JAKKS Pacific, Inc.

ladies and gentlemen thank you for standing by your conference call should begin momentarily again thank you for standing by your conference call should begin momentarily thank you Thank you. Thank you. Thank you. Good afternoon, everyone. Welcome to JAS specific first quarter 2022 earnings conference call with management, who will review financial results for the first quarter ended March 31st, 2022. JAS 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 provide an overview of the quarter, along with highlights of products, lines, and current business trends. Then Mr. Kimball will provide detailed comments regarding JAS specific financial and operational results. Mr. Berman will then return it with additional comments and some closing remarks prior to opening up on the call for questions. You're allowing me to place on mute for the portion of the call. If you would like to be placed in the queue to ask a question, please press star one on your telephone keypad. Before we begin, the company would like to point out that any comments made about JAC's specific future performance, events, or circumstances, including the estimates of sales and adjusted EBITDA in 2022, as well as any other forward-looking statements concerning 2022 and beyond, are subject to safe harbor protection under federal security 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 that 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 file within the SEC, as well as the company's other reports subsequently filed in the SEC from time to time. In addition, today's comments by management will refer to non-GAAP financial measures, such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure with the company's earnings press release issued today or previously. As a reminder, this conference call is being recorded. With that, I would now like to turn the call over to Mr. Stephen Berman.

Good afternoon, and thank you for joining us as we discuss our latest performance and current plans going forward. It has been an exciting first quarter for Jax as we shipped more product than any Q1 since 2008. Our net sales for the quarter were 120.9 million, a 44% increase compared to the prior year. On the toy consumer product side, sales can be thought of in terms of three key drivers. Our evergreen business of toys and consumer products solidly performed in the quarter, growing single digits almost across all divisions, and categories over the prior year. Disney Princess, Nintendo Super Mario, Perfectly Cute, Black & Decker all contributed to improved results. We continue to see fantastic demand for our Encanto Disney products. Retail inventory of Encanto at our top three US accounts at the end of the quarter was only 4 million. The team has been laser focused on fulfilling the existing demand and broadening the product line with some great new items in time for this holiday season. There also has been great excitement for our Sonic the Hedgehog 2 movie-related products since it hit shelves at the end of February. We were thrilled to see fans rush to the theaters when the movie released earlier this month. Over its first two weeks, the worldwide global box office has exceeded 230 million. The movie and our product line appeals to those new to Sonic as well as those of us who have loved the world of Sonic for over 30 years now. Point of sale at our top three U.S. customers increased over 40% in Q1 compared to last year, while their retail inventory levels started to catch up from recent quarters, finishing at plus 54%. We feel really good about the cooperation we're getting from customers working to stay ahead of the supply chain constraints and ensure that everyone has the product our consumers want throughout the year. In total, our toy consumer product segment was up 39% in the quarter, with North America up 37% and international up 52%. Although the pandemic continues to impact local economies in different ways, we are beginning to see solid progress in expanding our international footprint. Over the past two years, we have gone direct in more Western European markets as well as Mexico. Those transitions are often challenging in the best of times, and we have erred on the side of caution to not overinvest. But as we close Q1, we see signs of solid progress, particularly as European retailers had more lockdowns a year ago, and our team in Mexico opens more doors more and more as the weeks go by. Our top five direct toy markets outside of North America were the UK, Germany, Mexico, France, and Italy, and that group aggregated grew over 80% in Q1 versus the prior year. Q1 is a small quarter for our costume business, but nonetheless also performed extremely well. We shipped 9.8 million in the quarter, a nearly one and a half times increase versus a prior year. As we've discussed on recent calls, our costume business in Europe is ramping up along with our toy growth, and we've begun shipping Disney costumes across Europe in April. From a margin perspective, container costs and stretch delivery times continue to be a challenge as we have anticipated. The team in Hong Kong and in China are working closely with our counterparts in the US, Europe, and Southeast Asia to ensure that we are moving product into our warehouses as efficiently and cost-effectively as possible. But the situation remains volatile, in part given the wide range of product we offer. Particularly, some of our outdoor seasonal items, which remain subject to tariffs, are now further disadvantaged given the relative size and the simple math of how many units fit in a now more expensive container. We are factoring in all these issues as we plan our year going forward. Increasing cost pressures remain a hot topic everywhere. We continue to leverage our long-term vendor relationships to collaborate in developing products that will be market competitive while dealing with increasing manufacturing costs and above and beyond the aforementioned supply chain challenges. Towards the end of first quarter, we returned to on-premise operations in our Southern California offices. As much as the teams have done a remarkable job in collaborating in new and different ways remotely, it's been energizing to be able to walk the halls again and have more spontaneous conversations, both on a professional and personal fronts. We are also starting to see business travel return and are eager to see more cross-office collaborations in the months to come, in addition to spending more in-person time with customers and licensors. As each quarter passes, our balance sheet gets stronger and stronger. We are taking advantage of the low shipping season to import our 2022 inventory needs as early as we can, as we did last year, and managing our cash tightly to fuel our future growth. The first quarter in a company like ours is really just a warm-up for the rest of the year, so we're all aware that there's a lot of hard work ahead of us. But when I think back on all the challenges the company and the team has had to work through over the past several years, I couldn't be more excited about where we find ourselves today and the prospects going forward in 2022 and beyond. I will now pass the call over to John for some further discussions around our financials. after which I will come back with some more thoughts about the rest of 2022. John.

Thank you, Stephen, and hi, everybody. In the spirit of it being a new year and trying new things, we've extended the data and calculations provided in the exhibits of our earnings release to cover the material that I've historically recapped in my section of the narrative. As a result, I'm not going to reiterate all that data here. I would like to take the opportunity to go a bit deeper into a few areas that I feel are noteworthy in reviewing the quarter. First off, margin. As we discussed last quarter, we're seeing meaningful increases in input costs when it comes to importing product, inclusive of getting product from the factory to the port, ocean passage, getting product out of the receiving ports in a timely manner, and then transporting to our warehouses in the US and Europe. We absorbed a lot higher costs in the back half of 2021 in this area portion of which flowed through the P&L when that product was sold in Q1. It has been in recent years and continues to be our practice to contract for a certain amount of ocean transport to the U.S. to give us a degree of cost certainty. We secure the balance of our capacity on the spot market. As much as the spot market continues to whipsaw around early this year, we know that the retrospectively attractive contractual rate we enjoyed in 2021 will soon be gone and we will be absorbing higher contractual costs this year. This is not new news in the context of what we shared last quarter, but it is a bit more explicit about our confidence in projecting how we expect that cost to behave in the calendar year. It is the case that the front part of the year is lower volume at the ports and by extension, less challenging than what we saw in the back half of 2021. But that doesn't change that unfavorable year-over-year perspective on a container basis with the contractual rate resetting in Q2. Of course, a simple way to reduce spending in ocean freight is to import less product. However, as you can see in recent quarter's results, we're currently enjoying fantastic demand for our product, so we're having to be judicious about meeting that demand while realizing we're suffering on the margin side, given the current macro events. To that end, our March 31st inventory remains high at $85 million, which is $49 million more than this time prior year. Of the $85 million, $15 million is in transit, where last year that number was $5 million. You can think of that $85 million in at least four different ways. a view towards our short- to medium-term needs for 2022 sales, more in transit given the longer supply chain, capitalizing the higher supply chain cost-to-product value, and doing what we can to pull necessary 2022 inventory forward into our distribution centers ahead of the second half crunch. As to how all that plays out in the quarters to come is not something we're going to speculate on, beyond making the observation that we're happy to be in a place where there's a lot of demand for our current product line. Moving down the P&L and building on what Stephen said about cost pressures, as the business has retrenched during the pandemic, we have taken the opportunity to reset a bit as it relates to SG&A spending. There are elements in the direct selling section which have a variable volume attribute, and it's also subject to timing of certain expenditures that can move around during the year. Tracking G&A on a percentage of net sales basis is a bigger metric for us, not in terms of absolute dollars necessarily, but making sure we're at minimum maintaining scale in that more fixed portion of the P&L. Certainly benefiting from our strong Q1 top line, we see nice margin improvements in both areas versus prior year, with G&A, the larger of the two buckets, improving by over 400 basis points, which is great. That certainly helps offset some of the aforementioned gross margin squeeze and leads to our closing the quarter just under a 1% operating loss, which represents very strong performance for Q1 at a toy company. Our refinanced capital structure brought interest expense down from $4.9 million last year to $2.2 million this year, and the market-to-market of our preferred stock liability resulted in a non-cash loss of $645,000. We backed that loss out of our non-GAAP calculations of adjusted EBITDA and adjusted EPS. In aggregate, our adjusted EBITDA for the quarter is a positive $1.9 million versus a negative $2.4 million last year. Our trailing 12-month adjusted EBITDA is now $53.6 million, or 8.1% of net sales, which was $39.5 million and 7.4% of net sales at this time in 2021. Now I want to pivot to talk about cash in the balance sheet. As of March 31st, our total debt was $95.4 million. We had no draw on the credit line. With the trailing 12-month adjusted EBITDA, that calculates a leverage ratio of 1.8. As you know, our cash tends to have seasonal ups and downs given the seasonality of the business. If you were to calculate a trailing 12-month view of cash, you'd get $36.8 million. Whether you want to use that number or our cash balances of March 31st of $39.2 million, you get a net leverage ratio in the range of 1.0 to 1.1. Our trailing 12-month net sales is now at $658 million compared to a recent low of $516 million at the end of 2020. Given that our debt level has decreased from $161.7 million to $95.4 million over the same time period, We've been rolling forward the results of improved profitability and to reduce debt and increase working capital to drive higher sales. It's our intention to continue to follow that script, deploy cash to secure and expand evergreen brands and categories of business, steadily improve our balance sheet, and explore on-strategy acquisition opportunities as appropriate. And with that, I'll now hand the call back over to Stephen for some additional remarks.