JAKKS Pacific, Inc.

Everyone, welcome to the JAX Pacific Third Quarter 2022 Earnings Conference Call with Management, who will review financial results for the quarter ended September 30th, 2022. JAX issued its earning press release earlier today. The earnings release and presentation slide 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 first provide an overview of the quarter along with highlights of product lines and current business trends then mr kimball will provide detailed comments regarding jack's pacific financial and operational results mr berman will then return with additional comments and some close 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 one one on your telephone keypad. Before we begin, the company would like to point out that any comments made about Jack's Pacific's future performance events or circumstances, including the estimates of sales margins and or adjusted EBITDA in 2022, as well as any other forward-looking statements concerning 2022 and beyond, are subject to safe harbor protection under federal securities laws. These statements reflect the company's best judgment based on the 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 and forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAC'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. 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 measures 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.

Good afternoon and thank you for joining us today. It's been another strong quarter, great shipping numbers, and great sell-through at retail. Q3 for us was a solid continuation of our story this year, centered on the team's hard work to chase opportunistic 2022 demand while minimizing supply chain drag on our business. We shipped 323 million at the overall company level in the quarter, a 36% increase over the same quarter in the prior year. That brings our year-to-date net sales level to 664.3 million, which is 7% more than we shipped in all of 2021. We have never done that in the history of our company. It's really an accomplishment on a number of levels, both in terms of having that level of demand and the confidence from our customers, but also from a perspective of our vendor base and internal teams working to figure out how to deliver that amount of product in that amount of time. Calendar year 2022 is on track to be our second consecutive year of top line growth around 20%. How we deliver these numbers is consistent with our story from last quarter. We've worked with our customers worldwide to focus on FOB sales to push our volume through a broader and deeper range of supply chains. We've also partnered with them on addressing their specific needs around promotion opportunities and customized products. We've invested in extra tooling to create additional capacity for the ranges that are significantly exceeding our expectations. And increasingly, we have focused on maximizing our international opportunities. We've onboarded new team members while taking advantage of the excitement that's been building within our business to secure more shelf space with more customers outside of the U.S. Although the outlook for the economy and consumer demand remains a bit uneasy, we are happy to say we continue to see very robust demand across our product ranges. In the third quarter, the retail point of sale dollars at our top three accounts was up in the high teens versus a prior year. We are tracking at greater than 20% in retail sales growth year to date through September. And consumers began to think more about the holiday shopping season. We are seeing some good numbers in October as well across all of our major product lines. A special shout out to our Target toy shopping cart within our Perfectly Cute range. It's a tremendous item that the team worked on with Target. A bullseye top toy pick and has been flying off the shelf as soon as it appeared in this quarter. Our Q3 toy consumer product segment growth was 56%, with North America up 50% and International up 85% growth. All of our regions and nearly all of our top 10 markets were up double digits during the quarter, and they're all up double digits year to date. As you know, Q3 is when we get most excited about our market-leading costume business. According to the NPD Group, we are the U.S. market leader for the most recent five weeks, with over 20% market share as we were last year. Through the end of September, from a dollar perspective, we had 33 of the top 50 selling items per the same report. With $135 million shipped through September, we're having our biggest year with disguise since Jax acquired disguise back in 2008. Although our sales in the quarter of $53.4 million were down 17%, that's an anticipated side effect of customers buying product early to ensure that they can set planograms on time and not miss selling days, as was the case last year. Our year-to-date sales are up 36% versus prior year through September. I hope everyone knows by now our partnership with Snap makes your Halloween shopping even easier this year as their Lens Explorer, which launched earlier this month, lets you virtually try on and ultimately buy a broad assortment of disguised costumes. We are really excited to have worked with Snap to bring this to market, something that's been in the works for the past year. As some of you might know, Snap and Jax are neighbors here in Santa Monica. And with that jumping off point, we figured out this unique collaboration opportunity. As of this week, they had tracked over 2 million lens views and with brand owners using their social strength to point towards new and fun ways to shop, we're excited to see where it goes and how it makes the costume shopping experience better. Our outdoor seasonal business will also finish out the year with the consistent trend of difficult comps in part due to everyone's backing off higher cube items this year. in august and september sales meetings to introduce the 2023 product ranges we received good reactions to some of our innovation we have in this space so we are hopeful this business can start to pivot in the new year especially as container prices have backed off last year's five digit costs last year at this time we were starting to highlight one of the worst port bottlenecks we've seen in years We started incurring extra costs associated with importation of product, as well as having to deal with longer supply chain as it took much longer than normal to bring product from factory to warehouse to be available for sale. We've been talking since that time to time about all the countermeasures we've been taking to mitigate those costs and avoid similar or worse experience this year. I believe today people are aware that container costs have substantially decreased in the second half of this year. Other companies also reacted harshly to the events of last year and changed their seasonality and supply chain. And some industries are several months into meaningful slowdown in demand of their product, further freeing up ship and port capacity. As the supply chain now swings back to being shorter, we have to recalibrate our planning and product ordering cadence as our on-hand inventory gets a bit higher when ordered products show up faster than expected. Dealing with these unexpected guests does incur some additional expenses, which we're absorbing and expecting to continue through the balance of the year. From an order of magnitude perspective, as we sit here in late October, we feel we're in a much better place as it relates to supply chain issues than a year ago. But just because container rates are down, I want to be clear that there is still work to be done before we can remotely say it's business as usual on this front. Supply chains and logistics aside, I'm happy to report that as an organization, we are maintaining our discipline around margins and cost containment, even though we're steadily moving forward towards a more pre-COVID operating model. Certainly, our high sales volume has allowed us to scale our fixed costs this year. Although these cost areas that can pop up unexpectedly and still be material in a company our size, we are very pleased with our overall margin profile year to date. We're already getting into details of working through margin scenarios and cost expectations as we look ahead to next year. Last but not least, we have talked about our desire to run a steady, predictable, evergreen business, which nonetheless can still have a bit of a pop from unexpected, opportunistic breakout successes. As we have communicated earlier this year, we have one or two of those in the portfolio this year, which has enabled us to make an optional pay down of our long-term debt in Q3 in the amount of $17.5 million. Although this pay down incurred a prepayment penalty, when we assessed our current liquidity forecast and rising cost of LIBOR-based debt, we felt that this is the best move for the company and our shareholders. The payoff amount of our debt now stands at $69.5 million, a 29% reduction from where we were when we started the year. I'll stop here and let John get deeper into the financials, and then we will get back and talk more about Q4 and beyond. John?

Thank you, Stephen, and hello, everyone. As regular listeners know, there's a greater level of granular detail included in our release today But I'm going to be selective in what I highlight here towards what I think merits the focused attention. Obviously, another great quarter in sales performance across the board. As we reminded you last quarter, in 2021, we had about $30 million in Q3 FOB sales slip into October. But even taking that into account, great year-over-year sales performance here, as Stephen highlighted. We always talk about how we manage with a full-year worldview, regardless of the quarterly check-ins. We're on track to finish the year with great sales growth, which is obviously great, but especially when we see it flowing through to the bottom line and improving our balance sheet. In unpacking gross margin, we're down just over 310 basis points in the quarter, year over year, with a number of factors in play. Higher costs associated with importation and delivery of domestic product, particularly earlier in the year, ultimately exceeded any price increases that we've flowed through. Royalty expense is a bit higher, but was in line with our expectations, consistent with last quarter. And we're picking up a bit of scale on tooling amortization, although this is an area where our capital spending is up overall compared to prior years. Year-to-date CapEx is $8.6 million compared to $6.4 million and $6.2 million in the 2021 and 2020 equivalent time periods. We're continuing to get very good scale out of our SG&A area with operating margin reaching 16.7% in the quarter, up 120 basis points from prior years Q3. Year-to-date operating margin is 11.6% compared to 8.3% in 2021. Year-to-date operating profit of $76.7 million is more than double the year-to-date 2021 number of $35.8 million. Consistent with our bottom-line improvements, strong results compounded with seasonality changes have created a lot of volatility in our expectations for the income tax provision. We now anticipate exhausting any net operating loss carry-forwards we have available to us this year on the federal and state levels, which will result in higher tax expense compared to previous years. Our Q3 tax provision of $11.6 million brings our year-to-date provision to $13.3 million, or 20% of year-to-date pre-tax net income. Earlier this year, we began a number of analyses to ensure we're taking advantage of all readily available deductions to mitigate our tax expense. As Stephen also mentioned, we decided to make an optional $17.5 million pay down of our term loan in Q3. Note that in addition to a paydown fee of $525,000, these paydowns also result in non-cash write-downs of our loan origination expenses, which have totaled an additional $737,000 being expensed year-to-date. As of Q4, the interest rate on our term loan is 10.2%. Along with doing a lot of business earlier in the year and our efforts to wrangle inventory down to a level reflecting a shorter supply chain, our year-to-date cash flow from operations is $76 million, the best we've seen since 2004. Our cash balance at the end of the quarter was $76.6 million. Our total debt was down to $67.7 million, net of debt discounts and issuance costs, and we have no draw on our credit line. Elsewhere on the balance sheet, our improving credit rating factors into marking the market of our preferred stock liability. Despite higher market rates, our lower risk premium, among other assumptions, led to a higher valuation of the liability, generating a non-cash loss of $7.4 million. We backed that market adjustment out of our non-GAAP calculations of adjusted EBITDA and adjusted EPS. Along with other customary changes, we have adjusted our EPS calculation this quarter for the prepayment penalty. And given our change in tax position, we have also recalibrated the offsetting tax benefit that would exist without the excluded expenses. Net of those impacts, our adjusted diluted EPS for the quarter is $3.80, an improvement of 4 cents from Q3 2021. The increase in our year-over-year tax provision is an unfavorable $1.10 per share as a noteworthy year-over-year change. Year-to-date adjusted diluted EPS is $5.68 compared to $3.15 for the first nine months of 2021. Quarterly EPS is calculated based on a diluted share count of 10,259,789 shares. Year-to-date EPS is calculated based on a diluted share count of 10,111,475 shares. In aggregate, our adjusted EBITDA for the quarter is $59.4 million versus $41.7 million last year, a 42% improvement. Our year-to-date adjusted EBITDA is now $88.5 million, or 13.3% of net sales, which was $44.2 million and 10.2% of net sales at this time in 2021. Finally, some of you may have noted that we have refiled the S3, more commonly referred to as a shelf registration, which we originally filed earlier in the quarter. A few things happened since our original filing to prompt this exercise. One is that after we saw a strong reaction to our share price subsequent to Q2's results, we realized our ability to raise funds under that filing was significantly lower than what a refiled shelf could offer. As we spoke with a lot of different people after the original filing, we felt both the universal shelf structure, as well as establishing an ATM program, would give us the broad degree of flexibility we were looking to achieve when we made our original filings. With those thoughts in mind, we remain in the same philosophical place that we were during the last call. Nothing has really changed about how we were thinking about the original filing, even though the structure might look a bit different. We think fast access to lower cost liquidity is an important option to have, especially for a company of our size and seasonality. We, along with the board, will continue to assess the outlook for the business and think about the full range of tools and scenarios we have to drive value for the company, inclusive of the options which the newly filed shelf might avail to us. And now back to Steven for some additional remarks.