Toymaker Mega Brands says its Chinese production facilities are safe

MONTREAL (CP) - Toy manufacturer Mega Brands Inc. (TSX:MB) says its Chinese production facilities pass all safety standards and aren't facing the painful recalls that have affected some competitors. "We have very stringent testing and inspection procedures, especially related to lead and heavy metals," CEO Marc Bertrand said Thursday during a conference call to discuss second-quarter results.

"We can confirm that we are not working with any of the vendors identified with the most recent recall and from a cost standpoint we already have these procedures in place."

Health concerns have been raised recently about the paint and other materials used in the manufacture of the many products that are imported by western countries.

Mattel recently apologized for the recall of nearly one million Fisher-Price toys that had excessive levels of lead in the paint.

The plastic preschool toys included Big Bird, Elmo, Dora and Diego characters that were manufactured at one vendor.

Mega Brands is especially sensitive to these safety issues. Its reputation has been tarnished because Magnetix has been blamed for the death of one child and injuries to several others who swallowed its powerful magnets.

"We are committed to making the highest quality and safest products that parents and caregivers can trust," Bertrand told analysts.

Safety is an issue that should preoccupy all toy manufacturers since 80 per cent of all toys are made in China, said analyst Gerrick Johnson of BMO Capital Markets.

"I think going forward it's going to add a lot of cost to doing business in China," he said in an interview from New York City.

Montreal-based Mega Brands experienced strong sales growth around the world in all of its business segments even though its quarterly net profit dipped slightly to US$4 million.

Earnings for the quarter ended June 30 were unchanged at 12 cents.

However, its pretax earnings were down by 60 per cent to US$2 million.

Sales rose 19 per cent to US$121.5 million from $102.2 million. The firm reports in U.S. dollars.

For the first six months of the year, sales grew by 17 per cent to $211.6 million.

"The strong topline growth in the first half of the year demonstrates that we have great innovation and the right licences," Bertrand told analysts.

"These are the key fundamentals of our business and they provide a solid foundation for our growth and profitability."

Toy sales were up 40 per cent to $57.9 million on higher demand across all categories - preschool, boys five and up, Magnetix and games and puzzles.

North American sales increased 10 per cent to $87.1 million. International sales increased by 50 per cent to $34.3 million, driven by very strong demand for construction toys.

After settling lawsuits over safety issues, Mega Brands said its revamped Magnetix product line is back on store shelves around the world following a sorting program to remove older product.

While some retailers have dropped or reduced sales of the line, all large stores are selling the product.

Chief operating officer Vic Bertrand said he expects the Icoaster that has hit store shelves will be a key driver for the Magnetix brand.

"With great innovation in the pipeline, the Magnetix brand has a strong consumer following and our products continue to sell well," he said.

Mega Brands has conducted two global recalls of Magnetix products, the second prompted by confusion about the safety of the building sets.

No new cases have been reported.

The company recouped $1 million in lawsuit settlements from its insurers in the quarter and expects to receive $4 million this year and up to $9 million in 2008.

Mega Brands expects to take a charge of up to US$35.2 million related to the Magnetix recall.

Despite the company's assurances, Johnson believes Magnetix could face a 20 per cent drop in sales in the second half because of lingering U.S. public concerns over the product and reduced retailer support.

On the TSX, company shares were up 57 cents or 3.14 per cent to $18.74 Thursday. Mega Brand shares have ranged over the past year between a low of $18.02 and a high of $27.60.

© The Canadian Press, 2007