Good afternoon, and welcome to Funko's Conference Call to discuss financial results for the Fourth Quarter of 2020. 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 2020 financial results was issued this afternoon and is available on our Investor Relations Web site, investor.funko.com. Before we begin, I need to remind you that Management's remarks in 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 year ended December 31, 2020, in our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today. We undertake no obligation to update them. We'll be referring to certain non-GAAP financial measures on today's call, which is adjusted EBITDA and adjusted EBITDA margin, 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. It can be accessed at investor.funko.com. I'll now turn the call over to Brian.

Thank you for joining the call today. And I hope that everyone is staying safe and healthy. Before we begin, I want to commend our Funko teams around the world that demonstrated tremendous resiliency and came together to execute in 2020. It's because of them that we were able to continue to bring joy to our fans in a highly disrupted year, some major highlights of 2020. First, we delivered innovation, which is the heart of Funko. We successively launched new products ranging from Snapsies and Funko vinyl soda to pop albums, gift shop and a dozen of new board games, all of which expanded our presence among key retail partners, extended our reach to new consumers and further diversified our revenue stream. To that end, our diversification strategy continues to bear fruit in 2020, as our non-figure products represented almost 23% of our sales, supported by our Loungefly branded products of 17%, and our expanded game portfolio growing over 50%. Second, we continue to successfully leverage evergreen content, which allowed us to keep our products fresh and relevant during a time when many new releases were paused. For the year, sales related to evergreen content represented 66% of our business up from 51% in 2019. Additionally, there was only a single property in our top 20 that is related to a theatrical release. This unique ability to leverage evergreen properties across a wide variety of genres, products, brands and retailers enables us to drive revenue while continually reaching new fan bases. Third, we strengthened our direct to consumer platform in 2020 through several initiatives. We added important digital capabilities to enhance usability and functionality. We increased the number of SKUs on the site up from only a few 100 to over 2000. We launched funkoeurope.com in October almost two…

Thanks, Brian. We are pleased with the tremendous progress we made in 2020 against our key strategies to drive growth and diversification. As a reminder, these include building upon our core pop culture business, further diversifying our product portfolio, expanding our international reach and increasing the share of our business through our own direct-to-consumer channels. Heading into 2021, we are excited to build upon the progress to-date, we believe will position the company for sustained long-term growth. First maximizing the core pop culture business. In 2021, we will continue to create unique programs that resonate with our fans with a heightened focus on evergreen properties as well as expanding our consumer base by growing under penetrated content genres and launching new products. We saw strong success with our evergreen programs in 2020 and expect to continue to build upon those by leveraging new properties such as Seinfeld, recreating new ways to celebrate fan favorite properties such as Marvel Deadpool, and focusing on building holistic statements at retail. We are planning to drive expansion in our core business with sports, music and anime genres. The license sports and music merchandise market represents over 30 billion in annual sales. We are only just starting to focus on this growing business and capturing market share through license expansion, utilizing existing brands such as Pop and Loungefly, and creating new lines geared towards their specific fan bases. In 2020, we saw positive consumer response to the launch of pop album which recreates iconic records and offers fans a new way to enjoy the pop brand. For example, our pop album of AC/DC's classic Back in Black record was our top collectible item at one of our key mass market retailers. Given the strong initial fan reaction, we plan to expand this concept across new…

Thanks, Andrew, and good afternoon everyone. The fourth quarter came in better than anticipated across the P&L, marking a strong finish to the year. Our net sales increased by 6% significantly outpaced our expectations. Gross margin remained strong and we continue to manage costs while supporting our key initiatives. As a result, we delivered improved profitability and cash flow, proactively paid down debt and increased our liquidity position. Our top line performance in Q4 largely reflects the strength of our brands and product diversification. Our overall performance compared to our expectations was partially driven by better than anticipated results across Europe, as there was sustained consumer and retailer demand despite the q4 lockdown. Additionally, we saw continued strong demand within the domestic third-party, ecommerce, mass market and DTC channels. The number of active properties in Q4 was 724, an increase of 9% from prior year. Net sales for active property were 313,000 in the quarter [against] [ph] 2%, compared to last year. The top 10 performing properties in the quarter were the Mandalorian, Harry Potter, Marvel Comics, Dragonball Z, DC Comics, Disney Classic, Pokemon, The Nightmare Before Christmas, Star Wars Classic and Mickey Mouse. As Brian mentioned fourth quarter net sales in the U.S. increased 18% to 171 million, our strongest quarter ever domestically. Although our European performance came in better than we expected, sales increased 24% versus a year ago reflecting the ongoing effects of the pandemic. Additionally, sales in other international regions decreased 7%. On a product category basis, Q4 net sales of figures were flat at 170 million. Other sales increased 30% to 56 million, primarily reflecting strength of our Loungefly branded products, which grew 51% in the quarter. Additionally, we saw growth in our game, plush and accessory categories. Sales of our Pop branded products grew…

[Operator Instructions] And your first question comes from the line of Erinn Murphy with Piper Sandler.

Nice to see a lot of your hard work come together. I guess my first question is on the guidance for the first quarter in particular, can you just share a little bit more about what you're seeing in Europe versus the U.S., is the strength that you saw in the fourth quarter in the U.S. has that continued? And then, maybe if you can frame the full year sales guidance for us, between what you're expecting between pop and some of the figure business versus that diversification piece that you spoke to in the non-figure side?

Good, nice to hear from you. So yes, basically, what we're seeing underneath the covers, I'm going to answer your last question, first, is that we do expect to have growth across all of our product categories, some of our product categories, quite at the absolute dollar value as obviously, our core businesses. So, we feel a little bit more in those, for example, the size of Loungefly and soft lines and games. So we'll see probably more pressure for growth coming from those, but we do expect to see growth across the board. And as we move into kind of getting back to your first question, as we look at EMEA, and what we're seeing underneath the covers there. They still were down 24% in Q4. So they still did have headwinds absolutely just wasn't as much as we had anticipated. And as they continue to be on the lockdown, they'll still see headwinds until we can make it through, at least the first half of the year, but we are pleased with the performance of that business and what we're seeing, given how strict the lockdown has been over there.

And then, just two quick ones, maybe one for Brian and Andrew. First for Brian on virtual events. It seems like you've had some good success there. Can you talk about your thoughts about as we go back into hopefully a post vaccine world, revisiting in person events versus if there's some stickiness around what you're seeing in virtual. And then, secondly, for Andrew on the Snapsies performance, can you just talk about how you see, kind of capitalizing on that performance as we move into 2021 any opportunities between girls or boys toys after what you've seen thus far, thank you so much.

Yes. Virtual I mean, obviously, the Funko fare virtually they replaced New York Toy Fair, the results were staggeringly good considering and we obviously discussed the news recently, that San Diego Comic Con will not be held this year as well. So, obviously, we've learned a lot, from basically nine months ago, we did our first virtual event in San Diego Comic Con where our share of voice was actually better and bigger than San Diego Comic Con, the only share a voice we repeated that success and made some improvements in New York Comic Con and obviously Funko Fare did really well. So it certainly, I think it adds to what we can do as a company, and look, eventually the world is going to go back to normal, and we're going to have a big event, it might even be New York Comic Con, where we're physically at the show. But I think we're going to use the learnings that we gathered from these virtual events, to continue to find ways to drive retail in different and unique ways. And I think the one thing I'm so excited about is just seeing the year-over-year improvement in pre-order on stuff that 6, 7, 8, 9 months out, to see our retailers going out and getting those secured orders, giving us better, reads on indication of interest, what licenses are outperforming what we thought they were and sometimes not performing as well, all this, I guess, adaptability, we've had to learn to do and learned from when we didn't do quite what we thought we would do is certainly going to pay off in the future. So I would see, as a blend going forward once we get a macro environment that returns to normal, I think you'll see virtual events alongside of physical events, and then, virtual events on their own driving unique ways of pop culture that only Funko can do. So it's exciting and lots of learnings. And we just seem to get better at it as we go.

I'll jump in on the Snapsies part. Good to hear from you, as always. So yes, we launched Snapsies in December as a first to market in target. It was launched on time, we were excited about it, we got good results, it was lost on our promotional sidekick, and which we've sold out, you can't find it in stores anymore. Obviously, we just set in line, which we're really excited about. We just set in line about a week ago at Target's, if you go into your local Target, and maybe there unless it's sold out, which hopefully it is. And we are excited about it not only because it's our first ever girl specific youth collectible line. But we are also approaching it from a slightly more aggressive marketing angle than we have with some of our more traditional grassroots marketing efforts for the Funko brand in general. So we're excited to see some early results on that. We're excited to see that the digital efforts are working. We're excited to see that the store lift that we're seeing early is working. So we're seeing some very positive signs, we've got future plans to refresh the line with a lot of great product this year. And as I mentioned in the script, we're expanding our distribution. So we are getting some additional retail doors. As I mentioned, it was a first to market for Target. We've got other retailers coming on board, which we're very excited about. And we think there's a lot of opportunities amongst specialty non-traditional toy retailers on this line. So we're very excited. It's still early days, but we're excited about the brand.

And your next question comes from the line of Steph Wissink with Jefferies.

This is [Hannah] [ph] on for Steph. First, it looks like the growth in the quarter is increasingly being driven by non-core. Could you help us with how we should think about the margin contribution relative to the figures business?

As we look across the business, we did see success, across all the product categories. As we mentioned on the call, domestically we had a very strong quarter -- our strongest quarter yet. As we look at, if I'm hearing your question correctly from a margin perspective, as some of these other categories come into play, whether it be [indiscernible] of Loungefly, but do you have different margin make ups, so will impact the channel distribution will impact the total margin depending on the growth of each of those categories, but overall, we felt really good about where it landed also keeping in mind that DSC has a very strong margin profile. So there's some puts and takes underneath the covers, but we felt good about the growth across the board.

Turning to 2021, as you think about the 25% to 30% growth target, could you walk us through how much you're embedding in terms of inventory reload, distribution gains in international?

Yes. As we look across all of our categories, some of the smaller ones I think, as I mentioned earlier, games has -- we expect a lot of growth out of games coming into 2021, as well as our B2C business and our soft offline. What you'll also see from a regional perspective is, EMEA will have a stronger growth simply because they had a more challenging year in 2020. So we're expecting more of a pickup with them coming into the year as we move forward.

The next question comes from the line of Alex Perry with Bank of America.

And congrats in a really strong finish to the year here. Just first on the quarter, so sales came in about 14 points higher than the high end of your guidance range? I guess, first, where was the delta here, was it mostly Europe? And then, I guess, going into the quarter, what was the thought on Europe, just to maybe help us think about, where the delta was? Or was there a certain channel or property that sort of came in way ahead of your expectations?

Yes, so what we basically saw -- so as we mentioned, Europe came in at a negative 24% growth rate on the quarter that we had anticipated a much lower growth rate given they were going into full lockdown. And given what we had seen in Q2, when they were also in full lockdown. So, what you saw happening in Europe is, they took key learnings that lays it on from Q2, and they quickly pivoted to make sure that they were looking at their orders, pivoting their orders to other retailers to make sure that they could deliver the best possible quarter. And it really did a nice job, we were pleasantly surprised with their performance given what they were up against. And now as we look across the board that we did see, our DSC business did extremely well over the quarter. It was really across the board, not only did we see success in our third-party ecommerce, or mass market in DSC and but we are certainly seeing, the specialty players, aren't quite back to where they used to be, but they're really leveraging their DTC channel as well. And so it was really great to see all tides rise, so to speak.

That's great to hear. And then, just on the guidance, I think at that high end of the range would imply sort of 7% revenue growth versus 2019. I guess, what gives you confidence on returning the revenue base to pre-pandemic levels? And are you seeing an improvement in the content schedule versus maybe the update you gave us when you reported 3Q? And what is the assumption on the recovery in specialty in the guidance?

Yes. I'll take the first part and I will let Brian speak to content. But as we look forward, and yes, this is above -- the high end of the guidance is above our 2019 levels by about that 7%. And we have confidence in these numbers, because of our ability, what we've been able to achieve over the course of the past year, how we pivot into our DTC business, how we worked directly with our specialty retailers to make sure that, especially during the Q2, looking at our orders, making sure that we moved orders to other channels, our international expansion. We are seeing everything we've put into place, over the course of the pandemic really showed up in Q4. And we feel confident that as we look forward, that our guidance of 25% to 30%, fits right in line with our strategic initiatives and how we've invested in the business. So we feel good about our guidance. And I'll let Brian speak to the content piece.

Yes, Alex, I'm sorry. You broke up just a bit. Is the content for ’21?

Yes, just have you seen any sort of improvement in the content slate and then I guess the second part of that was any -- what's the assumption on the recovery and specialty sort of, in the guidance?

Yes. So, look, I'll tell you that the content in '20 was a barren desert right there. There was not, I mean, it was Mandalorian and that was really it. And then, we had some initiatives like Wonder Woman 1984, where we released product. And it was six months before the movie came out. So the product just didn't do well. So we basically had zero content in '20. So if you look at '21, and based on, just solidifying the content slate, five new Marvel TV shows and five Marvel movies alone in '21, we're really excited about that. We're obviously seeing a lot of the movies that were pushed from '20 into '21. They've got sticks in the ground for the second half of the year. You can relate video game content that we're excited about television with Seinfeld, which can be as bigger if not bigger than the Office, which has been great for us for the last two years. So we are insanely excited about the content slate not only for '21 but '22 and beyond, it's really shaping up well. I think Disney Plus, I like to call that out because it's a big part of this analysis back to back, huge wins for us with not only two seasons of Mandalorian. But then one division that's been outperformed anything we ever expected. So going into specialty, our specialty partners had been phenomenal about adapting the business during a very difficult time, they've pushed most of their business to online. So their own, ecommerce channels, and I think you're going to see an omni-channel approach for the next year, buy online, pick up in store, online and then I think when the world gets back a little bit normal, visiting their stores, so I think they're going to rebound, we definitely see them in great inventory positions and the demand for the products have never been better. So we are obviously very optimistic when the macro environment clears that we're in good shape there.

Perfect. Actually, if I could squeeze one more in. So inventory at the end of the quarter is down 4% versus 6% sales growth, I guess. How do you feel about the current inventory position? And then, are you seeing any inventory constraints, given port congestion issues on the West Coast? If so, have you seen any sort of gradual improvement there? I know a lot of other brands and retailers have been calling that out?

Yes, from an inventory perspective, we feel really good about our inventory position. We continue to make progress in terms of the efficiency of our inventory. So we feel like we're in a really good place, as we think about and thanks for bringing up the port congestion. Yes, we are seeing a little bit of that, especially with our Loungefly business. At this point, it's not necessarily disrupting, the total business model. But of course, we're experiencing like everybody else's for sure.

And your next question comes from the line of Garrett Johnson with BMO Capital Markets.

I have three questions here. The first one is very similar to a prior question. You discussed your growth for 2021 a lot of it coming from evergreen. But how much of that 25% to 30% is based on new theatrical releases, not just new entertainment, but specifically new theatrical releases?

Yes, it's obviously a portion. But we've had ebbs and flows as a company over the last five, six years. Six, seven years ago are our number one properties were TV and with Game of Thrones and Walking Dead. So there's always an ebb and flow of how important theatrical is, I think the one lesson we learned from Q4 of '19, where we didn't do very well and underperformed as, a reliance on theatrical events to drive majority of business is not a sound business strategy. We learned from that. We prepared ourselves rather quickly. And that change paid off obviously, in a pandemic that no one saw coming. And we drove amazing business with just evergreen and almost no TV new content. So now you add a bunch of new TV content plus a bunch of theatrical content, plus some great video game titles. We have a master toy announcement, we're going to have this pretty major coming up fairly soon. We don't like to put a percentage on how much that growth is, I think it'll contribute. But like anything else, we've certainly learned from the one mistake we made in that one quarter, we're going to take an omni approach to just every kind of thing that we think is moving the needle on pop culture.

I'm done, one more question, you kind of answered both of my prior questions. So Loungefly seems to be the biggest surprise here in the quarter. So what distribution channel are you seeing the most success with Loungefly?

I think a tremendous amount of success with the Disney Parks closed and which is amazing because that's their number one customer. It's still very specialty, we're seeing a lot of tremendous amount of growth online. So our own direct-to-consumer. And Amazon really become a focus for them as well. So and then we're also putting in plans, using the Loungefly skill set, but the pop brand, and we're starting to dip into the mass retailers. And so I think it truly is about that domestically, those three channels, and then obviously just doing a better job of the amazing amount of content they're creating. And having that resume international, the appetite in EMEA for Loungefly is through the roof. And we think we can do a better job of focusing on sales of the stuff created at Loungefly and moving it all over the world. So we think international is going to play a lot in the near future with their growth, in addition to Walmart, Target and Amazon. So I think we're not surprised with the growth. We have been very bullish. We've almost quintupled that business in a very short period of time. And we believe that the potential for Loungefly is unlimited. We think there'll be just many fans wanting to buy soft lines and accessories as hard goods and vinyl figures. So we're very bullish on the future of Loungefly.

And your next question comes from the line of Tami Zacharia with JPMorgan.

Congrats on the excellent results. I had some questions. My first question is, can you remind us what percent of sales in 2020 came from your own DTC website? And do you expect penetration to grow year-over-year in 2021? And what does that mean for your gross margin?

So we did see roughly about 8% penetration of the DTC business, which is up from less than 4% a year ago. So we did see tremendous growth, as we look forward to 2021. One thing to keep in mind is that, as I noted earlier, all tides are rising. So as a wholesale or EMEA businesses, everything else gets bigger, the shape of pie changes a little bit. So we do expect some increased penetration, but we don't think it'll be as significant simply because there is growth in all the channels.

And my second question is, can you give us an update on what percent of the specialty channel still faces closure in the international market? Any numbers around that now versus what you saw in the fourth quarter?

Yes. And it's really hard to track that, as you know, because even domestically, there's different rules and regulations across the board. However, I would say is that, what we saw in the second quarter was probably the most challenging that we've seen throughout the course of the year. We are seeing it come back to business as we notice, it did exceed our expectations in Q4. And as they have pivoted to DTC, it's really helped them alleviate some of the challenges they have internally as well. So as we look forward, it won't be our -- it'll be a slower back to normal than our other channels. And we've anticipated that but we do see eventually it will get back to where it needs to get to.

All right. And that concludes our questions for this time. And that concludes today's conference call. Thank you for your participation. You may now disconnect.