Good afternoon and welcome to the JAKKS Pacific First Quarter 2019 Earnings Conference Call with management who will review financial results for the quarter ended March 31, 2019. 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 the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and Brent Novak, Chief Financial Officer. Mr.

Berman will provide an overview of the quarter and provide highlights of the 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.

[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 by management will refer to the non-GAAP financial measures such as adjusted EBITDA.

Unless stated otherwise, the most directly comparable GAAP financial metrics has been filed to 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. With that I would now like to 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 first quarter of 2019. 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.

As has been the case for over a year now, the toy industry in several markets around the world is still feeling the reverberations of the disruption caused by the liquidation last year of Toys "R" Us.

That liquidation commenced at the end of Q1 2018 and continued through the end of second quarter affecting not only shipments to TRU, but to other retailers during the liquidation and it changed to consumer behavior.

We believe year-over-year comparisons in industry won't really be clean until the second half and even then it will be clouded by the changes in consumer behavior which affected the time in the retail purchases. We saw sales contributions from new license products notably Godzilla, Harry Potter, Fancy Nancy, Aladdin and Nintendo.

Considering how strong the calendar is for later in the year have us encouraged that we will see a strong second half and we continue to have a solid base of Evergreen products in categories. Kids Only and Moose Mountain are both off to a good start reversing recent weakness.

Net sales in Q1 declined approximately 24% compared to last year as a result of several challenges some of which were felt across the toy industry and some of which are specific to our products.

In the first quarter of 2018 most toy suppliers particularly those like us who are designated critical vendors had significant shipments to Toys "R" Us which obviously was not repeated in 2019 and is not been fully absorbed by other retailers. We had final sales to certain Toys "R" Us entities of approximately 9.5 million in 2018 first quarter.

In addition, we believe the fact that Easter came three weeks later this year shifting some revenue from Q1 to Q2. We estimate this accounted for a mid-high single digit percentage reduction in revenue in Q1 2019.

Looking at our products the sales decline was primarily because of lower sales of several entertainment driven licensed product lines especially sales of Incredibles 2 products which we saw significantly decline in demand as expected.

We also had sales declines in Moana, Frozen 1, Tangled and Elena of Avalor as well as proprietary brands such as Squish-Dee-Lish.

We believe that on the strength of several new product launches especially those tied to high profile films we will be able to experience a strong second half and therefore and have not adjusted our full year expectations for the topline.

Also later in the second quarter after the second half of this year, disguised had a strong lineup of film related and television related new properties to name a few are from Frozen 2, Toy Story 4, Lion King Live Action, Pokemon, Lego Movie 2, Descendants 3, Kim Possible, and Top Wing to name a few.

That being said, gross margins came in weaker than we would have liked impacting profitability in the 2019 first quarter which has also reduced our full year adjusted EBITDA expectations which Brent will discuss shortly.

We were able to partially offset the effects of the lower sales and gross margin in 2019 first quarter because we anticipated the industry wide sales challenge and took steps last year to reduce our costs with SG&A cost declining significantly in the first quarter and on a year-over-year basis. I will now turn the call over to Brent Novak. Brent.

Thank you, Stephen and good afternoon everyone. I will first review the financial highlights from the P&L, and then provide more color on sales composition before finishing up with some balance sheet commentary. Net sales for the 2019 first quarter were $70.8 million, down 24% compared to $93 million last year.

As Stephen said, the decline was essentially due to three factors; first, in Q1 of last year our final sales to certain Toys "R" Us entities were approximately $9.5 million, while some of the sales have been picked up by other retailers, we believe the whole toy industry is still experiencing lower sales through consumers and therefore less demand for shipments.

Second, the fact that Easter fell on April 21 this year compared to April 1 of last year, results in a shift of some sales from Q1 to Q2, we estimate the shift was between 5% and 8% 2018 first quarter sales.

Third, our Q1 2018 sales benefited significantly from licensed properties, especially Incredibles 2 that declined year-over-year as expected and the main drivers of licensed product this year are launching later in 2019. Gross margin in the quarter was 20.2%, down from 24.7% in Q1 of last year.

The main driver of the decrease was substantial shift in sales away from higher-margin licensed products toward some of our lower margin evergreen products as well as selling through some older products at lower margins, which also help drive our inventory balance down.

In addition, we had higher excess and obsolete charges compared to a credit in Q1 of 2018, which contributed to the decrease in gross margin.

Our direct selling expenses declined 34% year-over-year, the result of lower co-op advertising expenses and a decline in marketing costs, which is due in part to the timing as a result of the Easter shift and plan media spend later in the year.

Total SG&A expenses declined about 35% despite the inclusion of costs related to our ongoing negotiations with Meisheng and other bondholders regarding Meisheng plan to increase its investment in JAKKS in the 2019 first quarter.

The year-over-year decline is primarily due to the cost reduction plan implemented in the 2018 fourth quarter and a $13.8 million bad debt charge reported in the 2018 first quarter related to Toys "R" Us liquidation. Net interest expense was $3 million, up from $1.9 million as a result of higher borrowing and a higher average borrowing rate.

Income tax benefit for the first quarter of 2019 was 200,000 compared to $2.3 million in Q1 of last year, the variability of the income tax provision is based on changes in taxable income levels in various tax jurisdictions in which we operate.

Reported net income attributable to JAKKS shareholders was a loss of $29.2 million in Q1 of 2019 or $1.24 per diluted share compared to a loss of $36.2 million or $1.57 per diluted share in Q1 of last year. Adjusted EBITDA for the first quarter of 2019 was negative $17.1 million compared to negative $14.6 million in the first quarter 2018.

The sales drivers in the first quarter of 2019 by category were as follows; sales of dolls, role play and dressup, plus an activity products in our gross category amounted to$29 million for the 2019 first quarter, down 35% compared to $44.5 million in the comparable quarter last year.

We saw positive contributions from girl's toys from Fancy Nancy and Who's Your Llama.

These brands were more than offset by the expected declines 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 our slow rise phone product Squish-Dee-Lish, which was launched in the second half of 2017 but demand for this category is expected to win in 2019.

Sales of action figures, vehicles, role play and electronic products in our boys and other category for the 2019 first quarter were $15.1 million, down 26% compared to $20.5 million last year.

Positive contributions from Harry Potter, Nintendo, Godzilla were more than offset by declines in Incredibles2 Sales of seasonal products including, licensed right ons, ball pits, kids furniture, Malley outdoor activity products and more forts were$22.2 million in the 2019 first quarter, up 3% from $21.6 million in 2018 as we saw a nice rebound in sales of ball pits and right ons and kids outdoor furniture also did well.

Sales in our Halloween category which is also one of our business segments decreased $1.6 million to $3.6 million in the first quarter of 2019 compared to $5.2 million in 2018, due in part to the timing of orders and shipments that this business is heavily skewed to the third quarter.

Sales of baby doll accessories, figures, plush and games in our preschool and activity category were 900,000 in the first quarter of 2019, down from the $1.2 million reported in the first quarter of 2018, the decrease was driven almost entirely by declines in our pull my finger game. Looking at sales by business segment, U.S.

and Canada net sales for the first quarter of 2019 were $57.4 million compared to $70.5 million last year, driven by the same factors in the product group descriptions.

International sales for the 2019 first quarter were $9.8 million compared to $17.3 million in 2018, driven by declines in Incredibles2 and Squish-Dee-Lish products and we already mentioned Halloween sales in the category breakdown earlier.

Net cash used in operating activities was $1.9 million for the first quarter 2019 compared to net cash used in operating activities of $11.4 million in the first quarter 2018 due to changes in working capital. Free cash flow was negative $4.4 million in the 2019 first quarter compared to negative $14 million in the 2018 first quarter.

As of March 31, 2019 our cash and cash equivalents including restricted cash totaled $47.4 million compared to $46.8 million as of March 31, 2018 and $58.2 million at the end of 2018.The decline in cash from year-end is primarily due to paying down the $7.5 million credit facility balance that with outstanding at the end of 2018.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 March 31, 2019 was $67.8 million, down from $93.9 million as of March 31, 2018 and $122.3 million at the end of 2018. DSOs improved in the 2019 first quarter to 86 days from 91 days reported in the 2018 first quarter.

Inventory, as of March 31, 2019 was [indiscernible] versus $54 million as of March 31, 2018 and $53.9 million at the end of 2018. DSI in the 2019 first quarter were 89 days compared with 91 days in the 2018 first quarter. As of March 31, the company's debt includes principal amount of $113 million for convertible notes due June 2020.

$29.5 million for previously exchanged convertible notes due November 2020 and our $20 million term loan with Great American. There were no borrowings outstanding under our credit facility at March 31. Capital expenditures during the first quarter of 2019 were $2.5 million compared to $2.6 million in the first quarter of 2018.

The diluted loss per share calculations for the first quarter is based on a weighted average of 23.6 million common shares outstanding compared to 23.1 million for the first quarter of 2018. The 2019 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.As Stephen mentioned, although we believe the worse is behind us regarding the TRU liquidation, we continue to believe that there will be some disruption through the second quarter of 2019.That said, we continue to be encouraged by comments we are getting from our customers regarding some of our products and the content coming in 2019 specifically Frozen 2 but we do believe our gross margins will continue to see pressure into the second quarter of 2019.

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. Our 2019 topline expectation remains unchanged, but given the gross margin pressure, we expect in the first half of 2019, we now estimate that our adjusted EBITDA for 2019 year will be roughly $22 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 continue to 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.

And with that, I will now turn the call back over to Stephen.

Stephen?.

Before we get to Q&A, I'll share some thoughts on some of the properties and trends we think will be important in 2019. We continue to be optimistic about the second half of 2019 for a number of reasons. First, when we get past the noisy comparison with last year, we expect more of the TRU business to be picked up by other retailers.

Second, in 2019 has already been a great year for Toy and content. The lineup of content for the rest of this year is terrific and we have more than our share of licenses that we expect will drive sales. Third, we continue to expand our own IP consistent with our strategic goal of having our own IP constitute a higher portion of our total sales.

And finally in our seasonal area we added a play time category which is off to a terrific start. We have several Disney properties that should benefit from either new or continued content including Fancy Nancy, which continues to do very well in ratings on Disney Junior was launched very successfully for us in fall 2018.

The show has been Greenlit by Disney for another two seasons and will continue to expand our line with a focus on the hottest segments our faster dolls Role Play and Dress up.

We have product tied to Toy Story 4 such as Buzz Lightyear Star Command Center and during the second quarter we should see good sales of Dolls, Dress ups and Role Play items tied to Disney live-action release of Aladdin. The movie release is May 24th and our product is just in its shelves now.

We expect strong sell-through given the very early POS and social media buzz. This year Disney is celebrating the 30th anniversary of their release of the Little Mermaid and we have special products for that including a 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 a significant factor in both second half of 2019 and well into 2020 and beyond. In addition to the Disney licenses we just discussed, we also have several other licenses that should do well this year.

Harry Potter, was a big contributor to our first quarter sales, we have toys tied to Gyganosaurus, a new animated TV series on Disney Junior featuring dinosaurs and even though the movie doesn't opened in theatres until late this summer, we already are seeing good sell-throughs of Godzilla products, a Walmart exclusive and we expect the film release to keep sales strong.

Videogame related toys continue to sell well for us and other companies. Nintendo has done very well for us in recent years. Our Nintendo sales grew over 25% in Q1 2019 versus Q1 2018 and the products continue to do very well at retail.

We have Mega Man action figures based on the classic videogame 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. Slap 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.

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 activity platform and X Power dozer is our latest powered vehicle line.

In conclusion, we are still seeing the disruption from Toys "R" Us liquidation more than 12 months later. Our second quarter, we'll see some benefit from the Easter shift, but the big driver products and licenses are still skewed more to the second half. We are encouraged by the performances of some of our new brands and line extensions.

The rightsizing of our cost structure puts us in a good position to improve profitability in 2019 and beyond. With that, we will now take questions.

Operator?.

[Operator Instructions] And our first question is from Stephanie Wissink. Your line is open..

There is a couple of questions for us I think Stephen the first one for you.

As you think about the holiday season for 2019, how should we think about some of the retail space that you opened last year and new retailers for you, the continuation of some of that new development and then how much are you leaning into some of the bigger retailers you mentioned the Godzilla partnership on an exclusive basis at Walmart.

How should we think about kind of the channel mix that you are planning for the holiday 2019?.

Few things once since the Toys "R" Us liquidation as well as the early mid bankruptcy of Sears Kmart and some other companies. We were well on our way with diversifying the retail space, some of which are been going through the alternative channels such as the Walgreens and Dollar Stores and the Club.

So we've been really focusing on that prior to the TRU liquidation that expedited post the liquidation. So our expansion from the call it - alternative distribution has grown dramatically and it will grow even more in the second half with - in line space, which is shelf space as well as in line store space which will be sidekicks and power programs.

Our business will have a really nice growth with the Clubs as well as the dollar trade as well as the alternative channels like GameStop, Kohl's, [ROF] all those businesses to us are going to be offsetting a good portion of what we lost with the Toys "R" Us.

In addition to the Target's, the Walmart, the Amazon, the Dick's Sporting Goods, we have seen a dramatic increase in shelf space for the second half of the year because the consolidation of the Toys "R" Us call it gap had been pretty much filled in the second half of the year and retailers had a strong back half of 2018 and are looking for the same.

And some of which I'll use as we have our categories like Disguise there's a tremendous amount of new content from a Descendant, to Tangled, to Paw Patrol, to Lion King, the Toy Story, Pokemon, Frozen 2, we have tremendous amount content. So actually the Halloween business will have a very strong growth for us this year versus last year.

And then we are going into one of the most exciting things for retailer is Frozen 2, which we are gearing up for a very strong worldwide launch this on shelf is October 4 and the movie launch is November 21, which we do see a strong year this year and even a strong year next year in all retail avenues worldwide for Frozen..

Okay, that actually leads into my second question which is around Frozen, if you can just help us frame up, may be what expectations were for Frozen 2 on a relative basis to Frozen 1 and where they started and it sounds like the level of enthusiasm has actually been getting higher or bigger.

Is the gap to the first film going to be very narrow or is it possible that we don't see that natural sequel film phenomenon whether that content or theme around could be just as strong how are you thinking about the second film?.

So from working very closely with the Walt Disney Company and our Disney group has been working well over year on this and some of which we have even gone through the song with them have kept everything very, very confidential. But we've been working much more tied with them based off what we had successful in the year 2013, 2014, 2015 of our SKUs.

Knowing the education from that previous launch and knowing the retail awareness and call consumer acceptance, the increase from the original launch to the Frozen 2 launch is dramatically different and in sense of size and broadness and worldwide acceptance and even the spring plans going into next year are very far ahead than what they were previously because retailers are banking it for the also called the first half of 2020 for the DVD extremely release which were the biggest components of the strength of Frozen 2, when it was originally launched.

So we've learned of the SKUs that were strong and some of them which were weak when, and I say when it was weak, they really weren't but for the success of frozen they were just not as success for some of the large products.

So our lineup are exclusive lines that we have for a broad amount of retailers around world is very, very thought out and retail plans for Frozen 2 in general is exceptionally Sean not just in toy but overall. And our core Frozen Shizuo business has been continually strong to date..

And then the last one maybe Brent for you is, there was an 8-K filed today with some incremental disclosure on fiscal 2020 and I am wondering if you can just talk to the step up in sales that you see in the out year and then more specifically the step up in EBITDA which is quite substantially but you can give us the frame of reference for what you expect to see in terms of the profitability structure in the out year? Thank you..

So I think we'll see just on the gross sales, like we commented last time that you'll have a full year of Frozen 2, so that'll be a significant driver on the top line and then from adjusted EBITDA standpoint or profitability standpoint, we expect that given with a newer products like Frozen 2 that'll generate higher margins, which is what we're expecting in the back half of 2019 as well.

So if you're inch up a little bit on the gross margin, we expect it to hold our G&A relative at least what's controllable relatively flat so we should see that leverage finally start to drop down to the bottom line, so that's really kind of the drivers is maybe inch up a bit in gross margin and flat controllable OpEx should give you leverage to drive that adjusted EBITDA higher..

We have no further questions at this time. Thank you, ladies gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..