Good afternoon, and welcome to Funko’s Conference Call to discuss Financial Results for the Third Quarter 2018. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the Company. As a reminder, this call is being recorded. On the call today from management are Brian Mariotti, Chief Executive Officer; and Russell Nickel, Chief Financial Officer. I will turn the call over to Mr. Nickel to get started. Please go ahead, sir.

Thank you, and good afternoon. A press release covering the Company’s third quarter 2018 financial results was issued this afternoon, and a copy of that press release can be found on the Investor Relations section on the Company’s website. Management’s remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements regarding our business goals, plans, abilities and opportunities, industry and customer trends, growth, momentum and investment initiatives, collaboration and licensing relationships, consumer engagement and brand awareness, acquisitions and related expenses and anticipated financial performance. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our Form 10-K for the fiscal year 2017 and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligations to update them. Please also note, that we will be referring to certain non-GAAP financial measures on today’s call, such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted pro forma net income, adjusted pro forma earnings per diluted share and net debt, which we believe may be important to investors to assess our operating performance. Reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our earnings release and in the Investor Relations sections on our website at funko.com. We have also prepared a visual presentation that investors can consult to follow along with this discussion and it can be accessed in the Investor Relations section of our website. I will now turn the call over to Brian.

Thanks, and good afternoon, everyone. Funko had another fantastic quarter. We posted strong growth in sales, gross profit, adjusted EBITDA, adjusted pro forma EPS, as we have every quarter since we went public last year, we were able to deliver great results. Our sales in the quarter increased 24% over Q3 of last year to $176.9 million, adjusted EBITDA increased 26% to $34.1 million in the quarter. Additionally, we were able to gain operating leverage as our adjusted EBITDA margin was 19.2% versus 18.9% in Q3 of last year. Following these results, we are raising the guidance for the year. Our strong performance is against the backdrop of four straight quarters where the most of the public toy companies attributed weak sales to problems associated with Toys "R" Us. We did less than 4% of our sales with TRU in 2017 and we had said, going into 2018, we expected to see strong growth with them in the year. When they liquidated, we did not reduce our sales guidance. We said that we believed it would not affect our sales and it didn’t. This is in contrast with what traditional toy companies are saying and this underscores a big difference between our business model and theirs. As we have said before, our products are channel-agnostic, and we have a diverse set of customers, of which no retailer accounts for more than 10% of our year sales to-date. Because of this, we have been successful in regaining any sales we would have lost because of TRU with other retailers. Another factor was, that many companies across the industry are talking about is that tariffs imposed and threatened on products from China. A very small amount of allowance by our products have been impacted by the tariffs, but the effect has been…

Thanks, Brian, and good afternoon, everyone. Our strong third quarter results were broad-based and continued positive underlying trends. Net sales in the quarter increased 24% to $176.9 million and were driven primarily by the continued expansion of products and properties in our portfolio. In the quarter, the number of active properties increased 38% to 553 and net sales per active property were 320,000, which was down 10% year-over-year. We often see net sales per active property dip in a period when the growth in the number of properties accelerates. We see this as a good thing and we believe this highlights the value and importance of our diverse and growing portfolio of licenses. On a geographical basis, in the third quarter, net sales in the United States increased 16% to $121.3 million and net sales internationally increased 44% to $55.6 million. With our new ERP system implemented in the UK and the 3PL operation in Europe rolled out to support growth, we are able to get sales in Europe back up to strong levels. Net sales in Europe were up 49% in the third quarter over the prior year. On a product category basis, in the third quarter, net sales of figures increased 24% to a $141.8 million and net sales of other products such as bags, accessories, apparel and homewares increased 26% to $35.2 million. We saw continued strength with our Pop! brand with sales of Pop! Vinyl figures increasing 26% on a global basis over the prior year. As Brian noted, Pop! Vinyl is nearly nine years old and is still putting up big growth rates. This also contributes to the strength of the Pop! brand and underscores that pop has become a platform to transcend multiple product categories with the Pop! brand being up over 30% over…

[Operator Instructions] Our first question is from the line of Steph Wissink with Jefferies. Please proceed with your question.

Hi, good afternoon everyone. I apologize for the background noise. Brian, a question for you. You talked a lot about Funko animation. I am wondering if you can share with us a little bit about your initiatives around shoppable content, so making that content dynamic and converting that into direct access to your website?

Yes, it’s a great question, Steph. Obviously, as we get more and more in-depth and that transition from us owning Funko Animation Studio, one of the things we did is, is look at all of 2019 and the initiatives - the big product initiatives we have. I think we identified 42 different initiatives in 2019 and we are basing all of our animation around those big initiatives. And as we continue to get a little bit more sophisticated in having our new Chief Marketing Officer, Molly on our team, the ability to quick through and hit directly to retailers is certainly an important part. We are getting better at it. I think, by the time we hit 2019, we are going to continue to see better sales and the ability for our fans to find our content easier and easier. So, we are excited about using the animation format to drive awareness and to educate people on what we are making, but more importantly, to be able to deep link to our retailers including ourselves that are carrying our products.

And then, if I could, just two quick follow-ups, Russell. On the Walmart initiatives, so it sounds like that will be an incremental step function up in the fourth quarter. Can you give us a sense of how big Walmart was of the customers – typically of the customers we can try to scope out what that decline to increase will be kind of at the Funko? And then, also wanted just a clarification on the EU pricing reset, should we consider that one-time? So, post the acquisition of Underground Toys, realigining of pricing, is that a one-time event? Or is that something that continues over the course of the next couple of quarters? Thank you.

No, okay, yes, great question, Steph. So, I’ll take the last question first. So, that was a one-time adjustment. It was part of, frankly it was why – one of the main reasons why our gross margin was higher than normal in Q3 of last year is, as we digested and invested after the acquisition of Underground Toys, looking at that, basically that margin, we gave back some of that margin to more align globally, strategically align our global pricing. So, that was largely a one-time initiative. We are seeing strong demand in Europe. So we have moved more of our shipments this year in Europe to FOB which does have some sort of impact on our gross margin. That would – likely maintain as we continue, because obviously, the growth, the contribution margin is actually about the same. As it relates to Walmart. Walmart, I think in last year accounted for about 6% - 5% to 6% of our overall revenue. We are continuing, we did ship a little bit in Q2 and Q3 as we are still maintaining some placement in the Toy Aisle and some other seasonal opportunities. But it’s typically about 5% to 6%. I think in the third quarter, they were down roughly about 40% as they moved the transition over and getting ready for the new placements in the DVD and entertainment section.

Thank you. Very helpful.

Thank you. Our next question is from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

Great. Thanks for the question. I just have one for Brian and one for Russell. Brian, I was wondering if you could talk a little bit about the Foot Locker initiative. How far are you along with that today? And are you curating your Pop! specifically for Foot Locker, perhaps trying to send them more sports-oriented products? And then I have a question.

Yes, great questions. Yes, absolutely. Look, obviously, we were excited that they came to us early on when they had the concept in mind and how they wanted to come up with the stores and the store concept that they are very pop culture and very different than what they traditionally do. Obviously, i.e. no shoes. So, yes, our sales team started curating what would differentiate them between the marketplace and there was absolutely a heavy emphasis put on sports. The sell-through, the exposure, the – I guess, the expectations have all exceeded what they originally thought. I think we are going to be up to about 60 stores in November with this concept. So, yes, we are really excited. I think it goes to what we’ve said over and over and over again when retailers want to be in a business to pop culture, they turn to Funko because of the breadth of licenses, the array of products, the fact that we can ship on a weekly basis and keep that content fresh and unique. But, it’s certainly excited with the licenses we have with WWE, UFC, NBA, NFL, English Premier Soccer League, Major League Baseball and NHL. We certainly see growth in the overall sports category for us. This is awesome that Foot Locker has come up with this concept.

Great. Thanks. And then, for Russell, this is more a margin question. I think on the call, you said you feel comfortable about the long-term margin and I apologize if I misheard, I think you said 38% or 39%.

39%.

39%. I think earlier in the year, you said that 39% would be a good assumption for 2018. So I just want to understand what were some of the changing dynamics there that made you take a more conservative outlook on margin? Or said differently, the revenue guide was raised by $20 million to $25 million, but the top-end of the EBITDA guide was the same. So, any clarification you could provide there would be very helpful. Thanks.

Yes, I think, part of it is on the – in regards to the gross margin, part of that is, as we are seeing stronger demand in particular in Europe, as I mentioned on this call, with the FOB shipments shipping direct, that’s having an impact in terms of our near-term gross margin for the year. So that’s flowing through. And then, on the SG&A, we are still, as I’ve said, we are growing – continuing to grow. We are continuing to invest in the business, but we are also in a position to start to regain that operating leverage like we have been discussing and sort of suggested and commented that we would be in Q3 and lower half of the year and so we are seeing that in Q3. We’d expect to see that in Q4 as well.

Thank you very much.

Thank you. [Operator Instructions] Our next question is from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

Great. Thanks, good afternoon. Just a couple for me. First for Russell. On the guidance, you raised your full year sales guidance. But inside the fourth quarter decelerates the high-teens. I am just trying to reconcile that given how sharp you expect the acceleration in Walmart to be. So I am just curious if you are anticipating something else to fall-off? Or is there any other shift in timing from other accounts in the fourth quarter?

No, it’s – we’ve always anticipated a deceleration and we’ve commented that we are anticipating the deceleration in the later half of the year in part in Q4 because we are camping strong sales in Europe as we had some channel fill in Europe. We also had some growth last year as we took on the Loungefly acquisition. So, as a reminder, no one customer typically accounts for more than 10%. Walmart accounted for about 5% to 6%. We will see that initial set revenue in the third quarter or in the fourth quarter excuse me. And then we will begin to see some replenishment. So, we are not anticipating any fall-off. We are actually seeing strong growth across all of our channels, in particular, the specialty channel. I just think it’s a little bit more of a normalization and pointing to a strong results for the year overall.

Okay, that’s helpful. And then, I know tariffs have not been significant to-date, but can you just think out over the next two to three years how you see yourself find your manufacturing base? I know you’ve got strong hold in China and Vietnam today.

Yes, I think, we are not making any decisions based on something that Trump may or may not do. But we are using logic and we finding the manufacturing outside of China provides some competitive advantages. One, a much shorter lunar holiday break. Two, the idea that they lose very few of their workers coming back off of lunar holiday. Right now, we are above 50% in manufacturing outside China. We think as we nearly end of 2019, it’s going to be closer to 70%. So, I don’t think all of these moves are being made in theory for potentially a tariff that would affect us. But if something were to come down the pipeline, we are very well-positioned. I just think these are really smart decisions to find the best manufacturers with the highest quality, with the best cost of goods in the most stable environments for us to produce again. And we’ve found a lot of that success outside of China.

Got it. That’s helpful. And then, just last question for me. Just if you go into the holiday season, can you just talk about how you feel your position and how the retailers are thinking about you guys? Do you have incremental opportunity for NCAPS or anything kind of special? And then, last year in holiday you tested working with Cosco, curious if that’s going to be a test that you repeat? Thank you very much.

Yes, look, I think we are really well positioned again. Key metrics that we didn’t have 18 months ago, sell-through and inventory in all of our top accounts are much better than they were a year ago. So, we feel really good about that. There are - obviously are some incremental opportunities and some amplified gifting opportunities in Target for example. So, we feel really strong about what our Q4 is going to be. I think, we are off to a phenomenal start. And I think that, I don’t see anything that’s going to derail the continued growth for us as a company. So, we are certainly excited. As far as Cosco is concerned, it was a great test. We are looking at some programs for them in 2019. But we didn’t find anything that really interested to us for this – fourth quarter in 2018, but I do see a potential program or two for them in 2019.

Thank you.

Thank you. It appears there are no further questions. I would like to pass the floor back over to Mr. Mariotti for any additional concluding comments.

Thank you and for your interest and support in Funko and we look forward to seeing some of you at New York Toy Fair and speaking to you again on our fourth quarter earnings call, if not sooner. Thank you, very much.

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation, and you may disconnect your lines at this time.