Funko, Inc.

financial results conference call. At this time, all participants are in listening mode. Later, we will conduct 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'll now turn the call over to Funco's Director of Investor Relations, Rob Jaffe. Please proceed.

Hello, everyone, and thank you for joining us today to discuss Funko's 2023 fourth quarter financial results. On the call today are Mike Lunsford, our Interim Chief Executive Officer, Steve Dave, the company's Chief Financial Officer and Chief Operating Officer, and Yves Lapindevin, our Deputy CFO. This call is being broadcast live at investor.funko.com. A playback will be available for at least one year on the company's website. I want to remind everyone that during the course of this call, management's discussion will include forward-looking information. These statements represent our best judgment as of today about the company's future results and performance. Our actual results are subject to many risks and uncertainties that may differ materially from those stated or implied, including those discussed in our earnings release. Additional information concerning factors that could cause actual results to differ materially is contained in our most recent SEC reports. In addition, during this call, we refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Investors are encouraged to review Funco's press release announcing its 2023 fourth quarter and full year financial results For the company's reasons for presenting non-GAAP financial measures, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is also attached to the earnings press release issued earlier today. We have also posted supplemental financial information on the investor relations section of the company's website. I will now turn the call over to Mike Lunsford. Mike?

Thanks, Rob, and good afternoon, everyone. I'll begin with a few overarching comments on the past year. My first comment is on the general business front. 2023 was transformative for Funko. We addressed significant existing operational issues and executed a comprehensive cost reduction plan. The plan included eliminating unprofitable product lines and SKUs, two rounds of workforce reductions, and aggressive reductions in our inventory levels, which I'll return to in a moment. The major elements of this transformation are now complete. My second comment is on the strategy front. Over the course of 2023, we grew our D2C business, which in turn helped us achieve consecutive quarterly increases in our gross margin. Growing our D2C business remains a key goal for us. We have more control over our D2C business and believe we can grow it profitably. So we were pleased to see D2C sales in Q4 comprised 26% of our mix and increased nearly 30% over the same quarter last year. My third comment is on the product front. We expanded our offering with two important product launches. In early 2023, we entered the miniature collectibles market with the introduction of Bidipop. And around the middle of the year, we launched Pop Yourself online. Both products have been very well received by customers and were key contributors to our business in 2023. My fourth comment is on the operational front. We achieved another important goal, lowering the company's owned inventory levels. At year end, inventory was $119 million, which was down more than 50% from $246 million at the end of 2022. And for our larger retail partners who provide us with POS data, inventory in the channel at the end of 2023 was 32% lower than at the end of 2022 and at healthy levels relative to POS sales. Our growth in sales, improved gross margins, and the right sizing of our cost structure culminated in a successful Q4. Specifically, Q4 net sales were 291 million Gross margin was 38% and adjusted EBITDA was $23 million, all of which were at the upper end of our guidance range. Turning now to 2024, we expect 2024 full year net sales to be comparable to down slightly from 2023. Regarding phasing of the quarters, we expect to achieve positive comps later in the year but Q1 net sales to be lower than net sales in Q1 of last year. Our expectation is in part based on the following. First, we took deliberate action to manage down our inventory levels and we eliminated a significant number of unprofitable product lines and skews. Second, we are experiencing a softer content schedule primarily due to the recent Hollywood strikes And third, we face uncertainty around shipping costs primarily due to current hostilities in the Red Sea. Importantly, we expect 2024 full-year adjusted EBITDA to be considerably higher than our 2023 full-year adjusted EBITDA. The higher profitability we expect in 2024 compared with 2023 is based on the actions we are taking to, among other things, further expand our D2C business, and increase sales of pop yourself and limited edition products, areas of our business where we have more control and that we believe we can grow profitably. We believe that by focusing on these areas, we will gain operating leverage and a greater percentage of our sales will flow to the bottom line. In 2024 and beyond, our plan is to achieve long-term profitable growth. we will pursue our previously communicated plan, which centers around focusing on our fans and unmatched brand, running the business with financial discipline and focusing on fewer products done extremely well, investing in areas we can control, measure, and grow profitably, and keeping the flywheel turning, where each action we take builds on the previous one, propelling positive momentum. We believe this strategy is paying dividends. One recent example is the substantial reduction we made in both inventory and product SKUs, which shows how we are removing complexity from our business by focusing on fewer products. And another example is last month's sales event for our Jason Kelsey pop figure. After a recent NFL playoff game, Jason Kelsey's shirtless celebration in the stands went viral. We saw this as just the kind of event we could memorialize for our fans. Multiple internal teams collaborated to launch a Jason Kelsey pop figure, demonstrating how we are focused on our fans as well as our nimbleness and quickness to market. The limited edition product went from moment to market in 11 days, and our fans responded by making Jason Kelsey one of our top-selling Funko.com items of all time. Finally, a comment on our leadership team and search for a new CEO. Earlier today, we announced that Steve Nave, Funko's CFO and COO, will resign effective March 15th, 2024. Steve joined us a year ago to help with our cost reduction and operational improvement plan. He led our efforts to address our excess inventory and improve our Buckeye distribution center, negotiate lower shipping costs, right-size our cost structure, and manage our liquidity and improve our free cash flow. On behalf of the company, I want to extend our best wishes to Steve and thank him for his contributions. Eve Lipendovin, our Deputy CFO and Senior Finance Executive at Funko for the last four years, will serve as Acting CFO beginning March 15th. I have worked with Eve for several years now as both a board member and as the interim CEO. I have complete faith in Eve to lead our finance and accounting functions and to be our primary face to you, our analysts and investors. I believe you will find them to be diligent and extremely knowledgeable, not just about our financials, but also our business. Turning to the CEO search, as many of you know, I took the role of interim CEO last summer with a mandate from the board to set Funko on a solid foundation so that a new CEO will be able to focus on growing the company. We believe we now have in place a strong, lean, aligned senior leadership team to support the arrival of a new CEO and the growth of Funko. We expect to announce our permanent CEO in Q2 of this year. I will now turn it over to Eve to take you through the financials. Eve? Thanks, Mike.