Mega Brands working on five-year plan to expand Canadian toy production

MONTREAL – Mega Brands is looking at further expanding its Canadian toy manufacturing capacity and creating hundreds of jobs as it works on a five-year plan to rebuild the business from near collapse.

“Right now we’re looking at different scenarios and we’re talking with our government partners to see their interest in supporting our investment,” CEO Marc Bertrand said Friday after reporting its best quarterly results since its 2010 recapitalization.

The company capped a strong year with soaring North American sales in the fourth quarter that contributed to a nearly 20-fold growth in net income.

Reporting in U.S. dollars, the toy maker earned $4 million for the period ended Dec. 31, up from $234,000 a year earlier.

It earned 24 cents per basic share and one cent per share on a diluted basis, compared to one cent basic and a loss of 21 cents per share on a diluted basis a year earlier.

The big difference between basic and diluted earnings per share reflects the impact of the recapitalization, which potentially will increase the number of shares outstanding, thus reducing the amount of profit attributed to each share.

The strong results propelled Mega Brands to a new 52-week high, closing up 68 cents, or 5.77 per cent, to C$12.47 in Friday trading on the Toronto Stock Exchange.

Bertrand said all parts of its business are performing well to boost sales and margins, while new products such as construction toys for Barbie, Hot Wheels and Skylanders Giants and Halo were well-received at recent toy fairs around the world.

Mega Brands manufactures more than half of its toys in Montreal, at least double what it did a few years ago. It has spent $20 million over the last two years to add modern injection moulding and counting equipment, and plans to spend another $10 million in 2013.

It has approached the Quebec government for up to $50 million in financial support to build a new production facility, according to a filing with the province’s lobbyist registry. Bertrand said it also plans to approach the federal government.

He declined to provide many details about what it is considering, but said obtaining financial government support is “an important component” of its decision-making.”

The company obtained $11 million in interest-free loans from both levels of government for its three-year $30 million expansion.

Asked if the plant could be located abroad if such efforts fail, Bertrand said: “Our plans right now are to work with the Canadian and the Quebec government to further expand our operations here.”

The Montreal facility employs more than 1,000 of its global workforce of 1,600. It also operates manufacturing facilities in China and Tennessee.

Neil Linsdell of Industrial Alliance Securities says a new automated plant is needed to support further expected growth.

The analyst raised his target price for Mega Brands to $17 from $13.25 and declared the company a top pick.

He said Barbie, which has gained Mega Brands additional shelf space among retailers, should drive growth in 2013 much like the Lego Friends line also catering to girls did last year, becoming the fourth-best selling Lego line behind City, Star Wars and Ninjago.

Mega Brands’ net sales jumped 18 per cent in the quarter to $127.5 million from $108 million.

Mega Brands (TSX:MB) was expected to earn 15 cents per basic share on $117 million of revenues, according to two analysts polled by Thomson Reuters.

Pre-tax operating earnings (EBITDA) increased 33 per cent to $13.9 million, the strongest improvement in two and a half years and substantially ahead of analyst expectations of $12.6 million.

For the full year, the company’s profits doubled to $16.6 million or $1.01 per basic share as revenues grew 11.5 per cent to $420.3 million from $376.8 million in 2011.

Toy sales grew by 21 per cent in the fourth quarter, while stationery and activities sales were up one per cent.

North American sales rose 22 per cent, a fourth consecutive quarter of double-digit growth, while international sales were up seven per cent.

Mega Brands said the strong results put it on the path to achieving its goal of delivering $500 million of annual sales by 2014.

“We think we’re on plan to do that, if we can do it a bit faster we’ll try to do that as well,” Bertrand said.

Martin Landry of GMP Securities said Mega Brands had solid fourth-quarter results and “impressive” balance sheet improvement as it reduced debt by $30 million.

He said Mega Brands’ North American sales outperformed larger competitors Mattel and Hasbro for the fifth consecutive quarter, suggesting Mega Brands continued to gain market share during the quarter.