Good afternoon everyone. Welcome to the JAKKS Pacific Fourth Quarter 2022 Earnings Conference Call with management, who will review financial results for the quarter ended December 31, 2022. JAKKS issued its earnings press release earlier today.

The earnings release and presentation slides for 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 Kimble, Chief Financial Officer.

Stephen will first provide an overview of the quarter and full-year, along with highlights of the product lines and current business trends, then John will provide some comments regarding JAKKS Pacific's financial and operational results.

Stephen 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, margins, and/or adjusted EBITDA in 2023, as well as any other forward-looking statements concerning 2023 and beyond are subject to Safe Harbor protection under federal securities laws.

These statements reflect the company's best judgment based on the current market trends and conditions today and are subject to certain risks and uncertainties, which could cause the 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 report 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, most directly comparable GAAP financial metric has been reconciled to associated non-GAAP financial measures 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..

Thank you. Good afternoon everyone and thank you for joining us today as we recap the quarter and year and share our thoughts about what we’re seeing in the months and quarters ahead. Our fourth quarter sales ended up slightly exceeding our expectations, despite our exceptionally strong results early in the year.

Our fourth quarter net sales totaled 131.9 million, bringing our full-year net sales to 796.2 million, the highest annual results since 2014.

As we anticipated, sales were down 30% in the quarter, compared to the same quarter last year, largely attributable to our prioritizing FOB selling early in 2022 and the related changes and seasonality of our business. Our full-year growth was driven by a combination of key SKUs across our major brands.

In our Nintendo business, both our Mario Kart 24-volt Ride-on Racer and Let's Go, Yoshi Interactive action figure had great launches. Our Sonic Movie 2 Speed RC had a tremendous year. Our Disney Princess Style Collection kitchen and suitcase continued to deliver.

In addition, we had two strong entertainment led product lines for Disney's Encanto and SEGA, Sonic The Hedgehog. I'm happy to report that in total 7 of our top largest toy consumer product segments grew in calendar year 2022. We had a very strong holiday season led by key SKUs across our major brands.

And our Disney's Encanto Magical Casa Madrigal we've discussed before, but is worth bringing up again, it's been such a great item for us. And as we stated on our call, 2022 was our largest selling year with the Sky since the acquisition in 2008. We finished the year 148.9 million in net sales, a 38% increase over 2021.

In reviewing the year, customers clearly chased the Halloween holiday, in a couple of cases a bit too much, which bears a bit of recalibrating in 2023. That said, this business has never been better with our brand assortment of popular licenses and the steady build and capture of the international opportunity we think exists.

Last year at this time, we were deep in the chaos of in-bound shipping delays. With nearly 30% or approximately $20 plus million worth of our owned-inventory in-transit to one of our warehouses rather than being ready to ship.

I'm happy to say that we closed 2022 with only 4.9 million in transit to our warehouses and our overall owned inventory was down to 80.6 million heading into the new year. As have stated in recent quarters and really going back to our 2019 recapitalization, it's been a priority to reduce the overall leverage and interest expense.

Although our 2021 refinancing was a positive step in that direction, the rise in market interest rates in the past few quarters has increased the overall rate of our term loan above 10% per year. With that in mind, we've been extremely focused on freed up cash where we can.

Our exceptional performance in 2022 in combination with our unusually heavy first half seasonality combined to generate over 86 million in operating cash flow in 2022. As reported in recent quarters, we allocated [27.5 million] [ph] to the optional term loan paydowns in 2022.

In addition, we’re reporting today that we made an additional optional payment earlier this quarter of $15 million, 5 million of which incurred a 3% prepayment fee. The ECF suite provision of our term loan also required us to make an additional mandatory pay down of 23.1 million, without any prepayment fees.

When we tally up these additional payments, the current payoff level of our term loan as of today is just 30.8 million. We are beyond proud of these improvements to our balance sheet.

We are following our roadmap of lowering our borrowing costs and evaluating the broader array of options afforded to us as we increasingly engage the market from a position of financial strength.

As you’ve often heard me say on these calls, when you're in an industry like ours, it's imperative to be resilient and stay attentive to always the changing dynamics of the worlds in which we live in.

We were not immune from the issues of other companies in our space experienced last year as it relates to how customers track consumer demand and plan for the holiday season.

Slowing customer demand in our seasonal business in the second half [Technical Difficulty] beyond our supply chain generating excessive costs associated with warehousing and imputation of product, despite lower container spot rates in the second half of the year.

This hurt the productivity of our warehousing operations and [indiscernible] taken some aggressive actions as it relates to valuing of our own inventory. Our toy and kids consumer products point of sale remained up double-digits in Q4 at our Top 3 accounts. And we think we’ve performed better in this area than our peer groups.

Nonetheless, our provisions for sales allowance in Q4 were unfavorable to our 2021 results like many in the industry. These factors were the primary drivers of our fourth quarter gross margin finishing at 21.7%, compared to the 26.6% reported in Q4 2021.

John will go through the math in a bit more detail when I hand over the phone to him, but I wanted to highlight this as a clear area for improvement in 2023. With that said, the year ended up pretty much where we thought it would be and planned it to be since our last call. Most of us have been in this business a long time.

So forgive me for recapping one more time of the full-year highlights. Full-year net sales of 796.2 million, a 28% increase over 2021 and a 54% increase over our pandemic low of 515.9 million in 2020. Full-year operating income of 61 million, and operating margin of 7.7%, a 140 basis point improvement over 2021’s 6.3%.

Full-year adjusted EBITDA of 76.4 million, up 55% compared to last year and a highest level since 2010. At JAKKS, we are thankful and appreciative of all of our success as we know how challenging this business can be. We intend to continue to focus on timeless brands and categories.

Our singles and doubles that might not be exciting for everyone, but represents the foundation over which our business was built. We continue to actively pursue the most [prevalent IP] [ph] rights for our model. With the knowledge that sometimes passing on an opportunity is more prudent than chasing new business at any cost.

In 2023, we will continue to expand our North American distribution footprint beyond the major customers. In addition, as you know, we have been methodically going deeper into the largest international markets with both toy kids consumer products and costume businesses. And we intend to continue that in 2023 as well.

I'll stop here and let John go a bit deeper into some of the financials and then will come back to talk more about 2023 and beyond.

John?.

Thank you, Stephen, and hi, everybody. As regular listeners know, there's a greater level of granular detail included in our release today, but I'm going to be selective in what I highlight here towards what I think merits a focused attention.

We're pretty happy with how the year ended from a shipping perspective delivering the 20% top line growth we talked about last quarter and doing so for the second year in a row.

As Stephen alluded to, we saw similar trends as others in the industry as it relates to consumer sell-through at retail, inclusive of a bit more of the traditional rush in the last couple of weeks. The shelves could have been a bit more empty on 12/31.

We don't think we distinguished ourselves to the negative on that front, which is helpful from a big picture point of view. Gross margin is clearly an area where we were experiencing more challenges. Being proactive as it relates to cleaning up inventory is something you pay for here, especially in a smaller shipping quarter.

Royalties continue to run a bit higher as expected. Our tooling amortization is trending up a bit. We've talked about CapEx being up a bit this year as we duplicated tools on some lines to chase demand. One of the bigger expense areas here is from lack of warehouse productivity to geek out on it briefly.

In-bound freight and a portion of warehousing is capitalized to product and that math is driven in part by how much we'd spent on warehousing during the year and also how much product we're importing during the year.

When you consider how we've been trying to work down inventory since the beginning of last year and we experienced higher warehousing expense this year dealing with the supply chain backing up a bit and are needing to secure some incremental space that math doesn't work in our favor if more cost than you'd like and less product to spread the cost over, the result then flows through your P&L.

Everything wasn't bad here. We did have some improvements in landed cost margin year-over-year and we're lapping the excessive container cost of last year, but when you add it all up, gross margin for the quarter was 21.7% or 490 basis points worse than Q4 of last year. Full-year gross margin ends up at 26.5% or 300 basis points below 2021.

The 2022 gross margin percentage however is not adjusted for the portion of co-op advertising, which we moved into sales allowances at the beginning of 2022. Historically, that number is in the 200 basis point to 250 basis point range.

So, you can adjust that out if you want a more accurate year-over-year comparison here as you ponder what might be feasible in 2023. Direct-selling in the quarter was roughly in-line with our expectations aside from the aforementioned higher warehousing expenses.

The year-over-year number is negative on the P&L as that co-op advertising element is now recorded above net sales. G&A inclusive of product development and testing and depreciation and amortization was $31.1 million up from $27.9 million in Q4 2021. On a full-year basis, that number was 116.7 million, a 15% increase over 2021.

The main driver there has been our adding back [positions] [ph] post-pandemic to support the expansion of the business over the past couple of years.

Our non-comp related G&A inclusive of stock comp expense grew high-single-digits on a full-year basis, which feels reasonable as you think about 2022 being more of return to office in pre-COVID norms for us, as well as there being a bit of variable spend in that number.

We have been working on a bottoms up review of spending as we started New Year to ensure that we're minimizing and optimizing our expenditures. On a full-year basis, our operating margin of 7.7% was as high as that number has been since 2008.

Closing the books this year required a lot more time and effort as it relates to our tax provision, shout-out to the tax team.

We've concluded a [382 analysis] [ph] on both the federal and state levels to refine the level of net operating losses or NOLs we expect to utilize in the years to come in-light of a couple of impairments that we have identified as taking place in 2019 and 2021. A longer recap on this topic will be included in our 10-K filing.

As part of that exercise and in conjunction with our financial projections, as part of this quarter's close we’re releasing a valuation allowance against a portion of those historical NOLs.

This release generates a one- time non-cash gain of $52.6 million as part of this quarter's P&L, which we have adjusted out of our adjusted EBITDA, adjusted net income, and adjusted EPS calculations. Looking forward, we'd anticipate being around 21% as an effective tax rate in 2023.

Although Stephen walked you through it, I want to revisit the current state of our debt.

As part of our annual close process, we generated full-year operating cash flow of $86.1 million when adjusting for CapEx and optional paydowns we made during the year, our term loan has a mandatory pay down provision, which calls for payment of half of that amount.

And as a result, we have moved that [dollar amount of] [ph] $23.1 million to short-term debt as part of our [12/31] [ph] balance sheet. We have in fact gone ahead and made that payment as our number is finalized. In addition, we made an optional pay down in January of $15 million, the last 5 million of which included a 3% pre-payment fee of $150,000.

When you add those two amounts together for total payments of $38.1 million to date in 2023, that reduces our current term-loan payoff amount to $30.8 million. The carrying amount is slightly lower given unamortized loan fees, but that will be addressed as part of our Q1 close process.

As of March 3, our unrestricted cash balance was $37.9 million, net of those loan paydowns and we currently have no draw on our [ABL] [ph].

This is the time of the year where our liquidity tends to get tight as we are building product for second half consumer demand, but we're comfortable based upon our projections that we can navigate towards the second half of the year leaning on our ABL line if needed. Relevant interest rate on our loan is around 11.2% in Q1.

As a drastically reduced balance, the associated interest expense was less of a drag on our results acknowledging the drawing on our ABL is also more expensive these days given the higher Fed funds rate. In any case, currently job number 1 remains executing against year's operating plan.

We clearly had an atypically robust revenue line last year, driven by a couple of hits. We’ve a lot of great initiatives this year as ABL line will soon highlight, but how those two ultimately balance out is never really hard to project if one is being honest.

We have [clear opportunities] [ph] to improve gross margins, and then the challenge becomes what sort of scale can we get of our fixed cost base.

With a lower interest expense projection for the balance of the year, we plan to be opportunistic in evaluating whether refinancing our remaining debt is the right course of action or whether we should let the quarters ahead play themselves out, particularly given the range of opinions about where interest rates and market liquidity might be 12 months from now.

Elsewhere on the balance sheet, in reviewing our preferred stock derivative liability, primarily due to higher market discount rates, this quarter we recorded a lower valuation of the liability generating a non-cash gain of $1.4 million.

We back that market adjustment out of our non-GAAP calculations of adjusted EBITDA, adjusted net income, and adjusted EPS. Our adjusted diluted EPS for the quarter is a loss of $1.44, down from a gain of $0.14 from Q4 2021. Full-year adjusted diluted EPS was $4.28, compared to $2.59 for full-year 2021.

Quarterly EPS is calculated based on a basic share count of 9.7 million. Year to date EPS is calculated based on a diluted share count of 10.2 million. And in aggregate, our adjusted EBITDA for the quarter was a loss of $12.1 million versus a gain of $5 million last year.

Our full-year adjusted EBITDA was $76.4 million or 9.6% of net sales, compared to $49.2 million and 7.9% of net sales in 2021. And now back to Stephen for some additional remarks..

Working closely with our factories to ensure we are securing the best prices and on-time deliveries; Working with our customers and licensing partners to develop the right promotional programs to generate robust sell throughs for this year's products, while we simultaneously develop next year's; And lastly, we are always talking to everyone all the time about brand new product line extensions and opportunities to continue to layer on the newness and excitement that our business requires.

We look forward to updating you during the year about our progress and appreciate your continued support and interest. One final point before we move on to questions. Our company is focused on expanding its global distribution network.

We have been methodically building out our international structure and teams for a long-term growth in both mature and under developed markets. This has been rewarded with steady increases in our international sales over the past several years.

In order to further that growth, I'm extremely pleased to announce that effective January 1, 2024, our Chief Operating Officer, Jack McGrath will move full-time to our UK office and assume the role of President of European Operations. We anticipate that this will augment the coordination of our U.S.

and international initiatives and help us achieve our fullest market potential. We are confident that Jack will use his many years of experience with our U.S. operations to take advantage of the opportunities for appropriate expansion of our international footprint.

This restructuring has been the works for some time as we have plans to reassign his current responsibilities to the appropriate leaders of other departments. There is no intention to backfill the corporate COO position at this time. With that, we will now take questions.

Operator?.

Operator:.

Thank you, ladies and gentlemen. We have a lineup of calls after this one. So, we appreciate everyone that were on the call today and who we'll be speaking to after this call. And we look forward to talking to you after our first quarter is completed and during our first quarter earnings. Thank you again..

And this concludes today's conference call. Thank you for participating. You may now disconnect..