Q1 2007 Topps Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day and welcome to The Topps Company first-quarter fiscal 2007 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 the 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 2007 first-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 that 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 to 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 will turn the call over to Arthur Shorin, Chairman and CEO. Arthur, you may begin.

ARTHUR SHORIN, CHAIRMAN AND CEO, THE TOPPS COMPANY: Thank you, Betsy, and good morning, everyone. Thanks for dialing in. With me today are Scot Silverstein, President and COO, and Cathy Jessup, Vice President and CFO.

Cathy will provide a comprehensive analysis of Q1 and a financial outlook for the balance of the year. Scott will take you through a business update, and in the time remaining, we will take some questions. So over to you, Cathy.

CATHY JESSUP, VP AND CFO, THE TOPPS COMPANY: Great, Arthur, thank you, and good morning, everyone. I will be taking you through a review of Topps' financial results for the first quarter ended May 27, 2006, as well as providing an update on our financial expectations for the full fiscal year.

As you will hear, the year is off to a strong start as we continue to progress against the strategic initiatives detailed on the last conference call. Net income in the quarter is up 79% from last year on the strength of both higher sales and improved margins. So while we're still in the early stages of the implementation of our strategic plan, initial evidence, underscored by favorable Q1 results, suggest that we are on the right track to deliver significantly improved earnings and shareholder value.

Going into the financial results, consolidated net sales for the first quarter increased 3% to $81 million from $78.6 million in the quarter last year. Weaker foreign currencies than last year served to reduce sales in the quarter by $1 million. And in constant dollar terms, net sales increased 4.3%.

Income from operations for the quarter was $1.6 million versus $507,000 last year, and net income in the quarter this year was also $1.6 million, as interest income and taxes offset one another, and that was $0.04 per diluted share compared with $897,000 or $0.02 per diluted share last year.

In terms of sales, net sales of worldwide confectionary products were $42.7 million, a 3% decline from $44 million in last year's first quarter. The sales decline in the quarter was largely due to a shift in timing of U.S. prepacks, which are boxes combining sports and confectionary products sold primarily to our smaller retailers, and the shift stemmed from the timing of the new baseball agreement. In addition, Bazooka sales were soft in the period leading up to the relaunch.

However, U.S. sales of Baby Bottle Pops increased in the quarter, reflecting the success of the new 2DMax line extension. And international candy sales were also up, driven by Mega Mouth Spray and Juicy Drop Pop in Europe, as well as stronger lollipop sales in Latin America.

Turning to the profitability of the confectionary segment, as noted previously, this is the first quarter of our new reporting format, where we are showing the financial performance of our segments net of direct overhead. Our definition of direct overhead includes personnel costs directly associated with the segments, as well as business-specific costs such as storage, conventions, broker commissions and merchandising fees. It does not include corporate personnel costs such as finance, MIS, human resources or legal, or shared costs which would have to be allocated, such as rent, professional fees, most insurance, and hardware/software costs.

On this new reporting basis, confectionary margins were 17.6% in the quarter this year versus 12.7% on the same basis last year. The 4.9 point improvement was driven by a combination of manufacturing rebates, changes in the number of our candy products to remove high-cost components and features, some other expense reductions and some pricing benefits.

Turning to the entertainment segment, first-quarter net sales of $38.3 million were $3.7 million or 10.8% ahead of last year. The key factor in the entertainment top-line growth was an almost doubling of sports sales, driven by a spectacular turnaround in the U.S. sports car business and the sales products featuring the World Cup in Europe.

As we've explained, the renegotiation of our licensing arrangement with Major League Baseball this last year resulted in a reduction in the number of market participants from four to two and placed a cap on the number of products in the marketplace. We pushed hard for these measures, which we believe are significant not only for Topps, but also for the long-term health of the sports card industry.

This new arrangement, combined with our very strong product lineup, resulting in significantly higher sales per [technical difficulty] first quarter. For example, on each of our Bowman baseball and [Simon's] baseball products, sales were up over 60% versus year-ago levels.

We also experienced strong percentage increases on sales of football and basketball products in the first quarter. Sales of Draft Picks and Prospects, a football product, were more than twice last year's level.

Overseas, European sports sales in the quarter also far surpassed fiscal '06 levels due to the addition of products surrounding the English and Italian World Cup teams. Sales of noncore publishing products in the quarter were below last year, which benefited from a very successful Star Wars release. Key releases in this year's quarter featured Pokemon, WWE and Superman licenses. And WizKids sales in the quarter were also below year-ago levels, due to a continued soft gaming industry and the absence of a strong successor to last year's Pirates product.

The sales softness at WizKids was a key factor in the decline in the entertainment …