JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the JAX Pacific first quarter 2023 earnings conference call with management, who will review financial results for the quarter ended March 31st, 2023. JAX issued its earnings press release earlier today. The earnings release and presentation slides for today's call are available in 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, Stephen will first provide an overview of the quarter, along with highlights of product lines and current business trends. Then John will provide detailed comments regarding Jax Pacific's financial and operational results. Stephen 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 11 on your telephone keypad. Before we begin, the company would like to point out that any comments made about Jack Pacific's future performance, events, or circumstances, including the estimates or sales, margins, and or adjusted EBITDA in 2023 and beyond, as well as any other forward-looking statements concerning 2023 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 risk and uncertainties. which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risk 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. 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 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 Steven Berman.

Thank you. Good afternoon, everyone, and thank you for joining us today. We are very happy with how the year has started here for JAX. Our net sales for the quarter were 107.5 million, 11% decrease compared to a year prior. As everyone knows, we had a massive revenue growth last year led by the breakout success of a holiday 2021 film property. Although that business is still selling through very nicely at retail, it's an exceptionally challenging number to anniversary as the performance was a multiple of what we would normally see from a new film with new IP. That being said, This quarter's sales level in excess of $100 million marks the first time since 2008-2009 that we've posted $100 million-plus first quarters in back-to-back years, which is a great result. A related piece of exciting news is the reaction to the new Super Mario Bros. movie. As you likely have read, the film had the biggest box office opening of any animated film in history, with a worldwide gross now exceeding three-quarters of a billion dollars in just a three-week period, which is simply amazing results. We have had a decade-long relationship with Nintendo, and it's a cornerstone of our action play and collectible business. That division reported sales up 19% this quarter, totaling $37.8 million globally. Film-specific product was on shelf at the end of February and March sell-through has been very, very impressive, both for the product as well as our evergreen year-round Nintendo business. We have planned a total Nintendo business, movie and classic, to be extremely strong this year. We are working extremely close with our customers around the globe to ensure that they prioritize this opportunity in the second half in light of the film's off-the-chart performance as well as preparing for the streaming launch. Lastly, we are chasing additional opportunities in the Hollywood costume business for the Nintendo line as well. On the toy consumer product side, shipping was down 16% in North America and up 7% in the rest of the world. POS at our top three US accounts through mid-April was down high single digits, with retail inventory up mid-single digits. As we mentioned, in Q3 and Q4, we were very mindful of retail not being overstocked as that's short-term thinking, which is not good for their business nor our business. If you adjust out our Nintendo business as well as that tough holiday comp from last year, our toy consumer products retail inventory at the top three U.S. accounts is down significantly through mid-April, which is what we've been trying to work towards to set up a strong 2023. Despite the lower retail inventories, however, POS for those businesses during the same period is down only single digits, which we think speaks to the evergreen strength of our product range when you consider all the negative news lately about shipping patterns and economic uncertainty. We feel there will be opportunity for some retail customers to take market share given this climate, so we are, as always, staying in consistent dialogue with accounts large and small around the globe to ensure we are maximizing this year. Outside of North America, we continue to see steady growth. Our international business was up 12% year-over-year as we shipped $23 million. It was our biggest Q1 for international since 2015. Nintendo has always been a meaningful part of our international business. So some of the enthusiasm which we've been sharing as it relates to our international growth potential has been mindful that this film has been in the works and will further raise the visibility of our overall business. Our costume business was down slightly in the quarter in line with our expectations. At 9.6 million, it was down 2% globally with decreases in North America partially offset by continued international growth. We did see gross margin improvement in the quarter, as a year ago Q1 sales were burning with exceptionally high container costs. More closeout sales and a higher royalty mix were drags on the quarter, but we still managed to grow gross margin dollars year over year from $29.9 million to $31.4 million, or plus 5%. We continue to aggressively manage inventory optimization of our working capital. At the end of the quarter, we were down 64 million, a 21% reduction from where we finished the year, and a 25% reduction from this time last year. Our performance over the past couple of years has created a lot of positive momentum with our customers, licensors, and expanding our consumer base. And although the first quarter in a company like ours is really just a warm-up for the rest of the year, I'm happy to say we see momentum continuing on all fronts. We feel really good about how we're performing at retail and the product ranges we're bringing to market this year and the conversations we're having about new opportunities in 2024 and 2025. I'll now pass it over to John for some of the further discussions around our financials, after which I will come back with some more comments to share. John.

Thank you, Stephen. And hi, everybody. As Steven mentioned, it's first quarter, so this will be a bit light, as there's only so much to say about these months given our seasonality. I'm going to jump into margin, which as we hoped was much better than prior year, as our prior year number was terrible, in part reflecting excessive container costs. Q1 is always our smallest quarter, so trying to extrapolate our results to the balance of the year is challenging, however tempting. With that said, although there's a lot of moving pieces here, I'd break down margin in the quarter to say we had around 700 basis point benefit on the container issue, which we then gave back about 100 basis points in royalty expense and another 150 basis points in product margin. Last year, we had new product blowing through at full price. This year, we had a bit more closing out of slower-moving inventory and product a bit further along in its life cycle. And the outdoor seasonal business, which was down, is often no or lower royalty compared to the rest of the portfolio. As we look forward, we still hope to see gross margins improve, but the most horrific freight comps are behind us as it relates to the dollars expensed. And now we move into the higher volume quarters, so you have two reasons why percentage margin expansion shrinks. Beyond that, how well we do will depend more about how product margins play out. Full-year royalty expense in 2022 was 15.9%, and we wouldn't expect that to be much higher this year, maybe a little better, but the quarterization can move around. So you're left with a modestly improving freight story, fighting it out with the product margin line, inclusive of how clean the product is selling through at retail and how aggressively we're managing our own inventory. Moving down to P&L, we saw higher spending and direct selling year over year, which was cleaning up the excess warehousing situation we discussed last quarter. We are out of the overflow space in the U.S., but still working through some issues in Europe. Again, in a smaller quarter, everything tends to stick out. We're also seeing some year-over-year higher expenses as trade shows return to the industry. The European show in Nuremberg happened in Q1, and currently people are planning for the New York Toy Fair to return for the first time as a fall show in late September, early October. And we're certainly seeing a lot more traffic through our showrooms in Santa Monica, specifically in the past several weeks. Business travel is back, at least at JAX. G&A expenses were roughly in line with our expectations. One of the more unfavorable drivers was an increase in stock compensation expense. Going back to mid-2021, we've made a point of utilizing restricted stock as a mechanism to reward and retain senior staff. Given the company's challenges pre-restructuring, that wasn't a lever we were able to pull for several years, which left us at a competitive disadvantage compared to other larger players in our space, we felt. So we're happy to have that be part of the narrative again, as well as how it aligns long-term incentives internally. But from a P&L perspective, one starts with a base close to zero for a large number of employees building up over time given a three-year vesting horizon. In total, That expense was a bit over $5 million in 2022, and we'd expect it to be closer to $9 million in calendar year 2023. Interest expense in the quarter was $3 million compared to $2.2 million last year. $927,000 of that unfavorability, or 10 cents per share in EPS, which is not an adjustment we make in our non-GAAP reporting, was accelerated write-off of deferred financing costs and debt discounts attributable to our accelerated long-term debt paydown. Another $150,000 was prepayment fees, as discussed during the last call, which is something we adjust out for non-GAAP ETS reporting. This account also absorbs some expenses associated with early payment discounts, which we occasionally utilize with some key customers to further optimize our working capital, as well as banking-related fees and expenses. Our term loan interest is certainly lower, given the lower principal balance, but it's still the case that we have expenses for other things throughout the year showing up here. Our variable term loan rate is currently above 11%. Now, a quick word about taxes. Avid readers are aware that our 10-K filing was delayed, but nonetheless filed a couple weeks ago. The review of our 382 tax situation ended up taking longer than anticipated. We do have some differences in the financial tables compared to what we shared during the last earnings call, primarily in the areas of taxes payable and our deferred tax asset balance and related valuation allowance. I'd encourage you to reference our thoughtful narration in the 10-K for more details on the topic. As many of you know, taxes are something of an ongoing journey as one makes quarterly provisions and ultimately, but separately, files tax returns in various jurisdictions. Suffice to say, tax is an ever-present topic given our global business structure, and we continue to spend time and energy thoughtfully assessing what we're doing there, as we aspire to do with all forms of expenditure. Elsewhere, the marketing to market of our preferred stock liability resulted in a non-cash gain of $147,000. We backed that gain out of our non-GAAP calculations of adjusted EBITDA and adjusted EPS. The cumulative accrued PIC dividends are now $4.9 million on top of the underlying par value of $20 million. In aggregate, our adjusted EBITDA for the quarter is a negative $1.1 million versus a positive $1.9 million last year. Our trailing 12-month adjusted EBITDA is now $73.3 million, or 9.4% of net sales, which was $53.6 million and 8.1% of net sales at this time in 2022. Now, checking in on the balance sheet, as of March 31st, our debt, net of debt discounts and amortization, was $29.4 million. We had no draw on our credit line. The current payoff level of our term loan is $30.2 million. Adjusted EPS for the quarter was a loss of 40 cents per share, 12 cents worse than the Q1 2022 loss per share of 28 cents per share. And with that, I will now hand the call back over to Stephen for some additional commentary.