Funko, Inc.

Good afternoon and welcome to Funko's 2024 First Quarter Financial Results Conference call. At this time, all participants are in 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 of the company. As a reminder, this call is being recorded. I would now send the call over to Funko's Director of Investor Relations, Rob Jaffe. Please proceed.

Hello, everyone, and thank you for joining us today to discuss Funko's 2024 first quarter financial results. On the call are Mike Lunsford, our interim chief executive officer, Yves Lapendaven, our acting CFO, and Cynthia Williams, our newly appointed CEO. 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 referred 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 2024 first quarter financial results for the company's reasons for presenting non-GAAP financial measures. A reconciliation of the non-GAAP financial measures for the most directly comparable GAAP financial measures is also attached to the company's earnings press release issued earlier today. I will now turn the call over to Mike Lunsford.

Mike? Thanks, Rob, and good afternoon, everyone. I'll begin with the announcement made earlier today that our Board of Directors has appointed Cynthia Williams as Funko's next CEO. Cynthia's experience across the consumer products, gaming, and e-commerce industries, combined with the growth she spearheaded while at Hasbro, Microsoft, and Amazon, made her the clear choice to be our next CEO. We welcome Cynthia to the Funko family. I can tell you Cynthia is eager to get started, and I'm pretty eager for her to get started. She is here with us today and will make a few introductory comments a little later in our presentation. Turning to our financial performance, we reported a solid overall first quarter. Net sales of almost $216 million were within our guidance range, albeit at the lower end. Sales of some lower margin products shifted to Q2 from Q1. Otherwise, our net sales for the quarter would have been close to the midpoint of our expectations. Gross margin of 40% and adjusted EBITDA of $10 million were both well above our expectations. One key driver for the increased gross margin was higher than expected margins on sales in the value channel, which is the result of the processes we put in place to improve inventory management. Another key driver was lower than anticipated freight costs. Operationally, we continued to make progress reducing our inventory levels and paying down debt. At the end of Q1, inventory was $112 million, down from $119 million at December 31st, 2023, and total debt was down $27 million. This is on top of the progress we made last year, reducing inventory levels by more than half. What a difference a year makes. Since Q1 of 2023, we've made tremendous progress reducing inventory levels lowering fulfillment costs, and improving service levels. And just last month, almost two years to the day of opening our new warehouse in Arizona, we hit the milestone of over 100 million units shipped. Turning now to our outlook. We are reiterating our full year 2024 guidance. As expected, a lack of new entertainment content, primarily due to the recent Hollywood strikes, impacted our Q1 top line. We expect the content schedule remaining soft in the Q2 and then strengthening in the second half of the year. With regard to freight, our original forecast assumed a substantial increase in shipping costs due to conflicts in the Red Sea. Freight costs in Q1 were lower than we anticipated and have stabilized. Nonetheless, our logistics team continues to look for ways to manage and mitigate fluctuations in these costs. Turning briefly to a couple of recent product highlights and how they relate to our growth plan. With regard to focusing on our fans and unmatched brand, on our last call, we spotlighted our presale capabilities with the limited edition Jason Kelsey pop figure. Building on that success, we recently launched several exciting collaborations, including the Dunkings and Project Fred, Big Boy, Coke, and Sprite campaigns. And earlier today, we launched our first edition of the Jumbo Chon line. This new collectible line initially features our nostalgic and iconic Freddy Funko in a new anime stylization. All of these exclusive drops of premium priced, limited edition collectible items have all sold out and have been creating brand heat with our core customers. To focus on fewer products done extremely well, we are emphasizing evergreen and replenishment sales of Bidipop to drive SKU efficiencies and produce characters that consistently resonate with customers. And Pop Yourself is a great example of investing in areas we have better control over and expect to be able to measure and grow profitably. We continue to add options and accessories to our Pop Yourself line. In Q1, Pop Yourself sold especially well as a Valentine's Day gift, and the team is gearing up for the upcoming Mother's Day and Father's Day holidays. In April, we launched a Pop Yourself two-pack, strategically in time for the upcoming wedding season. Since launch, two-packs have generated more revenue than the singles. What we thought was going to be a nice addition to the line has performed well above our expectations. And as a sign of the product's growing consumer awareness, Pop Yourself was featured in a New York Times roundup of best wedding gifts. In combination, these highlights demonstrate how we keep the flywheel turning, where each action we take builds on the previous one, propelling positive momentum. With that, I'll now turn it over to Eve to take you through the financials. Eve?