Q3 2006 Topps Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day and welcome to the Topps Company fiscal 2006 third-quarter earnings conference call. This call is being recorded and cannot be reproduced or rebroadcast without the express permission of Topps. At this time for opening remarks and introductions I would like to turn this call over to Ms. Betsy Brod from Brod & Schaffer. Please go ahead, ma'am.

BETSY BROD, IR, BROD & SCHAFFER: Thank you, operator, and good morning, everyone. Welcome to the Topps Company fiscal 2006 third-quarter conference call. Management will begin with formal remarks and then we'll open the call up to take your questions. Before we begin I will read the Safe Harbor statement.

Today's call may contain forward-looking statements according to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations contained in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to be correct. This information may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors which could cause or contribute such differences include but are not limited to factors detailed in the company's filings with the SEC.

With these formalities out of the way I'll turn the call over to Arthur Shorin, Chairman and CEO. Arthur, you may begin.

ARTHUR SHORIN, CHAIRMAN, CEO, TOPPS COMPANY: Good morning, everybody, and thanks for dialing in. We should meet on happier occasions; Q3 was unsatisfactory and we'll talk about it. Cathy Jessup, CFO, will provide her comprehensive analysis, walk you through the P&L and share a glimpse forward. Scott Silverstein, President and COO, will comment on where we are heading. And in the time remaining we'll take some questions and do our best to answer them. So let's just get right to it. Cathy.

CATHY JESSUP, CFO, TOPPS COMPANY: Thank you, Arthur, and good morning, everyone. I'll be taking you through a review of Topps' financial results for the third quarter and the nine months ended November 26, 2005, as well as providing guidance for our fiscal fourth quarter.

Overall, as Arthur said, this is a somewhat difficult quarter for the Company. Our fundamentals, including our brands and balance sheet, remain strong and we continue to make progress against specific growth initiatives. You'll hear an update on that shortly from Scott. Nonetheless, third-quarter results released this morning reflect a net loss after discontinued operations of $3.7 million.

I'll be taking you through the details of the loss, which reflects both onetime non-operating charges and the cyclical nature out our business. Significantly, there were four material non-operating events impacting third-quarter results. First, we made the decision announced earlier to exit our online trading card exchange, thePit.com. This resulted in an after-tax charge of $3.7 million reported on the line "discontinued operations net of tax". This charge is less than previously projected due to a book tax benefit that materialized when we fine-tuned the number. We're currently negotiating the sale of this business for a relatively small sum and expect to conclude the deal in the fourth quarter.

The other three non-operating events are reported within SG&A and are therefore included above the line "loss before provision for income taxes". In aggregate they had a net positive impact of $236,000 on the third-quarter's results. These items include -- first, the recognition of $1.3 million in expenses associated with the organizational restructuring announced on the last conference call. We'll recognize another $1.4 million in related expenses in the fourth quarter. The reorganization will result in the elimination of 8% of our nonunion U.S. workforce and generate annualized cost savings of over $2.5 million.

Additionally, we took a $785,000 write-down against fixed assets in the quarter. This charge surfaced as a result of the implementation of a fixed asset register which was initiated as part of our Sarbanes-Oxley related work. And finally, on a positive note, we settled the WizKids litigation in which we were plaintiffs for just under $3 million. Net of related legal fees the settlement provided a $2.3 million benefit to the quarter. We're pleased not only with the settlement amount but also with the fact that legal costs will be reduced going forward.

In addition to these non-operating events, third-quarter results also reflect performance short falls in certain of our operations. We experienced a dramatic slowing in demand in the quarter for Italian sticker album products, particular WWE, which previously had been extremely strong. This sudden consumer turnaround or turn about was widespread, impacting our competitors as well, and resulted not only in a reduction in sales but also an increased returns and obsolescence as inventory levels suddenly became excessive.

In addition, we made the decision to release our Italian Calcio football product in the fourth quarter, a more traditional period for football collection, rather than in the third quarter as we had done last year. And last, after a strong second quarter U.S. Confectionery sales were below year ago levels in the third quarter compounded by margin erosion caused by a return to more normalized levels of advertising and increased trade spending.

These three factors, two of which reflect the cyclical nature of entertainment collection, combined to generate unsatisfactory third-quarter operating results. Having said that, as you'll hear when I get to the guidance section, we fully expect to return to profitability and favorable comparisons versus fiscal '05 performance in the fourth quarter.

To summarize third-quarter results reported today, consolidated net sales for the quarter were $72.8 million as compared with 70.3 million in fiscal '05. A stronger dollar served to reduce sales this year by $500,000. Income from operations for the quarter was a negative $1.3 million versus a positive 3.4 million last year. And net income before discontinued operations was a positive $29,000 versus 2.9 million in the quarter last year.

We reported a loss from discontinued operations related to the Pit this year of $3.7 million and $82,000 last year. Figures reflect both the asset write off taken in the quarter this year as well as the small operating losses generated by the Pit in both years' third quarters. Last, we reported a net loss after discontinued operations this year of $3.7 million or a negative $0.09 per diluted share compared with net income of $2.8 million or $0.07 per diluted share last year.

For the nine months consolidated net sales were $226.3 million, flat with the comparable period last year. Stronger foreign currency provided a $1 million benefit to this year's sales. Income from operations was $2.6 million versus 14.1 million last year and net income before discontinued operations was $5.9 million for the nine months this year as compared to 10.8 million last year. We reported a loss from discontinued operations in the period this year of $3.8 million versus 224,000 last year. And finally, net income for the nine months this year was $2.1 million or $0.05 per diluted share as compared with $10.5 million or $0.26 per diluted share last year.

Going into detail on net sales, net sales of Confectionery products were $27.4 million in the third quarter this year, a decrease of 1.6 million or 5.5% versus last year's quarter. Excluding the foreign exchange impact, sales of Confectionery products decreased 4.4%. Through nine months net sales of Confectionery products increased $500,000 or 0.4% to $113.7 million. Excluding favorable exchange rates, Confectionery sales decreased 0.2% over the period.

Third-quarter Confectionery results were influenced by lower U.S. sales of Ring Pop and Push Pop. Continued distribution gains in the U.S. of Juicy Drop Pop as well as improved Baby Bottle Pop performance driven by successful advertising and promotional campaigns contributed positively to year-over-year sales. Outside the U.S. European sales decreased slightly in the quarter …