Funko, Inc.

Good afternoon and welcome to Funko's conference call to discuss financial results for the second quarter 2020. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded. I will now turn the call over to Andrew Harless, Manager of Investor Relations, to get started. Please proceed.

Thank you and good afternoon. With us on the call today for management are Brian Mariotti, Chief Executive Officer, Andrew Perlmutter, President, and Jennifer Fall Young, Chief Financial Officer. A press release covering the company's second quarter 2020 financial result was issued this afternoon and is available on our investor relations website, investor.funco.com. Before we begin, I need to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our Form 10-Q. The three months ended June 30, 2020, under other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We'll be referring to certain non-GAAP financial measures on today's call, such as EBITDA and adjusted EBITDA, which we believe may be important to investors to assess our operating performance. Good afternoon, everyone, and thank you for being on the call today. We hope that everyone is staying safe and healthy.

In the quarter, our team did a tremendous job of pulling together to navigate the current environment and finding new and innovative ways to connect Funko with our fans. Although we were challenged by the dynamic retail landscape and broad-based store closures, we delivered net sales of $98 million, maintained strong gross margins, and drove significant savings in SG&A, allowing us to achieve break-even adjusted EBITDA. When the quarter began, non-essential businesses were closed across the globe, and many of the retailers that remained open were prioritizing the restocking of essential goods. Due to these factors, April was our most challenging month in the quarter. As governments started to relax stay-at-home mandates and retailers began to reopen, we saw order trends improve in May and accelerate into June. As expected, our international business was more impacted in the quarter due to broad government closures especially within Europe. In the U.S., we continue to see strong consumer demand within the mass market and third-party e-commerce sites. While our specialty retailers performed better than we initially expected, they were far more impacted by government shutdowns than the other channels. Importantly, we are also seeing more and more consumers tune to Funko.com and LoungeFly.com websites to purchase our products. which drove e-commerce sales growth of more than 3x in Q2 compared to last year. The traction we are seeing online tells us that our products are continuing to resonate with consumers and our fans are engaging with Funko even in time of disruption. We are staying nimble, maintaining financial flexibility and making progress against our four key strategies we outlined at the beginning of this year. These include building on our core pop culture business, diversifying our product mix, further penetrating international markets and expanding our direct-to-consumer business. To that end, during the second quarter, we successfully relaunched Funko.com with an expanded product offering allowing fans to purchase from a wider array of Funko products. We introduced several new products within the games category and unveiled a new high-quality fashion line under the LoungeFly umbrella. As you can see, we're not staying idle. Over the past several months, our entire organization acted quickly and decisively to mitigate the effects of COVID-19. We had to make some tough decisions along the way, all of which were necessary to navigate the current environment and build a stronger organization for the future. Most recently, we implemented a workforce reduction that affected approximately 25% of our employees. This is the only company-wide workforce reduction in Funko's 20-plus year history and was an extremely difficult decision. Going forward, this will enable us to streamline the organization and redirect resources toward key strategic priorities such as direct-to-consumer and product diversification. We believe these actions we take into increased financial flexibility, coupled with the underlying strength of the business, will enable us to navigate the impacts of COVID-19 and deliver long-term shareholder value. Looking at the second half of the year, we are continuing to plan conservatively and expect a gradual recovery due to ongoing COVID-19 resurgences and general uncertainty in both our U.S. and international markets. For the third quarter, we currently anticipate a net sales decline of approximately 25% compared to last year. In the U.S., we expect to see continued strength within both mass market and third-party e-commerce channels as durable consumer demand remains. Additionally, we expect to see ongoing momentum in our DTC channel. However, we expect these factors to be offset by a slower recovery among our specialty retailers. In Europe, given our retailer base is more specialty in nature, we expect this region to have a more gradual recovery than our domestic business. As we enter the fall retail season, we have never had such a diverse product offering in the market, which is enabling us to expand our relationships with our retail partners. As we have discussed in our last call, we expect to increase our shelf space at one of our mass partners by over 20% this fall within our core collectible category. Incremental to that, we expect to see increased spacings of our board games at all our major mass and online retailers, as well as new product placements within the toy aisle. Additionally, we are continuing to build unique programs that revitalize nostalgic evergreen properties and create excitement for our fans by utilizing our insights about Funko's consumers and their fandoms. By way of example, we have delivered successful retail programs such as The Golden Girls, Bob Ross and Masters of the Universe. We will be leveraging this unique ability as we launch amazing new products later this year, including a line celebrating Disneyland's 65th anniversary, which highlights a few of its iconic amusement park rides, a pop vinyl program of retro toys which will showcase favorite pastime toys in games such as Operation, Mr. and Mrs. Potato Head, Clue, Furby, and others, and a new collection focused on nostalgic McDonald's characters. Given the current environment, we are continuing to see movie release dates get pushed out. Even with the limited new theatrical content, we've been able to create products across other categories such as television, sports, music, anime, and nostalgic evergreen properties that resonate with our consumers. Looking forward, we are refining our merchandising strategy to include new lighthouse programs which are broader and more holistic product sets at retail that will cover multiple categories for figures, apparel, bags, accessories, and more. We are continuing to enhance our go-to-market strategy to ensure we are maximizing each program to offer fans multiple ways to connect with their fandoms. We continue to see passion amongst fan bases around the globe. Fandom, viewership, and the desire to engage with content, properties, and teams that consumers love is not diminishing because of the pandemic. Two weeks ago, we wrapped up Funko's virtual con where we engaged with hundreds of thousands of people around the world through our social media channel. held a charity auction on eBay that supported the NAACP Legal Defense Fund, unveiled new products, and offered exclusive convention items through Funko.com and other retail partners. The biggest takeaway from our virtual con is Funko's ability to create communities that stretch to all corners of the world, from the US to the Philippines, to the UK, to Brazil, Thailand, and India. It was truly amazing to see how large the Funko family has become as the joy and sense of community we bring to our fans in such a disruptive time. In today's highly dynamic environment, it is rewarding to see Funko's brands and products resonate strongly with consumers. We believe we have the platform in place to continue to diversify our revenue mix across product categories, geographies, and distribution channels. Our culture of innovation and ability to create products across multiple categories and licenses has allowed us to reach consumers around the globe and continually bring new fans into the Funko ecosystem. Before I turn the call over to Andrew to provide an update on our progress, I want to first take a moment to express my thanks and appreciation to the entire Funko team. The past several months have not been easy, but everyone pulled together as an organization, adapted quickly, and achieved successes during a challenging period. and lastly, thank you to all of our fans, our partners and our shareholders for your continued support as we navigate these dynamic times. I will now turn the call over to Andrew.