Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter, along with the highlights of product lines and current business trends. Then John will provide detailed editorial around JAKKS Pacific 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 or 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 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 can 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 non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share.

Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled through the 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.

Sir, you may begin..

Good afternoon, and thank you for joining us today. As we cross into the second half of the year, we are happy with our performance to-date and our outlook for the balance of the year. We feel we're lined up for another very, very good year here at JAKKS.

In the second quarter, we marked a number of meaningful positive milestones that are foundational to achieving our 2023 objectives. As we have previously disclosed, in early June, we retired the balance of our long-term debt several years prior to its scheduled maturity.

Our tighter working capital management and projections for the balance of the year gave us confidence we could make that decision and access cheaper financing as needed in the short-term. We're always looking for ways to improve our bottom-line results, and given this higher interest rate environment, this is a good opportunity for JAKKS.

We consider this a remarkable accomplishment given the high leverage of our recapitalized 2019 balance sheet. Over the last 3.5 years, the company has spent over $35 million in cash interest expense. We look forward to any future borrowings being on more favorable terms and to be done more strategically.

Turning to the more operational side of our business. The 2 major films we're supporting in the first half of the year in both the Toy and Costume businesses are paying dividends. The Super Mario Bros.

movie worldwide box office is now in excess of $1.3 billion, and as expected, is driving demand for both our classic evergreen Nintendo product line as well as the new product range inspired by the film. The Fire Breathing Bowser has already shipped over 300,000 units and is one of our most prolific must-have toys in recent years.

We are extremely proud of the team's success in taking such an iconic character and transforming him into such a memorable WOW Toy. Separately, the Disney, Little Mermaid film has generated over $0.5 billion at the global box office.

We've seen great reaction to our Ariel dress, our under the sea exploring Ariel feature doll with lights and music, and our singing seashell necklace that are all inspired by the film. And our Evergreen Disney Princess business is also benefiting, outperforming last year in terms of sell-through at the top 3 U.S. accounts.

Accordingly, we saw a Toy Consumer Products POS at the top U.S. accounts accelerate in the quarter from Q1, reaching high-single digits in total. Our Action Play and Collectible business was up 20%-plus, and our Dolls, Role Play and Dress-Up segment was slightly positive despite a robust Q2 last year.

In line with what we're hearing about trends at retail, we finished Q2 with around 10% to 15% less inventory on hand in those accounts compared to the end of Q1. Their inventory levels are down even more from this time last year if you set aside carryover from our big holiday 2021 film release.

We are continuing to see retail take a cautious attitude towards inventory, both now and as they project the holiday season. This approach is important in context at evaluating our Q2 sales results.

As a reminder, last year's market had a remarkable number of customers buying product early in the year to avoid out of stocks, and adapt for the longer supply chain they saw in 2021. In 2023, nearly all customers to a varying degree, are being conservative with their buys now and are looking towards the back half.

Retailers are carefully watching their margins and being more comfortable with the prospect of running out of stock than risking being in deep inventory. We are fortunate, though, to have once again some of the hottest businesses in addition to our proven evergreen lineup in this environment.

We continue to work closely with smaller customers who are seeing it as an opportunity to gain market share. This year, we shipped $167 million in the quarter, down 24% from the record-setting Q2 last year. Nonetheless, as expected, we saw a continuation of overall strong first half performance compared to our historical trends.

We attribute these results to a combination of strong first half entertainment properties this year and last, as well as our continued focus on the FOB business model, encouraging customers to buy for the second half at the ports in Asia to leverage their larger and efficient supply chains.

For the total company, in the first half of the year, we were down 24% in North America and up 10% internationally, led by a near-doubling of our business in Latin America.

The exceptional growth of our Action play and Collectible division to $52.6 million in the quarter, up 41% was not enough to overcome the drop in our Dolls, Role Play, Dress-up division, which nonetheless shipped $59 million this quarter, down from an astronomical $102 million this time, last year.

It's worth noting that this year's Doll division performance represents a 21% increase over the same quarter in 2021. Our outdoor seasonal business continues to face some challenges, ranging from retailers moving away from large cube items in store as well as the degree of overhang from COVID stockpiling on many of these items.

This business was down 34% year-to-date, and we are looking on a range of different initiatives to enhance and grow this division, which we are excited about and we'll be able to share more about later this year. In our Costumes business, we were down 32% in the quarter.

Late in the quarter, we found more customers pushing ship dates into July as our confidence builds around faster supply chains. Overall, we still are anticipating our Costume business to be slightly lower than last year, which was a record high.

I will now pass it over to John for some further comments, after which, I will come back with some additional material about where we are focusing in the second half.

John?.

Thank you, Stephen, and hello, everyone. We've been busy over the past few weeks reviewing the quarter and first half results, trying to figure out what's gone according to plan, what's been better than we would have hoped and what areas have been a bit lacking.

And overall, as Stephen pointed out, we're pretty happy with where we are, as it's roughly where we hoped we would be. We knew we had an extremely difficult revenue comparison due to the massive top line growth we've achieved in recent years.

But we also had a degree of confidence that gross margin percentages could improve and that we could hold the line on SG&A spending reasonably well to mitigate the revenue downside. And broadly speaking, that's where we've ended up. So, now we're on to the back half, and we'll try to stay on that path. So, some first half headlines.

Revenue was down 20% for the first half, and we continue to see a more front-weighted year compared to recent years, as Stephen noted. As an additional reference point there, although down year-over-year, our first half sales results are 40% higher than the comparable period in 2021.

We're happy to see second quarter product margins expand to 48.4%, up 370 basis points from 44.7% in prior year. For the first half, we're at 47.4% product margin, which is 420 basis point improvement from 2022. This improvement mitigated our gross profit dollar decline of 16% in the quarter and 9% for the first half.

The first half gross margin of $82.6 million is the second highest number since 2009, 14 years ago. It's also the first time our quarterly gross margin percentage exceeded 30% since Q3, 2021.

Moving on to SG&A, similar to last quarter, we see some expense areas running higher than prior year and are exploring operationally to recalibrate where appropriate. Overall, we've managed to keep the net dollar growth to $4 million year-to-date across direct selling and G&A, excluding depreciation and amortization.

Operating margin in the quarter dropped to 9.9% from 10.7% in the year-ago period. As the year progresses, we're continuing to evaluate spending decisions, prioritizing improvements to our infrastructure and processes as well as demand creation for key product lines.

It is a normal course of business for us to be in a constant state of looking to reduce or eliminate more legacy costs that has historically been a bit more fixed within our cost structure to self-fund those initiatives as much as we can.

It was that logic in part, which motivated our early term loan payoff as eliminating unnecessary interest expense frees up cash and spending for more productive uses.

The payoff triggers another one-time prepayment fee this time of $300,000 as well as triggering a write-off of deferred financing cost of around $700,000, which we reflect as a loss on debt extinguishment.

But netting out the prepayment fee as well as some estimate of potential short-term borrowing costs for the balance of the year, we're still confident this transaction allows us to avoid around $2 million in cash interest payments we otherwise would have been obligated to pay in 2023.

For clarity's sake, it's not necessarily our intention to run the company debt-free. We continue to monitor the debt markets and talk to people about scenarios and ideas to increase our liquidity, particularly with the lower cost of capital than what we've enjoyed in recent years.

But as of now, the combination of our short to medium-term plans and the current rate environment leads us to what you see today. We plan to maximize the day-to-day and rebuild our cash balances. Similarly, we're continuing our efforts to improve our working capital management.

You'll notice, our owned inventories of $65.1 million, which is the lowest Q2 level since Q2 of 2021. That number is somewhat masked that we're increasingly holding more inventory in Europe as we build out our direct sales capabilities in those markets.

Although to be clear, we remain an FOB first company rather than one that is going to build back-up inventory on the prospect of a possible sale down the road. Another noteworthy element of this quarter's financials is the increase in the marking-to-market valuation of our preferred stock derivative liability.

The reduction in our cost of capital with the elimination of our term loan increased the liabilities valuation to $27.8 million, generating a non-cash loss of $6 million in the quarter. As is customary, we adjust that amount out of our non-GAAP results.

You also might note a write-off as an adjustment to this quarter as we continue to wind down some older joint ventures to refocus our energies on the core business. Our adjusted EBITDA for the quarter was $20.7 million compared to $27.1 million in the same period last year. Our trailing 12-month adjusted EBITDA is $66.9 million.

Adjusted EPS for the quarter was $1.26 and $0.90 for the first half of the year. Those numbers are down from $2.10 and $1.85, respectively, from 2022. Finally, we wanted to acknowledge our recent inclusion in the Russell Index for the first time in several years.

We're happy to be back in the club as we've seen increased trading volumes since being added, which is great. And now, I'll pass the call back to Stephen for some additional comments..

Animal House, SuperBad and Cobra Kai amongst others. We have many more initiatives at various stages of development, and we'll have a lot more exciting things to discuss during the second half of the year. We will stop there and open up for Q&A. Thank you again for your support and interest.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Uerkwitz with Jefferies..

Just a couple of questions.

I guess the first one, you kind of touched on it in your prepared remarks, Stephen, but just kind of double-click on the idea of how Costumes -- how retailers are feeling about Costumes this fall in light of consumers? And then, kind of just touch on consumer buying habits for Costumes relative to Toy segments?.

So, on Halloween, we're actually having a very strong year with the sell-in right now and currently during second and third quarter are the primarily manufacturing and sell-in periods.

What we had this time last year, we had a bunch of retailers that were worried about not getting the goods due to the shipment delays and primarily a majority of that business is 90% FOB.

So this year, due to the shipping delays that kind of have gone to the waste side and shipping is somewhat back to normal, people are taking the normal goods on hand at the appropriate time and not rushing to get it early. So that was really the shifted quarter. It wasn't that -- it was change in our year forecast for it.

And then in addition, last year, we had one retailer that bought in very big in the Halloween business that cut back this year. Outside of that, we are having a very strong solid Halloween business, very diverse distribution. Our second big year internationally. That is actually -- we're seeing really nice growth.

And we have -- going into this year and going into next year or more so, we have a lot of new IP and properties that we'll be announcing shortly. So overall, the Holloween business is really solid.

It was just more shifting in the quarter, and we had our biggest Halloween last year, which we would not expect to have this year, but we're having a very strong Halloween as it stands today.

And then when it comes to the consumer buying patterns, I'd say, very proud of our company and proud of what we've developed internally on our divisional segments because our segments are really what's strong. And then while we have these segments, we have the right IP within those segments.

So for instance, our Boys segmentation, we have really strong IP with the Nintendo Classic, The Super Mario Bros. movie. We have Sonic Classic, Sonic Movie, Sonic Prime. We have Apex Legends. We have a plethora of content and some new that we'll be announcing shortly.

So that's really strong, and where category strength is really performing well worldwide in those categories. Disney segmentations, we're in a -- call it, pre-school, pre-cool is really what we call our Disney business.

So, while we're hearing really nice things about the Barbie movie, our Disney business does not get affected primarily because we're not in that same category of 11.5-inch dolls. So we're much in a younger period before really a child would buy a Barbie, they're buying our products at a younger age. So we're really in a great area of business.

So overall, we're seeing a slowness in the retail, but for JAKKS, our sell-throughs have been strong. Our inventory levels are lower both at retail and our distribution centers. So, we've been managing this process for over a year and looking at how things are lining up.

And we're just managing the business, I think, extremely well and strong and looking at not trying to be a hero in this environment, but be strong in profitability, as you can see that, as we paid-off -- down our debt, and looking at healthy revenue sales and profitable sales versus just sales to get sales..

Got it. No, no, that's super helpful. And then just kind of digging in on a couple of other segments. Action Play and Collectibles seem to be going really strong. Obviously, a lot of that is probably driven by a Super Mario Bros.

movie in your toy line there, but has there been any halo effect where Sonic is maybe outperforming because it's kind of in that game segment as well?.

It's interesting. So Super Mario movie product is doing extremely well, and Nintendo Classic is doing well. And what we've seen, what we were expecting of a possibility is seeing a slight slowdown of possibly Sonic. But at the same time, it's not happening. Our Sonic sales are extremely strong.

So we're not getting -- we're not trading dollars for one property to another. It is happening at retail, that it's affecting other Boys' properties. But what we're seeing, we're doing extremely well. Our penetration is getting deeper and deeper at various other retailers from value chains to specialty stores to mass. So, we're really in a good spot.

We have registered checkout lane products that are selling exceptionally well, and Sonic is still doing really strong with Nintendo and other Checklane products. So overall, for us, we're not trading dollars. It is affecting other licensed Boys' IP, but not in our segmentation..

Got it. No, that's helpful. And then just kind of like an industry question because I know you've done this for a while.

When you say retail wants to run lean inventory, does that mean fewer SKUs where they will maybe have normal inventory levels for the best-performing toys? Or is that just kind of lean across all toy segments, all toy lines, regardless of how successful they are?.

It's a good question, Andrew. So let's call it, across retail themselves. They're looking for overall inventory levels to be lower, not just in our Toy segmentation. Outside of Grocery, we call it the hard goods electronics, we call it the home entertainment areas, they're trying to keep a lower inventory.

But as it is during the first half of the year, as you know Andrew, toy sales are really non-holiday. They're more gift-giving, whether it's an Easter or a birthday or that type of a process. Going into the second half, retailers are garnishing getting more inventory, making sure they have the right product.

I think what's changing now is they don't need to buy everything from everyone. They're focusing on the right companies that have the right product for their needs and doing more with less companies.

And thankfully, we're one of those companies that we span across some of the various buyers at retail that a retailer can do a lot more with JAKKS in many of their segments versus other toy-related companies. So they are looking cautious for their inventory, but it's across the board.

But remember, Andrew, they still need, call it, market drivers, areas that they could promote and bring in customers so they continue the traffic during the holiday. So they do want the hot things for the holidays..

Got it. No, that's helpful. And then, last question I had. You paid down your debt. I mean, you've always been on offense here, but it looks like you probably put your foot on the pedal.

How are you thinking about International and growing that over the next several years?.

So to say, right now, everyone knows the U.S. or North American market is a mature market. So the only way we can grow International is, call it, more ancillary distribution, more shelf space, and then continuing with more IP or more products within our categories, that's North America.

Internationally, as we mentioned, I think, in the first quarter that I'm delighted at the same time sad because he's very close to me in the company and very strong in our company. But our COO, Jack McGrath, is moving internationally because he can handle the growth that we expect. He understands the DNA of JAKKS. He can make decisions immediately.

He understands, he has been with us 25 years. So we wouldn't be moving him all the way overseas, unless we believe materially in the growth. And we've already made rapid changes immediately. We have a new warehouse that opens up next month in August. We have a new staff in -- or additional staff in Italy. We grew Latin America this year.

So, Jack working with myself and the team, will be able to expand that growth. Let's say, it would take 5 years, 6 years to do it. We can get that growth in 2 years, and yearly growth. So, we're really excited about International. In fact, I'm going again with him. August, we're going, and again in October.

There's a lot of growth opportunity, and we're getting a lot more licenses in categories because people are having issues worldwide. So, we're benefiting from on an offensive internationally, not defenses.

People are coming to us to actually distribute their products internationally because they don't want to build the overhead in which we've already built. So we're excited really, really internationally as well as just in total for the company..

Ladies and gentlemen, those are it for the -- just Q&A, we have calls that are ongoing throughout today and this evening. We appreciate everyone on the call. Thank you for joining. We're going to have a lot more to hopefully talk about during our Q3 conference call and beyond. Thank you very much..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..