JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to Jax Pacific's second quarter 2021 earnings conference call with management, who will review financial results for the quarter ended June 30, 2021. 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 Steven Berman, Chairman and Chief Executive Officer, and John Kimball, Chief Financial Officer. Mr. Berman will first provide an overview of the quarter along with highlights of product lines and current business trends. Then Mr. Kimmel will provide detailed comments regarding Jack Pacific Financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening 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 1 on your telephone keypad. Before we begin, the company would like to point out that any comments made about JAC specific future performance events or circumstances, including the estimate of sales and or adjusted EBITDA in 2021, as well as any other forward-looking statements concerning 2021 and beyond, are subject to safe harbor protection under federal law, security law. The statements reflected 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 the forward-looking statement. For detailed concerns concerning these and other such risks and uncertainties, you should consult Jack's most recent 10-K and 10-Q filing with the SEC, as well as the company's other reports subsequently filed in the SEC from time to time. In addition, today's comments on 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 with the company's earning press release issued today or previously. As a reminder, this conference is being recorded. With that, I will now extend the call over to Mr. Berman.

Good afternoon and thank you for joining us as we review our performance for the second quarter of 2021. Our second quarter results exceeded our internal projections and position us for a strong back half of 2021. I'll begin with an overview of our second quarter performance, with John covering our financials in more detail, and then I'll explain why we are excited about what's in store for the back half of the year. Looking at the quarter, we are very pleased with our performance as we recorded second quarter positive operating margin for the first time in many years. Our bottom line has increased materially over the last 18 months, and we continue to push the business forward on the stronger foundation. Our adjusted EBITDA in the quarter was $5 million, our first profitable second quarter since 2016. Our performance was driven by strong sales across the core business categories as we continue to focus on the priorities we've previously discussed. Expanding gross margins, improving profitability by reducing costs, and driving down debt. Jack's business has been built over the years by identifying, acquiring, and or building product expertise where we can be a leader. We are confident consumer demand will be timeless and we can provide compelling brands, product design and innovation to meet our margin criteria. This past quarter demonstrates how that formula works for us and differentiates us from other companies in and around the kids consumer space. This was another quarter of steady growth, not due to an opportunistic pop in one segment or product line, but due to strong demand across the whole company. Our evergreen businesses continue to perform well. We deliver higher gross margins for the sixth consecutive quarter with improved product margins and lower royalty expense. And importantly, we refinance our long-term debt and credit facility, extending its terms and lowering our borrowing costs. We are very pleased to have delivered these results despite one of the most chaotic first halves of the year in memory. Like many, we've been dealing with the lack of containers and ocean freight capacity, and when found, surcharges increased to ship product. We're seeing extensive port delays and in some cases closures. We're seeing rolling power blackouts leading to reduced production time and the continuous moving of customer shipping windows. Lastly, chip shortages are impacting key items planned for the holiday season. All of these factors were in play in second quarter, and will continue into the back half of the year. That being said, true to our nature as a hands-on entrepreneurial firm, though, we are literally working around the clock in collaboration with our long-standing partners and achieving solutions where we can. It's a meaningful challenge to our normal course of operations, and the team is rallying and having success, but it presents an ongoing range of issues with a narrative often challenging daily. We are working hard to stay ahead of these events, and we increased our inventory level for the quarter to 60 million, slightly ahead of our historical June 30 levels. And we've been addressing the smaller things as well, like dealing with pallets. There's a meaningful pallet shortage nationwide, driven by higher lumber prices, reduction in logging, settlement issues, and the downstream disruptions we are all experiencing across industries due to the pandemic. Pallets are literally foundational to our ability to ship product to customers, whether for transit or in-store display. Months ago, the team recognized this as a growing issue and began working with local suppliers to ensure we had access to the right quantities to stay on track this year. The results to date have been gratifying. From a sales perspective, we saw double digit sales growth across both our girls, boys, and costume businesses with outdoor seasonal sales coming in flat compared to last year. Our second quarter girls shipments were led by the continuation of strong POS for the Disney Princess brand, which is up over 30% year over year. We're also continue to see great reaction to our perfectly cute baby range. Sales growth in voice continues to be driven by Nintendo and Sonic the Hedgehog. We added to our Nintendo SKU count at Walmart in the U.S., and in addition to seeing international growth for the businesses, particularly in Europe. Nintendo's core line has sold very well across the entire line of figures, playsets, and plush. Sonic's SKU count also increased at many retailers and will continue for the fall. Our disguise costume business was up 37% compared to Q2 2020. Understandably, we're in a much better place with Halloween planning in 2021 than we were this time last year. We have seen strength across the board, particularly in Disney Princess and in Frozen, but also with gaming properties like Minecraft. As the economic opening continues, we are gradually seeing improvements in retail traffic and audience returning to theaters. Streaming dominated during the pandemic and production filming is ramping up to meet the rise demand for content across new and established channels. We feel we're well positioned with the timeless brands being delivered directly into households via streaming and gaming platforms while still working with all the leading content creators. I will now pass the call to John to review our financial performance, after which I'll return with more commentary on our expectations for the remainder of the year. John.

Thank you, Stephen, and good afternoon, everyone. Net sales for the 2021 second quarter were $112.4 million, up 43% compared to $78.8 million last year. As Stephen mentioned, we saw great results across the board in both our toy consumer products and costumes segments. In our girls and preschool targeted businesses, primarily dolls, dress-up, role-play toys, plush, and other consumer products, net sales were $49.3 million in Q2. up 50% compared to $32.8 million in the prior year. The big driver of the growth was the strong sales of Disney Princess and Raya merchandise, slightly offset by lower sales of Frozen. Our Perfectly Cute ranges continue to positively contribute to the girls' division. In our boys' targeted division of action figures, vehicles, role-play toys, and other electronics products, net sales were $19.6 million, up 83% compared to $10.7 million last year. Sales for our video game-related toys, Nintendo and Sonic, delivered the majority of the growth, while we still see our Black & Decker role-play line strongly contributing. We are continuing to see the growth in the boys' business in both the U.S. and internationally, with more points of distribution and broader product ranges. In our outdoor seasonal division of ball pits, play structures, activity tables, foot-to-floor ride-ons, skateboards, and other spring-summer-inspired toys, net sales were $12.6 million in the quarter, flat versus the second quarter of 2020. This division certainly benefited from a lot of online purchases last year, and our activity table business in particular continues to sell through about as fast as we can sell in. When you add those pieces together, second quarter sales in our toys consumer product segment were up 45% to $81.5 million globally, compared to $56.2 million in the second quarter of last year. Growth came from North America, up 42%, while international also grew by 60% with the opening of retail stores throughout Europe. Net sales in our costume segment, disguise, were up 37% at $30.8 million in the second quarter. As Stephen pointed out, we remain excited for a bigger and better Halloween season this year with disguise. Moving down the P&L, gross margin in the 2021 second quarter was $31.9 million at 28.4% of net sales, a 710 basis point improvement over the 21.3% of Q2 of last year. Product COGS for the second quarter were 54.7% of net sales, a decrease of 410 basis points from 58.8% in the second quarter of 2020. The balance of improved gross margin for the second quarter was the result of a 270 basis point improvement in the royalty line. The lower royalty rate for the quarter was driven partly by a volume shift, but also a more favorable portfolio of licensing agreements. Despite higher ocean freight costs, we were really pleased to see these increases in gross margin rate teams continue to work diligently to mitigate these cost increases throughout the balance of 2021, but they're clearly a real issue and something we know will be problematic on a couple of fronts. Our second quarter direct selling costs were $6.3 million, or 5.6% of net sales, compared to $3.9 million, or 5% of net sales, in the second quarter of 2020. Our 2021 second quarter G&A, including product development and testing but excluding depreciation and amortization expenses, was $23.2 million, or 21% of net sales, up $21.8 million, or 28% of net sales, in the second quarter of 2020. These results combined to generate a second quarter operating profit of $1.8 million, compared to an operating loss of $9.7 million in the second quarter of 2020. Our year-to-date interest expense is $9.2 million, compared to $11.1 million in the first half of 2020, reflecting the beginning of the lower borrowing costs as well as an overall lower level of debt. As a reminder, certain elements of our capital structure, specifically our convertible senior notes and preferred stock derivative liability, are marked to market quarterly with non-cash gains or losses depending upon a number of factors, inclusive of market debt rates, current share price, and the time to maturity of the notes. In the second quarter of 2021, the combined impact of those valuations resulted in a loss of $5.3 million. Also uniquely this quarter, the refinancing of our debt resulted in write downs of costs associated with our 2019 recapitalization. These refinancing elements offset our improved operating performance to create a net loss attributable to common stockholders in the quarter of $15.4 million or $2.48 per basic and diluted share compared to a net loss attributable to common stockholders of $23.6 million or $7.70 per basic and diluted share in Q2 of 2020. Excluding the impact of the non-cash valuation adjustments, debt extinguishment-related expenses, as well as stock compensation expense, our adjusted net loss attributable to common stockholders in the second quarter of 2021 was $2.3 million, or $0.38 per basic and diluted share, compared to a loss of $13.4 million, or $4.38 per basic and diluted share reported in the second quarter of 2020. Our adjusted EBITDA for the quarter was $5 million, first positive second quarter adjusted EBITDA since 2016, compared to a loss of $4.6 million in 2020. That brings our trailing 12-month adjusted EBITDA to $49.1 million, its highest dollar level in the past four years, representing 8.7% of our trailing 12-month net sales. Accounts receivable as of June 30, 2021 were $107.9 million, up from $69 million as of June 30, 2020. DSOs for the 2021 second quarter increased to 87 days from 80 days reported in the 2020 second quarter. Inventory as of June 30, 2021 was $60.6 million versus $57.7 million at June 30, 2020. DSIs in the 2021 second quarter were 90 days compared to 85 days in the 2020 second quarter. As we have previously disclosed, last month we refinanced our long-term debt into a longer duration with lower borrowing costs. This refinancing triggered an acceleration of the maturity of our convertible senior notes to mature in early September 2021. In the event that any notes are not converted prior to that time, the company has the option of redeeming the notes at par value. To prepare for that possible scenario, the company arranged for a drawdown provision as part of its long-term debt financing to be utilized if additional cash was necessary to redeem notes. At this time, the company has no way of knowing whether that drawdown will be utilized. One way or another, this issue will be resolved by the end of Q3. In addition, we secured a new $67.5 million credit line, which leverages more of our asset base to increase the company's overall liquidity. We currently have no outstanding balance under that credit facility, aside from $11 million in letters of credit as of June 30. Also, as of June 30, our availability under the line is $53.4 million. During the second quarter, the company applied for forgiveness of its PPP debt of $6.2 million and is awaiting feedback. In the absence of knowing whether any funds will be forgiven, the company presumes a two-year loan period with interest beginning to accrue in June 2020. Payments would begin in September 2021. However, PPP debt repayment is suspended while a forgiveness application is pending. As of June 30, 2021, the company's debt at face value was $119.3 million, including the aforementioned $6.2 million PPP loan due June 2022, $14.1 million of recapitalized convertible senior notes due September 2021, inclusive of PIC interest, and $99 million owed under our term loan due June 1, 2027. Capital expenditures during the second quarter of 2021 were $2.3 million compared to $2.8 million in the second quarter of 2020. Depreciation and amortization for the second quarter of 2021 was $2.8 million compared to $2.6 million in the second quarter of 2020. The basic and diluted income per share calculation for the second quarter of 2021 was based on a weighted average of 6.22 million common shares outstanding, up from 3.064 million in the second quarter of 2020. This number reflects the impact of our reverse stock split 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.