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 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% 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.