JAKKS Pacific, Inc.

Good afternoon, everyone. Welcome to the JAX Pacific First Quarter Earnings Conference Call with Management, who will review financial results for the first quarter ended March 31st, 2026. JAX issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors 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 and full fiscal year, along with highlights of recent performance and current business trends. Then John will provide some focus around Jax Pacific's financials 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 one one on your telephone keypad. Before we begin, the company would like to point out that any comments made about Jax Pacific future performance, events, or circumstances, including the estimates of sales, margins, earnings, and or adjusted EBITDA in 2026, as well as any other forward-looking statements concerning 2026 and beyond are subject to safe harbor protection under federal security laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subjected to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and 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 call is being recorded. And with that, I would now like to turn the call over to Steven Berman.

Good afternoon, and thank you for joining us today. Our Q1 financial results were roughly in line with our expectations and comparable to our strong Q1 2025 results. And our near-term outlook is better than it was 12 months ago. We continue to see a degree of caution from U.S. accounts, I would characterize many of them as somewhat tentative about the year, many becoming more accustomed to the volatility we've been experiencing. They are, among other things, trying to forecast consumer health. Our industry continues to closely monitor higher oil prices given the implications for residence and transportation costs. As I said before, these are dynamics that come with running a global company. We have dealt with these sort of challenges before, and I'm confident we will successfully navigate our way forward in 2026 and beyond. We continue to invest significantly time, effort, and financially on some exciting new initiatives coming together for 2027 and 28, while also executing in the year on our plan and pursuing late incremental opportunities. Globally, our net sales finished at $170 million in Q1, comparable to our first quarter results over the past several years, but down 6% from prior year. Toy and consumer product net sales were down 7%, with costumes up in one of its smaller quarters. The decline was caused by lower results in North America at 78 million. It was down 15 million, or 16%, with both our domestic and FOB business decreasing for the quarter. Roughly a quarter of that The decline was due to reduction in low-margin closeout sales related to our lower level of U.S. imports last year. Demand for our FOB model remains extremely strong, with over 70% of our Q1 North American business shipped FOB. As mentioned above, we see the U.S. retailers remaining somewhat cautious trying to recalibrate cost pressures, pricing resilience, and ultimately consumer behavior. Our international business grew nicely in the quarter, reaching $29 million, a 38% increase versus the prior year. We saw healthy growth in both our domestic business as well as our FOB orders. Latin America declined slightly in the quarter but grew margin dollars. Although slightly down from last year, we finished the quarter with a very strong gross margin of 33.4%, reflective of our robust product margins from new product introductions and reduced closeout sales in the quarter. SG&A expenses were down 4% in the quarter, offsetting some of the drop in margin dollars, but not enough to avoid a quarterly adjusted EBITDA loss of $371,000 versus a gain of $354,000 recorded at the end of Q1 2025. I will now pass it over to John for some comments. after which I will come back and discuss some product initiatives and areas of focus moving forward. John.

Thank you, Stephen, and hi, everybody. The first quarter did not distinguish itself dramatically to the positive or the negative, which is all that one can really ask for in the first quarter in the toy industry. Some of our drop in revenues is attributable to a new dress-up initiative last year not carrying forward, in addition to some softness in our private label business. We're happy to see our gross margin percentage holding up at 33.4%, even if it is down 100 basis points from the exuberant 34.4% from this time last year. Deconstructing gross margin prompts the issue of tariffs. For your accounting teaser of the day, U.S. domestic products sold in the quarter would have reflected tariff expense related to when the product entered the country when those sales in the year-ago quarter did not have that issue. As to whether Q1 2026 product was imported in Q1 or in previous quarters, there's a level of precision that we don't aspire to. I can tell you we paid $1 to $2 million in U.S. tariffs in the quarter, where we paid less than $100,000 in the year-ago quarter. That gives you a sense for order of magnitude of the numbers here in the quarter and as they relate to prior year. This is also a fine place to mention that we have filed for tariff refunds that we feel are eligible for reclaiming as a result of the relevant Supreme Court decision. We do not intend to go deeper on that topic until we have a much higher degree of confidence that refunds are forthcoming and have figured out any related implications. It would be nice to get some of this money back, but frankly it's one of the least interesting things to talk about in the business today, so we're moving on. Back to the numbers. $36 million in Q1 gross profit, although down 9% from last year, That is still a very robust number for our business, so we're happy to have that on the scoreboard as we exit the quarter. Our selling expenses were flat from a margin perspective in the quarter, primarily due to favorable timing. On a full year basis, we would expect this area to grow at minimum in tandem with sales, particularly as we restricted spending against some marketing initiatives last year given revenue shortfalls. That projection does not anticipate downside scenarios reflective of higher shipping costs due to higher diesel costs. G&A delevered slightly, but also benefited from some timing elements. We are aiming to hold G&A spending to no more than revenue growth on a full year basis, while also making the necessary expenditures to support new 2027 launches. Slightly softer results reduce our trailing 12-month adjusted EBITDA down by 2% to $34.6 million. On an adjusted per share basis, the quarterly loss of 17 cents is lower than the loss of 3 cents per share from this time last year. The diluted share count is based on roughly 11.4 million shares. Turning to the balance sheet, we finished the quarter with $64 million in cash, up a bit from $59 million last year. Inventory was flattish at $53 million, essentially unchanged from last year. As mentioned in our release, the board approved a Q2 payment of 25 cents per common share, payable at the end of Q1. The record date for the dividend is May 29th, and the payable date will be June 29th. And back to Stephen for some more comments about the year ahead.