Good afternoon and welcome to Funko's Conference Call to discuss Financial Results for the 2019 Fourth Quarter and Full Year. 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. I will now turn the call over to Andrew Harless, Manager of Investor Relations to get started. Please proceed.

Thank you and good afternoon. With us on the call today from management are Brian Mariotti, Chief Executive Officer; Andrew Perlmutter, President; and Jennifer Fall Jung, Chief Financial Officer. A press release covering the company's fourth quarter 2019 financial results was issued this afternoon and is available on our Investor Relations website, investor.funko.com. Before we begin, I need to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 2019 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 obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, such as EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted net income, adjusted earnings per diluted share, 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. We've also prepared a visual presentation that investors can consult to follow along with this discussion and it can be accessed at investor.funko.com. I'll now turn the call over to Brian.

Good afternoon, everyone and thanks for joining us. I will begin with my remarks today with a review of 2019. And then I'll share our perspective of Funko's competitive positioning, the opportunities in front of us, and how we're planning to drive growth in 2020 and beyond. Before turning to my formal remarks, I would like to briefly comment on the coronavirus. Our thoughts are with our employees, partners and communities around the world being impacted by this crisis. We are closely monitoring the developing situation and tracking disruption to our supply chain. At this time, we believe there will be an impact to the first half of 2020 due to manufacturing disruptions and delayed shipments which Jen will walk you through later in the call. We are working closely with our manufacturing, logistics and retail partners to mitigate disruption and we'll provide updates as appropriate. Now, turning to 2019. In 2019, we delivered strong top line growth of 16% despite a tough finish in the fourth quarter. As Q4 unfolded, orders from many of our top retail customers came in below expectations due to the softness surrounding the holiday shopping season. At the same time, key tempo releases underperformed. Going forward, we will be focused on leveraging the diversity of our model through new products and categories, as well as strategic partnerships that allow us to generate new revenue streams and expand our addressable market. We have a winning culture at Funko, and the organization as a whole has a strong sense of accountability. Our teams are leaning into the challenges at Q4 and putting the pedal to the floor in 2020. We are planning to bring dozens of new products to market this year that we're tremendously excited about, and we're also building for the future by enhancing…

Thanks, Brian, and good afternoon everyone. As you heard, we had a highly successful Toy Fair and have a tremendous lineup of initiatives for 2020. Let me provide some color on how we'll be executing against our top growth areas, driving the core business, introducing new products, increasing our international mix and expanding direct to consumer. First and foremost in 2020, we will be focused on continuing to grow Funkos core pop culture business. Our ability to drive core business is centered around two things. One, leveraging Funko strength and building creative and nostalgic programs that utilize evergreen content and tissue-targeting under penetrated content genres to expand our addressable market. We have a number of unique evergreen program slated for 2020. These include new takes on beloved characters, such as our Marvel vendor line content that we're leveraging for the first time such as Disney theme parks and expanding on past successes, such as Harry Potter. Additionally, we will be focused on building programs to grow underpenetrated genres such as anime, sports and music. And 2020, we will be growing our anime license base, increasing the product categories we produce against and further expanding distribution. In fact, we just announced an exclusive partnership with Bandai which allows Funko for the first time ever to distribute anime properties in Japan, the largest market for anime merchandise in the world. We've also expanded our rights under Pokemon and Dragon Ball Z, two additional examples of our ability to leverage existing licenses to drive growth. Within the music category, we are building successful programs against favorite artists such as Guns and roses, BTS, Kurt Cobain and Queen and believe we are becoming the go to license within the music industry. In 2020, we will be adding additional fan favorite artists such as Amego's,…

Thanks, Andrew, and good afternoon, everyone. At a high level, the fourth quarter was disappointing, but as you heard from Brian. We had a number of successes in 2019 and we're focused on our four key priorities to drive growth in 2020 and beyond. Turning now to our quarterly performance Q4 net sales came in at 214 million, down 8%. The year-over-year decline reflects three primary factors, one a week holiday season for many of our retail partners, which resulted in order significantly below initial indications as well as lower than expected repurchase orders from our top customers. Two underperformance and the key technical properties in the quarter and three, difficult comparisons to Fortnite, which was a significant sales driver in Q4 of last year. The number of active properties increased 14% to 657 and net sales per active property were 320,000, down 20% year-over-year, primarily reflecting tough fourth quarter sales performance. In the quarter, our top 10 performing properties were Harry Potter, Frozen 2, Avengers endgame, Star Wars Episode IX, Dragon Ball Z, DC Comics, Fortnite, My Hero Academia, Star Wars Classic and Game of Thrones. We continue to see underlying strength in the evergreen category, including the diversity of products and number of properties. As a percentage of our total mix evergreen properties accounted for 52% of net sales in Q4. Some of our stronger performing evergreen programs in the quarter included Harry Potter, DC Comics, StarWar classic, Marvel Comics, Disney classic and Pokemon. In the fourth quarter net sales in the US increased 9%, while the international sales decreased 8%. Within international Australia and Canada decline year-over-year, which is partially offset by double-digit growth in Europe. On a product category basis, Q4 net sales of figures were down 10% to 170 million, primarily reflecting the overall softness…

Thank you. [Operator Instructions] Your first question comes from Erinn Murphy with Piper Sandler. Your line is open.

Great, thanks, good afternoon. A couple of questions for me, I guess first on the guidance, Jen, on the first quarter. Can you just help us think about how you're looking at US versus international trends and then I guess relatedly, on the SG&A side, just with the UK DC consolidation how long into the first half, should we see some duplicative costs in the P&L?

Yes. Excuse me. Thanks for the question. Erinn, have been doing well. On the first question for Q1, I would just relatively, think about a consistently across the two -- across the two regions, as we report out on international in the US. And then in terms and the cost of the SG&A for the duplication. We are on track and on budget looking to go live at the end of the month. And so we're feeling really good about that transition to the new distribution center, there will be some incremental costs that come into Q2 as we continue to wind down the original distribution center. So I would look at as a first half event.

Okay, got it. And then, maybe just stepping back with what you're seeing right now from a supply chain perspective, just given the Corona virus outbreak. Can you share a little bit more about any, any more detail on what you're actually seeing kind of how long the average delays and then what are some of your contingency plans. If we continue to see kind of global travel stop and just this kind of sustained outbreak through the first half. Like, what type of things can you control. Can you dual source, just curious on that.

Yes, it's Brian. Great question, obviously -- we're in better shape than some with the fact that we do produce 70% of the goods that are produced outside of China with primarily Vietnam being our main producer doesn't mean at some components like tooling do not come from China, they do and sometimes that can affect even some of the Vietnam shipments. But as of right now, we're about three weeks of sliding production behind and we're getting numbers of about 45% to 50% capacity at our Chinese factories. Now, we do have capacity that we can move into Vietnam. If this were do you continuing to be a problem in China. So there is an ability to load up Vietnam with more products and even dramatically reduce our exposure were traditional toy companies that produce mainly in China can't. So I think we're in good shape. Obviously, we can't really speak to the economy, and what this does for people and whether they're going out and shopping all that stuff, and we obviously have some stuff slide from Q1. I think that's pretty much obvious at this point. But I do believe as the year goes on, we're in really good shape and we have the levers to pull to protect ourselves.

Yes. That being said, keep in mind we were in the same place. I think as most people there is there's still a lot of information coming out. So we will continue to monitor the situation;

Okay. And then, just last question. I guess, Brian, this would also be for you. Can you talk a little bit more about the opportunity that you see in direct to consumer. Just how big is that business today where could it go is you really start to kind of clean that channel up and really focus on the full price opportunity there. Thank you.

Yes, we make it. We have beta a bunch of investments over the last couple of years and getting our self into a position to be able to start pulling levers when it comes to D2C. The app is just one great investment that we've done over the last couple of years where we're being able to engage with our fan base push information to them and users to eventually turn on direct to consumer. I think our first strategy is just going to be increasing the amount of SKUs offered on the website. Right now we're primarily Flash cell-based. A couple of new items a week pop up. They saw in minutes and we go onto the next week. So the idea of carrying maybe upwards to 1,000 SKUs. For the year by the end of the year is exciting for us and I think we can time that with new releases and adding exclusive content to that and put a loyalty program in place. It's going to make it exciting for people to shop on Funko.com. So we're excited about that business, obviously the margins are better and we just think that taking control some of our own narrative when it comes to our own products in our own marketing, it's just a natural evolution for us, we continue to mature as a company.

Great, thank you. I'll let someone else go ahead. Thank you.

Your next question comes from Stephanie Wissink with Jefferies. Your line is open.

Hi, this is Ashley [ph] on for Seth. Thanks for taking our questions. guys assumes a pretty big step-up in the second half. In the first half, what degree of visibility do you have today into that other corresponding bookings or [indiscernible]?

And are you -- so are talking about sales?

Yes.

Yes. So as we look at the year, obviously, we've indicated that you will see a progression throughout the throughout the year by quarter, keep in mind, there is just inherent seasonality within our business that we do see. We have also factored in the content slate. As we mentioned on the prepared remarks, we do see a heavier content slate towards the back half of the year. But overall, I think you keep in mind too that we do have some of our new programs coming out in the new properties. And sorry, -- our new products coming out towards the back half of the year as well. So, there's a couple of things going on the seasonality, though, if you look historically I think 2019 was a bit of an anomaly it's not completely that differentiated from how we've been looking historically.

Okay, great. Then if I could just squeeze in one more, what kind of cost [indiscernible] you have sales come in below or vice versa. How should we think about leverage opened over.

Yes, we -- as we've said, our cost base is fairly fixed. Of course we do have levers that we could pull but at this point, we really are focused on investing in our infrastructure and investing for growth. So that's why we will continue to see deleverage this year, but obviously we would if things were to turn significantly down for the economy or whatnot we would obviously always look for areas to cut back.

Okay, great, thank you so much. I'll pass it off to someone else.

Your next question comes from Drew Crum with Stifel. Your line is open.

Okay, thanks guys, good afternoon. Brian, what percentage of sales came from IP and as you roll out some new product in the second half, Non-licensed specifically if you're $840 million to $865 million revenue guidance range. How should we think about non-licensed product because a percentage of that total.

Small but significantly growing compared to all the previous years, we've been in the work with obviously we're excited. We're excited. This is our first main foray into in producing original IP that we think is going to at least have some sort of impact on the top line. And so we are excited about that. In the margins to go along with it. We have been very, very conservative in what we think the original IP is going to do in 2020 and we're going to hopefully evaluate a successful launch in the second half of the year and then how more I guess a better outlook on what that white spaces and what that potential growth is for 21, but as you saw in some of the reports in out of Toy Fair, Analyst wise and otherwise, a real positive reaction to what we displayed for the first time in the Girls Toys, specifically the early to disrupt that space with some technology that we're very, very proud of and coupling that with the animation studio. We're excited, I mean is this is going to be something that we will continue to you on a year-on-year basis, we have 150 world-class artists that want to voice, we think we can do this. We've disrupted the collectible and pop culture entertainment licensed merchandise. We think we can do the same toys. We're just can be super conservative about what that guidance is -- in 2020 specifically until we get a better read.

Okay, got it. And then with respect to Japan, did you guys generate any sales out of Japan in 2019. And just I guess a point of clarification, the distribution agreement with Bandai, did I hear correctly you're restricted to anime only or can you sell other products into that market.

It's a great question. Obviously, we felt like over the last four or five years. We've got a wonderful partner over there hot toys but the numbers were what they should be in a lot of it came from Bandai strategic positioning within the territory and our inability to get anime type properties into Japan; as a matter of fact, we've had none. And so we weren't giving -- we are playing at the one-hand tied behind our back over there. So Bandai will be the new distribution partner, they will carry all of our goods -- but the big win there is, is obviously the anime titled. Again, Japan has been a small territory for us, we're going to start to see moderate growth in '20 with a much more positive outlook in '21 giving them the chance to really get their feet wet in how to distribute Funko products, but we are excited about the relationship and what it means to potentially grow -- we think a very important and very influential market.

Okay. And then...

Sorry -- Drew, just keep in mind, it's really a Q4 play there.

Okay. And then, Jen, just one last one from me. CapEx $42 million in 2019 should that step down in '20?

Yes. In 2019, we did have a Hollywood store included in that CapEx. So I would at this current time, expect it to retain to our more normalized levels. The biggest piece of what we normally spend on is that the tooling and molding, so given where we are today, that's what we would say, but initiatives change throughout the year and we'll update if there is anything new.

Okay, thanks guys.

Your next question comes from Michael Swartz with SunTrust Robinson. Your line is open.

Good afternoon, guys. Brian, just wanted to start with you, some of your commentary around direct-to-consumer and building out your e-commerce platform, I think you said you're going to 1000 SKUs by the end of the year. I guess, how do you manage the potential conflict with some of your retail partners in doing that?

Look, I think this is probably the number one reason we've waited this long. We've been very careful as a smaller company to work very hard in growing our -- not only our brick-and-mortar retail partners business, but there also their e-commerce business. And we're at a point right now where you guys are very aware of the retail environment and there are people, some companies that maybe aren't as strong as they used to be, we've got great partners go out of business over the last three or four years, and there is a reason to put this in right place and start replacing some of those people that have not -- are no longer with us as far as retail partners. So we will continue to do what we do best, which is find retail partners and impair them with content that matches their fan base or their demographic. And I think we would doubt won't affect our business to continue to grow but we just need to take a little bit more control of the narrative right now and this seemed like about the right time to really push forward. And then we had some things we had to do on our end, back-end wise, and app development-wise, and maturity-wise and processes rise, and operational-wise to get ourselves in a position that when we do open up the SKU count that we don't -- we don't mess it up, we do it the right way and give our customers a great experience. So, I think that's kind of what the thought processes behind it.

All right, thank you. And Jen, just on maybe a little clarification on the coronavirus impact. I think -- it looks like you're embedding maybe $15 million or so impact to the topline. What would the impact be to EBITDA? And second part of that question is, what are your -- I guess, what are you assuming, how long this disruption goes on? Is it till the end of March, till the end of April?

Right now, we're considering the impact that we've included in here is mainly a first -- it's fully is a first half impact with the majority of it happening in Q1. And then -- yes, as we mentioned earlier at this point, our SG&A is relatively fixed. So as those flow through gross margin that will be the impact all the way down to the bottom line.

Okay, thank you.

Your next question comes from Michael Ng with Goldman Sachs. Your line is open.

Great, thank you for the question. It was encouraging to see that the Pop products themselves outperformed the company and figures in both, the quarter and the year. So I was hoping you could talk a little bit about the resilience of Pop that you're seeing. And then on the other side of the coin, could you talk about some of the brands within figures that may not be performing as well is that Mystery Minis or Dorbz? Thank you.

Yes, Mick. Great question. And thanks, I appreciate it. Yes, we're pretty ecstatic. I mean, we're kind of in unchartered territory, right; and we have a platform that has grown 10 straight years and every year the number has gotten bigger to try to grow from. So, we're pretty proud of -- we consider the platform and the brand, we've created, and we do believe that that platform is what people on a global basis view pop culture through. So it's kind of our filter that has been accepted on a worldwide basis of how to view pop culture. So, we're excited about the health of that business. We always look at pop as a Trojan Horse that gets us into any new territory in any retailer, always leads with pop, and then it falls with Loungefly and Mystery Minis and other things. So to take the second part of your question, we always want to try different formats and all of them; Mystery Minis is probably the one exception. Most of them are very small in scale comparative, that obviously, the behemoth 900-pound gorilla [ph], that is pop. But the ones that we're really going to focus on right now is [indiscernible] and that non-licensed IP through the fund delivery system of the machine and we're also letting out some of our retail partners purchased that in PDQs without the machine, we have content to support both. And very excited about the initial response to soda. When you're getting yelled out by retailers and fans and distributors that they're not getting enough, their allocation isn't big enough sort of soda, selling value -- it's selling too quickly. That's something we haven't really heard a lot of in the last couple of years and it's been probably the most excited we've been about a vinyl line since Pop's inception in 2010. So you're going to see a lot of focus for us on continuing to do the Mystery Mini line, it's always been a very successful line with us with Vinly bag and soda, and obviously, [indiscernible] and then, obviously pop; those are our big vinyl initiatives at this point.

Great, thank you very much.

[Operator Instructions] Your next question comes from Tami Zacharia with JP Morgan. Your line is open.

Hi, thanks for taking my question. Could you talk about the rollout cadence of Snapsies and some of the other non-licensed toys? And how many retail doors initially you expect to get into this year?

Sure, I can take that. It's Andrew Perlmutter. We -- the initial rollout plan for really all of our toy IP will be both, licensed and now it will be in the back half of the year towards fall. Most retailers do their fall sets in August, and that's when we would be timing those rollouts. And what was the second part of your question?

Retail doors you expect to get into?

So just coming off of Toy Fair, we know that we've got a couple of very multi-door strategic partners lined up. I think Target was mentioned as one of them which they are. And we are coming off Toy Fair we're solidifying the rest of the distribution. It was the first time that the majority of our customers saw the item and it got a very good feedback, so now we're following up to see who is going to execute.

Got it. And so my follow-up question is, the inventory write-down in the fourth quarter that you took; could you comment on how you're selling down this inventory? Is it through your DTC channel or through regular retail partners?

Yes. Hey, Tami. We are actually we have written down the inventory, we are -- we will dispose of it in the most environmentally-friendly way, we're actually talking to a couple of foundations right now, most likely we'll be looking to donate it.

Got it. Thank you so much.

Thank you.

There are no further questions at this time.

Great, thank you for everyone for joining call today. We'll update you soon. Thanks.

Thank you.

This concludes today's conference call. You may now disconnect.