recently updated for 2017, we expect a net loss and loss per share for the full year, with positive adjusted EBITDA on lower net sales compared to 2016. Future growth and profitability are expected through the company's continuing effort to enter new categories, create a stronger portfolio of new and existing licenses and develop owned IP and content in addition to ongoing margin enhancement and operating cost containment initiatives.

And with that, I will turn the call over to the operator for the start of Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Steph Wissink with Jefferies.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [2]

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Two questions just to start. The first is, bigger picture, if you can help us appreciate what is transitory in terms of the impact of the license guarantee shortfalls as well as the TRU situation? And what do you expect to be reconciled by the end of the year as we kind of start 2018? Is 2018, in your view, kind of a clean start, or do you expect any of these things to kind of linger into the first half of '18?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [3]

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Good question, Steph. Basically, a lot of these are transitory. We have contract expirations. We're getting new categories. We're working closely with our licensing partners. And they see that we have a very big development slate on the toy side, and we support their products or their entertainment properties very well, so it's a combination of things that will minimize the headwinds going forward. That, in addition to our robust product flow.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [4]

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Okay, that's helpful. And then I think the second, a kind of follow-on question to that is, are you finding that your license partners are willing to be flexible as you run into maybe some moderating trends in some of these key licenses? Do you expect to see more flexibility going forward, particularly as the tail start to develop in the demand curve for some of these properties?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [5]

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Definitely. We've been working closely with probably, I'd just say, the largest of our license are partnerships. And they see trends changing, and we are working really close in future licensing agreements and the extension of the licensing agreements that benefit both them and ourselves. Also, they're allowing much more alternative distribution, which they never have done in the past. But they see things changing, and they're working with us closely with that.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [6]

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And then I wanted to just follow up on the license opportunities, Incredibles was certainly a great victory. Is there anything else in the pipeline? It sounds like in your press release there might be a few more things coming. But you're seeming to get access to bigger, more powerful licenses across kind of a master structure. Maybe talk about that negotiation and your success there and how you're thinking about opportunities over the next couple of years.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [7]

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Yes. Firstly, we're actually excited about the Incredibles. If we take a pinnacle movie, which was this year was Cars, which did very well in merchandise, we have a pinnacle movie next year, which is Incredibles. And the last Incredibles movie was 14 years ago. And being granted the global license worldwide just shows the ability of JAKKS being able to turn products into a turnkey launch and all various platforms from die cast to pre-school to prequel to role play and dress up, so it's a really encompassing license. And Disney sees JAKKS being able to do things extremely quickly. And as trends and fads change very quickly, you need to be quick to market, and that's what we're known for. So we do have quite a few new licenses that we will be, hopefully, able to announce by year-end. And that being said, the trend going forward, retailers used to set during spring and fall over the last 10 years. And now it's becoming like the online world about a 365-day open door for sets. So you really have to be ready for any opportunity to get to market quickly, whether it's a license or it's a fad. So our partners are looking to us to do more and more as things are changing very rapidly with the consumer and at retail.

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Operator [8]

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The next question is from Gerrick Johnson with BMO Capital Markets.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [9]

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You guys paused shipments to Toys"R"Us. Can you quantify what this equates to in missed 3Q sales and will it be made up in the fourth quarter? And then also the question on the bad debt of $7.3 million. Are you able to discuss how much you're getting back on prepetition receivables and also what is insured and what isn't?

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [10]

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Yes, I'll take the second one first. Basically, our exposure is, at this point, estimated at $7.3 million. We don't know what the payout on various categories of claims might be. Bankruptcy law is fairly complicated. You've got shipments within 20 days, within 40 days, et cetera. So while we're working closely, Stephen has been speaking very often, and we're certainly lobbying and hoping to get critical vendor status, which could change the complexion of that. But at this point, $7.3 million is what we estimate our exposure to be.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [11]

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So Joel, how do you get to that $7.3 million? Can you go through some of the equation to get to $7.3 million?

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [12]

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The details are not -- I mean, a portion of it is insured. So there's a retention piece. There's also uninsured. So there's 3 or 4 different components. I'll just say that with the insurance, there are a number of negotiations in different directions. So we're not trying to be cagey, it's just that some of this will be proprietary until some of those conversations and negotiations are resolved.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [13]

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Yes, I fully understand, Joel. And then also on the shipments to Toys"R"Us that you have paused, will those be made up in the fourth quarter? And can you quantify what that might have been?

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [14]

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Can't quantify, but we did start shipping -- things are moving a bit slower than expected, so we don't know what can be made up in the fourth quarter. But as Stephen mentioned previously, we do expect TRU after they -- and even during the rationalization of their store base, we expect them to be a strong retailer and continue to be a major customer of ours. It's just hard to tell what's going to happen in the next quarter.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [15]

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Okay. And maybe I could ask what was the license that you had to write down the minimum guarantees on?

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [16]

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Related to -- there were a number of them across different territories.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [17]

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Okay. Any idea which ones those were?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [18]

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Gerrick, yes, some of which we won't be discussing, but the -- it was -- some of the licenses we are negotiating longer term, some of them were ending this year. The material ones were Star Wars, was Whisker Haven and Sofia the First.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [19]

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Okay. And are there minimum guarantees associated with the Incredibles 2?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [20]

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Yes, there's minimum guarantees associated with every license.

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Operator [21]

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Next, we have Drew Crum with Stifel.

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Andrew E. Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [22]

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So first question, can you just remind us some of the steps made to address the maturities that come due next August? And I guess, help us understand what the next milestone is in addressing those? And then...

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [23]

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No, I'm sorry. Go ahead, Drew.

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Andrew E. Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [24]

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I was going to say, separately, can you give us some additional detail on what you saw in the U.K.? One of your other competitors earlier this week also noted some weakness in that market.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [25]

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Okay. For the 2018 converts, we have been negotiating with the convert holders. So we're planning to take them out either prior to the maturity or when the maturity occurs. Either way they will be taken out. And there's $42 million left. We have an extension that we're working on with Oasis, which will extend their convert to November 2020, and then that will leave about approximately $20 million remaining. But either way, either we'll pay all of them off or extend one of them and pay the rest of them off on the '18s. And then we are working on the 2020s with regards to individual bankers about how we're going to work out on the '20s going forward, which we've been already in the process of looking and addressing them well early on. The U.K., where actually have seen retailers had a problem with regards to the currency and the purchasing power of some of the retailers. And if you look at the NPD in the U.K., I believe it was down 20% or 30%. I don't have the numbers in front of me. There were -- I think the U.K. was down, for the first 3 quarters, 11% in NPD; and Q3, it was down 21%. So it's really a market condition for toy retailers in general.

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Andrew E. Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [26]

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Got it. Okay. And then just last one for me, guys. Disney is launching the television special on ABC in December. Talk about what part of that license you have, and is it a needle mover for the business in the fourth quarter? Or does that bleed into 2018?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [27]

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Are you talking about the Frozen?

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Andrew E. Crum, Stifel, Nicolaus & Company, Incorporated, Research Division - VP [28]

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Yes, Olaf's Frozen Adventure.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [29]

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Olaf's. So yes, we have the same rights in which we have for our current Frozen deal, which is a broad array of licenses in our, call it, pre-school, girl role play, dress up. We have licenses in Halloween as well as the Moose area and Kids Only! So we have a broad array of licenses. What we're hoping is that's going to actually give a nice boost back into Frozen going forward, more in, I would say, the first half of next year because this comes out in December. So the awareness will actually take it through the first half of next year.

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Operator [30]

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Next, we have Kirk Ludtke with Cowen.

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Kirk Ludtke, [31]

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A couple of quick follow-ups. You mentioned that your sales to Toys was down. Were there any other customers, major customers where sales were down year-over-year?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [32]

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Yes, we actually had a -- thank you, it's a good question. We actually, over the year, if we take a look at the business, this time last year, we stopped shipping to a large U.S. retailer, or earlier, call it, August, September. In addition, we had 2 other companies that actually went bankrupt, which was a company called Pinnacle, which was an online retailer. And then we had Best Costumes, which went bankrupt. So those 2 impeded our sales. And then we recently had the bankruptcy of Toys"R"Us. So all of that combined had an impact for the full year. But Toys"R"Us, again, as I mentioned earlier, we believe is going to be a much stronger, healthier toy retailer as of today, with them being able to clean up and being able to breathe. And we'll be working closely with them for 2018 and beyond. And they've been out here in meetings. So those are the big impacts for the year and the quarter. In addition, we have been negotiating some of the dot-com retailers, brick-and-mortar retailer terms and those have actually held back sales until we get the terms settled.

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Kirk Ludtke, [33]

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Interesting. So there's quite a bit going on that contributed to the decline in sales.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [34]

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Yes. Again -- and this was really a very unique, call it, a full year -- not calendar, but full year, of trying to garnish additional sales from that large U.S. retailer, which we stopped shipping. And then 2 -- let's call it 3 bankruptcies. That being said, we have grown our online sales. We have grown our alternative distribution. So this is kind of part and parcel we've dealt with over the last 20 years. And we see a much cleaner and clearer picture going into '18.

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Kirk Ludtke, [35]

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Okay, that's helpful. You mentioned when -- that you stop shipping to Toys, did you also stop shipping to their international business? Or was it is just domestic?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [36]

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So we actually had just a disruption internationally because we -- during, I think, the month of September, the nervousness of what we heard that was occurring with regards to the possible bankruptcy had made a lot of shipments, call it, pause. But we stopped shipping in the U.S. because that's what we do, that was going on, we paused and then we stopped. International has been moving forward very healthy. But it was just more of a little bit of nervousness during that time.

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Kirk Ludtke, [37]

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So you actually -- but you actually stopped shipping to both the domestic and the international business?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [38]

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We paused shipping or slowed shipping internationally. And then once we -- when the realization on the 18th of September, when Toys"R"Us went bankrupt in the U.S. and Canada, the opening orders that we had internationally kept going because we had clarity.

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Kirk Ludtke, [39]

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That's helpful. Okay, I get it. So it was a slowdown internationally, not a stoppage.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [40]

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Correct.

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Kirk Ludtke, [41]

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And then, you mentioned that it's off to a slow start, but you've resumed shipping, but it's off to a slow start. Is that what -- can you elaborate on that?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [42]

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Yes. So and it's not anyone's fault, and when they went through the bankruptcy and they started back, it just takes a lot more effort because you got to start back, setting up new vendor numbers. And there's a whole ramp-up of ordering and manufacturing that has to go on. Because when you pause, we also paused manufacturing at the same time. So we didn't have any liabilities of component or goods. So it's just more of that gearing back up again process than anything else.

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Kirk Ludtke, [43]

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Okay, that's interesting. It's more complicated than it might seem.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [44]

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Yes, but they are -- I will tell you, they are moving extremely fast and aggressive, but it just takes more time on both sides, not just JAKKS and Toys"R"Us, just in general, to get everything back to going normal again.

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Kirk Ludtke, [45]

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Got it. And then with respect to the critical vendor status, I'm guessing that they are -- the treatment of your prepetition claim will be a function of how you treat them post-petition, is that generally how it works?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [46]

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Yes, it's how it works. But we -- firstly, we have a long history and a great relationship with TRU and also their management. So theoretically, we are there with the critical vendor status, it just takes time, and just we're working with them very closely. But nothing is signed, but we have been -- in a sense, verbally committed by both sides, it's just a process that we have to work through with also our insurance company. And it's just more mechanical than anything else.

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Kirk Ludtke, [47]

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So if you get critical vendor status, do you reverse some of that charge you took this past quarter?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [48]

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It will probably be a nominal amount, if that occurs. There's a -- but theoretically, yes, some of that would be reversed.

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Kirk Ludtke, [49]

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Okay, that's helpful. And how do you think about your Toys inventory going into year-end, given that they may be closing a lot of stores. Do you try to get that inventory level down in anticipation of...

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [50]

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You mean, our current inventory as JAKKS or as Toys"R"Us' inventory?

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Kirk Ludtke, [51]

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Your goods at Toys, given that they could be closing a lot of stores and that could -- dumping a lot of your product on the market.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [52]

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It's a very good question, and we actually accounted for that in our internal forecast. So for Toys themselves -- our inventory at Toys is extremely healthy. But I think, we believe, there could be a disruption just with discounting in general because of them having their inventory, and they're going to clean up their inventory, to make sure that they have a better and healthier Toys"R"Us. So we actually took into consideration some of the disruption that may occur from that and do our account of the forecast for the year which, obviously, when we took that into account, we had an additional -- some impairment due to testing, so we took that into account. But also, at the same time, there's a benefit because of all of our other retailers and the alternative channels that we're shipping to. The dollar stores, T.J.Maxx, Big Lots and so on are growing at a faster pace. So it's a unique shift and we've seen it before. But that, we believe, there will be somewhat of a disruption in discounting.

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Kirk Ludtke, [53]

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And I suspect that your other customers care, right, because they're buying at full price. Do they get involved in that?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [54]

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No, I think they will be -- again, this is only the opinion, I think they will be, themselves, managing to make sure that they get the traffic and get the right amount of percentages that they want for their sales growth. So all retail environment from online to brick-and-mortar will, I'm sure, manage it very well themselves.

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Operator [55]

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And next we have Stephen Puckowitz with Stifel.

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Stephen Puckowitz, [56]

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Just a real quick question. Sorry if I missed this, but what was the availability on the revolver? I'm just trying to get a full liquidity picture.

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [57]

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As of September 30, it was in excess of $10 million. And off of that comes the $28 million in letters of credit that we have underlying it.

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Stephen Puckowitz, [58]

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Right. So total draw down technically is about $38 million -- I'm sorry.

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [59]

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No, the potential drawdown. Yes, 2 drawn on 2, so we had additional availability of about 10, so the total would be 40 -- borrowing base of 40.

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Stephen Puckowitz, [60]

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Right. So your net availability is, factoring in the LOCs, is about $10 million. Okay, got it.

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [61]

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Correct.

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Stephen Puckowitz, [62]

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Plus the cash.

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [63]

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Correct.

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Stephen Puckowitz, [64]

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And just a follow-up question. Oasis, still a member of your board, correct?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [65]

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Yes. Not Oasis, a member from Oasis. Yes, correct.

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Operator [66]

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The question is from Linda Bolton-Weiser with D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [67]

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So my first question is just on the Incredibles. We see product out at retail now being sold, I think, by ThinkWay or something. Is that product going to have to be cleared out of retail before you begin your shipments? And when would your initial shipments be expected in 2018? And then also when is the movie in theaters in 2018?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [68]

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Okay. Firstly, ThinkWay is a very good partner with the Walt Disney corporation. So their product -- they have a very niche area of business with the majority of all the Pixar films and Disney films. So they'll continue to ship. They have -- and usually, they're high-end electronic items, so they're one-off items. And they will probably continue to ship in areas that we will not enter in as a company. The movie launches worldwide approximately June 15. And we will start commencing shipments either the latter part of December or early part of January, prior to Chinese New Year.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [69]

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Okay. And then -- sorry to be kind of basic on this question, but what are some of the other differences that matters whether you do or don't get critical vendor status? Is the critical vendor, does that ensure more visibility as to how much you can ship to Toys"R"Us? Or what? What is the exact difference between being a critical vendor and not being one?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [70]

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Critical vendor just means that you will be in the front of the line to be paid early and on a certain amount that's prenegotiated with Toys"R"Us and the manufacturers.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [71]

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Okay. So it sounded from Hasbro's commentary that it has an agreement lending it some visibility as to what it can ship in, given anticipated store closures. So it seems like they have some visibility on fourth quarter. Would you say that's true of yourselves? Or is there a high degree of uncertainty with regard to the shipments to Toys"R"Us?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [72]

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The critical vendor is irrelevant of us or Hasbro shipping them. It's really up to the companies. The critical vendor really has to do with the receivable. So I believe -- I can't speak for Hasbro, but I think they signed a critical vendor. Their terms are negotiated terms to be critical vendor, I think, over the last few days, just from what I read. And we're on the same process. But we are back to working out shipments to them. We're just in the process of having our new vendor agreement set up, so that's just taking more time than we expected. But they are healthy and ready to take goods, and they have been out here with a complete buying group and management teams really planning for 2018 and beyond.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [73]

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Okay. And then just you had said that BIG FIGS Star Wars was one of your areas of decline in the quarter. With the motion picture coming out in December, do you think that, that BIG FIGS Star Wars, would actually be up in the fourth quarter for you for sales?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [74]

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No, we actually accounted for it just to be down, and we're looking more forward just because of the space at that retail and what inventory is at retail. We're looking for Star Wars to be much healthier for JAKKS next year than it will be this year.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [75]

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Okay. And then, would you expect your operating cash flow minus CapEx to be positive in 2017? And what is your CapEx forecast for the year?

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [76]

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The forecast is $13 million to $14 million. We trimmed it by about $1 million. But as far as the free cash flow, we're working on, as I mentioned in the earlier portion of the call, is we're looking to very closely manage our working capital, which includes bringing inventory levels down to seasonal lows by the end of the year, and that will have a direct impact. One of the things that were included in the charges this quarter were inventory impairment due to expected disruption in the market, be it from TRU sales and the reaction to other retailers. But it's all dependent upon the inventory balance primarily.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [77]

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And did you mention the target inventory level by the end of the year? I just didn't catch it, if you did.

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [78]

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No, we didn't. we're looking at between $55 million and $60 million. Ordinarily, we would have liked, on the toy side, levels of about $50 million. But we're ramping up on the C'est Moi product line and the distribution is handled a little bit differently. It's going to be primarily domestic. So we'll be having slightly higher inventory levels for that business as it ramps up.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [79]

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Okay. And then speaking of C'est Moi, can we actually see it in some retail stores by the end of the calendar year or not until January?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [80]

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You will -- we're shipping it in December. And it will be launching in January and February at several retail outlets as well as our launch of our C'est Moi online store.

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Operator [81]

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Next, we have a follow-up from Kirk Ludtke with Cowen.

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Kirk Ludtke, [82]

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You mentioned your Amazon business was very strong in the quarter. And I was just curious, what drove that?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [83]

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It actually is drove -- as we have been working closely with Amazon. We actually have people out in Seattle, and we've been working on plans over the last, call it, 18 months on specific product and categories. And I just believe it's their traffic that they're receiving online and the correct product mixes, in addition to working closely with them, which has enhanced both of our businesses together.

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Kirk Ludtke, [84]

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That's great. So has there been any...

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [85]

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Just to add that, we actually have done something, I think, wonderful which we're doing online with brick-and-mortars as well, is we've done more video posts and digital marketing on the online initiatives for both retail onliners as well as brick-and-mortar online.

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Kirk Ludtke, [86]

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That's helpful. And is there any trends in retail pricing -- but just stepping back from 30,000 feet, have you noticed any trends, in pricing sense, the Toys bankruptcy? Is there -- in other words, are competitors trying to take advantage of it and...

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [87]

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Nothing to do with the Toys"R"Us bankruptcy, but I will throw a category that's picked up over last 2 years, our collectibles, which you would see from our Tsum Tsum or from Shopkins or LOL, which is from a company called MGA. There's a lot more collectibles which, I'd call it, the surprise, when you're opening up products, the blind packs. So that area has really picked up over the last couple of years, and it's become a separate category. And that being said, those price points are much lower than just general price points, but nothing to do with Toys"R"Us bankruptcy or anything.

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Kirk Ludtke, [88]

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Okay. And then last question, is Toys asking you to extend longer terms on your post-petition shipments?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [89]

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No, we're -- pretty much right now, we're just working with them on general terms. Nothing has changed. They're really just trying to get right back into an aggressive shipping mode and purchasing mode and trying to put the bankruptcy behind them. So they've -- nothing out of the ordinary.

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Kirk Ludtke, [90]

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Okay. And then, when do you expect to complete those negotiations?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [91]

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They're ongoing. So each -- we have so many -- we have different divisions, such as the Disguised Halloween. We have Moose Mountain. So we're trying to collectively get and consolidate some of these divisions all into one. So they're ongoing. Some of which may have been already completed, I don't have the information in front of me. Some of which could be done in days. It's just an ongoing workload on both companies.

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Operator [92]

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Next, we have a follow-up from Stephen Puckowitz with Stifel.

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Stephen Puckowitz, [93]

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I saw your reclamation claim. It looks like most of your shipments were within the 20-day prefiling window. Can we infer that most of the insurance is for the longer-dated shipments?

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [94]

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The insurance is actually more so on an FOB basis versus -- you would look at it as the shipments on -- domestic growth would be the way we look at it. So the insurance is done through a Chinese or Hong Kong insurance company. So I don't have the actual details of the 20-day shipment of goods. So it pretty much varies because it breaks up between the U.S. and internationally. So I don't have all the details in front of me.

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Stephen Puckowitz, [95]

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If you were to guesstimate, what would your thoughts be here?

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Joel M. Bennett, JAKKS Pacific, Inc. - CFO and EVP [96]

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I don't want to guesstimate. I don't want to take that risk of guessing. I'm sorry, but I just don't have the information.

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Stephen Puckowitz, [97]

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Okay, I could follow up.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [98]

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Okay, please.

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Stephen Puckowitz, [99]

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I'll do it.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [100]

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All right. That is it for the question and answers for today. We appreciate everyone's questions, and appreciate everyone taking the time for the call. And thank you very much.

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Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President and Secretary [101]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.