JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the JAX Pacific Third Quarter 2023 Earnings Conference Call with Management, who will review financial results for the quarter ended September 30th, 2023. JAX issued its earnings press release earlier today. The earnings release and presentation slides for today's call are available on the company's recently remodeled 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 recent performance and current business trends. Then John will provide some additional editorial around Jax Pacific's financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for your 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 Jax Pacific's future performance, events, or circumstances, including the estimates of sales, margins, and or adjusted EBITDA in 2023, 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 the current market trends and conditions today. and are subject to certain risk 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 JEC'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 Stephen Berman.

Good afternoon, and thank you for joining us today. It's been a very busy quarter for Jax, as Q3 often is, with new product segments launching and plans for 2024 firming up. As you know, Q3 is always the highest shipping quarter for Jax. I'm proud to say we feel very confident in how we're lined up to finish the year, as well as some of the initiatives the teams are working on for 2024 and beyond. We knew at the beginning of the year that repeating 2022 revenue levels would be an impossible feat without a total unexpected breakout hit as we had last year. With that sales outlook, we made gross margin improvement a major focus as it is extremely important to our blueprint for enhancing overall margin. We have seen in our results it's imperative in building and maintaining a strong balance sheet. Our teams in Asia work methodically with our manufacturing partners to ensure that we are getting the sharpest possible pricing on legacy items entering their second or third years in the market. Separately, New product development continues to be regularly challenged to ensure we are stretching the team's creativity to generate value for the consumer and for our customers, while also ensuring cost-mindful product designs. With Q3's results, we can see the dividends of those efforts paying off. Year-to-date, our gross margin of 32.5% is our strongest performance in this metric since 2011. Our year-to-date gross profit of $186.9 million is $6.9 million, or 4% higher than at comparable period in 2022. That improvement has helped us to compensate for increases in SG&A expenses such that our year-to-date operating margin of 12.7% represents an improvement of 11.5% operating margin we had in the first nine months of 22. The net results from an adjusted EBITDA view is $67.1 million in adjusted EBITDA in the quarter, up from $59.4 million in the same quarter last year. Our action play and collectible business was up 43% in the quarter and 37% year-to-date, accelerating its performance versus last quarter. Our doll role play and dress up segment is lapping that exceptional 2022 and was down approximately 27% in the quarter and 30% year to date off a larger base, as we pointed out last quarter. We still think it's worth noting that the Dahl segment is up significantly versus 2021, 247 million year-to-date this year versus 207 million year-to-date in 2021. This team is often a victim of its own and many successes. Our outdoor seasonal business showed some trend improvement, down only 2% in the quarter and slowing the year-to-date decline to 23%. We have some quality placement of new items this fall, and as mentioned previously, some new initiatives in the works, which we think can energize this business next year and beyond. Q3 is, of course, almost the most interesting time of year to discuss our Halloween costume business. The headline is the year has worked out in line with our expectations, which is a great outcome given how big the business has become. Last quarter, we discussed how the seasonality impacts has moved around this year. So we saw it catching up this quarter with a 19% year-over-year growth in Q3. Year-to-date, we shipped 122 million through Q3, which is 9% lower than last year. As we mentioned before, some larger US customers recalibrated their buying levels this year after an aggressive 2022. That drove most of the downside, as our international business has been roughly flat year-to-date. We've been aggressively working on our distribution outside of North America and remain focused and committed to building that business to leverage our strength in North America. Again, to provide a 2021 reference point, that $122 million shift number is significantly higher than the $99 million we shipped in the first three quarters of 2021. So overall, another great year for the team at Disguise. Moving on to a market view, the past quarter was also noteworthy and continuing our efforts to expand our overall business outside the United States. In Latin America, we're up and shipping 50 plus percent year to date. Although we've had an office in Mexico for several years, this year we started offering selective domestic replenishment for key items via a local third party warehouse. This investment helps to evaluate our year round on shelf presence, further proving the viability of our product line to local retailers. With this success, They can then confidently place the larger orders with us FOB in Asia, consistent with our go-to-market approach. Over time, we also see as a potential platform for additional shipments into Latin America. And we're quickly seeing a positive reaction at retail, with syndicated data suggesting we're up over 50% in Mexico year-over-year. Also in the quarter, we officially opened our dual-purpose office and warehouse facility in northern Italy. We plan to start shipping from there in the new year, which will generate a number of new benefits. Specifically, being able to serve a wider range of smaller customers more quickly and with improved economics than shipping smaller orders as individual deliveries from Northern Europe. In addition, we onboarded a new team with deep industry experience in Jax, France, a market where we know we've been underperforming during COVID. Although our COO, Jack McGrath, is officially not in his new role as President of European Operations until the new year, he has been spending a considerable amount of time and focus on addressing challenges in the region to accelerate our performance in 2024 and beyond. I couldn't be more excited about the opportunity presented by his taking his years of experience with Jax and focusing them on taking a fresh look on how we're doing business in the European market. Switching now to talking about what we're seeing at retail. On the toy side, it's been the case all year and continued this past quarter when we look at our own data and syndicated data. We've seen that the toy portion of our business continues to perform better than the overall industry in the U.S. The same has been true in some of our European markets where we also see syndicated data. Certainly some of the great content from our studio partners is helping to drive people to the register this year, much as it did last year. But broadly, we've been pleased with how the total portfolio is performing this year, as we said last quarter. That being said, in Q3, we did see retail slowing. Retail sales at our top three U.S. accounts were down low single digits year-to-date and down high single digits in the quarter. Separately, at the end of the quarter, Retail inventory at the same accounts were down over 20% versus prior year, delivering on their goals to finish the calendar year at lower owned inventory levels. As we work through this transitional year at retail, we've managed to stay in stock across all of our key product segments and are set up well to fulfill demand in Q4. I will now pass it over to John for some further comments. after which I'll come back to discuss Q4 and a bit about next year. John.

Thank you, Steven. And hi, everybody. It's always great to report results after a $300 million sales quarter. We knew the first half of the year would have the most difficult comparisons as we were chasing business on a holiday 2021 film. And the second half of the year would also be challenging, but hopefully less so. That view is playing out in our results. Although down 20% as a total company in the first half of the year, We were down only 4% in Q3, shipping $310 million in the quarter. As Stephen pointed out, broadly speaking, the year is going about as well as we could have hoped. 2020 unleashed COVID. 2021 had expensive freight. 2022 had warehouses overflowing. And so far, 2023, from the perspective of our business, has had more positives than negatives. What that means from a year-over-year perspective is twofold. Bad things that happened in 2022 haven't reappeared, and some additional good things have been added. From a net sales perspective, both the toy CP segment and costumes are tracking year-to-date at higher levels than anything in the 2019 to 2021 time period. And gross profit dollars for both segments are higher than any time in the past five years as well. There are a number of things happening with gross margin. In the quarter, it was 600 basis points improvement. So let me try to break that down. As Stephen referenced, the landed product cost improvement amounted to around 350 basis points. I'd say that was a mix of some of the good stuff that Stephen talked about earlier, but also last year on both the toy and costume businesses, we blew out some inventory at margins that weren't anything to brag about for a couple of different reasons that made sense at the time. We also managed to avoid bleeding money by way of above average freight costs. That was a pickup of another 150 points. There are a number of other puts and takes, but I'll throw in for good measure that our read of retail last year was more markdown exposure than what we're seeing at this point this year, so that's also net-net favorable. And finally, this quarter we began capitalizing a small portion of our tooling to our owned inventory valuation. This has been an outstanding topic for some time, but we've got around to figuring out how to get it done without the accounting being too cumbersome. So that was a one-time pickup of $1.8 million in the quarter. We have adjusted that depreciation dollar amount out of our adjusted EPS results. So to answer your question, we think we have line of sight to continue to hang out in this low 30 neighborhood on a full year basis. But that's of course subject to minimizing stuff going wrong, nor does it contemplate any dramatic changes in our product mix, which we don't anticipate in the near term. We're losing a bit of scale with SG&A being up, but fortunately the gross margin lift has been enough to generate operating margin improvement, which is great. That has allowed us to selectively invest in staff and infrastructure where appropriate, with the goal of being in a better place next year organizationally, despite revenue being down this year. We've also made some decisions like skipping the New York Toy Fair this past quarter, which may not have generated massive financial savings, but certainly removed a layer of organizational distraction, if nothing else. In addition to the P&L, we're feeling good about the balance sheet. Our Q3 ending cash balance of $96.4 million is high for this time of the year. There are a couple of drivers. One is that we're trying to keep a tighter leash on inventory and turning it back into cash in a timely manner. Another is we've accepted the federal government's offer to California-based businesses to defer payroll and tax payments into October, which helped quite a bit. You'll notice in aggregate that our AP and taxes payable are up over $20 million versus this time last year. We remain debt-free as of the end of the quarter and as of today. The majority of the interest expense you'll see in the P&L is associated with some early payment discounts that we sporadically take advantage of to maximize liquidity. We'll likely be doing less of that in the near term given our current cash situation. The reduction in our cost of capital from our improved financial position increased the preferred share liability valuation to $28.6 million, generating a non-cash loss of $800,000 in the quarter. As is customary, we adjust that amount out of our non-GAAP results. Adjusted EPS for the quarter was $4.75. and $5.66 for the first nine months. Those numbers are up from $3.80 and down from $5.68, respectively, from 2022. Our trailing 12-month adjusted EBITDA is $74.5 million. And now back to Stephen for some additional remarks.