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Edited Transcript of JAKK earnings conference call or presentation 23-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 JAKKS Pacific Inc Earnings Call

MALIBU Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of JAKKS Pacific Inc earnings conference call or presentation Thursday, February 23, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stephen Berman

JAKKS Pacific, Inc. - Chairman, President, CEO

* Joel Bennett

JAKKS Pacific, Inc. - EVP, CFO

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Conference Call Participants

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* Steph Wissink

Piper Jaffray - Analyst

* Linda Bolton Weiser

B. Riley & Co. - Analyst

* Gerrick Johnson

BMO Capital Markets - Analyst

* Bill Goldman

Suddis - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the JAKKS Pacific fourth-quarter and full-year 2016 earnings conference call with management, who will review financial results for the quarter ending December 31, 2016.

JAKKS Pacific 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 then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with the highlights of the product lines and current business trends 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 by JAKKS Pacific's future performance, events, or circumstances, including the estimates of sales and earnings per share for 2016, as well as any other forward-looking statements concerning 2016 and beyond, are subject to Safe Harbor protection under federal security laws. These statements reflect the Company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause the actual results to differ materially from those projected in forward-looking statements.

For details concerning these and other 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 like to turn the call over to Stephen Berman.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [2]

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Good morning, everyone, and thank you for joining us today. This morning, we are going to review our performance during the fourth quarter and recap the full year, review our go-forward strategy, and give an update on initiatives and goals of transforming JAKKS Pacific from a toy company to a kids' consumer products company.

As you know, we announced on December 16 that our fourth-quarter sales were coming in below our expectations. Weak performance of a couple of our key licensed products and a challenging retail environment led to the shortfall, as we noted in mid-December.

Since then, we've learned we are not alone. It is now apparent that the strong retail momentum the industry carried into the fourth quarter suddenly turned down after the Thanksgiving weekend. NPD has reported that industry sales were sharply negative for the first three weeks of December, before turning back up in the last week of the year, resulting in a much weaker fourth quarter, and some categories, which had been among the strongest growing categories through October, actually wound up being some of the weakest by the time December was over.

Our sales in fourth quarter were up slightly compared to last year, resulting in a decrease of about 5% for the year. We are obviously not satisfied with that, and while the retail backdrop was challenging, it is our job to grow JAKKS and shareholder value whatever the environment. You will notice we are giving more detailed product sales information so that investors and analysts will have a better understanding of the key drivers and costs that impact on our business. We will also provide this information in our quarterly updates and going forward.

Now I'd like to give you an overview of some of our broader goals, what we've been able to do well, what we need to do better, and where we see the opportunities for near and long term. Over the past 22 years, we have demonstrated that we do several things very well.

First, our speed to market is faster than most of our big competitors. We have consistently been shrinking the amount of time from conceptualization to commercialization, often doing it in weeks or months what it takes our competitors over a year to do. This is not only good for our sales, but makes us more attractive to the licensor and both brick-and-mortar and online retailers. A good example is Tsum Tsum, which went from concept to on shelf in less than eight months.

Second, we work closely with our global licensing partners not only to create great products at attractive prices for consumers, but also to innovate and create new categories, a broad array of retail exclusives which offer consumer choices and additional ways for our licensors to capitalize on their properties. A great example of this is BIG-FIGS, a category which didn't exist before we created it. Again, this not only added sales to JAKKS, but it created added benefits of making JAKKS a go-to licensee.

Third, we have a good eye for finding companies and product lines that we can add to our solid base of recurring revenue and expand our roster of intellectual properties. We have an average of more than one acquisition a year over the past 20 years in some core product lines, such as Moose Mountain ride-ons and ball pits, Maui outdoor toys, Funnoodle pool toys, Tollytots doll accessories, Disguise Halloween costumes, CDI role play and dress up, and others, were the results of strategic and opportunistic acquisitions.

We will continue to rely on these competitive advantages as we look for new sources of growth. Let's review the key components of our underlying strategy to grow JAKKS Pacific into a world-class producer of consumer products for kids. For years, our strategy has been to build up a base of evergreen revenue, some of which is based on licenses, some on owned IP.

In addition, we augment that with original and licensed promotional products that have the potential to break out to be hits, even if we don't expect them to become evergreens. On top of that, we seek to enter new categories through acquisitions and internal development to keep building our own revenue base. In addition, we look to broaden our geographic reach by setting up operations in a growing number of countries, which gives us greater profit and access to more licenses with our partners.

And, finally, we have aggressively over the past few years focused a great amount of attention to the shift to online retailing. Over the past 18 months, we've concentrated on creating digital experiences for the online shoppers, such as videos, 360-degree product images, and enhanced web pages, in addition to a dedicated staff. Last year, we were able to grow our online sales by double digits.

So to repeat, core evergreen base, opportunistic promotional products, addition of owned IP internally and through acquisitions, geographic expansion, and riding the shift to online distribution.

In 2016, we made some strong progress on all these fronts. Core product lines, such as basic Disney Princess and Black & Decker, performed well over the holidays, and we are set up well for 2017. Our XPV vehicle line had a nice increase on the strength of Skateboarding Mikey. We had a great global launch for Tsum Tsum and Moana, which are licensed brands, and Gift ems, which is a new proprietary brand. We established Studio JP, a joint venture with Mejin, to create new animated content that will help propel our brands, which can be monetized down the road. We acquired C'est Moi, an innovative brand of healthy and performance makeup and skin care products for kids to enter one of the fastest-growing consumer product categories.

We opened up sales offices in France and Germany last year, further expanding our global reach, and our sales online accounts grew 12% year over year.

This year, we are going to do things differently. For starters, we are changing the nature of guidance we offer to investors and analysts. Due to the variability inherent in forecasting, with the backdrop of ever-changing retail and global economic landscapes, we will no longer publicize specific revenue and profit projections. This is a move that some of our public competitors made years ago.

We will, of course, continue to have internal budgets and targets and will manage against those, but we're taking ourselves out of the forecasting business, and we believe this approach allows us to focus on running the business and the investment community to focus on those aspects of the business more in our control.

In lieu of specific revenue and EPS guidance, we will be providing additional details on our sources of revenue and the relative profitability of those sources. Joel will provide these details in his comments. We believe these new enhanced disclosures will help investors and analysts as they built and refine their models. We will provide this information in our quarterly updates.

We are expecting 2017 revenue to be down somewhat, as some of the factors that led to the fourth-quarter shortfall will continue to pressure our sales. These include the impact of the strong dollar on our prices in key international markets, high levels of overall retailer inventory across the industry, constricted open to buy among retailers, and weakness in some key licensed products. At the same time, our spending in 2017 will be similarly conservative, and because we are adopting this much more conservative stance at the outset of the year, we believe we are less likely to be negatively surprised.

Joel will go over the expense outlook in further detail, but we expect to have higher profit margins in 2017 compared to 2016 because of the tight spending controls and conservative assumptions, and we expect that overall our profits will be higher.

On the financial side, as you have seen in recent weeks, we are working to clean up our balance sheet through a series of transactions, exchanging cash and stock for our outstanding 2018 convertible notes in an accretive way.

I will now turn over the call to Joel Bennett, our CFO, so he can review our fourth-quarter and full-year performance, discuss our expense assumptions and our capital allocation. Joel?

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

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Thank you, Stephen, and good morning, everyone.

Ahead of our latest guidance, net sales for the fourth quarter of 2016 were $167 million, compared to $163.4 million in 2015, with a net loss of $7.6 million or $0.47 per diluted share versus a loss of $9.3 million or $0.50 per diluted share in the year-ago quarter. And also ahead of guidance, adjusted EBITDA for the fourth quarter was $4 million, compared to negative $2.1 million in the fourth quarter of 2015.

Now moving on to our sales performance by category, sales of dolls, role play and dress-up, plush, and activity products in our girls' category amounted to $103.3 million for the quarter, compared to $89 million in 2015. This was driven by dolls and role-play toys featuring Disney Princess, Frozen, and Moana; Tsum Tsum and Gift ems collectible figures and accessories; and private-label products.

Sales of action figures, vehicles, role play, and electronics, as well as our sales of pet products in our boys' and other category for the fourth quarter were $25.1 million, compared to $38.8 million last year. This was driven by Nintendo, Star Wars, and WWE in 2016, though Star Wars declined year over year.

Sales of our seasonal products, including licensed ride-ons, ball pits, kids' furniture, and Maui outdoor activity products, were $25 million in 2016, compared to $27.1 million in 2015. Off-season sales of our Halloween products, which is also one of our business segments, totaled $5 million in the fourth quarter of 2016, compared to $3.2 million in 2015. Sales of baby doll accessories, figures, and plush in our preschool category were $8.1 million, compared to $5.3 million for Q4 2015. This category was driven by Graco baby doll accessories and products featuring Daniel Tiger's Neighborhood.

In the accompanying presentation, we show how gross margins in each of these product categories compared to our overall average corporate gross margin. Looking at sales by business segment, North America sales for the fourth quarter were $128.3 million, comparable to the $127.9 million in the year-ago period. This segment was driven by Disney Princess, Frozen, Moana, and Elena of Avalor, as well as Tsum Tsum collectible figures.

International sales for the fourth quarter were $33.8 million, compared to $32.3 million in 2015, driven by North America drivers, plus Sofia the First and Star Wars, and we already mentioned Halloween in the category breakdown.

Gross margin in the fourth quarter was 31.2%, up from 30.3% last year, due to lower product costs as a result of continuing margin expansion efforts and lower royalties, offset in part by higher tooling amortization.

SG&A expenses in the fourth quarter of 2016 were $54.5 million or 32.6% of net sales, compared to $56.5 million or 34.6% of net sales in 2015. SG&A in dollars was down in 2016 due to ongoing cost-containment efforts, offset in part by higher product development costs in support of the robust product flow, and the decrease as a percentage of net sales is due to lower expenses on slightly higher sales.

Operating margin was negative 1.4%, improved from negative 4.2% last year due to the improved margins on slightly higher sales in 2016. Adjusted EBITDA for the fourth quarter was $4 million, compared to negative $2.1 million in the year-ago quarter. The $6.1 million increase is due primarily to the higher margins on increased sales and lower SG&A expenses.

Consistent with the seasonality of our business, operations provided cash of $38 million for the fourth quarter of 2016, compared to $56.9 million in the same quarter of 2015. The decrease is due in part to lower year-over-year third-quarter sales, which drive Q4 cash generation, and the planned higher year-end inventory levels in 2016 due to the timing of the Chinese New Year factory closures and the Easter holiday in 2017.

As of December 31, 2016, our working capital was $236.6 million, including cash and cash equivalents of approximately $86.1 million. This compares to working capital of $255 million in the same quarter of 2015. The decrease is due in part to the 2016 repurchases of stock and convertible notes in the aggregate amount of $21.5 million.

Accounts Receivable as of December 31, 2016, were $173.6 million, up from the $163.4 million at the end of the fourth quarter of 2015, due in part to higher Q4 sales in 2016, resulting in DSOs in 2016 of 96 days, up from 92 days in 2015.

Inventory as of December 31, 2016, was $75.4 million versus $60.5 million at the end of 2015, resulting in DSIs in 2016 of 79 days, compared to 64 days in 2015, due to the planned higher inventory levels in preparation for earlier Chinese New Year factory closures and Easter holiday sell-in.

Capital expenditures during the quarter were $3.5 million, comparable to the fourth quarter of 2015, bringing the total for the year to $14.8 million, in line with expectations.

Income tax expense for the fourth quarter of 2016 was $1.9 million, compared to $300,000 for Q4 last year. The increases in dollars and the effective tax rate in 2016 were due in part to AMT, triggered by a shift in taxable income to the US that was offset by NOLs.

The diluted EPS calculation in the fourth quarter includes an average of 16.1 million common shares outstanding during the quarter and excludes 23.1 million shares, assuming the conversion of the convertible debentures.

During the fourth quarter, we repurchased $5.4 million principal amount of our 2018 convertible senior notes at a cost of $5.4 million, which resulted in a reduction in the number of shares underlying these converts by 622,000 shares.

In addition, after year-end, during January and February 2017, we exchanged a total of $39.1 million principal amount of the 2018 notes for 2.9 million shares of common stock and $24.1 million in cash. After these exchanges, the remaining balance of the 2018 notes was reduced to $54.7 million, there was a net reduction in the number of diluted shares outstanding of approximately 1.6 million shares, and annualized interest expense was reduced by $1.7 million.

Now to our 2017 outlook. For 2017, the Company expects higher net income, higher earnings per share, and higher adjusted EBITDA on lower net sales compared to 2016. This expected improvement to profitability is the result of our continued focus on building our base of evergreen brands and categories, as well as entering new categories, creating a strong portfolio of new and existing licenses, and developing owned IP and content in concert with our ongoing margin expansion and cost-containment efforts.

And with that, I will return the call back to Stephen.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [4]

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Thank you, Joel.

Before opening the call for questions, I wanted to talk more about what we'll be doing in 2017 to further our drive to become a world-class producer of consumer products for kids. As always, our core business will benefit from existing evergreen brands and licenses, plus new licenses. Among the important new licenses we have for 2017 are Marvel's Guardians of the Galaxy 2; Beauty and the Beast, based on the live-action movie; Disney?Pixar Cars; DC Super Hero Girls; Power Rangers: The Movie; The Lego Batman Movie; and Microsoft's Minecraft. We expect these licenses to be important specific contributors to the sales in our seasonal division, our girl doll division, our Halloween costume division, and specific areas in our boys division.

In terms of our own brands, we expect our successful launch of Gift ems to have a solid second year. We carefully manage the product mix at retail in a way that would enhance collectability and keep the consumer engaged and collecting. Consistent with one of our primary goals, Gift ems is an owned IP, which means it carries high margins and we have greater control over what we do with the brand and where we can distribute it.

Later this year, we are excited to introduce a key promotional item that capitalizes on the popular global trend of the chocolate egg surprise. The JAKKS-branded Chocolate Egg Surprise Maker is a fun activity toy that gives kids the ability to make their own chocolate surprise gifts.

Tsum Tsum, a Disney-licensed brand, also had a solid global rollout in 2016. We will follow up this year with new figures and accessories. Our core Disney Princess products were up in 2016, despite Frozen being down. However, Frozen remains important to our portfolio. We expect the line to benefit later this year from an animated 22-minute short film, Olaf's Frozen Adventure, a holiday TV special in Q4.

Elena of Avalor, which airs daily on The Disney Channel, performed ahead of our expectations for us. Our rights expand to include large dolls in the fall 2017 and we'll have innovative new role-play items shipping later this year. Disney's Moana had a terrific box office debut in November. It was also a nice contributor in December sales for us and that is expected to increase in 2017 with a DVD and streaming release in March.

The live-action release of Disney's Beauty and the Beast next month should be a great catalyst to boost overall Disney Princess sales. Our Belle Teacart item did extremely well last year, and remember the two key characters in the story are teacups, so we expect it to do well again this year with the release of the new movie. We also have a broad array of product based on the movie Beauty and the Beast.

On the boys side, we again have a mix of licensed products and proprietary IP. Consumer interest in Nintendo's characters is getting a big boost from their move to mobile games, as well as the upcoming launch of their new gaming platform, Nintendo Switch. In addition to figurines, our Nintendo business in 2017 should benefit from Splatoon, our blaster toy that perfectly ties into the game play of the popular Nintendo game of the same name.

And our Power Ranger BIG-FIGS dress-up and accessories, inspired by the upcoming new Power Rangers movie, should also see a nice lift when the movie hits theaters in March. Real Working Buddies Dusty, a special featured vehicle, is a great example of us bringing innovation to the industry with our owned IP. We're optimistic it will do well this year and carry forward into next year, much as we got several years out of our Max Tow line, another proprietary brand we launched a few years ago.

Regarding international expansion, last year we opened new sales offices in Germany and in France. In 2017, we'll have direct sales offices in the UK, France, Germany, and Mexico, plus a joint venture in China expanded our footprint and is supporting our efforts in this market. The international expansion is expected to grow our sales, our profit margins, and our access to attract licenses.

As I alluded to earlier, the joint venture we have with Mejin allows JAKKS to have a greater presence in a very important and rapidly growing market.

We are also looking to broaden our retail distribution. Part of that effort is entering categories where the natural distribution channels are adjacent to our historical channels and part of that is making sure we are following the traffic. The mantra in retail has always been location, location, location. While that remains the case, these days location increasingly means online.

As I mentioned earlier, we have seen growth in our online sales, which includes sales to online-only retailers, such as Amazon, but also the e-commerce sites of major brick-and-mortar retailers, such as Walmart, Toys "R" Us, Target, Costco, and others. For 2017, we have significantly improved our ability to work with these retailers.

The online retailer experience is different from the in-store experience. So much more it happens after we ship the product. Brands have to have a strong presentation on the retailer's site with product information, photos, videos, consumer reviews, et cetera. The brick-and-mortar retailers use different buyers for their online business, so we have sales-specific individuals dedicated to online channels. We will continue to nurture these increasingly important channels.

In 2017, we will be making investments in several new initiatives that we talked about late last year. These initiatives are designed to get us into faster-growth product segments with higher margin with our own IP. While we are making the investments this year, we don't expect a meaningful revenue impact until 2018 and beyond, but let's review some of these.

As you know, last year we announced we had acquired C'est Moi, French for it's me. This innovative brand of performance, health, makeup, and skin care products for kids is generally sold in retail channels outside of where we typically sell toys, and we believe we can grow its sales in those channels, as well as our existing channels. According to NPD, in 2016 the makeup category once again experienced the greatest sales growth in the US prestige beauty industry, which grew 6% and reached $17 billion in sales. We are gearing up to launch the product line broadly this fall.

In 2017, you will see a number of products from JAKKS focusing on kids' health and wellness. This includes a branded line of kids' fitness products, Little Mighty Gym, which features the Mighty Runner, a gaming system designed to get kids more active in their play. And next year, we will launch Morph Boards, an innovative modular fitness system that combines skateboarding, balance training, resistance training, and other elements of CrossFit.

Last year, we also announced our joint venture with China-based Mejin Culture and Creative, which also is our distribution partner in China. The joint venture, called Studio JP, will give JAKKS access to Mejin's state-of-the-art animation capabilities, which we are currently using to create proprietary animation content. This content will initially be used to enhance the sales of some of our brands, starting with Cuppatinis, but we envision being able to monetize the content itself down the road. In the pipeline is content for Gift ems, Creepy Crawlers, and Animal Tracks, just to name a few.

We are very excited about how our partnership with Mejin could help us grow, and apparently so is Mejin, as they recently announced that they had purchased almost 7% of our outstanding stock in the open market.

To wrap up, our strategy remains on growing our core evergreen products with licenses and innovative IP. To augment this with promotional products that have the potential to become hits, whether they are licensed or original IP. On top of that, we are focused on growing margin and profitability and we will continue to enter new product categories.

We will also continue to expand our geographic footprint by opening new international offices and have a special focus on efforts to maximize the online channels.

This ends the prepared portion of the call. We will now open it up to questions and answers. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Steph Wissink, Piper Jaffray.

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Steph Wissink, Piper Jaffray - Analyst [2]

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Good morning, everyone. Thanks for taking our questions. Just a couple, one for you, Stephen, just this bigger thought around positioning yourself as a children's products company outside of just toys. Maybe tell us a little bit about how that has been in process. I know you mentioned a lot of the acquisitions, but as you think about the next three to five years, are there clear adjacency opportunities that you think can help further pivot the business? And then, what are the margin implications of that?

And then, Joel, one for you, just on the growth margins in particular. As you do move more towards your owned IP and some of the online initiatives, can you talk a little bit about the margin trajectory and some of the drivers of the margin overall? Thank you.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [3]

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Thank you, Steph.

So with regards to staying within the kids' consumer products industry, things have changed over the last several years to where we all know that the toy compression of age groups and categories has shifted younger and younger, and the tendency of brands to stay strong has changed and the retail environment has changed.

But with that being said, there are many areas within the kids' consumer products business that are growing, one of which is the health and beauty area for kids. Years ago, it was taboo for children to wear makeup and skin care, but nowadays some of the youngest kids from 5 up are wearing performance makeup and skin care and it's because of the YouTube influencers and the way that kids are looking at social media and it's acceptable, so that's one of the reasons we got into this category.

It was a company that's been around over 10 years, and it's a real focused category that really involves children at a young age, teaches them the right way to put on health and beauty, and the name, C'est Moi, which means this is me, it allows children to be of any race, creed, religion, size, and it makes them beautiful themself and that's why we like the product so well, and it's truly diversifying us into other retail environments and aisles at retail. So that is one initiative.

The other initiative has been our health and wellness focus. One of the strong areas in the industry is health and wellness and fitness, so we entered into two new areas of business, one of which is called Mighty Gym that actually is a gamefication for children to actually track and have fun and be active at the same time, which gives them a great experience (multiple speakers) gets deeper and stronger as we go forward.

And we made a long-term deal with a company called Morph, which has a patented experience with regards to health and wellness for kids and health and wellness for adults, as kids like to role-play with their families.

So, those are three areas that we have moved into. In addition, we've moved into the content world with regards to content from base IP that we've acquired over 23 years. So there's a lot of new initiatives that we're undertaking, but still keep it in mind our own evergreen categories of businesses that are extremely strong and have a very basic revenue base, and those will continue to grow based off of new content from our licensing partners in the majority of the categories, which is our Disney category, our Halloween category which is Disguise, our seasonal category, our boys category, and pet, so that area is continuing to grow.

And then, lastly is the international expansion with these areas of businesses. We've obtained more rights than we've had over the years. We've opened up offices, so now we're going direct, and the platform that we have to bring in our existing categories and new categories is really leading us to expand in all the right areas. And when one area has a weakness, like last year there was strong weakness in the boys' action figure business, it will be offset by different categories that we're in.

So we really are diversifying for the ups and downs in our industry, as well as retail.

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Joel Bennett, JAKKS Pacific, Inc. - EVP, CFO [4]

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Now regarding margins, just dovetailing on what Stephen had indicated with the international growth, in going direct to retail we're picking up higher margins by eliminating distributors, in many cases.

That said, I think your question was in particular to the owned IP. Owned IP, we don't have royalties. In owned IP, we control our own destiny. We don't need licenses to distribute it throughout the world.

Regarding online, as you know there's real-time adjustments, real-time competition, so margins are a little bit tighter in that channel, but we expect overall sales increase to increase profit dollars, plus we've always been very nimble in creating exclusive items for each of these channels so we kind of view this similar to that where, when the warehouse stores came online, we gave special SKUs to the more traditional retailers so you don't have the ability to price compare.

So in general, we're seeing consistent margins with some upswing as we continue our general, ongoing re-costing and cost reducing on our legacy items. So overall, we're looking at modest tailwinds on gross margin.

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Operator [5]

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Linda Bolton Weiser, B. Riley.

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Linda Bolton Weiser, B. Riley & Co. - Analyst [6]

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Hi, thank you. I'm sorry if I missed it with all the numbers, but can you provide an operating cash flow number for either the quarter or the full-year 2016?

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Joel Bennett, JAKKS Pacific, Inc. - EVP, CFO [7]

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For the quarter, it was $38 million in 2016, compared to $56.9 million last year. For the full year, it was $17 million versus $65 million last year. Note that 2015 was, call it, the collection year on the big Frozen year that we had in 2014, and in 2016, the Q4 number was impacted by the higher inventory that we were holding because of the earlier Chinese New Year factory closures and also Easter. In addition, sales were up modestly so AR was up year over year for the quarter.

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Linda Bolton Weiser, B. Riley & Co. - Analyst [8]

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Thanks. And then, you've mentioned the modest tailwinds on your gross margin for 2017. The overhead SG&A ratio, with your sales decline expected for the year, would we expect then to be some negative leverage there so you'd see an increase in the SG&A ratio? Or do you have some cost-cutting initiatives that would offset deleverage from the sales decline?

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Joel Bennett, JAKKS Pacific, Inc. - EVP, CFO [9]

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One, we have in general ongoing cost-containment initiatives. We look to improve profitability even in good years. That said, had we forecasted last year at the level that we wound up, we would've not committed as much to things as media buys, so essentially we're living within our means and are able to actually achieve increased EBITDA on the lower sales.

That said, and I think Stephen mentioned it in his call, are sort of the way that we're running the business, we're actually pushing for much greater sales for increased leverage. So, one, we don't expect deleverage because we're, as I said, living within our means, but hope to leverage based on higher sales.

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Linda Bolton Weiser, B. Riley & Co. - Analyst [10]

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Okay. And then, both Mattel and Hasbro actually made some comments at their recent meetings that they did expect sales to be down in the first quarter. Is that a safe bet to think about that for you as well or do you think that Beauty and the Beast movie related toys would actually give you a lift in the first quarter?

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [11]

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We have our drivers for the quarter, but we're not giving specific guidance and that would include more specific color on the quarters.

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Linda Bolton Weiser, B. Riley & Co. - Analyst [12]

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Okay. And then, can I just ask you about the C'est Moi line in the kids' cosmetics? I think when you were talking about it, when you acquired it you had talked about the launch being toward the end of calendar 2017 and that you did have some idea of some prestige or specialty beauty retailers who may carry it in 2017. Do you have any more details you can give us about the expected launch, the retailers, maybe the breadth of the line, how many SKUs there might be, or anything like that?

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [13]

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Linda, this is Stephen, and also congratulations on the merger of your company (multiple speakers)

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Linda Bolton Weiser, B. Riley & Co. - Analyst [14]

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Thanks.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [15]

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So the line presentation to retail is in the March. The e-commerce build goes from March through September. The initial production of the product lines, which will consist of over 30 SKUs, will start in September, and the shift to two specific customers will be in November/December.

We will not be going to those customers because there's a very large PR backing to it and there's an e-commerce launch to it. There's strong, I'd call it, influencers that will be behind it and there will be two strong retailers that are very much involved that we've been working hand in hand with.

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Linda Bolton Weiser, B. Riley & Co. - Analyst [16]

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Thanks. That's helpful. And then, finally, can I just ask you -- you had talked a lot about the e-commerce and the efforts you're making there and some growth rate. What percentage of your total sales are e-commerce sales currently?

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [17]

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It would be anywhere -- it's in the [ducks] of 12% to 17%.

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Linda Bolton Weiser, B. Riley & Co. - Analyst [18]

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Okay. Thank you very much.

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Operator [19]

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Gerrick Johnson, BMO Capital.

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Gerrick Johnson, BMO Capital Markets - Analyst [20]

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So with the weak December, how are retailers thinking about ordering for 2017? I'm not just talking about quantities, but also how they get fulfilled, FOB versus domestic?

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Joel Bennett, JAKKS Pacific, Inc. - EVP, CFO [21]

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It would be easier to talk kind of North America and, call it, western Europe because it would be hard to talk -- worldwide retail is vastly different.

There's been a stronger shift on an FOB basis, which is great for us because JAKKS has been set up as an FOB company from inception, but there's been a big turn for an FOB business, which will allow the retailer to actually make a higher margin buying on an FOB basis because they add their own loads, their own cost of capital, so that's one of the big initiatives that are happening.

There is still a component to some goods being on a domestic basis, things that are, call it, evergreen products, things that are ongoing, like I'll use our foot-to-floor ride-ons that we have inventory on. That is not really a seasonal business. So stuff that's everyday business, there's a domestic component of it and/or TV advertising, but what really, I think, has affected retail is just the strong discounting that has trained the consumers' minds around the world, or more western Europe and the US, that discounting is a very big component to lead to not only in the toy industry, but to lead into getting traffic into the specific retailers versus online, which is a different component.

So, I think you'll see discounting continue because that's the way you get the foot traffic in, but you'll see retailers probably making a little bit better margins because they're ordering more on an FOB basis, and looking at them managing their loads and their cost of capital differently than the past.

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Gerrick Johnson, BMO Capital Markets - Analyst [22]

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Okay. So are any of these retailers saying, you know, let's just be a little bit more cautious and take a little less in in 2017?

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [23]

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That's such a broad question. Some retailers are taking a conservative approach. Some retailers had inventory overall -- I'm not just specifically talking toy, but if we talk toy, they had some inventory overall from just the actual marketplace.

But it's so early in the year we're not seeing that right now. We're seeing actually -- we're seeing steady sellthroughs, which is terrific at this time of year versus this time of year last year. So if we base things off of sellthroughs and they continue as they are, we're off to a really great start in 2017. And our Disney business, our POS is up 30% in the top three accounts and Moana continues to sell through well. Elena has strong POS, and Tsum Tsum, so it's a mix.

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Gerrick Johnson, BMO Capital Markets - Analyst [24]

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Okay.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [25]

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Did that answer your question okay? I'm sorry.

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Gerrick Johnson, BMO Capital Markets - Analyst [26]

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That's a great answer. Thank you, Stephen.

So at Toy Fair, I don't know if it's an advantage or disadvantage for you to have your call after Toy Fair where you get to talk to a lot of people during the week, but it seemed that those companies that ship primarily FOB actually came through December okay. They had strong years and cleared their inventory in that last week, which was very strong. And traditionally, you guys have been an FOB shop. Has that changed? Were you much more oriented towards domestic in the fourth quarter?

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [27]

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No, we're pretty much -- actually, in the fourth quarter this year, we expected a little bit more on the domestic basis because there's more just-in-time retail reaction, but we're actually increasing the FOB business. It's been around 55%, 60%; now it's becoming 60%, 65% on an FOB basis because we're also going deeper in the sense of distribution around world.

But we're primarily FOB. The reason for the inventory pickup on our side is Chinese New Year is early and Easter is later. Easter, I think, is mid-April, so we needed to build inventory to get through that period of time, so we built the inventory in November/December that would help us get through the first-quarter needs of retailers. So Elena, Moana, Nintendo, Moose, Black & Decker, those ones are the ones that we were building inventory on that are the evergreen areas of business that we're not worried if inventory stayed with us for an extra month or so. This is inventory that we sell daily.

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Gerrick Johnson, BMO Capital Markets - Analyst [28]

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Okay. And I have just one more, again referencing Toy Fair. Actually, first, in the past you'd mentioned suspending shipments to certain retailers, so when I was at Toy Fair I couldn't find anyone else who did the same. So in 2017, do you think you are going to be resuming shipping to this retailer, because it seemed like they took product in and paid everybody this year? Thanks.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [29]

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For the US retailer, we'll be staying consistent with our decision. We've dealt with things in the past with clawbacks on payments and so on, so we think it's in the best interest for JAKKS to continue with the position that we took and it allows us just to feel more comfortable and not take risks.

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Operator [30]

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(Operator Instructions). Bill Goldman, [Suddis].

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Bill Goldman, Suddis - Analyst [31]

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I wanted to better understand the bridge on revenues (multiple speakers)

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [32]

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I'm sorry. Can you speak up a little bit, just because I (multiple speakers)

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Bill Goldman, Suddis - Analyst [33]

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The bridge on revenues from 2016 to 2017, I just want to make sure I understand the drivers there. I guess the growth would come from geographic expansion, the makeup line, the Studio JP, maybe some health and fitness, I'm not sure. But what are the headwinds in 2017 versus 2016? Is it just the general retail environment or is it certain licenses, such as Star Wars? I'm just trying to understand the delta as I think about 2017 versus 2016?

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [34]

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So if we're looking into 2017, what we're doing is we're taking a conservative approach just due to the retail environment, which was inherently unpredictable last year.

We are managing really strong internal targets and our focus is to take a conservative approach while making sure that we continue on building on profitability in both profit, EBITDA, and EPS. And we have an extremely strong base business, and our base business is what I know you've seen, which is our core categories, the Disney girl category; our Halloween Disguise; our girls itself, which consists of DC superheroes and so on; our seasonal in boys.

But we have a lot of great new things that are being launched this year with movie properties on top of what we already have. So, for instance, in our Disney area, we have Beauty and the Beast; we have Rapunzel the TV show, which is called the Tangled Series; we've got the momentum of Elena. That's just in our Disney and Halloween. We have the new movie Power Rangers. We just signed with Minecraft and Lego Batman and Lego costumes in our girls division. We have DC's Superheroes, DC toddler dolls, and our chocolate egg makers.

In boys, we've got Power Rangers, we've got the Master of Smurfs. And Nintendo, we're expecting really strong efforts by Nintendo in marketing, and the reaction has been fantastic. We have the rights to Stanley tools.

So when you take our existing business, which is solid, and you add a lot of these new initiatives and/or new licenses, we do expect nice sales. But what happened last year, some of the properties that we had high expectations for did not perform and that was primarily, we mentioned earlier, Frozen and we said there were two big properties and they were in the boys category.

But this year, we're not betting on one thing that actually will really need us to make the year. We have such a broad array of products, a broad array of distribution on brick and mortar and our online initiatives that we implemented about 18 months ago that took us to do the videos and so on. It's picking up dramatically, again, for the online specific retailers and for the brick-and-mortar online.

So, we had a tough year last year in the sense of what we went through and we plan on that not having that tough year this year.

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Bill Goldman, Suddis - Analyst [35]

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Okay. What I was trying to get at was just to understand a little bit of 2017, I guess you guys were guiding for a decline in revenues, so I was just trying to understand that versus 2016, because it sounds like there's a lot of positive development, so I'm trying to understand what some of the negative developments are, other than sort of the retail environment and maybe the channel having a little bit too much inventory. So that's what I was sort of driving at; if any comments on that, that would be helpful.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [36]

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I'd primarily say it's really just the unpredictability at retail and taking a much more conservative approach to forecasting.

Again, we went through it, we did last year, and you learn from it and the industry has been going through changes, and so we decided to take that conservative approach and that's the reason for not giving the guidance, just because of unpredictability. We have the predictability of understanding our cost structure, understanding every bit of our overhead. In the areas we control, we're extremely strong, and we actually can build and grow and that's why we're diversifying, but we also want to make sure that we do what's right for the shareholders and for the Company.

I just want to make one clarification. Our online business is approximately -- it's in the double digits; it's not as high as 17% of our sales. I just wanted to make sure; we just got the numbers.

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Bill Goldman, Suddis - Analyst [37]

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Okay. And then on the balance sheet, two questions. One, I thought I saw $10 million of short-term debt. I'm assuming that's a draw on the revolver. I'm just kind of wondering why you'd do that with $86 million of cash on the balance sheet.

And then, secondly, I want to understand the strategy for the 2018 maturities. It seems silly to me to be issuing stock with the stock down where it is. So, just trying to understand like why we wouldn't just use cash to pay down debt as opposed issuing shares at such a low dollar price.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [38]

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Sure. As far as the short-term draw, it was to effect the transaction for the notes in Q4. Basically, the line is meant to help us manage the imbalance between where the cash is domiciled, and just mechanically, it's generally a 30-day LIBOR, so even though we only may need it for a couple of weeks, we have it out for at least 30 days.

So over the course of the year and generally based off of the way the cash flows, we are able to pay it down by the end of the quarter if we've ever needed it. But, essentially, that's what it's there for.

As far as the 2018s, the capital allocation committee is looking at a number of different manners in which to reduce the outstanding. Given that we do have cash, but the cash needs vary pretty dramatically from quarter to quarter, that said, it's much more effective using a combination. While it's not optimal to use cash, as an example, we had $93 million at the end of last year. It would take us $90 million to take it all down, but we were able to with a combination, and lowering the overall solution dilution. We think it was a prudent way to handle it. And the allocation committee is considering a number of different ways of doing it.

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Bill Goldman, Suddis - Analyst [39]

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I'm not totally sure I understand why you'd be issuing stock at $5 or whatever it is, so I could call you guys off-line and try and understand it (multiple speakers)

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Joel Bennett, JAKKS Pacific, Inc. - EVP, CFO [40]

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You can call us off-line and we can go through it in more detail, if you prefer.

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Bill Goldman, Suddis - Analyst [41]

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Okay. Thanks, guys.

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Stephen Berman, JAKKS Pacific, Inc. - Chairman, President, CEO [42]

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Everybody, thank you very much for taking the time with the call today. We appreciate it and look forward to having our call after first quarter. Thank you again.