JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the Jax specific third quarter earnings conference call with management. We'll review final results for the quarter ended September 30, 2020. Jax issued its earnings press release earlier today. The earnings release and presentation slides for today's call are available on the company's website in the investor section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer, and John Kimball, Chief Financial Officer. Mr. Berman will provide an overview of the quarter along with highlights of product lines and current business trends and a discussion of the impact of COVID-19. Then Mr. Kimball will provide detailed comments regarding Jack Specific's financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. Your line will be placed on mute for the first portion of the call. If you would like to be placed in the queue to ask a question, please press star, then 1 on your telephone keypad. Before we begin, the company would like to point out that any comments made about Jax Pacific's future performance, events, or circumstances, including the estimates of sales and or adjusted EBITDA in 2020, as well as any other forward-looking statements concerning 2020 and beyond, are subject to safe harbor protection under federal securities laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult Jack's most recent 10-K and 10-Q filings with the SEC, as well as the company's other reports subsequently filed with the SEC from time to time. by management will refer to non-GAAP financial measures such as adjusted EBITDA. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this conference is being recorded. With that, I would now like to turn the call over to Stephen Berman.

Thank you and good afternoon, everyone, and thank you for joining us today. Considering a number of challenges we faced in the third quarter, we are pleased with our results. We believe that there continue to be promising trends underway that leaves us very optimistic about 2021 and beyond. We had a solid EBITDA in the quarter, lifting our year-to-date EBITDA to 24 million, up over 50% compared to last year. We grew our margins to the highest level in three years. Our retail POS at top customers is up 28% year to date. Our year to date operating income is positive for the first time since 2016. We recently amended our term loan prepaid part of it and lowering our EBITDA covenant, giving us greater flexibility. Considering the challenges of COVID and the difficult revenue comparisons, I think our year-to-date results show considerable progress in our efforts to improve our cost structure and put us in a position to produce strong results in 2021. Our net sales in the third quarter were down 14% from the results we posted a year ago, but we are encouraged by the composition of those sales. In our toy segment, our sales were down approximately 8%. This decline was mostly due to the reduction in sales of products tied to Disney's Frozen 2 which we shipped heavily last year ahead of the November release of the movie. There were no comparable blockbuster films released in 2020. So excluding products tied to Frozen 2 and the original Frozen, our toy sales were up 13% in the third quarter compared to last year. Most of our major retail customers were able to return to normal operations in the third quarter. although many smaller retailers and specialty stores continue to see traffic and sales well below the normal levels. This is especially true for companies that rely on Halloween season, and this is tied to the other significant factor in our sales decline. We said after the second quarter, retailers selling Halloween products were quite cautious when ordering Halloween products. leading to lower shipments to these retailers, despite the fact that Halloween was on a Saturday, which typically gives a boost to our sales. We planned for a big decrease in sales, and that's what we saw, with the skies down to approximately 27% in sales, comparable to what we saw in terms of POS. There were quite a few bright spots in the quarter too. Disney Princess in general did very well. Outside of Frozen and Frozen 2, our Disney sales grew 18% compared to last year. Our Nintendo business was up 60% and Sonic the Hedgehog was up fivefold. The Extreme Power Dozer is off to a great start. Our Perfectly Cute Baby line of product, which is an exclusive we produce for one retailer, more than doubled. And our Perfectly Cute Home, a comparable line, was up double digits. Cute Girls Hairstyle, based on a popular YouTube channel, got off to a very strong start. We are encouraged with how well these new products did in the third quarter and the momentum they take into the fourth quarter. And we are even more encouraged by our retail POS and our retail inventory levels. Year-to-date, through the end of September, POS at our top three customers was up 28%, and retail inventory at these retailers is down over 16%. We are pleased with this position as we move through the holiday season. We know we have some difficult comps in Q4 against the launch of Frozen 2, but we're satisfied with how clean our inventory levels are at retail. Even more encouraging than the sales trends and POS is how much we have reduced our costs compared to last year and the year before. John will review some of this shortly, and I will talk more about it later in the call, but we have taken millions of dollars in expenses out of the cost structure, such that despite the double-digit reduction in sales, our gross profit dollars were only down high single digits, and our adjusted EBITDA was only down low single digits. As we have since last year, we continue to focus on improving profitability more than just capturing sales. We are weeding out low-margin products, High volume but low margin promotional programs that we ran in the past were not repeated this year. As a result, our gross profit margins came in at the highest level of any quarter in three and a half years. We believe our cost structure now will allow us to generate much higher levels of profitability than in the past when we see sales growth return. So while we don't like to report sales declines, we're actually quite encouraged by how our results reflect greater sales and spending discipline and a greater focus on profits. John will now review financials, and I will return to discuss what we see for the rest of the year and provide a glimpse into initiatives we are taking for 2021. John?

Thank you, Stephen, and good afternoon, everyone. Net sales for the 2020 third quarter were $242.3 million, down 14% compared to $280.1 million last year. Reported net income attributable to common stockholders for the third quarter was $32.1 million or $4.27 per diluted share compared to $16.3 million or $5.08 per diluted share in the third quarter of last year. The third quarter of 2019 included charges related to the extinguishment of debt and changes in the fair value of our convertible senior notes, totaling $13.7 million. In the third quarter of 2020, when combining the changes in the fair value of our convertible senior notes and preferred stock derivative liability with modest expenses related to the pandemic, the adjustments essentially offset each other. Excluding the impact of such charges and gains, as well as stock compensation expense, Our adjusted net income attributable to common stockholders in the third quarter of 2020 was approximately $32.6 million or $4.76 per diluted share compared to $31.4 million or $5.38 per diluted share in the third quarter of 2019. Adjusted EBITDA for the 2020 third quarter was $42.7 million compared to $44.1 million in the third quarter of 2019. Our trailing 12-month adjusted EBITDA is $27.6 million. Compared to last year, our girls' targeted business declined in the quarter. Inclusive of dolls, role play, dress-up, and preschool toys and consumer products, net sales were $129.3 million in Q3, down 11% compared to $145.9 million in the third quarter of last year. The big driver of the decline was the strong initial sales of merchandise related to Frozen 2 in the third quarter of last year, as well as products tied to the original Frozen film. Excluding Frozen products, sales of girls' products were up over 24% compared to last year. Products that contributed positively were Perfectly Cute Baby, Disney Princess, Cute Girls Hairstyles, and Kitten Cat Fae, which more than offset declines in Toy Story 4, Fancy Nancy, and Moana. Sales of action figures, vehicles, role play, and electronics products in our boys' category for the 2023 quarter were $33.6 million, up nine percent compared to 30.8 million dollars last year positive contributions from our video game related toys including nintendo sonic the hedgehog and the launch of apex legends as well as extreme power dump truck and flywheels vehicles more than offset declines in godzilla tp blaster and last year's extreme power dozer sales of seasonal products including licensed ball pits and play structures were 24.4 million dollars in the 2020 third quarter down 12% from $27.6 million in the third quarter of 2019, primarily due to declines of morph board and kids-only activity tables. The revenue downside in kids-only was a result of taking a more critical view of margin and inventory management this year, as the product margin for the business was seven points higher, despite the lower volume. More specifically, last year we ran a special blitz promotion that produced strong sales volume but came at a low margin. Broadly speaking, we are seeing strong retail sell-through with our activity tables, foot-to-floor ride-ons, and skateboards, but have been production constrained to react given the lingering impact of the extended Chinese New Year shutdowns and this unanticipated spike in consumer demand. Sales in our Halloween segment, the skies, decreased 27% to $55 million in the third quarter of 2020, compared to $75.8 million last year. As Stephen said earlier, the decline is primarily a reflection of retailers' caution in ordering Halloween merchandise, and our related caution in managing accounts receivable. Our reduced 2020 film slate also played a role. As a reminder, we were down 38% in this segment in Q2. Looking at sales by business segment, sales in our toys consumer product segment, which includes all markets around the world, were down 8% to $187.3 million compared to $204.3 million in the third quarter of last year. The decrease was driven by the same factors noted above in the product discussion. North America Toys CP were down 4% for the quarter, while EMEA, Latin America, and Asia were each down over 20%. Looking at the rest of the P&L, reported gross margin in the 2020 third quarter was 30.8% compared to 28.9% in the 2019 third quarter. This is the highest quarterly gross profit margin as a percentage of net sales we have reported since the March quarter of 2017, and the highest gross margin rate for a third quarter since 2016. Steady improvements in our product margins and lower inventory obsolescence expense outpaced higher royalty charges incurred in the quarter. The increase in royalty expenses as a percentage of sales was driven partly by a mixed shift towards products with higher royalty rates. Significantly lower spend for SG&A, including product development, depreciation, and amortization-related expenses, in the 2023 quarter totaled $37.1 million, or 15.3% of net sales, compared to $45.2 million, or 16.1% of net sales in the third quarter of 2019. On a year-to-date basis, 2020 SG&A is 24.8% of net sales compared to 26.9% in 2019, despite net sales being $58.5 million lower year-to-date compared to prior year. Our net interest expense in Q3 of this year was $5.6 million compared to $4.6 million last year reflecting a full quarters portion of our recapitalized balance sheet compared to prior year. Net cash provided by operating activities was $27.8 million for the third quarter of 2020 compared to $35 million in the third quarter of 2019. Free cash flow was a positive $26 million in the 2020 third quarter compared to $32.6 million in the 2019 third quarter. As of September 30, 2020, our cash and cash equivalents, including restricted cash, totaled $79.8 million, compared to $66.3 million at the end of 2019, and $75.9 million as of September 30, 2019. Accounts receivable as of September 30, 2020, were $166.8 million, up from $117.9 million as of December 31, 2019, and down from $200.8 million at September 30th, 2019. DSOs for the 2020 third quarter decreased to 63 days from 66 days reported in the 2019 third quarter. Inventory as of September 30th, 2020 was $54.6 million versus $54.3 million at December 31st, 2019 and $65.3 million as of September 30th, 2019. DSIs in the 2020 third quarter were 30 days compared to 40 days in the 2019 third quarter. And looking at DSIs on a trailing 12-month basis, we were at 63 days for 2020 and 73 days for 2019. By the end of the third quarter, the company had exhausted the $6.2 million in funds received under the Paycheck Protection Program. We spent $8.3 million in eligible forgivable expense through September 17th, 2020. It remains the company's intention to file for forgiveness of this loan. In the absence of knowing whether any funds will be forgiven and how the program may change as the year continues, the company has taken a conservative approach and presumed a two-year loan period with interest beginning to accrue in June 2020. As a result, we now reflect $2.5 million in short-term and $3.7 million in long-term debt on our balance sheet related to this loan. As a result of September 30, 2020, the company's debt at face value included the aforementioned $6.2 million PPP loan due June 2022, $30.6 million of recapitalized convertible senior notes due July 2023, and $138.8 million owed under our term loan due February 2023 both inclusive of PIC interest. We currently have no outstanding balance under our credit facility aside from $10.4 million in letters of credit as of September 30th. During the Q3 quarter, $1.0 million of the July 2023 convertible senior notes were converted to common shares at $5.65 per share. Subsequent to September 30, an additional $2.0 million of the aforementioned notes were converted to common shares at the same price. As of October 31, 2020, the face value of the July 2023 convertible notes is $28.7 million, including accumulated pick interest. Also subsequent to September 30, the company reached an agreement with its term loan note holders in Wells Fargo to amend the company's existing lending agreements. The details of these amendments were filed as an 8K on October 19, but among other attributes, it required a term loan principal pay down of $15 million upon execution as well as contemplating an additional $5 million prepayment in the next 12 months, subject to certain conditions. As a result, the company has classified $20 million of its term loan debt as a current liability, and therefore the company's revised balance of its 2023 term loan will be $20 million in short-term debt and $118.8 million in long-term debt, both inclusive of picker interest. The $15 million principal payment was made in October. Capital expenditures during the third quarter of 2020 were $1.8 million compared to $2.4 million in the third quarter of 2019. The diluted income per share calculations for the third quarter of 2020 were based on a weighted average of 6.96 million common diluted shares outstanding, up from 6.04 million in the third quarter of 2019. This number reflects the impact of our stock split in July 2020, as well as the aforementioned convertible senior note conversions. And with that, I will now hand the call back over to Stephen for some additional remarks.