JAKKS Pacific, Inc.

Good day, and thank you for standing by. Welcome to the Q3 2024 JASP Pacific Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your questions, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steven Berman, Chairman and CEO.

Good afternoon and thank you for joining us today. It's an exciting time of the year here as Q3 is always the highest sales quarter and by extension generates a lot of activity. The end of the year is in sight with less than 60 shipping days remaining and our goals for the full year are starting to feel like they're more within reach. Our teams around the world were collaborating across offices extensively last quarter to ensure we were fulfilling orders and not taking no for any answer when obstacles appeared whether driven by East Coast port issues or otherwise. We always try to deliver as much of our second half volume in Q3 to mitigate full year risk and to ensure customers and shelves are set for the holidays. In Q4, we pivot a lot of our attention to execution of pre-planned retail programs and consumer marketing to generate strong sell-through. We are executing against the game plan this year with some great programs in place across wide range of accounts in all of our major markets. As highlighted in our press release, all three of our toy, Consumer products divisions delivered year-over-year sales increases in third quarter. That includes our outdoor seasonal business, which adamantly has been challenged in recent years. Improved listings in some of our core businesses and the timing of the shipments are leading to the improvements. It's still early days, but it's great to see some of the positive trends emerging there. Although we are selective about what we discuss during any given quarter, as a reminder, portfolio management is an essential part of our operation. We are actively managing over 30 different businesses with the Natoya consumer products alone in this year. Whether it's a property-driven businesses like various IPs from the Walt Disney Company, IP from Nintendo, Daniel the Tiger Neighborhood, or Black & Decker, or many others, or category-driven, one like play tents or ride-ons, each product line has its own dynamics. There are differences in customer base, retail placement, competitive set, manufacturing issues, costing and pricing, product innovation, and brand relevance. I could go on and on. And every country is a distinct market in regards to most of those points. Those drivers are then independent of whatever broader trends might be impacting our customers and consumers. which tend to get most of the attention and discussion. But the success of any of these businesses is really driven, bottoms up, starting with the unique product line and the consumer and customer value proposition. The portfolio approach is essential to maintaining and growing a healthy business over time, especially given that our end consumers will naturally age out of our offerings in most instances. This reality forces us to constantly change ourselves when it comes to product freshness and innovation while maintaining sensitivity to retail margins requirements and consumer price considerations. Our dolls role play dress up business was up 6% in the quarter and is up 2% year to date. And our action play and collectible business was up 5% in the quarter but down 9% year to date as the timing of the Sonic 3 film in December this year doesn't compare well with the Super Mario Brothers movie film which was released April 2023 independent of other aspects of that business but great quarters for both divisions regardless really exciting things happen in each one but now looking forward we are also continuing to fight for business internationally and keep up with customer demand Latin America continues to be our biggest success story We shipped 22.6 million in the quarter, up 48% compared to the prior year, and currently up 23% year-to-date in the region. Our European region continues to open up new accounts and build out its infrastructure, but it's a battle that's taking place customer by customer and market by market as we knew it would be. As a region, it benefited significantly with the strength of Super Mario Bros. Movie last year. Nonetheless, Down 3.8% in a big quarter is a good sign and improvement over Q2. Asian Pacific is relatively small for us and is also down 3.4% in the quarter. Canada is down over $4 million in the quarter due to a combination of timing and some challenging trade dynamics there. Turning to what we see at retail, I'd say the consumer is constantly showing up and acting when novelty and newness appears on the shelf. but they're not filling the cart with everything they see. A lot of our aggregate year-over-year POS trends are dominated by retailers actively destocking last year and by extension pushing through the channel content-led properties from recent years. But several of our new fall introductions have received great consumer reactions and have left retailers scrambling to pull products from their warehouses and back rooms into the front of the store. With our strong sell in this quarter, the meaningful cash register ring is starting to happen now, and particularly in November, December, as our media and promotional campaigns kick in. Obviously, Halloween shopping is continuing as we speak. As we have communicated all year, retail is still feeling out where the consumer is, and we've known we were looking at a down shipping year. This is a holiday that famously shows up extremely late, even more so than Christmas tends So despite today's date, it's hard for us to say with any definitiveness how the year will end up. Early reads on POS from syndicated data suggest that sell-through is soft across the industry. The good news is that we are doing better than most everyone else and potentially picking up a bit more of the market share in the process. But again, that's really just an early read from earlier this month. Our 2025 lineup is largely developed, and the team will soon be pivoting to closing the books on 2024 and refocusing towards what will hopefully be a stronger 2025. It is worth noting that outside the US, our costume business was up in the quarter, which is a 7% increase versus prior year. The UK in particular has seen some costume companies reorganize, and there remains a lot of disruption happening there. But our company-wide efforts in Europe are designed to support our toy and consumer products and costume businesses in more than an integrated manner than how we go to market in the U.S. So we remain both hopeful and confident we continue to build the quality of volume there. Moving over to the balance sheet, we are remaining extremely disciplined with $63.5 million in net inventory at the end of the quarter, inclusive of in-transit product, compared to 68.8 million at this time last year. We are lower despite our continuing to build out an EU hub and spoke warehouse system to be more responsive to customers with faster replenishment times. We're also taking advantage of our financial strength and resilience to scrutinize our trading terms to maximize margins and ultimately cash. This approach is prompting our receivables to grow meaningfully versus the prior year, as we had anticipated. Our approach is working, and our AR has been turning back into cash, such that we had no drawdown on our credit line by the end of the quarter. By extension, I'm extremely happy to reiterate that we remain debt-free as a company. In a world of uncertainties and volatility around interest rates, it's just great to be operating from this position of strength as we prepare for the next year and evaluate new business opportunities for 2026 and beyond. Another noteworthy element of our business is the extensive number of exclusive products we bring to a broad array of retailers globally. We have also had a heavy focus over the past few years to secure additional space at retail. Beyond traditional in-aisle planograms, you can find us with out-of-aisle placement, standalone displays, pallet programs, end caps, and at the check lane. This additional real estate at various retailers globally opens new consistent selling opportunities both in season and year round as our price value and strong consumer propositions drive solid results for the customers by extension of our licensors. We know that the question of capital allocation is on many investors' minds and it's on ours too. We do not have any new news on that front to announce today I do feel we are getting closer to the point that we can be more specific about our plans in this area. As a company, we are in a much, much stronger place than we were during the turmoil of 2018 and 19. We are still mindful, however, that our success is not a reason to squander all that hard work. We are soliciting a wide range of opinions and taking very thoughtful look at all of our options and possibilities for the years ahead and by extension, what our capital goals and needs should be. I will now pass it over to John for some further comments, after which I will come back to discuss Q4 and a bit more. John.

Thank you, Stephen, and hello, everyone. It's always a bit more pleasant to talk about the business after Q3. Another $300-plus million sales quarter behind us, slightly more than last year, a super outcome. Stephen talked a lot about sales, but I'll layer in one more observation. Earlier this year, we added to our earnings presentation deck an attempt to more clearly break out the core evergreen business that we view as foundational to the company. This analysis looks to isolate the more volatile content-driven figure and doll product lines. We understand that for those who don't live in our aisles at retail every day, the dynamics of the 30-plus businesses in our portfolio are near impossible to visualize and keep track of. And as we've also pointed out, there are limits to what we can share for both confidentiality and competitive reasons. But in any case, I wanted to highlight that among the positive attributes of our Q3 results, you can see, I think it's page 18, our content business lifting nicely year over year, given the strength of that portion of the portfolio as we enter the back half of the year. But more importantly, the core evergreen businesses collectively have put up solid numbers this year, inclusive of Q3. That is not to suggest we intend to fall into the trap of scrutinizing the quarterly box score when we are managing to a full year result. This view of our business is more of an analysis of the outcome of our collective efforts, more than an organizational design or a specific destination we're trying to navigate towards. But overall, we continue to feel it's helpful, so we hope externally you find it at least somewhat insightful. Moving on down the P&L, gross margins held up well in the quarter. Cost of product was a bit higher than prior year, as we've been seeing and anticipating. Similarly, royalty expense has been a little bit lower in aggregate to help compensate. We're very happy with a 33 plus percent gross margin in any quarter, but in particular during our largest quarter. Gross profit dollar growth of 2% in the corner, $1.8 million in total, is modest, but much better than the unfavorable $14 million gross profit swing we saw in the first half of the year. We continue to feel that we are running a business that should deliver a minimum of 30% gross margins on a full year basis. That projection assumes that not everything executes perfectly, but that the number of things that don't work as planned remain a somewhat tolerable quantity and don't miss the intended mark too dramatically. Selling expense in the quarter was $7.6 million, down from $10.7 million in the prior year. There are at least a couple of different things happening in this area. We're lapping some expensive quarters in the selling, warehousing, and outbound freight areas last year. which in total generated about $1.5 million in one-time favorability this quarter. We also have a bit of a timing save as we have been pushing more of our planned media spend into Q4 than what we have done historically. I would say year-to-date that's about $2 million that will find its way into Q4 compared to last year. So a lot of moving pieces here, but as we get closer to the end of the year, the cumulative variance starts to smooth out a bit. Our G&A spending similarly was decent in the quarter at $33.1 million, down 2% from $33.8 million, and meaningfully improved from the garbagey plus 16% increase we posted in the first half of the year. We are starting to lap some staffing-related cost increases that took place in 2023. We also continue to work down some short-term spending, which I've talked about before, related to Sarbanes-Oxley, cybersecurity, and other process-related deferred maintenance-type areas we've been catching up on. And it's also worth noting that the teams have taken to heart the message that we were very clear about at the start of the year about the revenue comparison being tough this year. So we needed some new thinking and ideas about where we could reallocate spend to more beneficial areas. As a result, we saw some benefits here and there starting to dribble through in the quarter. This is a persistent bailing water exercise as broadly our fixed costs tend to creep up consistently such that without scale leverage, it is very challenging to maintain or expand margins. In reviewing the year-over-year detail, it's worth noting that the credit worthiness of some retailers remains a concern for us. I would estimate that we're up to about 1% of year-over-year sales decline, attributable to a deteriorating credit situation in some of our customers. This reflects a combination of customers who have filed for bankruptcy, as well as those we consider very high risk. We are frequently in discussions internally for both our toy CP and costume businesses around this issue. Our crystal ball isn't perfect, We have one noteworthy account in North America who remains significantly past due, but has yet to file. But overall, we think we've done a good job to date turning off shipping at the right time. We do suspect there is more bad news to come on this front in the world of retail, unfortunately. On a lighter note, let's talk about interest expense. As Stephen pointed out, as we move through our seasonal curve, we have paid down our short-term borrowings as of quarter close, and we remain undrawn as of today. Our year-to-date interest expense is $938,000, a reduction of $4.8 million versus the first nine months of 2023. For fans of EPS, that's over 40 cents per share in annual pickup with one quarter left to go. And for fans of cash, it's clearly a meaningful year-over-year pickup in pre-tax net income, even if it doesn't appear in our adjusted EBITDA metric. Adjusted EPS for the quarter was $4.79 and $4.50 for the first nine months. Those numbers are up from $4.75 and down from $5.66, respectively, from 2023. Our trailing 12-month adjusted EBITDA is $58.5 million, reflecting an 8.5% EBITDA margin. And now, back to Stephen for some additional remarks.