Good morning, everyone. Welcome to the JAKKS Pacific Fourth Quarter and Full Year 2019 Earnings Conference Call with management, who will review financial results for the quarter ended December 31, 2019 and the full year ended December 31, 2019. JAKKS issued its earnings press release earlier today.

Our earnings release and presentation slides for today's call are available on our website in the Investors section. On the call this morning are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Mr.

Berman, will first provide an overview of the quarter along with highlights of product lines and current business trends. Then Mr. Kimble will provide detailed comments regarding JAKKS 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.

[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 2020, as well as any other forward-looking statements concerning 2020 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 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 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 is being recorded. With that, I would like to turn the call over to Stephen Berman..

the consolidation of our Canadian operations into JAKKS U.S. distribution center substantially reducing overhead costs. The implementation of new European distribution hub in Rotterdam driving greater efficiencies in Europe when fully functional in second quarter 2020.

The finalization of our service agreement with a bonded 3PL warehouse in Yantian, China which will provide inventory stocking solutions to quickly ship key items to meet international customer demands. JAKKS is committed to improving its position as a top 10 global toy manufacturer.

We firmly believe we are positioned for growth in 2020 and beyond with a strong long-term outlook and a bright future. With that I will turn the call over to John..

Thank you, Stephen, and good morning everyone. Net sales for 2019 fourth quarter were $152.5 million up 15% compared to $132.3 million last year. Reported net loss attributable to common stockholders for the fourth quarter was $20.6 million or $0.70 per diluted share compared to a net loss of $3.2 million or $0.14 in the fourth quarter of last year.

The net loss in Q4 2019 includes a number of noncash charges of $10.7 million such as intangibles impairment and tooling disposal and the change in fair value of the derivative liability associated with our preferred stock. Adjusted EBITDA for the 2019 fourth quarter was $3.3 million compared to a negative $1.6 million in the fourth quarter of 2018.

Adjusted net loss attributable to common stockholders for the fourth quarter was $0.26 per diluted share, an improvement of $0.11 over the same period last year. For the full year of 2019, net sales were $598.6 million up 5% compared to $567.8 million in the prior year.

Reported net loss attributable to common stockholders for 2019 fiscal year was $56 million or $2.16 per diluted share compared to a net loss of $42.4 million or $1.83 in 2018.

Included in the 2019 full year losses of $13.2 million loss on extinguishment of debt associated with the recapitalization we completed in Q3 of 2019 and $10.7 million associated with the aforementioned charges and change in fair value recognized in Q4 of 2019.

Adjusted EBITDA for the full year of 2019 was $18.9 million compared to $2.3 million for the full year 2018. Adjusted net loss attributable to common stockholders for the full year of 2019 was $0.73 per diluted share an improvement of $0.52 over 2018.

Our girls targeted businesses was the biggest driver of growth in both Q4 and for the full year inclusive of doll, role play and dress-up toys we achieved $99.6 million in Q4 up 37% compared to the comparable quarter last year.

As one might expect the release of Frozen 2 provided both a lift for our existing Frozen product, as well as an opportunity for new product tied to the film. Those sales more than offset some of the anticipated declines in various older product lines related to properties such as Fancy Nancy, Moana and Squish-Dee-Lish.

For the full year girls toys were up 14% to $301.7 million in 2019 compared to $263.6 million in 2018 largely attributable to the aforementioned drivers. Sales of action figures vehicles role play and electronics products in our boys category for the 2019 fourth quarter were $22.9 million down 20% compared to $28.8 million last year.

Positive contributions from our Nintendo products in addition to launches of our Fly Wheels and Xtreme Power brands were not enough to compensate for downsides and a mix of entertainment driven properties such as Incredibles 2, Harry Potter and some non-entertainment properties such as Stanley Black & Decker, and our TP Blaster brand.

For the full year boys toys were down 29% to $79.2 million in 2019 compared to $111 million in 2018. The decline in Incredibles 2 was somewhat mitigated by upsides during the year from properties like Godzilla and Sonic. Sonic remains an ongoing program for us in 2020.

Sales of seasonal products including licensed Ride-Ons, Ball Pits, Play Structures, Kids Furniture and MorfBoard were $23.1 million in the 2019 fourth quarter up 16% from $19.9 million in 2018 as strong sales of Ride-Ons offset declines in MorfBoard and Maui Outdoor toys.

For the full year seasonal products were up 10% to $90 million in 2019 compared to $81.9 million in 2018 with the same factors that drove Q4 sales also driving full year results. Sales in our Halloween category decreased $3 million in the fourth quarter of 2019.

However when it comes to the very seasonal nature of Halloween, we're much more focused on full year performance. For full year 2019, the Halloween segment was up 18% to $119.6 million.

Sales of baby doll accessories, figures, plush and games in our preschool and activity category were $3.1 million in the fourth quarter of 2019 down from $3.9 million in 2018.

The decrease was driven primarily by lower sales of Daniel Tiger's Neighborhood, as well as declines in our Pull My Finger game, our 2019 launch of Gigantosaurus contributed positively for both the quarter and full year. For the full year preschool and activity products were down 16% to $8.1 million in 2019 compared to $9.7 million in 2018.

Looking at sales by business segment, U.S. and Canada net sales for the fourth quarter were 13% up to $113.6 million compared to $100.9 million in the prior year quarter driven by the same factors described earlier in the product group descriptions.

International sales for the 2019 fourth quarter were stronger at $35.2 million up 43% compared to $24.6 million in the 2018 fourth quarter driven by strength in Australia, Asia and Europe. For the full year net sales of our International segment were $94.5 million compared to $101.9 million in 2018 representing a decrease of $7.4 million or 7%.

The decrease in net sales was primarily driven by lower sales of Incredibles 2, Disney Princess products and Squish-Dee-Lish partially offset by higher sales of Frozen 2 which was not sold in the prior year period.

We already mentioned Halloween sales in the category breakdown earlier, moving down the P&L, reported gross margin in the 2019 fourth quarter was 30.4% down slightly compared to 30.6% in the 2018, fourth quarter.

Gross margin for the full year was 26.6% compared to 27.4% in 2018 with the decrease driven by product mix toward lower margin products earlier in the year and a higher royalty expense as a percentage of sales.

SG&A expenses including direct selling expenses and depreciation and amortization and the 2019 fourth quarter totaled $57.2 million or 37.5% of net sales compared to $44.9 million or 33.9% of net sales in 2018.

For the full year SG&A expenses in 2019 totaled $177.1 million or 29.6% of net sales compared to $187.9 million or 33.1% of net sales, a dollar reduction of 5.7%.

Net cash used in operating activities was $4.3 million for the fourth quarter of 2019 up when compared to net cash used in operating activities of $3.2 million in the fourth quarter of 2018, primarily due to an increase in royalty advances.

For the full year 2019, net cash provided by operating activities was $21.8 million up when compared to net cash used in operating activities of $624,000 in 2018. Free cash flow was a negative $6.1 million in the 2019 fourth quarter and a negative $5.4 million in the 2018 fourth quarter.

For the full year 2019 free cash flow was positive $12.4 million compared to a negative $12.4 million in 2018. As of December 31, 2019 our cash and cash equivalents, including restricted cash totaled $66.3 million compared to $58.2 million 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 new licensed opportunities. Accounts receivable as of December 31, 2019 were $117.9 million, down from $122.3 million as of December 31, 2018.

DSOs improved in the fourth quarter to 71 days from 85 days reported in the 2018, fourth quarter. Inventory as of December 31, 2019 was up only slightly to $54.3 million versus $53.9 million at the end of the fourth quarter of 2018. DSIs in the 2019 fourth quarter was 62 days down from 70 days in the 2018 fourth quarter.

As of December 31 2019, the company's debt includes $1.9 million of convertible senior notes due June 2020, $37.6 million of recapitalized convertible senior notes due July 2023, and $134.8 million owed under our term loan due February 2023. We currently have no outstanding balance under our credit facility.

Capital expenditures during the fourth quarter of 2019 were $1.8 million compared to $2.2 million in the fourth quarter of 2018. For the full year 2019, CapEx was $9.4 million compared with $11.8 million in 2018.

The diluted loss per share calculation for the fourth quarter of 2019 was based on a weighted average of 29.6 million common shares outstanding. For the full year 2019, the diluted loss per share calculation was based on a weighted average of 26 million shares. And with that I will now hand the call back over to Stephen for some additional remarks..

Thank you, John. As I said earlier in each of our major product categories we have a mixture of evergreen products, continually refreshed licenses and opportunistic promotional products.

Our base of evergreen products reliably produces strong year-over-year consistent revenues and we augment this with innovative and creative promotional products and lines based on our current licenses.

In our Girls division for 2020 among our new products we have Kitten Catfe, a line of preschool products based on kittens and which is our own IP and Cute Girls Hairstyles which is a hairstyling line based on a popular social media channel.

A broad line of our Disney Princess Style Collection, Frozen 2 with the new spring line of lower-priced products and a broader new fall line with new products and their interactive Singing Elsa Doll.

In addition, our Minnie Mouse lines also have broader distribution for this year and Daniel The Tiger, and Giganotosaurus also continuing for preschoolers with broader distribution. In addition we hope there will be other licenses that we should be able to talk about soon.

In our Boys division we continue to see growth in Nintendo and will have broader global distribution of this line during 2020 and beyond. Our Saga product lines notably Sonic the Hedgehog has seen nice sell-through and should get a nice boost from the successful release of the movie last weekend.

We will also be launching a line of toys based on the popular book series Last Kids on Earth. In addition we are expecting strong sales from our relaunch of Fly Wheels which was one of the most successful proprietary products JAKKS has ever had.

In our seasonal division, we will benefit from having a full year of sales of our line of license indoor play tents, and our innovative Redo Skateboards and the relaunch of Eyeclops.

Finally, we are looking forward to a number of strong licenses in our Disguise costume segment including Trolls 2, Frozen 2, Harry Potter, Wizard of the World, Zombies 2, Mulan, Bakugan and others.

And we are especially excited to be announcing today we'll be bringing out costumes based on the five times Grammy Award winner Billie Eilish, one of the hottest new recording artists of all time. Let me additionally add that we'll continue to see broader global rights for many of these licensed products.

These are universal play patterns and the licenses translate very well and we will continue to get the rights in more and more countries. In addition, we have a new partnership in Europe with more costumes which is expanding our reach and sales opportunities. In summary we have made a lot of progress.

And while we know we have a lot more to do, we believe we have made tremendous strides. We are operating in a consistently fluctuating retail and consumer marketplace, and we are prepared to address changes with both speed and agility.

We know we still have improvements to make but as a company we are gratified to have achieved good growth at a time when industry sales remain challenged. With that in mind, I firmly believe that we are positioned for global success and we will drive to deliver meaningful contributions to our partners, consumers and all key stakeholders.

Before I open the call to questions, I'd like to comment on the coronavirus and how it's affected us and what we are doing. Our thoughts and prayers go out to those affected by the outbreak. Any company was sourcing products from China has to be flexible during this period of disruption.

We have been adjusting the work shifts, and are working with our suppliers to minimize the disruption. All of that said, we are not in a position to know how this will affect our prior to production suppliers in various segments and our manufacturers, and therefore our sales.

We think it's reasonable to expect industry-wide delays in terms of production and deliveries around the world.

We are rescheduling any China-based direct import shipments and production loss during the past week and we are monitoring the situation closely to determine how quickly our manufacturing partners can resume full production levels and catch up on missed activity.

While this is normally a slower production period for us, we're reviewing toolmaking, tooling capacities, product procurement, production and flow of goods going forward into the Halloween season and beyond.

While we have been moving product manufacturing to other countries and are producing products in Vietnam, Cambodia and India, the majority of our current production comes out of China. We will update you on this when we report first quarter results in April. With that we will now take questions.

Operator?.

[Operator Instructions] We have a question from Stephanie Wissink from Jefferies..

This is Ashley Helgans on for Steph, thanks for taking our questions. So to start on the coronavirus.

Where are your factory partners in terms of having personnel back and capacity online today? And then where do you expect them to be in the next two to four weeks?.

So based throughout China there is so many variations with provinces and different segments of manufacturing. So for instance our - major cut and sew supplier which is located in Hangzhou in the outskirts of Hangzhou is starting to get up and running almost at full capacity because - they only have had two affected people in that province.

So they are able to get much more labor, but it truly depends on the actual manufacturing capabilities and the segments in which are located from Shenzhen to Guangdong to Hangzhou. So it really depends on the actual area.

So at this point in time, there's a flow of labors coming into specific manufacturers and then there are no flows of labor going to other manufacturers. But right now with where we stand. I'm on the phone each evening on a WeChat call with each manufacturer that are our major components. And it's a really by day process.

They're hoping to have more labors come in and cross borders by next week but it really just depends where they are located and actually the amount of labor that they need during this off-season period. So it's really by manufacturer or by factory is how it works..

Okay great, thank you. And then if I could just squeeze in one more. Payables in the quarter were up 15% in line with sales. But when we look at the returns and allowances on the balance sheet they were up 30%.

How should we think about this gap?.

Yes, Ashley it's John. I'll take a stab at that one. That is in line I think with our last quarter's results as well and it's something we are kind of keeping an eye on in terms of getting.

Top of mind I have couple of different thoughts as to why that's happening, but we'll probably have to take it offline to give you something which is a little bit more fact-based rather than gut-based..

Okay. We can take it offline. Thanks so much for the color and look forward to seeing you guys next week..

I mean I think to answer your question. We don't see it as a temporary sort of blip in terms of how the balance sheet is trending. We think that's probably more in line with our current mix and where the business is heading next year..

We have a question from Gerrick Johnson from BMO Capital Markets..

Hi Stephen, what was the $11 million impairment in tooling write-down what did that relate to?.

It’s John again. The $11 million isn’t tooling per se it was a mix of three different things. Tooling that we ended up writing down faster than we normally would depreciate was a little bit less than $1 million of that.

Most of that was attributable to some incredibles tool stuff which we thought was essentially at end of life faster than we would have normally expected it to be. And some tooling that was put in place chasing Tsum Tsum back in early 2018.

The big piece of that was $9-plus million of intangible impairment off the P&L relating to the acquisition of Maui that was done back in 2012. As the company kind of reviews the product line in a greater level of detail and looks for - are we investing our resources in the right places and maximizing margin.

As I think you might know the company exited the fund little business last year along with - at the same time evaluating how that business is doing and what the prospects of it were.

And although along with having some leadership changes in that business over the past several months and kind of looking at it carefully in terms of where it is and where we think it's going. During the quarter it made sense to revisit that intangible value and to essentially go and write it down. So that was the majority of that Q4 write-down.

I believe there is also a piece to associated with the derivative element of our preferred stock which is something we have to mark-to-market every quarter..

And Stephen you talked a lot about consistent revenue and building out stable evergreen businesses. So I guess the obvious question here is how much of your growth in the quarter came from Frozen and Frozen 2 in particular.

And then do you still think that Frozen 2 will be as big in 2020 for you as it was in 2019?.

Okay so firstly, we don't breakout actually - the actual property revenue. But Frozen obviously Frozen 2 was the strong property for us. And this year or last year at the same time our Princess sales held extremely strong throughout the Frozen [indiscernible]. So previously in 2013/2014 Princess slowed down while Frozen picked up.

We had a good benefit of Princess doing extremely well not just the basic Princess, but our new style collection. So going forward we have a broad array of our Princess line that's expanding and we are ahead of Frozen in the sense of product development. The first time around we didn't have a spring line because we didn't know the success.

This time around we have a very nice spring line which is at lower price points which is really set up across - the board at U.S. and international customers. And then we have which was our number one SKU was a Sing-A-Long Elsa Doll which we had in 2014 that we are launching for fall 2020.

So in addition to Frozen being strong last year we see it strong this year. We will have a - the sky is Frozen 2 line much more broader than we did in 2019 as the movie came in October and no one really new about Frozen 2 in October 31st last year..

So it sounds like you're very confident in Frozen 2 in 2020.

But do you think it will be contribute as much to P&L in 2020 as 2019?.

I would say it won't contribute as much or it possibly can. What we're excited for is the DVD launch I think I believe it's at the end of this month and the streaming launch. But that being said our Princess sales are growing. So the actual area of business itself is extremely stable and growth.

And in addition we actually have a very strong tent-pole [ph] movie launch property which is called Raya which is Disney's November animated film which was pretty much Moana happened years ago.

Frozen and we're looking forward to the launch of Raya which will be in November and we have a broad array of products very similar to what we did in Frozen or Frozen 2..

And then one more from me. So DSOs I think they were down 14 days yet international was up over 40% compared to the U.S. at what over 13%.

So with the shift to international shouldn't DSOs have expanded so, what explains the better collection this year?.

Yes that's a good question. Yes to be honest I don't think we have an answer for you off the cuff on that. We are mindful that as we expand the international business, the DSO metric usually doesn't necessarily work in our favor. But we were happy to sort of see where we were at the end of the quarter..

Okay..

And we're moving on to New Year..

All right, all right.

I want to keep going retail POS and inventory?.

Right now retail PO, I'm sorry..

Inventory and channel, yes retail POS?.

Inventory and channel - is actually extremely I'd say low for the normal period of time versus last year. By good fortune we ended the year pretty clean at retail. We didn't have any major issues across the board both U.S. and internationally. And there has been other companies have had some major issues.

So we're looking going into this 2020 pretty lean at retail inventories..

Okay good and POS in the quarter?.

I don't have that off the top of my head, I'm sorry. We could do that offline..

Thank you..

Well that is it for the conference call today. We appreciate everybody being on the call and we're looking forward to having our first quarter conference call in April and talking more about 2020 and beyond. Thank you very much..

Thank you. Ladies and gentlemen this concludes today's conference. Thank you for participating. You may now disconnect..