Funko, Inc.

Good afternoon, and welcome to FONCO's conference call to discuss financial results for the fourth quarter of 2021. 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 Ben Avina-Tapper, Director of Investor Relations, to get started. Please proceed.

Thank you and good afternoon. With us on the call today are Andrew Perlmutter, Chief Executive Officer, and Jennifer Paul-Young, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call, management will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable U.S. GAAP financial measures and supplemental financial information can be found in the earnings press release in 8K that we released earlier today. All of these items plus a visual presentation that investors can consult to follow along with this discussion are available on our investor relations website, investor.funco.com. I will now turn the call over to Andrew.

Good afternoon, everyone, and thank you for joining us today. Today is my first earnings call as the CEO, and it is my pleasure to announce Funco's best quarterly and annual results ever. We surpassed $1 billion in annual net sales and reported the highest full-year adjusted EBITDA and EPS in company history. The strength was broad-based with growth in all channels, geographies, and brand categories, reflecting the power of the Funco brands to generate sustainable demand throughout the volatility of the past two years. Our employees, fans, and partners all deserve a tremendous amount of credit for helping make this past year possible. I'll begin with some highlights from the year before turning to the fourth quarter. In 2021, we grew figure revenue by 59%, sustaining excellent momentum in our core business with strength across geographies and channels. We expanded into an entirely new market With the launch of digital pop NFT lineups, we launched new physical products like vinyl gold and Popsies, extending our footprint with key retailers and introducing new fan bases to Funko, and we more than doubled our sales in the direct-to-consumer channel. These achievements contributed to more diverse revenue mix and top-line growth of 58% for the year with adjusted EBITDA margin expansion of more than 200 basis points. Our ability to deliver product while managing through supply chain disruptions has been critical to our performance. We took important steps this past year to onboard new factories, providing additional capacity and further diversifying our manufacturing footprint to partially mitigate these disruptions while strengthening our foundation for the future. The guidance we provide today assumes that the current level of supply chain disruption, and specifically freight inflation, will persist at least for the first half with only modest relief possible in the second half. However, as I just described, our business is resilient, as is the demand from our great fans. We are prepared for the challenges we anticipate, and we believe that we are well positioned should the operating environment improve faster than expected. Before I share some of the fourth quarter highlights, I want to call out how we'll be talking about the business going forward. One of my first actions since becoming CEO in January was to provide additional structure to the great collection of brands that make up Funko. This new brand structure will allow us to seamlessly execute against our growth targets and maximize strength of our brands. To that end, today, we have four main brand categories. Our collectible brands includes our iconic Pop Vinyl, as well as newer additions like Soda and the newly launched Vinyl Golden Posse's, Lounge Fly, focused primarily on soft lines represents our next largest brand. Our emerging toys and games brand, including some of our newest and highest growth opportunities, and finally, our digital brands, which today includes our digital pop NFTs. With this new brand structure, we're better aligned to execute against our four growth pillars. Our first growth pillar is continued innovation within our core collectible brands category, while our second growth pillar is sustained revenue diversification through products and brands adjacent to our core portfolio. Our third growth pillar is continued expansion of our D2C e-commerce platform. And finally, our fourth pillar is international expansion. Here, we will continue to leverage the breadth of our brands and selectively add resources and capabilities to open up key international markets. I'll now share some of the highlights from the quarter. Under our first strategic growth pillar, we delivered another excellent quarter with strength across our collectible brands and in all channels. The Pop brand grew 41% year-over-year in the fourth quarter. Our sustained success with Pop stems not only from our industry-leading breadth of properties, but also our strong fan engagement and innovation we bring to the Pop product line. We've introduced innovative new figures and designs and highly successful seasonal product lines. Our participation in the Macy's Thanksgiving Day Parade with our balloon featuring Grogu from the hit series The Mandalorian is a great example of the strong fan engagement and innovation we continue to bring to the brand. Our balloon generated one of the top social media events ever for Funko, serving as an introduction to the Funko brand for millions of new fans. As with other fan engagement events we hosted this past year, the products tied directly to these events continue to be among some of our most popular releases. Animating sports and music are also exciting opportunities for growth for our collectibles brands. We recently launched a new figure line, Vinyl Gold, targeting sports and music sneakerhead demographic. Early results have been very positive with a new slate of artists and athletes set to launch this spring. We also introduced Popsies, our collectible green line, launched at the end of Q4, and here, too, the responses have been excellent. We've had repeated sellouts in our D2C channel, and the feedback from our exclusive launch partner has been very encouraging. Turning to our second growth pillar, revenue diversification, we continue to meaningfully expand the breadth of our portfolio through the successful incorporation of new pop culture-centric brands. Most notably among these is Lounflot, which continues to experience high demand, leading to record results despite the supply chain disruptions of the past several quarters. The Lounsfly brand, which has come to define collectible fashion with its unique design and high product quality, generated strong growth in our D2C channels and across our retail partners with excellent results in both the U.S. and European markets. Lounsfly's excellent year was driven by multiple factors, all of which point to even more exciting opportunities to come. The average selling price increased double digits driven by a deliberate emphasis on premium, higher value products, which allow us to more fully capture Lounsly's quality and design advantages while continuing to diversify our wholesale channel as demand from independent specialty and online retailers has accelerated. And finally, Lounsly continues to be our fastest growing brand in our international markets, nearly doubling sales in Europe over the past year. We've grown the Lounsly brand from approximately 20 million in business when we acquired it in 2017 to over 140 million in sales this past year. And we believe we have only just begun to unlock LoungeFly's full growth potential. Domestically, the opportunity is broad-based with a particularly strong outlook for both independent specialty retailers and our D2C channels. Internationally, based on the strong demand that we're seeing across Europe and early indications from our other international markets, we believe a similar growth trajectory is possible. Our second area of revenue diversification is within our toys and games brand. While our collectible and lounge fly brands are category leaders, our toy and games brands are playing the role of disruptor in their respective markets with strong growth and share gains you would expect from a compelling new entrant into the market. We've made great strides in leveraging these brands to expand our footprint with key retail partners into the toys and game aisle. Funko Games launched more than 40 titles in 2021, a significant achievement that gives us great runway and opportunity in the category. We also had great success with our collectible gaming platforms, and we'll be introducing new titles in this space in the coming months. In November, we noted that our games business was able to be opportunistic when retailers were looking for product at the height of the supply chain disruption last fall. Today, we've held onto those gains in shelf space, contributing to a fourth quarter growth rate for games, more than double that of the overall games market. Within toys, our products designed for a younger audience continue to do exceptionally well, with an expanded Five Nights at Freddy's line already in the works at some of our key retail partners. Finally, the last area of diversification is our digital business, which today encompasses our digital pop NFTs. Q4 was our second quarter of digital pop sales and also marked the launch of Drop.io, and NFT marketplace developed by our affiliate, Tokenwave. To date, we've completed eight major drops and we've been thrilled with the enthusiasm for these products. While still in the early stages, we are encouraged by the exceptional demand we continue to see for digital tops across a wide range of licenses. Our third growth pillar, D2C growth, continues to be one of the best performing channels for Funko. In Q4, D2C grew 74% and now represents 11% of our total business. We believe there is substantial opportunity for future growth driven by expanded product offerings, greater use of exclusives, and technology enhancements designed to improve conversion. This past year, we increased the number of unique customers by more than 50% while increasing our annual customer value by double digits. Customer value is benefiting from growth in both orders per customer and average order value, reflecting strength of our D2C sites across multiple factors. These enhancements will provide improved integration across Funco and Loungefly sites and allow for more streamlined process to expand our e-commerce platform internationally. We're excited about the future of the D2C channel, which importantly continues to be incremental to the growth of our wholesale business. The fourth growth pillar, international expansion, is another area where we've just begun to scratch the surface. In Europe, The region with the most established international presence, fourth quarter revenue increased 58% to 64 million, one of the largest quarters ever in Europe and representing 19% of total sales. We're seeing a strong rebound across the entire region and some of the hardest hit countries during the pandemic were some of the best performers in Q4. Demand is strong across all brands led, as I mentioned, by some of our newer additions like LoungeFly. Outside of Europe, the opportunity is potentially even more exciting as we're still in the early innings. Globally, some of our largest retail partners report that Funco is one of the most searched terms on many of their international e-commerce sites. This is truly an encouraging sign of the strength of the Funco brand and the opportunity we see globally. Our progress and specific approach will vary by geography, but we have an exciting roadmap to extend our footprint globally. We will be focusing on near-term opportunities in Latin America, Canada, and Oceania, each with a tailored go-to-market plan that is already underway. We're in a great position to deliver against all four growth pillars. As always, we'll balance focused internal execution with prudent M&A where appropriate to extend our product portfolio and expand our geographic footprint. For 2022, we anticipate revenue growth of between 20% and 25%, an adjusted EPS of $1.75 to $1.91 with adjusted EBITDA margin relatively in line with fiscal 2021, reflecting one-time project spend that Jen will describe in detail, as well as freight headwinds that we are now expecting to remain in place for most of the year. Despite external factors that are largely out of our control, we've proven our ability to deliver in difficult environments, and I'm very confident we are well positioned to meet our objectives for the full year. Looking beyond 2022, based on the strength of our portfolio, the sustained demand we cultivate with our fans, and our proven ability to execute, we believe that Funco can deliver double-digit revenue growth over the next three years while consistently expanding margin. In closing, the fourth quarter capped off a truly remarkable year for Funco. We surpassed 1 billion in annual net sales, launched multiple new products, both physical and digital, generated exceptional growth across our brands, and delivered more than 200 basis points of adjusted EBITDA margin expansion in one of the most disruptive supply chain environments in memory. It's a testament to the iconic nature of our brands, incredible faithful fan base, and importantly, the dedication of our amazing employees and partners We entered 2022 with strong momentum, and I couldn't be more excited about the opportunity ahead. And with that, I'll turn the call over to Jen to take you through the financials.