Good afternoon. And welcome to Funko’s Conference Call to discuss Financial Results for the First Quarter of 2023. At this time, all participants are in a listen only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this call is being recorded. I'll now turn the call over to Ben Avenia-Tapper, Director of Investor Relations to get started. Please proceed.

Thank you, and good afternoon. With us on the call today are Brian Mariotti, Chief Executive Officer; and Steve Nave, Chief Operating Officer and Chief Financial Officer. Before we begin, I’d like to remind everyone that during the course of this conference call, management will discuss forecasts, targets and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today’s earnings press release. In addition, we will refer to non-GAAP financial measures during the discussion. Reconciliations to their most directly comparable US GAAP financial measures and supplemental financial information can be found in the earnings press release and 8-K that we released earlier today. All of these items plus a visual presentation that investors can consult to follow along with this discussion are available on our Investor Relations Web site, investor.funko.com. I'll now turn the call over to Brian.

Good afternoon. And thank you for joining us today. It's been a productive quarter at Funko and we're excited to update you on all the ongoing progress we have made. While our priority continues to be improving our operations, we haven't lost sight of all the opportunities we have to continue to grow the brand. I'm pleased to report that we are ahead of schedule with respect to cost reductions and operational improvements as we've made remarkable strides across the business. Top line results came in at the high end of our guidance and our strong performance on the operating initiatives drove our Q1 adjusted EBITDA outperformance by more than $30 million. Steve will provide additional details on the progress we have made on all of our operating initiatives shortly. Enthusiasm for the brand remains high despite a challenging retail climate. Between our exceptional direct-to-consumer growth, the strong performance of our recent product launches and the early success of our newest commercial partnership with Fanatics, we remain confident in the ongoing passion and loyalty of our fans. I'll start with D2C, which grew 61% year-over-year and now represents approximately 17% of net sales. Our D2C growth continues to eclipse the e-commerce industries single digit growth rate and highlights the power of our brand. This channel is important for several reasons. First, the strength of our D2C business represents a very strong indication of our fans’ continued enthusiasm for the brand. In the channel which we control inventory levels and product newness, demand is at an all time high. Our data suggests that among avid collectors, many purchases that may have occurred at a retail partner in the past are migrating to funko.com. Our D2C performance also highlights the strength and effectiveness of our new Web site launched in Q1. During…

Thanks, Brian. As Brian said, we're well on the way to delivering the operational improvements necessary to support Funko’s future growth. To provide greater transparency on our performance, I'll share additional context around the operating initiatives we discussed last quarter as I walk you through our first quarter results. I'll also provide an update on our outlook for the second quarter and the full year. In March, we described multiple steps we are taking to drive between $150 million and $180 million in annualized improvements to our financial profile. I'm pleased to report that we've made great progress across the board. I'll start with our efforts to improve our gross margin. Last quarter, we described the container rental charges we were paying, which peaked at just over a $100,000 per day. This was our most immediate action item and I'm pleased to report that as of the end of the quarter, we've eliminated all excess containers. We were able to accomplish this work much more quickly than we originally anticipated. The introduction of a price increase on our exclusive products is the second gross margin lever we've been focused on. In Q1, we successfully wrapped up negotiations on this action with our retail partners and we are on track to receive the full benefit of this pricing action by the third quarter of this year. Finally, we've made strides on our efforts to drive efficiency in our product costs. We've instituted a competitive bidding process with our manufacturers and are currently implementing design, cost, tracking and reduction initiatives. Turning to our operating expenses. We've been similarly successful in reducing the rate of SG&A increase, particularly with the US fulfillment costs in our Arizona distribution center. Within our US distribution center, we have rebalanced our staffing levels, introduced more efficient shift…

[Operator Instructions] Our first question today goes to Andrew Uerkwitz of Jefferies.

Thanks guys for let me ask a couple questions. I guess the first one, just kind of on the Q1 results, you talked about the storage cost effectively going away faster than you anticipated. Is that because you were able to move inventory quicker, the ERP system warehouse system got rolled out faster? Just kind of curious what allowed you to clear that out more quickly?

We were able to get out of it more quickly than we anticipated because -- I don't remember if we brought this up on the last call. We did acquire some short term expansion space in Arizona, not too far from our Buckeye facility where we were able to start staging inventory to get the containers emptied and returned. And without getting into too much of the puts and takes of that process, we also were able to find a third party agent willing to accept the trailers on behalf of the carriers, because the carriers would only take so much back at a time, which is kind of ridiculous, because they're charging us rent but that's the way it works. So we found a third party agent that can receive containers back on behalf of the carriers and that immediately stops the per diem charges that we were seeing. I think you also -- so you mentioned ERP and WMS, those projects are not done. So ERP, just as a reminder to everybody, we're not really investing much in ERP this year. We're singularly focused on the warehouse management system that is definitely on track, looking to launch that in the first week of July. So we should see some further efficiencies after that. And then honestly, Andrew, I forgot the other part of your question, so feel free to…

No, that answered it. I appreciate the additional color. And then just kind of switching to -- just a little bit more color on, I guess, the back half change and revenue guide. Is that just purely retailers wanting less, is that -- it sounded like you mentioned a couple of initiatives were pushed out. So was that a part of it? And what kind of contribution do you think D2C will have by the end of the year, if you can share that?

I think obviously D2C is one of the levers we were able to pull when we have a very conservative retail buying environment right now, everybody is afraid of having too much inventory. And so we have been able to -- we can continue to shift goods to our D2C to see to basically move revenue from one source to another obviously in a more profitable manner. So that part of it we feel pretty excited about.

I would just add on to that. The sales drop that we have just guided is a reaction to what we are seeing kind of at the macro level. It's not like a bunch of our customers have come back and said we are not going to buy all this stuff. It's just more looking at macro, having conversations with our retail partners about the second quarter and just trying to get their mood on inventory levels and things like that. So we feel like bringing the sales down was the prudent thing to do, because of just the uncertainty going on kind of out there on the retail landscape.

Thank you. The next question goes to Linda Bolton-Weiser of D. A. Davidson.

So I was wondering, if you could just comment on the channel, the regular brick-and-mortar channel inventory levels, and how things stand kind of among the bigger box retailers versus the specialty retailers out there, and what the current situation is?

So what we are seeing with the larger retailers and I'm sure in other consumer products companies you are probably hearing the same thing is that a lot of the larger retailers are just taking a peanut butter approach right now to inventory management, and reducing inventory across all categories and we are definitely not immune to that. As we can imagine, I've got really good contacts in the retail industry and I'm hearing the same thing from everybody that I talk to that, we want more of your product, but we are facing a tops down mandate to reduce inventory by x percent and it's hitting everybody. So I think that that's definitely part of it. Now the good news is eventually they are going to run out of stock. So sell through is obviously still better than sell in. At some point, the sell in -- those curves are going to have across and they are going to have to start restocking. And we have got checked out with a number of customers and they are all kind of anecdotally saying yes that we will definitely have to be upping our replenishment game here in the not too distant future.

And then I think you said the Loungefly was up 4% in the quarter, that's different from the other kind of categories of product. Why was Loungefly so much better than just the other Pop! figures?

Obviously, we've diversified the -- over the last couple of years since we've only diversified the retail and some of the channel mix. They continue to excel at D2C. Some of their partners, we don't have a ton of partners compared to Funko. But the ones they do are doing very, very well. The parks are doing very well, especially. We have opened up some new doors like Spencer that is performing extremely well for us. So I think we are just seeing more of an opening of new retail partners that want to participate in the Loungefly brand and that's kind of offsetting some of the -- maybe the smaller customers who are having credit issues or just their products aren't as moving as fast as we'd hoped. The new doors, the additional doors are really helping Loungefly. And this is ahead of a really exciting time for them with the new doggy fashion that's coming in the summertime and also our stationary line that's launching in the fall. And then, following up with a really big unisex offering for all of our bags and apparel and accessories in Q1 of ‘24. It's good to see that they still have momentum going in a really tough macro environment in terms of retail. So we're pretty excited. And again, the D2C channel is just one of those great levers we're able to pull as we can move products from one channel to another if we need to another.

And then can you just remind me, did you have any target for your own inventory by the end of 2023, do you have a target for that?

Not that we've shared, no.

[Operator Instructions] And the next question Gerrick Johnson of BMO.

Steve, I'd like to take Linda's question and go a little bit more granular. Can you share with us channel inventory quarter-to-quarter and year-over-year and quantify that, and then perhaps bifurcate it between mass and specialty?

That's probably not something that I can answer on this call. We can follow-up on that. But yes, going that granular on this call, I'm not equipped to that right now.

Thank you. We have no further questions. I'll now hand the call back to Brian for any closing comments.

All right. Thank you very much guys for joining us on this earnings call, and we look forward to talk to you guys in the future.

Thanks everyone.

Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.