Good afternoon and welcome to the JAKKS Pacific Fourth Quarter 2018 Earnings Conference Call. Management will review financial Results for the quarter ended December 31, 2018. JAKKS issued its earnings press release earlier today.

Presentation slides containing information covered in both today's earnings press release and call are available on our website in the Investor section. This presentation includes videos showing some of our key products. On this call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and Brent Novak, Chief Financial Officer. Mr.

Berman will first provide an overview of the quarter and provide highlights of product lines and current business trends. Then Mr. Novak will provide detailed comments regarding JAKKS Pacific's financial and operational results, prior to opening up the call for your questions.

Your line will be placed on mute for the first portion of the call [Operator Instructions].

Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events, or circumstances, including the estimates of sales and/or adjusted EBITDA in 2019 as well as any other forward-looking statements concerning 2019 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 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 JAKKS’ 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 our management refer to Non-GAAP financial measures such as adjusted EBITDA.

Unless stated otherwise, the most directly comparable GAAP financial metrics has been filed with the associated Non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this conference is being recorded. And with that I will now turn the call over to Stephen Berman..

Good afternoon everyone. And thank you for joining us today. This afternoon, we are going to review our performance during the fourth quarter of 2018. I will talk about how our brands and products performed in the quarter compared to last year and to our expectations. After my comments, Brent will discuss our financial performance.

2018 was a year that we saw unprecedented disruption in the global toy industry principally but not exclusively because of the bankruptcy and the liquidation of Toys "R" Us. When we held our second quarter earnings call last July, we said that while we expected that eventually most of the lost Toys "R" Us sales would be picked up by other retailers.

We do not expect our sales or industry sales to see anything of a full transfer of these sales until next year. Other manufacturers disagreed but now looking back the transfer of business to other retailers did not happen for JAKKS and much of the industry. MTB reported that retail toy sales in the U.S.

were down 7% for the fourth quarter and down 2% for the full year, that is roughly in line with the decrease that we saw in the U.S. in the fourth quarter. We believe most of that decline is due to the fact that other retailers were unable to make up the lost Toys "R" Us sales.

We expect that by the end of 2019, the issue will have largely completed the adjustment but we expect to continue to see the disruption in the first half, bearing in mind that most of the industry's major suppliers were shifting to Toys "R" Us well into the first quarter of 2018, and that the liquidation sales appear to have pulled forward a lot of the consumer purchases into the first half of 2018.

As disruptive as this event was to our results in 2018, it is now behind us and we are focused on the future and we can point to a number of encouraging signs in our fourth quarter results. For the second consecutive quarter, we exceeded our internal forecast for top-line and adjusted EBITDA finishing the year with positive adjusted EBITDA.

Sales within our international segment were strong in fourth quarter up around 25% year-over-year. We had many new products which sold well in 2018 including some of our own IP and we continue to have solid base of evergreen products in categories where we are the industry leader.

We have seen success and expanded beyond traditional toys and beyond traditional toy retailers and we have seen a nice increase in our sales to online retailers. Our net sales in the fourth quarter declined approximately 3% primarily due to the loss of sales to Toys "R" Us compared to last year. This brought our full year declined to approximately 7%.

Excluding sales to Toys "R" Us our sales were up 12% in fourth quarter and 1% for the full year as fourth quarter saw strong performances for online sales and from some of our larger customers. Despite the reduction in sales, we were able to produce better financial results for the year than we expected.

As Brent will detail shortly, our gross margin improved significantly, we greatly reduced our operating loss and posted positive adjusted EBITDA for the full year despite having extremely challenging first half of 2018.

During fourth quarter, we had strong sales of several new or recently launched products led by Incredibles 2, Fancy Nancy, Harry Potter, MorfBoard, Disney Princess, TP Blaster, Daniel Tiger, Nintendo and Perfectly Cute.

Offsetting the positive sales contribution of products we just mentioned there were several entertainment properties that contributed significant sales in the fourth quarter of 2017, which you find this year in the absence of new content such as Moana, Frozen, Squish-Dee-Lish which was launched in 2017 second half, Elena of Avalor, Tsum Tsum and Beauty and the Beast.

We also saw some declines of emotional products that are nearing the end of their life cycles such as Chocolate Egg Surprise. Brent will provide more details later in the call. Not surprisingly online sales continue to build momentum.

Our total sales through online retailers were up dramatically in the fourth quarter over 30% in total and nearly 50% excluding Toys “R” Us from the fourth quarter 2017 results. Increasing online sales as a percent of total sales has been a goal of ours in recent years. And we are pleased to see this accelerate in 2018.

For the quarter, we estimate that our online sales represented over 15% of our total sales and for the year over 10% of our total sales. Because we anticipated the industry-wide sales challenge and because of steps we took early in the year to reduce our costs we saw improvements in our operating cost structure.

On a GAAP basis, our gross margin for the year was up by more than two full points and our total SG&A costs were down around 15%. Our inventories and our accounts receivable were both down by more than a reduction in full year sales and considerably more than the fourth quarter sales. I will now turn the call over to Brent Novak.

Brent?.

Thank you, Stephen and good afternoon everyone. Net sales for the 2018 fourth quarter were 132.3 million, down 3%, compared to 136.6 million last year. As was the case all year, the decline was essentially due to a decrease in sales to Toys “R” Us.

Reported net income for the quarter with a loss of 3.2 million or $0.14 per diluted share, compared to a net loss of 30.4 million for $1.33 per diluted share in the fourth quarter of last year. Adjusted EBITDA for the 2018 fourth quarter was negative 1.6 million, compared to negative 6.8 million in the fourth quarter of 2017.

For the full year of 2018, net sales were 567.8 million, down 7%, compared to 613.1 million last year. Reported net income for the 2018 year was a loss of 42.4 million or $1.83 per diluted share compared to a net loss of $83.1 million or $3.89 per diluted share in 2017.

Adjusted EBITDA for the full year of 2018 was $2.3 million compared to $15.8 million for the full year of 2017. The sales drivers in the fourth quarter of 2018 by category were as follows.

Sales of dolls, role play and dressup plus an activity products in our gross category amounted to $72.9 million for the 2018 fourth quarter, down 14% compared to $85.2 million in the comparable quarter last year.

We saw positive contributions from the gross category with Incredibles 2, Fancy Nancy, and Disney Princess as well as from Perfectly Cute, a private label brand we produce for one major customer.

These brands were more than offset by the expected decline in a number of girls lines including several entertainment content driven lines such as Moana, Frozen, Alina of Avalor and Tsum Tsum as well as Squish-Dee-Lish and Chocolate Egg Surprise, both of which were launched in the second half of 2017.

Sales of action figures, vehicles, roleplay and electronic products in our boys and other category for the 2018 fourth quarter were $28.8 million up 36% compared to $21.1 million last year driven by Incredibles 2, Harry Potter, TP Blaster and Nintendo which more than offset declines in real Working Buddies and Star Wars.

Sales of seasonal products including, licensed right ons, ball pick, kids furniture, Malley outdoor activity products and more forts were $19.9 million in the 2018 fourth quarter, down 12% from $22.5 million in 2017, as a nice sales performance by more fort were more than offset by declines in other areas.

As was the case in the third quarter, sales were impacted by the ball pick category as well as a decline in indoor kids' furniture. Sales in our Halloween category which is also one of our business segments increased 19% to $6.8 million in the fourth quarter of 2018 compared to $5.7 million in 2017.

Sales of baby doll accessories, figures, plush and games in our preschool and activity category were $3.9 million in the fourth quarter of 2018, up from $2.1 million in 2017. The increase was driven primarily by a strong increase in Daniel Tiger. Looking at sales by business segment. U.S.

and Canada net sales for the fourth quarter were $100.9 million compared to $111.3 million in the prior year quarter driven by the drop in sales to Toys "R" Us as well as the same puts and takes described earlier in the product group descriptions.

International sales for the 2018 fourth quarter were stronger at $24.6 million and up when compared to $19.6 million in the 2017 fourth quarter driven by strength in Europe. And we already mentioned Halloween sales in the category break down earlier. Moving down the P&L.

Reported gross margin in the 2018 fourth quarter was 30.6%, compared to 22.1% in the 2017 fourth quarter. Gross margin was higher than a year ago due to non-recurring items recorded in the prior year related to minimum guarantee shortfalls and inventory charges.

That said, the 2018 fourth quarter gross margin was the highest gross margin percentage we have seen since the first quarter of 2017. And it reflects a more favorable product mix, prudent sales forecasting and the lack of large one-time minimum guarantee shortfalls.

Gross margin for the full year was 27.4%, compared to 25.4% in 2017, with the increase driven by the lack of significant non-recurring items in 2018.

SG&A expenses including direct selling expenses and depreciation and amortization in the 2018 fourth quarter totaled 44.9 million, or 33.9% of net sales, compared to 56.7 million or 41.5% of net sales in 2017.

The year-over-year decrease primarily relates to lower compensation in the 2018 fourth quarter, due in part to the previously announced restructuring plan and a 3.2 million bad debt recovery from TRU in the 2018 fourth quarter, compared to a 1.6 million of bad debt charge in the 2017 period.

For the full year, SG&A expenses totaled 187.9 million, which included a net 8.7 million bad debt charge compared to SG&A expenses of 219.8 million in 2017, which included 11.2 million in bad debt write-offs and a 13.5 million impairment charge.

Lower SG&A costs on a year-over-year basis excluding these items was primarily due to lower compensation due in part to the recently announced restructuring plan and reduced spending across a number of categories. Income tax expense for the fourth quarter of 2018 was 1.2 million, compared to 716,000 in Q4 of last year.

For the full year, income tax expense was 3 million, compared to 1.6 million in 2017. The variability of the income tax provision is based on changes in taxable income levels in various tax jurisdictions in which we operate.

Net cash used in operating activities was 3.7 million for the fourth quarter of 2018, down when compared to net cash provided by operating activities of 17.6 million in the fourth quarter of 2017, due to the timing of paying our payables and accrued liabilities.

For the full year 2018, net cash used in operating activities with 626,000, down when compared to net cash provided by operating activities of 11.4 million in 2017, due in part to additional cash advances paid in 2018. Free cash flow was negative 5.5 million in 2018 fourth quarter and a positive 13.1 million in the 2017 fourth quarter.

For the full year 2018 free cash flow was negative 12.4 million, compared to negative 3.5 million in 2017. The decline in free cash flow for the above periods were driven by decline in the operating cash previously noted.

As of December 31, 2018, our cash and cash equivalents including restricted cash totaled $58.2 million compared to $65 million at the end of 2017. We continue to focus on improving the company's liquidity position while also balancing the need to invest in the business and security licenses.

Accounts receivable as of December 31, 2018 were $122.3 million down from $142.5 million at the end of the fourth quarter of 2017. DSOs improved in the 2018 fourth quarter to 85 days from 96 days reported in the 2017 fourth quarter. Inventory as of December 31, 2018 was $53.9 million versus $58.4 million at the end of the fourth quarter of 2017.

DSIs in the 2018 fourth quarter were 70 days, relatively flat with the 68 days in the 2017 fourth quarter. As of December 31, the company's debt includes $113 million of convertible notes due June 2020. $29.5 million of previously exchanged convertible notes due November 2020.

The $20 million term loan with Great American and $7.5 million outstanding under our credit facility, the $7.5 million was subsequently repaid in the 2019 first quarter. Capital expenditures during the fourth quarter of 2018 were $2.2 million compared to $4.5 million in the fourth quarter of 2017.

For the full year 2018 CapEx was $11.8 million compared with $14.9 million in 2017. The diluted loss per share calculations for both the fourth quarter and the full year 2018 are based on an average of 23.1 million common shares outstanding.

The 2018 year-end diluted share count excludes 23.4 million shares underlying our outstanding convertible senior notes. Before I pass the call back over to Stephen, I would like to discuss our expectations for 2019. We closed 2018 on a positive note exceeding our internal expectations for the back half of the year.

As Stephen mentioned, although we believe the worse is behind us regarding the Toys "R" Us liquidation. We continue to believe that there will be some disruption and adverse impacts in to 2019. On the positive side, we are encouraged by the early indications we are receiving from our customers regarding some of the content coming in 2019.

Specifically Frozen 2. We have also seen some good progress on the gross margin line and expected benefit from the previously announced restructuring plan. Currently we believe net sales in 2019 will increase year-over-year by approximately 5% or to $596 million give or take a few percentage points.

Assuming we achieved our net sales objective of $596 million adjusted EBITDA is expected to be roughly $27 million.

Adjusted EBITDA excludes significant non-recurring and non-cash items, including stock based compensation expense acquisition related costs and restructuring charges, many of which pertain to future events and are not currently estimable with a reasonable degree of accuracy. Therefore no reconciliation to GAAP amounts can be provided.

From a seasonality perspective, we expect 2019 gross sales to be more significantly weighted towards the back half of the year. We currently estimate that approximately 27% of our gross sales will be generated in the 2019 first half with the balance generated in the back half of the year.

I would also like to note that the 2018 first half benefited from sales of Incredibles 2 products and final sales to Toys “R” Us in certain jurisdictions which in 2018 first quarter totaled approximately 9.5 million in those certain jurisdictions. And with that, I will turn the call back over to Stephen.

Stephen?.

Thank you, Brent. Before we get to Q&A, I will share some thoughts on some of the properties and trends we think will be important in 2019. We're optimistic about 2019 for a number of reasons. First, we expect more of the Toys “R” Us business to be picked up by other retailers.

And we expect the big winners to be customers we have strong relationships with. We still have to anniversary shipments to Toys “R” Us in the first quarter 2018, but after that, the comparisons are easier. Second, 2019 is shaping up to be very content rich year with an almost unprecedented lineup of entertainment content.

And we have more than our share of licenses that we expect will drive sales. Third, we continue to spend our own IP consistent with our strategic goal of having our own IP constitute a higher portion of our total sales.

We have several Disney properties that should benefit from either new or continued content including Fancy Nancy, which is doing very well in ratings and in toy sales and we will be shipping for the full year in 2019.

We have product tied to Toy Story 4 such as the Buzz Lightyear Star Command Center, which received the best of Toy Fair award from Parents Magazine. We also have from the highly anticipated live action Aladdin film Dolls, Dress up and Role Play items.

Disney will be celebrating the 30th anniversary of the release of The Little Mermaid this year, and we have special products for that celebration, including beautiful clamshell vanity. And of course, Frozen 2 will be out in time for Thanksgiving.

We have several products shipping in the weeks leading up to the box office release, including special feature Dolls, Dress up and Role Play. One key driver of note is a play date event a kid size reindeer styled after the popular character from the original film. We expect the Frozen brand to be significant factor in both 2019 and 2020.

In addition to the Disney licensed products, we also have several other licenses that should do well this year. Starting with Harry Potter, which was very strong for us in 2018. Becca’s Bunch a new pre-school program for children ages three to six years old on Nick Junior.

Gyganosaurus, a new animated TV series on Disney Junior featuring dinosaurs and Godzilla returns to the big screen this summer, and we have a line of products exclusive to Walmart. Daniel the Tiger goes into 2019 with great momentum after a strong last year.

One trend we are very well positioned for in 2019 and beyond is the success of toys tied to popular video game franchises. Nintendo has done very well for us in the recent years growing over 30% in fourth quarter and double digits for the whole year. We continue to have action figures tied to Megamen based on the classic video games.

And Sonic the Hedgehog is another beloved video game character that will benefit from new content on both TV and in theaters in 2019.

We have several products based on our own IP that look promising for 2019 starting with TP Blaster, sheet storm, the follow to last year's surprise hit TP Blasters Kid Shot, more fort should benefit not only from broader distribution for the full year but also for the addition of an electric motor giving riders yet another way to experience the versatility of the more system.

Slot Ninja is a fun action game, while Kenyatta Fiesta is a line of collectibles and activity sets which will broaden our presence in both those two categories and X Power dozer is our latest powered vehicle line. In conclusion, we expect some of this disruption from Toys "R" Us liquidation to extend into 2019.

But this would be largely over by the end of the first half. So we are also very encouraged by the performances of some of our new brands and some of our new opportunities that will allow us to be well positioned for the future. The right sizing of our cost structure puts us in a good position to return to profitability in 2019.

With that we will now take questions, operator..

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And our first question comes from Stephanie Wissink from Jefferies. Your line is open..

Thanks. Good afternoon, everyone. Stephen, the first question is for you. I always appreciate your candor when you're talking about the industry and wondering if you can just help us with that 5% growth forecasts for JAKKS.

How are you thinking of that relative to the industry expectation? What are you thinking about the backdrop will be in terms of growth this year?.

Good afternoon Stephanie, good morning. Well for JAKKS, I can speak specifically for JAKKS based off of the movie lineup, the TV show line up, the depth of our own IP and our categories that are, you know, very strong and very consistent. We're seeing growth in our mass distribution, both U.S. and internationally.

The alternative distribution channel has grown very, very well both in the U.S. as well as internationally.

And online sales from our online retailers as well, the online component of our brick and mortars are all really starting to come to fruition for us after about a three year plan of going and getting deeper into distribution that coupled with the content that we have, we have a tremendous amount of new content and we're hitting many different categories with all the new content coming out.

So it's really like a perfect storm for us this year.

In addition, on the separate sides Halloween, we're seeing a very nice dramatic growth for us this year in North America, one of which is the content line up as well as additional distribution we had going into 2019 as last year 2018, we had several online retailers in our Halloween segment that went into liquidation.

So we believe the past call it hardships are behind us and we see a really good future going forward. I can't speak exactly for the industry so I just don't know what the toy industry or through MTD what they believe the growth is for 2019.

And separately besides that we have obviously one of the top, top most call it sought after properties and a broad product line for the up and coming Frozen 2, which again, we did Frozen originally, we did really nice the first course, first quarter that was out, but the real strength was the following year, which will be 2020..

But that's why to Steph -- when you look at that seasonality why we're kind of guiding more heavily for the back half. So 27% in the first half, the balance coming in the second half..

Stephen, how should we think about Frozen 2 relative to Frozen 1 here? Typically, we assume that the sequels are less productive from a consumer products and merchandising perspective. But maybe share a little bit of insight into how Disney thinking about the globalization of that property this time.

And then you mentioned several things that you have and just wanting to help understand for us to understand is the license similar in scope to what you had last time? Or do you have access to more subcategories this time around?.

For us the license is similar, but now we are much more educated of the content of Frozen and the characters is much more passionate to the understanding of the storyline from the first Frozen came out it was an unknown to many of us inclusive of Disney in the sense of what's the success will be.

And we believe and also Disney believes as well as retail believes the sequel will be extremely powerful. Normally sequels are little bit less than the original, but for Incredible, for instance Incredibles the movie when it came out originally when it came out the second time.

The movie surpassed the success of the original as well as the product lines did as well. So we're really now our breadth of our line is extremely expansive. We have a broad array of exclusives worldwide for retailers, the promotional plans that are being made by retailers around the world are much more in line ups, they know the success.

So everyone is pushing for the success and counting on the success from Disney from us and from worldwide retailer. So I really believe this is a good being pretty equal to the original based on what we see today. .

And then Brent really quickly for you. Just on cash flow in 2019. I know you had to use up cash this year.

Based on your sales growth forecast for the EBITDA what do you expect to be generating cash in 2019?.

Q2 increased free cash flow? Yes, so adjusted EBITDA would be about 27 million, that's what we're projecting right now. So we should be able to generate a bit of cash going into 2020. There may be some working capital movement there, because again we're going to be more back half loaded in terms of sales. .

Okay, that's great. Thank you, guys..

And Steph one other thing was we have the NPD data and NPD is same that sales in the U.S. in 2019 will be down approximately 1%..

[Operator Instructions]. And your next question comes from Garrett Johnson from BMO Capital. Please go ahead. Your line is open. .

So you called out strength in Europe others in the space have called out Europe as being very weak. We heard a lot of commentary around Toy Fair of Europe being very weak. So what are you seeing there differently? Why's your business doing well in Europe. Thank you..

Good afternoon Garrett. One is for us is our price points and our product line, we're seeing the appropriate price points that are resonating in addition to having the right products for the specific territory. So for us I can only speak for is that we're seeing nice pockets at specific retailers.

There is some weakness at certain retailers across certain countries but for us in general we see nice things going.

And for us we also have changed to a direct model was part of our business in Italy, Spain distribution partnerships we have actually have extremely built our UK operation too much more in depth operation of sales focused and marketing focus. So a lot of things we've been working on started coming to fruition last year..

Yeah but the incredible to was pretty strong to in Europe and so that that create some volatility going forward just to add that note on Stephen's. .

Okay and we didn't hear anything about same loss.

What's the update on the same are we actually launched in initiative?.

The same loss we actually launched in fourth quarter four new retailers one is Walmart.com, Riley Rose, Fab Fit and Fun and Ricky's in addition to our launches early in 2019 we have Target stores and HE Butt and our focus is now with specific influencers that we're working with to garnish now the actual sell through is based on the distribution and more of the call it structural necessity for say model be a placement at retail, both online retail and brick and mortar.

And from there then we focused on the marketing with issues to the sell throughs. .

Okay and sorry to bounce around but one more I should ask this one first. Can you talk about your POS in the quarter.

How did that perform?.

As in the POS last week ended up the year at retail going into first quarter 2019 from listening to the retailers across the board, as I'm generalizing levels are very low for us. We don't have high levels of inventory overall there are specific pockets of items that will have additional call it inventory that we need to address.

But nothing that we see that's material to the company so we came into the year or the end of last year very healthy and not over shipping. And it actually provided sell throughs to be very well and not having a tremendous amount of inventory going into 2019..

Okay, so your POS was up in the quarter?.

I don't have the key data year over year if it was up so I just don't have that in front of me..

Okay. All right. Thank you..

And that concludes question-and-answer session. I'll now turn the call back over Stephen Berman for concluding remarks..

Well thank you, ladies and gentlemen for the call. And we look forward to updating everybody after our first quarter and looking forward to a strong 2019. Thank you very much..

That concludes this conference call, thank you for participating and you may now disconnect..