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 Investor 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 the Safe Harbor Protection under Federal Security laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other 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.

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 kid's 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 in a challenging retail environment led to the shortfall as we noted in mid-December. Since then we have learned we're 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 wind 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're 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'll notice we are giving more detailed product sales information so that investors and analysts will have a better understanding of the key drivers and cost 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…

Thank you, Steven 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, plus in activity product in our growth 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 and action figures vehicles role-play in 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 license ride on, ball pits, kids furniture and Maui outdoor activity products were $25 million in 2016 compared to $27.1 million in 2015. Off season sales over 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…

Thank you, Joel. Before opening the call for questions, I want to talk more about what we will 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 on Marvel's Guardians of the Galaxy 2, Beauty and the Beast based on the live action move, Disney Pixar cars, DC Superhero Girls, Power Rangers of 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 at our boys divisions. 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 in collecting. Consistent with one of our primary goals, Gift 'ems is an owned IP which means case high margins and we have greater control over what we do with the brand and where we can distribute it. Later this year, we're 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 license 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…

[Operator Instructions] Our first question comes from Steph Wissink from Piper Jaffray. Please go ahead.

Hi, good morning everyone, and thanks for taking our questions. Just the couple, one for you Stephen, just to figure thought around positioning yourself as the children's product 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 acquisition but as you think about the next kind of 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 Joe one for you just on the gross 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.

I'm sorry can you hear us?

Yes, now we can.

I'm sorry. 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 a 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 consumers 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 make-up and skincare but nowadays some of the youngest kids from five up are wearing performance make-up and skincare and it is because of the YouTube influencers and the way that kids are looking at social media and it's acceptable. So that is one of the reasons we got into this category, it was companies been around over 10 years and it is real focus category that really involves children at a young age, teaches them to right way to put on health and beauty and the name C’est Moi which means it allows children to be of any race, creed, religion, size and it makes them beautiful themselves and that is why we like the products so well and it's truly diversifying into other retail environment and isles 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 gamification for children to actually track and have fun and be active at the same time which gives them a great experience and…

Now regarding margins just to dovetail 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 the royalties, in owned IP we control our own destiny. We don't need licenses to distribute it through 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 use this similar to that where you know when the warehouse stores came on, line 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 recasting and cost reducing on our legacy items. So overall we're looking at modest tailwinds on gross margin.

Thanks guys, really helpful. Appreciate it.

Thank you. Our next question comes from line of Bolton Weiser from B. Riley. Please go ahead.

Hi, thank you. Sorry if I missed it with all the numbers, but can you provide an operating cash flow number for the quarter or the full year 2016.

Yes 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 the - call it a 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.

Thanks. And then you've mentioned the tailwinds, modest tailwinds on your growth margin for 2017. And the overhead SG&A ratio, with your sales decline expected for the year, would we expect then to be some sort of 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 the deleverage from the sales decline?

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 round up, we would have not committed as much the 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 Steven mentioned it in his call, are sort of the way that we're running the business, we’re actually pushing for much greater sales or 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 a higher sales.

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 safe that 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?

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

Okay. And then, can I just ask you about the same outline in the Kids cosmetics? I think when you were talking about it when you acquired it, you had talked about the launch being towards 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 lines, how many skews there might be? Is there anything like that?

So, Linda, this is Stephen. And also congratulations on the merge of your company with other company. So the live presentation to retail is in March. The ecommerce bill goes from March through September. The initial production of the product lines which will consist over 30 SKUs will start in September and the shift to a two specific customers will be in November-December. We will not be going to those customers because there's a very large PR back into it, and there is an e-commerce launch to it. There is strong, I’ll 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.

Thanks. And then finally, can I just ask you, you had talked a lot about the ecommerce and the effort you're making there, and some growth rate. What percentage of your total sales are ecommerce sales currently?

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

Okay. Thank you very much.

Thank you. Our next question comes from Gerrick Johnson from BMO Capital. Please go ahead.

Hi, good morning. 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 verse domestic.

Well, it would be easier to talk kind of North America and Western Europe because it will be hard to talk worldwide retail is vastly different. There has been a strongest shift on FOB basis which is great for us because JAKKS has been set up as an FOB company from inception. But there has been a big turn for an FOB business which will allow the retailer to actually make a higher margin buying on FOB basis because they add their own loads, own cost of capital. So that is one of the big initiatives that are happening, there is still a component to some good being on a domestic basis things that are call it evergreen products things that are ongoing that I will use Foot-to-Floor Ride On that we have inventory on not really seasonal business. So stuff that is everyday business there is a domestic component of it and/or TV advertising but what is really I think has affected retail is just the strong discounting and that has trained the consumer's minds around the world or more Western Europe and the U.S. 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 the different component. So I think you will see discounting continues because that's where you get the foot traffic in but you will see retailers probably making a little bit better margins because they are ordering more on an FOB basis and looking at them managing their loads and their cost of capital differently than the past.

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

It is such a broad question of some retailers are taking a conservative approach, some retailers had inventory overall, I'm not specifically talking to it but if we talk they had some inventory overall from just the actual marketplace but it's so still early in the year, we are not seeing that right now, we're seeing I've seen - we are seeing steady sell throughs which is terrific this time of year versus this time of year last year. So if we base things of the sell throughs and they continue as they are, we are off to a really great start in 2017 in 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 themselves, it is a mix.

Okay.

That answered your question, okay? I'm sorry.

Yes that is a great answer, thank you, Stephen. So Toy Fair, I don’t know if it's event for you to have your call after Toy Fair when you get to talk to a lot of people but, it seems that those companies that ship primarily FOB actually came through December, okay they had strong years and clear their inventory in that last week which is very strong and traditionally you guys have been in FOB shop, has that changed were you much more oriented towards domestic in the fourth quarter?

No, we are pretty much actually in the fourth quarter of this year, we expected a little bit more on the domestic basis because there is more just in time retail reaction but we are actually increasing the FOB business it has been around 55, 60 now it is becoming 60, 65 on an FOB basis because we are also going deeper in effect of distribution around the world but we are primarily FOB the reason for the inventory pick up on our side is Chinese New Year is early and Easter is later at least 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 the November and December that would help us get through the first quarter needs of retailers. So number one, Nintendo, Maui, Black & Decker those ones are the ones that we were building inventory on that are the evergreen areas of business that we are not worried that if inventory stayed with us for an extra month or so, this is inventory that we do daily.

Okay. And I have just one more again, again referencing Toy Fair, well 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 be resuming shipping to this retailer because it seems like they took product in and paid everybody this year. Thanks.

For the U.S. retailer that will be staying consistent with our decision that was things in the passive call backs on payment and so on. So we think it’s the better interest with JAKKS to continue with the position that we took and it allow us just to feel more comfortable and not take risks.

Okay, great thank Steven.

[Operator Instructions] Our next question comes from [indiscernible]. Please go ahead.

Good morning. I wanted to better understand the bridge on revenues….

Sorry, can you speak up a little bit just because….

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

So if we go - 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 and both profit EBITDA and EPS. And we have an extremely strong base business and our base business is that I know you’ve seen which is our core categories that Disney growth category, our Halloween disguise, our Girls itself which consists of DC Superhero and so on, our seasonal in boys but we have a lot great new things that are being launched this year with movie properties on top what we already have. So for instance in our Disney area we have Beauty and the Beast. We have Rupensil the TV show called the Tangle Series. We got the momentum of Elena that’s just in our Disney. In Halloween we have the new movie Power Rangers. We just signed with Minecraft with LEGO Batman, LEGO costumes in our Girls division. We have DC Super Heroes, DC Toddler Dolls and our Chocolate Egg Makers. In our Boys we've got Power Rangers, we got The Master of Smurf and Nintendo we’re expect really strong efforts of the Nintendo in marketing and the reaction has been fantastic. We have the rights to stand the 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 is some of the property that we had high expectations for did not perform and that was primarily we mentioned earlier it was 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 actual will really need us to make the year. We have such a broad array of products, a broad array distribution on brick-and-mortar and online initiatives that we implemented about 18 months ago that took us to do the videos and so on is picking up dramatically again for the online specific retailers and to the brick-and-mortar online. So we had a tough year last year in the sense what we went through and we plan not having that stuff here this year.

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

I primarily say says it’s really just the unpredictability at retail and taking a much more conservative approach to forecasting. Again we went through what 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 the unpredictability. We have the predictability of understanding our cost structure, understanding every bit of our overhead so in the areas that we control we're extremely strong and we actually can build and grow 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-digit it’s not as high as 17% of our sales. I just want to make sure, we discussed the numbers.

Okay. And then on the balance sheet I guess two questions. One I thought I saw about $10 million of short-term debt. I'm assuming that's a draw on the revolver. Just kind of wondering why you do that with $86 million of cash balance sheets. 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 to issuing share at low dollar rate.

Sure, as far as the short term draw is 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’re able to pay down by the end follow-up the quarter if we ever needed it. But essentially that's what it is there for. As far as the 2018 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 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 you know with the combination and lowering the overall 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.

Yes, okay, I mean I'm not totally sure, I understand whey you’d be issuing stock at $5 or whatever it is. So I could call you guys offline and try and understand.

You can call offline we could go through it in more details if you prefer.

Okay. Thanks guys.

Everybody, thank you very much for taking the time for the call today.