JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the JAX Pacific fourth quarter full year 2023 earnings conference call with management, who will review financial results for the quarter and year ended December 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 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 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 1-1 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 2024, as well as any other forward-looking statements concerning 2024 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 risk uncertainties. which would 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 has been recorded. With that, I would now like to turn the call over to Stephen Berman.

Good afternoon, and thank you for joining us. It's been four months since our last earnings call and update at the end of Q3. and I'm happy to say that we are very pleased with our performance since then. Perhaps more importantly, we continue to make solid progress in building a better future for our stakeholders despite the persistent uncertainty around the economy and consumer strength. Here are some high-level headlines of what's new since we last spoke. As we expected, Halloween in the U.S. was down versus prior year according to syndicated data. Although our shipping was also down, It was better than the industry and solidified our position of strength as the U.S. market leader. It's with that voice that we continue to engage customers and licensors about opportunities for 2025 while also lining up and delivering orders for this coming season. More on costumes in the second half of today's materials. Christmas did arrive on December 25th as scheduled, but with a return to pre-COVID last-minute shopping patterns. As a FOB-first business, we are less reliant on pushing additional product to customers post-Thanksgiving, and to that end, finish the year roughly in line with our expectations and maybe even a little better. Q4 POS at top three U.S. toy consumer products accounts was positive at two of the three despite having difficult revenue comparisons with the prior year. In addition, urine retail inventories at those same accounts We're down high single digit percentages versus prior year. As the press has noted, the Thanksgiving 2023 film release we supported underperformed from a box office perspective and similarly was a challenge at retail. We still think it's a great product line and we are looking forward to a streaming launch in a few weeks to introduce the film to a broader audience. But realistically, it's unlikely to provide a lot of chase opportunity for us in 2024. We have deployed our former COO into his new role as President of European Operations as of January as scheduled. As part of our re-energized focus on our European expansion, we sent our largest contingent ever to the Nuremberg Toy Fair earlier this month, having great meetings with customers from both Europe and around the world. Our balanced evergreen portfolio continues to resonate and, more importantly, attracts attention. As we increase the size and strength of our European team and footprint, the momentum for growth is building. There is a lot of work to be done and a lot of opportunity to be had, but Jack and the team are locked in on identifying various opportunities to strengthen our retail expansion that can be acted upon to have immediate benefit to our company. To hit some of the financial highlights for the quarter and year, Q4 net sales of $127.4 million were down 3% versus prior year. bringing our full year total net sales to $711.6 million. The full year number was down 11% versus prior year, primarily attributable to the massive amount of volume we did in 2022 from a Thanksgiving 2021 film release that was on fire all of last year. Although the Super Mario Bros. movie, released in Q2 2020, generated a lot of business in 2023, as well as promotional support of our evergreen Nintendo line, it wasn't enough to close that gap, especially given we also benefited from a strong Sonic 2 film in 2022 as well. Better landed product cost and reduced ocean freight helped to contribute to an expansion of full year gross margin percentage. Q4 in particular increased 480 basis points year over year. This improvement generated a 6% increase in gross margin dollars in 2023 compared to prior year despite the sales decline. It's a remarkable achievement. This growth margin dollar level, $223 million, is the highest the company has achieved since 2015. As much as we all enjoy talking about market share gains when they happen, we enjoy margin dollar gains even more. That strength flowed through SG&A to generate a full year operating margin of 8.3%, an improvement of 60 basis points over prior year despite losing top line scale. Our Q4 adjusted EBITDA was slightly better than prior year, leading to a full year adjusted EBITDA of 75.7 million, slightly below 2022's 76.4 million. but still a tremendous outcome for us at a performance level we did not anticipate at the beginning of the year. Our action play and collectible business was down 9% in the quarter and up 27% on the year, led by Super Mario Bros. Movie, Sonic Prime, and our core Nintendo and Sonic product ranges. Our doll, role play, and dress-up segment finally started to lap the exceptional 2022 and was up 6% in the quarter, but down 25% for the full year. Our outdoor seasonal business also stabilized, delivering growth of 4% in the quarter and slowing the full year decline to 18%. From a geography view, our international business, inclusive of costumes, grew 1% for the full year. It was led by 75% growth in Latin America which had 32 million full year up from 13 million in 2021. It's now larger than our business in Canada, which we also had a great year at 27 million up 2% versus prior year. North America was down 13% with both the toy and consumer product and costume business be down as I've discussed. Before handing it off to John, as we wrap up on 2023, I wanted to point out that when COVID struck in 2020, we made some difficult decisions and retrenched the business to ensure our stability. Given a precarious financial position and the significance of the unknowns, we made it through 2020 successfully. And from there, we have steadily delivered over the subsequent years, improving our financial health annually. Over the past three years, We averaged $710 million in net sales, $67 million in EBITDA, and $49 million in cash flow from operation, leading us to a place where I can honestly say our overall business, the quality of our product portfolio, and the caliber of our global team have never been stronger. I will now pass it over to John for some comments, after which I will come back and talk more about how we are thinking about 2024. John.

Thank you, Stephen, and happy Leap Day, everybody. Happy to talk a bit more about another solid quarter and wrapping up another great year. We already talked a lot about sales, so jumping into margins, and specifically into our landed product costs. We had 110 basis point improvement in this area in the quarter, driven by lower landed product costs for the product we import compared to last year, and ultimately better ex-factory margins and a more favorable product mix. That brought our full-year cost of goods down to 50.9% of net sales. On a full-year basis, that's 200 to 400 basis points better than these results over the past five years, and an unsung accomplishment within our financial results. That level of improvement is driven by a combination of initiatives generating positive returns, designing for margin, working collaboratively with our factory base, and carefully managing own inventory, which ranges from how much do we bring in, when, and at what cost per container. It remains a constant narrative in our organization to try to ensure we can maintain this level of cost of goods efficiency, as it's clearly a key driver of our strong results. We gave back 60 basis points on the royalty line for the full year. Most of that difference was driven by our running into minimum royalty guarantee issues in some of our international markets. If guarantees are a fact of life in most royalty agreements, we will always look to optimize rate versus guarantee level where we can. which sometimes means the effective rate ends up being a bit higher than originally planned. That has been the case with a couple of agreements recently and is not anything we are overly concerned about going forward. We would expect this area to be relatively stable as we head into the new year, if not an area where we can scrape back some basis points, ideally. Our direct selling costs were up in the quarter and on the full year. Lower volume and inventory levels mean some loss of scale as it relates to our warehousing expense. Increased international sales generate higher outbound freight costs, as we're responsible for delivering product directly to customers. In the area of G&A expenses, there are a couple of different dynamics taking place. We are not immune from the broad narrative that most cost areas are increasing more than not over the past couple of years, inclusive of labor. Although that is motivating a persistent review of how and where we're spending, it is nonetheless challenging to keep the cost base flat, given how labor-driven it tends to be. But in addition, we're also taking the opportunity to make improvements in areas like technology, cybersecurity, and selectively upgrading the organization for the medium term. These various initiatives, although not revolutionary, are necessary and in some cases arguably overdue to sustain the performance levels we've achieved in recent years and ideally unlock new abilities to achieve greater efficiency in the near term. And to be clear, that commentary is independent of how we've talked about building out our European and Latin American footprint to accelerate growth in those markets. Nonetheless, with dollar costs up across SG&A, we still finished the year with an operating margin of 8.3%, the highest level we've achieved in 15 years. We were down less than $2 million in operating income on over $80 million in fewer sales. We're going to score that as a good outcome as far as we're concerned. From there, we'll highlight that our interest expense dropped to $6.5 million from $11.2 million for the prior year, despite the rising rate environment, thanks to our debt retirement in the first half of the year. We are planning for that expense to reduce further to a nominal amount in 2024. Moving on to taxes, last year at this time we had a significant valuation allowance release against deferred tax assets, which required a lot of analysis of our 2019 through 2022 returns. Over the past several months, we've decided to conduct a more rigorous assessment of that analysis, which we are finalizing as part of our Q4 close this year. That further review has identified an increase in net operating losses, or NOLs, that the company will be able to utilize going forward. Although the change in annual cash tax exposure is somewhat limited, it does generate a $2.6 million pickup on the P&L and lowers our effective tax rate for the year to 15.2% versus the low 20s number that we usually plan to. We have adjusted that one-time pickup out of our adjusted EPS results. Other housekeeping. The change in fair value of our preferred stock liability was an increase of $1.4 million in the quarter. We back that non-cash charge out of our adjusted non-GAAP results. Those are the significant drivers of our EPS and adjusted EPS results. Quoting the adjusted numbers only, our Q4 result was a loss of $1.04 per diluted share compared to a loss of $1.42 per diluted share last year On a full year basis, our earnings of $4.62 per diluted share represents an increase over the $4.29 per share we recorded in 2022. For adjusted EBITDA, we finished at $75.7 million, a bit below last year's $76.4 million, but nonetheless a result we're extremely happy with. The last time we had back-to-back years at this level of EBITDA was well over a dozen years ago in the pre-Frozen era. Some quick balance sheet highlights. Our cash, cash equivalents, and restricted cash totaled $72.6 million as of 12-31, down from $85.5 million in the prior year, but one needs to consider that we eliminated $67.2 million in long-term debt with cash on hand during the calendar year. As of February 16th, the same cash metric totaled $47.5 million as a more current reference point, as we have completed paying Q4 royalties owed and have begun investing in 2024 products. Similar to other players in the space, we deliberately have been working down owned inventory to better align with customer demand and proactively manage working capital. It's also worth noting that we continue to encourage the FOB model as being most beneficial to our customers and ourselves in delivering the right price value for retailers and end consumers. Our FOB sales mix exceeded 70% on a total company basis in 2023, another great result of the team's efforts. Our finished goods inventory finished at $52.6 million, a 35% reduction from last year's $80.6 million. And now, back to Stephen for some more comments about the year ahead.

Thank you, John. We're already two months into yet another interesting year in our industry. For the fifth consecutive Q1, we find ourselves wondering about the outlook for the economy and more specifically, the implications for the average consumer. A new overlay this year is a bit of a new film and TV desert, resulting from the various entertainment industry work stoppages of 2023, along with streaming providers taking a more thrifty view of their investment levels. Although that backdrop doesn't make doing solid business easier for anyone this year, we do feel we are better set up for success more than most. Our focus on tried and true evergreen play patterns, brands, and categories serves us well in times like these. These are the businesses that often float to the top of the market's priority list when there's nothing being crowded out by some of the large one-off promotional events or activities. The preschoolers of today are not studying an entertainment calendar or bemoaning the lack of the July 4th tentpole. They're still going to birthday parties or long for shopping trips out to brick-and-mortar retail. And it's on shelf at retail that we continue to offer a strong and wide array of sub $30 price point toys that deliver fun and innovation for the recipient and happiness and satisfaction for the gift giver. With that view, we're once again set up for a solid year. That's not to suggest that we are immune to the larger dynamics. Over the past two springs, we have greatly benefited from high product lines driven by blockbuster April film releases. driving sales tied to the movie, as well as supporting and expanding our year-round business for those brands. Those are difficult numbers to replace. And a business like our costume business is often led by the latest blockbuster films, and the relatively light volume this year tends to lead to a somewhat softer overall business. But as I'm often reminding our internal teams, that's just how the world of business works. You must adapt and do the hard work to compensate if your underlining goal is to deliver consistent, predictable results, which is our primarily financial objective here at Jaxx. Without foundation, there are a large number of things we're excited about as we head into the new year, although admittedly many of them are anchored a bit more towards the second half. From a content perspective, we are delighted to hear the news that Disney plans to release Moana 2 in theaters this holiday season. The film tells us the next chapter in the world of Moana, their successful 2016 film. We chased demand when the original Moana film exceeded commercial expectation, and it has been a consistent seller for us ever since. We'll have a new focus line of products inspired by the film on shelf in Q4. And separately, we're also excited to be enjoying three new pieces of entertainment in the world of Sonic the Hedgehog. First up is Season 3 on Sonic Prime, which released in mid-January on Netflix. Second is The Knuckles Show, which was featured during the Super Bowl and is launching late April on the Paramount Plus streaming platform. It is set after the second film, but prior to Sonic the Hedgehog 3. The third film in the Sonic the Hedgehog franchise, which is launching in theaters in December of this year. The team has developed custom product lines for Sonic Prime and the film in addition to refreshes and extensions of our successful core Sonic the Hedgehog toy and costume assortment. Moving to Disney Princess, we will benefit from two Disney global marketing campaigns this year. Spark of Joy, celebrating the joy Disney brands and stories bring to families all over the world. And Create Your World, a three-year Disney Princess brand campaign launching this fall. celebrating the magical world you would create through the Disney Princess brand and the world of products. Jack's Toys will be featured throughout that campaign. Since last quarter, we also made great progress sharing our new Simpsons line with retailers around the world. New episodes of Season 35 began to air earlier this month, and Season 36 is projected to debut in September. The hours watched on this property are just incredible. We can't wait for fans to see our range, specifically the figures and dioramas featuring caricatures and locations from the show. It's been over 15 years since a Simpson toy range has been in the market, and we are thrilled to make them available. We announced and disclosed last quarter the starting of a worldwide relationship with Authentic Brands Group. ABG is a brand powerhouse with a wide portfolio of IP, which has mass appeal to millennials, Gen Zs, and Gen Y. We have been collaborating on a wide range of products that will slot into our division as well as expand the scope of our offerings. We've been working on iconic assortment of their properties, names like Element, Quicksilver, Roxy, Juicy Couture, Sports Illustrated, and Prince, just to name a few. We have completed the initial fall 2024 retail presentations at both Mass, such as Target, Walmart, and Amazon, and sporting goods channels, such as Dick's Sporting Goods, Academy, Dunham's, Shields, as well as specialty international retailers. The brand's global reach was proven during the recent Nuremberg Toy Fair, being met with excitement from our international customers. We are extremely excited to be rolling out our new line of skateboards and roller skates with amazing new designs for Element, Roxy, Quicksilver, and Juicy Couture at specialty and mass retailers both in-store and online. In 2025, Jax will be launching a complete line of outdoor products including chairs, umbrellas, canopies, beach accessories, inflatable pool floats, sand and splash mats, foldable wagons, and extensive lines of dolls and doll accessories infused with fashion elements from Roxy, Quicksilver, Forever 21, Prince, and Sports Illustrated. As we've said separately, we think the U.S. holiday market is still trying to calibrate where consumer demand is post-COVID with customers dialing their annual buys up and down as a jockey for market share. In addition, many other manufacturers in the space continue to struggle creating additional noise in the market. We do have the rights to several new films this year, inclusive of Sony's Ghostbusters, Frozen Empire, Illumination's entertainment Despicable Me, Embassy Universal's Wicked, and Kung Fu Panda 4, in addition to our strong evergreen licensed IP portfolio from Disney Princesses to Lilo and Stitch, Nintendo, Sonic, Pokemon, Halo, Minecraft, just to name several. We're also continuing to add additional rights where we have U.S. rights as our capabilities outside the U.S. steadily build and build. Nuremberg was a great show for Disguise as we continue to have separate booths to present the product lines. There are a couple of interesting new businesses queuing up for 2025 to which we look forward to telling you about in the quarters to come. As we always have a lot of different things going on, there was one more important thought I wanted to share. 2024 commences our 30th year in business as Jack Freeman and I founded Jack Specific back in January 1995, 29 years ago. Those who have known us over the years during our various ups and downs know that it has truly been a remarkable journey so far. It was great being back in Nuremberg this year for the first time in a long time and catching up with many longstanding customers and relationships I now consider friends for all the time we have shared in the decades since. The past five years have created their own remarkable chapter as we worked through our 2019 restructuring, navigated through peak COVID in 2020, and subsequently have put up three tremendous years of results across 2021, 2022, and 2023. We are extremely proud of our performance during this time, but are only looking forward towards another year that will inevitably prove challenging, but we feel is still filled with major opportunities. Thanks again for your support and interest. And with that, we'll take a couple questions. Operator.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Andrew Urquhart with Jefferies. Your line is now open.

Hey, thank you guys for taking my questions.

Stephen, I have kind of a question for you. I really appreciate the color on kind of talking about the movie slate and the impact that could have. Are there specific – could you talk generally about the impact it has on consumers? Is it lower sales because they're going to the store less? Is it just a they're just not or the property? Like, I'm just kind of thinking through. There's still birthday parties to buy for. There's still holiday to buy for. So I'm just trying to think the impact that it might have directly on Jack's, you know, just kind of or any colleague. Maybe it impacts Halloween. Just trying to get a sense on what the real driver here is against the consumer when you have a weaker movie slate.

Firstly, thank you, Andrew. So we've had this throughout the periods as Jackson being in the industry. What it normally does when you don't have any, call it real hot, overall toy-rific properties, there could be some great movies, but they may not be in a sense merchandisable as well. But in our world, like a Frozen or Mawander, things like that are toy-rific. So what that does is it just The excitement of the consumer of driving them into the retail and going to buy something that's hot isn't there. And when they come in, they're buying something hot. They usually always acquire additional products on an impulse basis. So by not having such a real hot theatrical or even TV initiatives this year, it's really back to the basics, which is the positive for us. That's our commitment. core concept of Jaxx is evergreen, basic, brick-by-brick business. And if something hot comes along, we run, chase it, but we never bet on it to ensure our year. So, for example, today we just finished off an amazing meeting with one of the large retailers in the sporting world with our new authentic initiatives that we're going to be launching in 2024 that we didn't expect until next year to launch some of these things In addition, we have a movie that we're really excited about because we've had great track records with it in the past, is the new Moana movie, which is coming out. So there are some excitements as well as the Sonic excitement, but those things are happening later in the year, and there's really not any major consumer-selling product movies that are happening for the first half or even in the first three quarters of the year. So you've got to think of core evergreen businesses that really do well. So our basic tents, ball pits, ride-ons, Nintendo, Sonic, the Simpson line, which is new. Simpsons has been around 30-something, I forgot how many years, over 35 years. It's the first time there's product coming out in 15 years of the Simpsons. So even though it's not a new launch of a of a brand new, call it IP. It's a strong IP that's evergreen. So where we stand, we're very solid, but there's just nothing great that's coming out that is going to push the industry into these high levels of excitement.

Got it. No, that's super helpful. That's really helpful. And speaking of kind of in the back half of the year, aside from the Sonic and Simpsons, some of your outdoor initiatives, will we see some of that as well? Or because it's outdoor, that's more of a 25 initiative, just trying to frame, some of these new license deals?

So the ABG seasonal, I'll use that because we have other seasonal properties that are really kid-focused, you know, the Paw Patrols and the ball pits and tents and ride-ons. But the ABG, as I just mentioned, our team has flown back from a major sporting goods retailer, and they have full commitments, a broad array of commitments on the skateboard, roller skates, and the element safety equipment. And we have been on the road since Nuremberg, and the team has been on the road of marketing retail roadshow. So we expect to have the skateboards and seasonal business that I just mentioned in fourth quarter or third quarter launching. And then spring, which launches in December, January, February, March, that's when we expect all the tents, the carriages, the chairs, the Quicksilver and Roxy, all to come out, which will be for summer 25. But the skateboards and roller skates are... they're getting some really good grasp at retail. We expect that to happen at fall this year. But on the other parts, we still have like Sonic Prime Netflix, which came out in January. Knuckles, which comes out Paramount Plus in April. Sonic 3, the movie in December. The Simpsons, Moana. We have a big global marketing campaign with Disney with Spark of Joy and Create Your World's Disguise. There's Afro Unicorn. We have Nintendo and Kirby. Bendy the Ink Machine. Dungeons and Dragons. There's a lot of Content and IP that we've launched, but there's just something that that not as a tentpole movie excluding yannick and that's a Moana to got it that that's super helpful I appreciate that color and good job getting some of those new initiatives out sooner rather than later Thank you.

That was a big goal for us Yeah, no, I think that's great and then and then kind of just how should I how should we frame the international opportunity and I know there's an overall global weakness, but, I mean, I would think with some of the international initiatives, you guys might actually be up year over year on an international geography basis. Is that, one, is that right? Is that the right way to think about it? Or how should we kind of frame the international opportunity?

Yeah, so we've been out there, and I'm going out there again shortly in the next couple of weeks. The big initiative is we opened up our new distribution center in Piacenza, Italy, in our new offices there. in France and a new distribution center in Belgium, which is going to help get into all the ancillary territories that are hard to get to. But remember, we're primarily an FOB basis business. That being said, if you saw how much our Latin America growth has increased, we were up for vendor of the year at Walmart, Mexico, I think Whirlpool won above us. So the big initiatives are expansion and the way that you're articulating it, I've seen growth internationally. We do expect some tremendous growth in certain areas and some of moderate, but it's too early for us to say right now as we stand where that growth will be, but we do see strong momentum. We're coming from a lower base as well, which is easier for us to achieve growth. There's a lot of new initiatives that we have that work worldwide, from the ABG initiative releases that we have to Simpson is worldwide, Moana too. So there's a lot of things that we didn't know November, December that we know today that should help us. And then our basic evergreen business and new licenses with the sky should help us with the direct to retail approach. So we're looking forward to seeing it, but we'll know more once we get all these toy fairs and meetings completed.

Got it. That's helpful. And then I guess one question for John on the cost side, Because you're FOB, should we worry at all about the rising cost of shipping at all, or how should we think about the pushes and pulls there as we get through the year?

I think we're always going to be mindful of things that could go a bit sideways, but to your point, given our heavy focus on FOB, it's not really a top five concern for us, I would say, at the moment. The issues as it relates to Europe, are more problematic, and the more shipping gets disrupted to Europe, if you think about it, that just means more time that ships are on the water, taking a longer time to get someplace, and therefore draining capacity out of the system, even if what we're focused mostly on is the Asia to LA route. So we're continuing to keep an eye on it and monitor it. Obviously, we work down our inventory a lot, as a lot of people did towards the end of the year. which means bringing in more product this year is something that we're going to have to do, at least in order to be able to deliver some of the sales that we want. But we don't think it's – like I said, it's probably not a top concern at the moment.

Got it. Okay. And then I guess the last question then is that it looked like 23 was kind of a big discounting year for a lot of your competitors. How are you thinking about – discounts in 2024 it it feels like inventories are finally normalized but even last fall they were normalized we still saw some discounting just curious uh what you're thinking about discounts and where the right price points are going to be this year i know you guys tend to be on that sweet spot of below 30 but just curious how you how you see uh 24 playing out on a price point basis so

On the inventory level, it seems that the majority of the people in our industry have gotten cleaned up with inventory, but speaking specifically on Jack's, we are pretty clean on inventory. We always have a little bit of obsolete throughout the years, and as John just mentioned, we got pretty low on inventory, so we want to refresh it with all good product, which is a great place to stand. But that being said, the majority, as you mentioned, our sweet spot is under 30. And even during the holidays, I think it's over 85% of our products are under $50. So that really is a sweet spot for the difference of the consumer being slightly getting weaker, very much unknown. We've had for the last six years a complete structure of doing three parts development, which is mass, specialty, and then value. So we are really ancillary in all the different distribution channels that we're heading into. So we hit the consumers where they stand financially. In addition to that, the evergreen areas of our business are just very steady eddy in what we do. We're not concerned with the inventory and that part, but I do believe when you close that inventory, you do hit margins somewhat. So I think that is still part of everyone's business, but for us it's a minimal part of our business.

Got it. Very helpful, gentlemen, and appreciate you taking my questions.

Thank you.

Thanks, Andrew.

I'd now like to hand the conference back over to Stephen Berman for closing remarks.

Okay. Great to have the first call of the year now and excited to talk about this year going into first quarter and above. And we're excited for Jax. We're excited for this year. We're excited for 25 and looking forward to giving an update after first quarter. Thank you, everybody.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you. you Thank you. Thank you. Good afternoon, everyone. Welcome to the JAX Pacific fourth quarter full year 2023 earnings conference call with management, who will review financial results for the quarter and year end of December 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 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 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 1-1 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 2024, as well as any other forward-looking statements concerning 2024 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 risk uncertainties. which would 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 has been recorded. With that, I would now like to turn the call over to Stephen Berman.

Good afternoon, and thank you for joining us. It's been four months since our last earnings call and update at the end of Q3. and I'm happy to say that we are very pleased with our performance since then. Perhaps more importantly, we continue to make solid progress in building a better future for our stakeholders despite the persistent uncertainty around the economy and consumer strength. Here are some high-level headlines of what's new since we last spoke. As we expected, Halloween in the U.S. was down versus prior year according to syndicated data. Although our shipping was also down, It was better than the industry and solidified our position of strength as the U.S. market leader. It's with that voice that we continue to engage customers and licensors about opportunities for 2025 while also lining up and delivering orders for this coming season. More on costumes in the second half of today's materials. Christmas did arrive on December 25th as scheduled, but with a return to pre-COVID last-minute shopping patterns. As a FOB-first business, we are less reliant on pushing additional product to customers post-Thanksgiving, and to that end, finish the year roughly in line with our expectations and maybe even a little better. Q4 POS at top three U.S. toy consumer products accounts was positive at two of the three despite having difficult revenue comparisons with the prior year. In addition, urine retail inventories at those same accounts We're down high single-digit percentages versus prior year. As the press has noted, the Thanksgiving 2023 film release we supported underperformed from a box office perspective and similarly was a challenge at retail. We still think it's a great product line and we are looking forward to a streaming launch in a few weeks to introduce the film to a broader audience. But realistically, it's unlikely to provide a lot of chase opportunity for us in 2024. We have deployed our former COO into his new role as President of European Operations as of January as scheduled. As part of our re-energized focus on our European expansion, we sent our largest contingent ever to the Nuremberg Toy Fair earlier this month, having great meetings with customers from both Europe and around the world. Our balanced evergreen portfolio continues to resonate and, more importantly, attracts attention. As we increase the size and strength of our European team and footprint, the momentum for growth is building. There is a lot of work to be done and a lot of opportunity to be had, but Jack and the team are locked in on identifying various opportunities to strengthen our retail expansion that can be acted upon to have immediate benefit to our company. To hit some of the financial highlights for the quarter and year, Q4 net sales of $127.4 million were down 3% versus prior year. bringing our full year total net sales to $711.6 million. The full year number was down 11% versus prior year, primarily attributable to the massive amount of volume we did in 2022 from a Thanksgiving 2021 film release that was on fire all of last year. Although the Super Mario Bros. movie, released in Q2 2020, 2023 generated a lot of business in 2023, as well as promotional support of our evergreen Nintendo line. It wasn't enough to close that gap, especially given we also benefited from a strong Sonic 2 film in 2022 as well. Better landed product costs and reduced ocean freight helped to contribute to an expansion of full year gross margin percentage. Q4 in particular increased 480 basis points year over year. This improvement generated a 6% increase in gross margin dollars in 2023 compared to prior year despite the sales decline. It's a remarkable achievement. This growth margin dollar level, $223 million, is the highest the company has achieved since 2015. As much as we all enjoy talking about market share gains when they happen, we enjoy margin dollar gains even more. That strength flowed through SG&A to generate a full year operating margin of 8.3%, an improvement of 60 basis points over prior year despite losing top line scale. Our Q4 adjusted EBITDA was slightly better than prior year, leading to a full year adjusted EBITDA of 75.7 million, slightly below 2022's 76.4 million. but still a tremendous outcome for us at a performance level we did not anticipate at the beginning of the year. Our action play and collectible business was down 9% in the quarter and up 27% on the year, led by Super Mario Bros. Movie, Sonic Prime, and our core Nintendo and Sonic product ranges. Our doll, role play, and dress-up segment finally started to lap the exceptional 2022 and was up 6% in the quarter, but down 25% for the full year. Our outdoor seasonal business also stabilized, delivering growth of 4% in the quarter and slowing the full year decline to 18%. From a geography view, our international business, inclusive of costumes, grew 1% for the full year. It was led by 75% growth in Latin America which had 32 million full year up from 13 million in 2021. It's now larger than our business in Canada, which we also had a great year at 27 million up 2% versus prior year. North America was down 13% with both the toy and consumer product and costume business be down as I've discussed. Before handing it off to John as we wrap up on 2023, I wanted to point out that when COVID struck in 2020, we made some difficult decisions and retrenched the business to ensure our stability. Given a precarious financial position and the significance of the unknowns, we made it through 2020 successfully. And from there, we have steadily delivered over the subsequent years, improving our financial health annually. Over the past three years, We averaged $710 million in net sales, $67 million in EBITDA, and $49 million in cash flow from operation, leading us to a place where I can honestly say our overall business, the quality of our product portfolio, and the caliber of our global team have never been stronger. I will now pass it over to John for some comments, after which I will come back and talk more about how we are thinking about 2024. John.

Thank you, Stephen, and happy Leap Day, everybody. Happy to talk a bit more about another solid quarter and wrapping up another great year. We already talked a lot about sales, so jumping into margins, and specifically into our landed product costs. We had 110 basis point improvement in this area in the quarter, driven by lower landed product costs for the product we import compared to last year, and ultimately better ex-factory margins and a more favorable product mix. That brought our full-year cost of goods down to 50.9 percent of net sales. On a full-year basis, that's 200 to 400 basis points better than these results over the past five years, and an unsung accomplishment within our financial results. That level of improvement is driven by a combination of initiatives generating positive returns, designing for margin, working collaboratively with our factory base, and carefully managing own inventory, which ranges from how much do we bring in, when, and at what cost per container. It remains a constant narrative in our organization to try to ensure we can maintain this level of cost of goods efficiency, as it's clearly a key driver of our strong results. We gave back 60 basis points on the royalty line for the full year. Most of that difference was driven by our running into minimum royalty guarantee issues in some of our international markets. If guarantees are a fact of life in most royalty agreements, we will always look to optimize rate versus guarantee level where we can. which sometimes means the effective rate ends up being a bit higher than originally planned. That has been the case with a couple of agreements recently and is not anything we are overly concerned about going forward. We would expect this area to be relatively stable as we head into the new year, if not an area where we can scrape back some basis points, ideally. Our direct selling costs were up in the quarter and on the full year. Lower volume and inventory levels mean some loss of scale as it relates to our warehousing expense. Increased international sales generate higher outbound freight costs, as we're responsible for delivering product directly to customers. In the area of G&A expenses, there are a couple of different dynamics taking place. We are not immune from the broad narrative that most cost areas are increasing more than not over the past couple of years, inclusive of labor. Although that is motivating a persistent review of how and where we're spending, it is nonetheless challenging to keep the cost base flat, given how labor-driven it tends to be. But in addition, we're also taking the opportunity to make improvements in areas like technology, cybersecurity, and selectively upgrading the organization for the medium term. These various initiatives, although not revolutionary, are necessary and in some cases arguably overdue to sustain the performance levels we've achieved in recent years and ideally unlock new abilities to achieve greater efficiency in the near term. And to be clear, that commentary is independent of how we've talked about building out our European and Latin American footprint to accelerate growth in those markets. Nonetheless, with dollar costs up across SG&A, we still finished the year with an operating margin of 8.3%, the highest level we've achieved in 15 years. We were down less than $2 million in operating income on over $80 million in fewer sales. We're going to score that as a good outcome as far as we're concerned. From there, we'll highlight that our interest expense dropped to $6.5 million from $11.2 million for the prior year, despite the rising rate environment, thanks to our debt retirement in the first half of the year. We are planning for that expense to reduce further to a nominal amount in 2024. Moving on to taxes, last year at this time we had a significant valuation allowance release against deferred tax assets, which required a lot of analysis of our 2019 through 2022 returns. Over the past several months, we've decided to conduct a more rigorous assessment of that analysis, which we are finalizing as part of our Q4 close this year. That further review has identified an increase in net operating losses, or NOLs, that the company will be able to utilize going forward. Although the change in annual cash tax exposure is somewhat limited, it does generate a $2.6 million pickup on the P&L and lowers our effective tax rate for the year to 15.2% versus the low 20s number that we usually plan to. We have adjusted that one-time pickup out of our adjusted EPS results. Other housekeeping. The change in fair value of our preferred stock liability was an increase of $1.4 million in the quarter. We back that non-cash charge out of our adjusted non-GAAP results. Those are the significant drivers of our EPS and adjusted EPS results. Quoting the adjusted numbers only, our Q4 result was a loss of $1.04 per diluted share compared to a loss of $1.42 per diluted share last year On a full year basis, our earnings of $4.62 per diluted share represents an increase over the $4.29 per share we recorded in 2022. For adjusted EBITDA, we finished at $75.7 million, a bit below last year's $76.4 million, but nonetheless a result we're extremely happy with. The last time we had back-to-back years at this level of EBITDA was well over a dozen years ago in the pre-Frozen era. Some quick balance sheet highlights. Our cash, cash equivalents, and restricted cash totaled $72.6 million as of 12-31, down from $85.5 million in the prior year, but one needs to consider that we eliminated $67.2 million in long-term debt with cash on hand during the calendar year. As of February 16th, the same cash metric totaled $47.5 million as a more current reference point, as we have completed paying Q4 royalties owed and have begun investing in 2024 products. Similar to other players in the space, we deliberately have been working down owned inventory to better align with customer demand and proactively manage working capital. It's also worth noting that we continue to encourage the FOB model as being most beneficial to our customers and ourselves in delivering the right price value for retailers and end consumers. Our FOB sales mix exceeded 70% on a total company basis in 2023, another great result of the team's efforts. Our finished goods inventory finished at $52.6 million, a 35% reduction from last year's $80.6 million. And now, back to Stephen for some more comments about the year ahead.

Thank you, John. We're already two months into yet another interesting year in our industry. For the fifth consecutive Q1, we find ourselves wondering about the outlook for the economy and more specifically, the implications for the average consumer. A new overlay this year is a bit of a new film and TV desert, resulting from the various entertainment industry work stoppages of 2023, along with streaming providers taking a more thrifty view of their investment levels. Although that backdrop doesn't make doing solid business easier for anyone this year, we do feel we are better set up for success more than most. Our focus on tried and true evergreen play patterns, brands, and categories serves us well in times like these. These are the businesses that often float to the top of the market's priority list when there's nothing being crowded out by some of the large one-off promotional events or activities. The preschoolers of today are not studying an entertainment calendar or bemoaning the lack of the July 4th tentpole. They're still going to birthday parties or long for shopping trips out to brick-and-mortar retail. And it's on shelf at retail that we continue to offer a strong and wide array of sub $30 price point toys that deliver fun and innovation for the recipient and happiness and satisfaction for the gift giver. With that view, we're once again set up for a solid year. That's not to suggest that we are immune to the larger dynamics. Over the past two springs, we have greatly benefited from high product lines driven by blockbuster April film releases. driving sales tied to the movie, as well as supporting and expanding our year-round business for those brands. Those are difficult numbers to replace. And a business like our costume business is often led by the latest blockbuster films, and the relatively light volume this year tends to lead to a somewhat softer overall business. But as I'm often reminding our internal teams, that's just how the world of business works. You must adapt and do the hard work to compensate if your underlining goal is to deliver consistent, predictable results, which is our primarily financial objective here at Jaxx. Without foundation, there are a large number of things we're excited about as we head into the new year, although admittedly many of them are anchored a bit more towards the second half. From a content perspective, we are delighted to hear the news that Disney plans to release Moana 2 in theaters this holiday season. The film tells us the next chapter in the world of Moana, their successful 2016 film. We chased demand when the original Moana film exceeded commercial expectation, and it has been a consistent seller for us ever since. We'll have a new focus line of products inspired by the film on shelf in Q4. And separately, we're also excited to be enjoying three new pieces of entertainment in the world of Sonic the Hedgehog. First up is Season 3 on Sonic Prime, which released in mid-January on Netflix. Second is The Knuckles Show, which was featured during the Super Bowl and is launching late April on the Paramount Plus streaming platform. It is set after the second film, but prior to Sonic the Hedgehog 3. The third film in the Sonic the Hedgehog franchise, which is launching in theaters in December of this year. The team has developed custom product lines for Sonic Prime and the film in addition to refreshes and extensions of our successful core Sonic the Hedgehog toy and costume assortment. Moving to Disney Princess, we will benefit from two Disney global marketing campaigns this year. Spark of Joy, celebrating the joy Disney brands and stories bring to families all over the world. And Create Your World, a three-year Disney Princess brand campaign launching this fall. celebrating the magical world you would create through the Disney Princess brand and the world of products. Jack's Toys will be featured throughout that campaign. Since last quarter, we also made great progress sharing our new Simpsons line with retailers around the world. New episodes of Season 35 began to air earlier this month, and Season 36 is projected to debut in September. The hours watched on this property are just incredible. We can't wait for fans to see our range, specifically the figures and dioramas featuring caricatures and locations from the show. It's been over 15 years since a Simpson toy range has been in the market, and we are thrilled to make them available. We announced and disclosed last quarter the starting of a worldwide relationship with Authentic Brands Group. ABG is a brand powerhouse with a wide portfolio of IP, which has mass appeal to millennials, Gen Zs, and Gen Y. We have been collaborating on a wide range of products that will slot into our division as well as expand the scope of our offerings. We've been working on iconic assortment of their properties, names like Element, Quicksilver, Roxy, Juicy Couture, Sports Illustrated, and Prince, just to name a few. We have completed the initial fall 2024 retail presentations at both Mass, such as Target, Walmart, and Amazon, and Sporting Goods channels, such as Dick's Sporting Goods, Academy, Dunham's, Shields, as well as specialty international retailers. The brand's global reach was proven during the recent Nuremberg Toy Fair, being met with excitement from our international customers. We are extremely excited to be rolling out our new line of skateboards and roller skates with amazing new designs for Element, Roxy, Quicksilver, and Juicy Couture at specialty and mass retailers both in-store and online. In 2025, Jax will be launching a complete line of outdoor products including chairs, umbrellas, canopies, beach accessories, inflatable pool floats, sand and splash mats, foldable wagons, and extensive lines of dolls and doll accessories infused with fashion elements from Roxy, Quicksilver, Forever 21, Prince, and Sports Illustrated. As we've said separately, we think the U.S. holiday market is still trying to calibrate where consumer demand is post-COVID with customers dialing their annual buys up and down as a jockey for market share. In addition, many other manufacturers in the space continue to struggle creating additional noise in the market. We do have the rights to several new films this year, inclusive of Sony's Ghostbusters, Frozen Empire, Illumination's entertainment Despicable Me, Embassy Universal's Wicked, and Kung Fu Panda 4, in addition to our strong Evergreen licensed IP portfolio from Disney Princesses to Lilo and Stitch, Nintendo, Sonic, Pokemon, Halo, Minecraft, just to name several. We're also continuing to add additional rights where we have U.S. rights as our capabilities outside the U.S. steadily build and build. Nuremberg was a great show for Disguise as we continue to have separate booths to present the product lines. There are a couple of interesting new businesses queuing up for 2025 to which we look forward to telling you about in the quarters to come. As we always have a lot of different things going on, there was one more important thought I wanted to share. 2024 commences our 30th year in business as Jack Freeman and I founded Jack Specific back in January 1995, 29 years ago. Those who have known us over the years during our various ups and downs know that it has truly been a remarkable journey so far. It was great being back in Nuremberg this year for the first time in a long time and catching up with many longstanding customers and relationships I now consider friends for all the time we have shared in the decades since. The past five years have created their own remarkable chapter as we worked through our 2019 restructuring, navigated through peak COVID in 2020, and subsequently have put up three tremendous years of results across 2021, 2022, and 2023. We are extremely proud of our performance during this time, but are only looking forward towards another year that will inevitably prove challenging, but we feel is still filled with major opportunities. Thanks again for your support and interest. And with that, we'll take a couple questions. Operator.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Andrew Urquitz with Jefferies. Your line is now open.

Hey, thank you guys for taking my questions. Steven, I have kind of a question for you.

I really appreciate the color on kind of talking about the movie slate and the impact that could have. Are there specific – could you talk generally about the impact it has on consumers?

Is it lower sales because they're going to the store less?

Is it just a they're just not or the property? Like, I'm just kind of thinking through. There's still birthday parties to buy for. There's still holiday to buy for. So I'm just trying to think the impact that it might have directly on Jack's, you know, just kind of or any colleague. Maybe it impacts Halloween. Just trying to get a sense on what the real driver here is against the consumer when you have a weaker movie slate.

Firstly, thank you, Andrew. So we've had this throughout the periods as Jackson being in the industry. What it normally does when you don't have any, call it real hot, overall toy-rific properties, there could be some great movies, but they may not be in a sense merchandisable as well. But in our world, like a Frozen or Mawander, things like that are toy-rific. So what that does is it just the excitement of the consumer of driving them into the retail and going to buy something that's hot isn't there. And when they come in, they're buying something hot. They usually always acquire additional products on an impulse basis. So by not having such a real hot theatrical or even TV initiatives this year, it's really back to the basics, which is the positive for us. That's our core concept of JAX is evergreen, basic, brick-by-brick business. And if something hot comes along, we run, chase it, but we never bet on it to ensure our year. So, for example, today we just finished off an amazing meeting with one of the large retailers in the sporting world with our new authentic initiatives that we're going to be launching in 2024 that we didn't expect until next year to launch some of these things In addition, we have a movie that we're really excited about because we've had great track records with it in the past, is the new Moana movie, which is coming out. So there are some excitements as well as the Sonic excitement, but those things are happening later in the year, and there's really not any major consumer-selling product movies. that are happening for the first half or even in the first three quarters of the year. So you've got to think of core evergreen businesses that really do well. So our basic tents, ball pits, ride-ons, Nintendo, Sonic, the Simpson line, which is new. Simpsons has been around 30-something, I forgot how many years, over 35 years. It's the first time there's product coming out in 15 years of the Simpsons. So even though it's not a new launch of a of a brand new, call it IP. It's a strong IP that's evergreen. So where we stand, we're very solid, but there's just nothing great that's coming out that is going to push the industry into these high levels of excitement.

Got it. No, that's super helpful. That's really helpful. And speaking of kind of in the back half of the year, aside from the Sonic and Simpsons, some of your outdoor initiatives, will we see some of that as well? Or because it's outdoor, that's more of a 25 initiative, just trying to frame, some of these new license deals?

So the ABG seasonal, I'll use that because we have other seasonal properties that are really kid-focused, you know, the Paw Patrols and the ball pits and tents and ride-ons. But the ABG, as I just mentioned, our team has flown back from a major sporting goods retailer, and they have full commitments, a broad array of commitments on the skateboard, roller skates, and the element safety equipment. And we have been on the road since Nuremberg, and the team has been on the road of marketing retail roadshow. So we expect to have the skateboards and seasonal business that I just mentioned in fourth quarter or third quarter launching. And then spring, which launches in December, January, February, March, that's when we expect all the tents, the carriages, the chairs, the Quicksilver and Roxy, all to come out, which will be for summer 25. But the skateboards and roller skates are... they're getting some really good grasp at retail. We expect that to happen at fall this year. But on the other parts, we still have like Sonic Prime Netflix, which came out in January. Knuckles, which comes out Paramount Plus in April. Sonic 3, the movie in December. The Simpsons, Moana. We have a big global marketing campaign with Disney with Spark of Joy and Create Your World's Disguise. There's Afro Unicorn. We have Nintendo and Kirby. Bendy the Ink Machine. Dungeons and Dragons. There's a lot of content and IP that we've launched, but there's just something that is a tentpole movie excluding Sonic and Moana 2.

Got it. That's super helpful. I appreciate all that, Keller, and good job getting some of those new initiatives out sooner rather than later. Thank you. That was a big goal for us. Yeah, I think that's great. And then kind of just how should we frame the international opportunity for I know there's an overall global weakness, but, I mean, I would think with some of the international initiatives, you guys might actually be up year over year on an international geography basis. One, is that right? Is that the right way to think about it? Or how should we kind of frame the international opportunity?

Yeah, so we've been out there, and I'm going out there again shortly in the next couple of weeks. The big initiative is we opened up our new distribution center in Piacenza, Italy, in our new offices there. in France and a new distribution center in Belgium, which is going to help get into all the ancillary territories that are hard to get to. But remember, we're primarily an FOB basis business. That being said, if you saw how much our Latin America growth has increased, we were up for vendor of the year at Walmart, Mexico, I think Whirlpool won above us. So the big initiatives are expansion and the way that you're articulating it, I've seen growth internationally. We do expect some tremendous growth in certain areas and some of moderate, but it's too early for us to say right now as we stand where that growth will be, but we do see strong momentum. We're coming from a lower base as well, which is easier for us to achieve growth. There's a lot of new initiatives that we have that work worldwide, from the ABG initiative releases that we have to Simpson is worldwide, Moana too. So there's a lot of things that we didn't know November, December that we know today that should help us. And then our basic evergreen business and new licenses with the sky should help us with the direct to retail approach. So we're looking forward to seeing it, but we'll know more once we get all these toy fairs and meetings completed.

Got it. That's helpful. And then I guess one question for John on the cost side, Because you're FOB, should we worry at all about the rising cost of shipping at all, or how should we think about the pushes and pulls there as we get through the year?

I think we're always going to be mindful of things that could go a bit sideways, but to your point, given our heavy focus on FOB, it's not really a top five concern for us, I would say, at the moment. The issues as it relates to Europe, are more problematic and the more shipping gets disrupted to Europe. If you think about it, that just means more time that ships are on the water, taking a longer time to get someplace, and therefore draining capacity out of the system, even if what we're focused mostly on is the Asia to LA route. So we're continuing to keep an eye on it and monitor it. Obviously, we work down our inventory a lot, as a lot of people did towards the end of the year. which means bringing in more product this year is something that we're going to have to do, at least in order to be able to deliver some of the sales that we want. But we don't think it's – like I said, it's probably not a top concern at the moment.

Got it. Okay. And then I guess the last question then is that it looked like 23 was kind of a big discounting year for a lot of your competitors. How are you thinking about – discounts in 2024? It feels like inventories are finally normalized, but even last fall they were normalized. We still saw some discounting. Just curious what you're thinking about discounts and where the right price points are going to be this year. I know you guys tend to be on that sweet spot of below 30, but just curious how you see 24 playing out on a price point basis.

So On the, call it the inventory level, it seems that the majority of the people in our industry have gotten cleaned up with inventory, but speaking specifically on Jack's, we are pretty clean on inventory. We always have a little bit of obsolete throughout the years, and as John just mentioned, we got pretty low on inventory, so we want to refresh it with all good product, which is a great place to stand. But that being said, the majority, as you mentioned, our sweet spot is under 30. And even during the holidays, I think it's over 85% of our products are under $50. So that really is a sweet spot for the difference of the consumer being slightly getting weaker, very much unknown. We've had for the last six years a complete structure of doing three parts development, which is mass, specialty, and then value. So we are really ancillary in all the different distribution channels that we're heading into. So we hit the consumers where they stand financially. In addition to that, the evergreen areas of our business are just very steady eddy in what we do. We're not concerned with the inventory and that part, but I do believe when you close that inventory, you do hit margins somewhat. So I think that is still part of everyone's business, but for us it's a minimal part of our business.

Got it. Very helpful, gentlemen, and appreciate you taking my questions.

Thank you.

Thanks, Andrew.

I'd now like to hand the conference back over to Stephen Berman for closing remarks.

Great to have the first call of the year now and excited to talk about this year going into first quarter and above. And we're excited for Jax. We're excited for this year. We're excited for 25 and looking forward to giving an update after first quarter. Thank you, everybody.

This concludes today's conference call. Thank you for your participation. You may now disconnect.