Good morning and welcome to JAKKS Pacific's Second Quarter 2017 Earnings Conference Call with executive management, who will refer - review financial results for the quarter ending June 30, 2017. JAKKS issued its earnings press release earlier this morning. Presentation slides containing information covered in both today's earnings press release and call are available on our website in the Investors section. On this call this morning are Stephen Berman, Chairman and Chief Executive Officer; and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter and then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of product lines and current business trends prior to opening up the call for your 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 of sales and earnings per share for 2017 as well as any other forward-looking statements concerning 2017 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 could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other 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. As a reminder, this conference is being recorded. With that, I would like to turn the call over to Stephen Berman.

Good morning, everyone and thank you for joining us today. This morning, we're going to review our performance during the second quarter of 2017. I will talk about how our brand and products performed in the quarter compared to last year and to our expectations. After my comments, Joel will review the details of our financial performance, provide an update on our debt reduction plan and offer some additional color on how we see the year playing out. Then we will open the calls to questions. We expressed in February and reiterated in April, with first quarter sales flat to slightly down, we expect our full year 2017 adjusted EBITDA and EPS to be up over last year despite a decline in full year 2017 sales. In line with our internal forecast, total first half sales were down approximately 10%. In the more important second half, we have some tailwinds on sales we didn't have in the first half and we have significant tailwinds on cost. So we continue to expect full year EBITDA and EPS to be up despite a decrease in sales. We expect the sales decline to be much more modest. During the quarter, we saw declines in several film-related product lines that were weak last year. But we also saw several lines that performed quite well. Properties that showed strong year-over-year increases or which renew this year include, Disney's Moana, Beauty and the Beast, Cars, Tangled and Elena of Avalor and DC Superhero Girls from Warner Bros, Nintendo across several categories and Gift 'ems, one of our own proprietary products. We expect these products, as well as other new products and categories, to be strong performers in the second half as well and to be joined by other new product launches slated for fall which I…

Thank you, Stephen and good morning, everyone. Consistent with our general outlook, net sales for the second quarter which excluded sales to a major U.S. retailer as well as a seasonal promotion that we had in 2016, were $119.6 million compared to $141 million last year, with a net loss of $16.7 million or $0.77 per diluted share which included the onetime noncash bad debt charge of $2.3 million relating to 2014 and 2015 sales. Excluding this charge, the net loss would have been $14.9 million or $0.69 per diluted share. This compares to a loss of $4.4 million or $0.27 per diluted share in the year-ago quarter. And adjusted EBITDA for the second quarter was negative $5.4 million compared to adjusted EBITDA of $4 million in the second quarter of 2016. The sales drivers in the quarter by category were as follows, sales of Dolls, Role Play and Dress Up plus an activity products in our Girls category amounted to $51.3 million for the second quarter compared to $61.6 million in 2016, driven by Dolls and Role Play toys featuring Disney Princess, Moana, Elena, Beauty and the Beast and Frozen, Tsum Tsum and Gift 'ems collectible figures and accessories and the launch of DC Superhero Girls, though Frozen and Alice Through the Looking Glass are down year-over-year, as expected. Sales of Action Figures, Vehicles, Role Play and Electronics products in our boys and other category for the second quarter were $15.2 million compared to $22.4 million last year, driven by Nintendo with new gaming platform and video game catalysts, BIG FIGS and Ooshies and absent catalysts, XPV Turtles RC, Star Wars and Warcraft declined year-over-year. Sales of seasonal products, including licensed Ride-ons, ball pits, kids furniture and Maui outdoor activity products were $19.9 million in Q2 2017, down from…

Thank you, Joel. Before opening the call for questions, I wanted to talk more about what we'll be doing in 2017 and beyond to further our drive to become a world-class producer of consumer products for kids. Consistent with our strategic goals of expanding the broad base of stable evergreen categories of products, partner brands and licenses as well as developing our own IP, let's review some of what we have coming up for the second half of 2017 and the early part of 2018. As you know, we have, for many years, been a very important licensing partner of Disney. That partnership continues to expand and in the second half of this year, we'll benefit from a growing number of Disney properties, including several that were strong in the first half, namely, Moana, Beauty and the Beast and Elena of Avalor; as well as Cars 3 and Spiderman RC vehicles. With Warner Bros. DC comics is also broadening out as a licensing partner and we're launching more DC Superhero Girls products as well as several products tied to the Justice League which hits theaters in November. Nintendo continues to be a strong licensing partner. Our Nintendo sales were up strongly in the first half and should do well with our Nintendo's Splatoon shooter, a physical product that emulates the videogame. Other important licensing partners that will help our second half includes Black & Decker toys and Role Play, WWE big figures and dress up and Ooshies licensed collectibles. And, of course, our Disguise division always does well with licenses such as Disney Princess, Lego, Nintendo and Pixar characters, with new licenses this year and Disguise, including Minecraft, PJ Masks, Shopkins and others. As importantly, we continue to launch new proprietary brands which we expect to sell well and to…

[Operator Instructions]. And our first question comes from Steph Wissink from Jefferies.

I think I saw all the detail in the prepared remarks. I just have a few questions. The first is just with respect to the sale decrease year-over-year, if you could just help us forth-rank the large customer that you suspended last year which hasn't quite anniversaried yet. I think you mentioned some entertainment properties that were down year-over-year and then the promotional program that you didn't anniversary. Just help us appreciate relativity among those three impacts in the quarter.

Okay. The customer was in the mid-to high-single, 7-digit range as with the promotion. And also, for that matter, Frozen. Offsetting that, in part, were some of the initiatives that Stephen explained in his portion of this call.

Okay. So the large customer and the promotional program, the larger of the 2 or should we think that all 3 of those are similar in size?

I would take the large customer, the promotional program and the properties that - which we mentioned, I think it also was Ninja Trutle XPV were pretty much the total decrease for that - for the quarter.

Okay. And then on the inventory, I think you mentioned some planned inventory purchased and what you have on your balance sheet today for some of your back-half initiatives. But could you just provide us some contexts and how that relates to some of your geographic growth strategies as well?

Sure. With our expansion in the international markets, we also have local inventories that help - that better help support the local retailers and we expect we'll have overall revenue enhancement capabilities. In the international markets, the increase is about $7 million. In addition, on the domestic side, we have some new initiatives on the Halloween side with our dot-com customers which accounted for an increase year-over-year of about $6 million. And a little bit is, we're still working through some of the inventory that we've brought in for spring.

Okay. Just a couple more, guys. One quick one on Disgues, just remind us what the growth margin profile is of that business relative to your corporate average. And is there any strategy in terms of kind of how to think about the evolution of that model from a margin perspective over time?

Well, Halloween is kind of a mature business and there's much elasticity in the pricing. Even though we have great costumes and great licenses, we don't command premiums, it's just the nature of the beast. The average margin is below the corporate average. So when this particular quarter also dovetailed into a margin answer for the question you didn't ask, is that, with Disguise up a little bit in the quarter, it amount to - it made up a higher proportion of this quarter's sales. So that was a little bit of the drag on the margin. But it's a great business, we do have a wonderful mix of licensed and nonlicensed properties that we expected to make great contributions for the foreseeable future. So...

Okay. Just a final one for us guys, it's related to the EBITDA bridge for the full year guidance, I think you're suggesting EBITDA up slightly versus last year. If you could just remind us what the base is that you're using for your guidance? The 2016 base? And then secondly to that, how should we think about the kind of 60 million-plus acceleration into the back half relative to what you've reported year-to-date. And help us just size that what the drivers of that EBITDA should be in the back half?

Sure. Last year's EBITDA is $41.7 million and 2 big components of the back half, at least in terms of the comps. Within Q3, we had $4.2 million of legal and audit settlements from prior years. And also, we expect, having forecasted at this level of sales, our marketing spend will be much more efficient. So that translates into about $10 million of tailwinds. In addition, as we go into the back half, it's roughly 2/3 of the year's sales. So we expect to regain the leverage lost in the front half. So based off of the sales, those tailwinds in our costing in general, actually our SG&A was down year-over-year in Q2. So all of the components that we put in place are well on track for us to achieve those general outlook numbers.

Our next question comes from Tristan Thomas from BMO Capital Markets.

Just 1 quick question. Have you observed any change in customer shipping to either more FOB, away from domestic?

Actually, we're much more focused as an FOB company than a traditional, kids consumer product company or toys companies in general. But I'd - on a - we haven't seen more of a shift, we've continued that path as a company. We have seen more of a shift more on the U.S. side of larger retailers wanting just-in-time inventory. So you're - we're managing more of the just-in-time inventory on an FOB basis. But at the same time, that also needs a requirement of bringing some more domestic inventory to fulfill those needs.

Our next question comes from Linda Bolton-Weiser from D.A. Davidson.

Hasbro, on its call yesterday, talked about expecting fourth quarter sales to be bigger than third quarter which is a little unusual. I would assume that's because retailers are wanting to take products later and later. So is that something that you're kind of expecting too? And I'm just asking because you actually have an easier comparison in the prior year in third quarter and a harder comparison in fourth quarter. So how are you kind of expecting things to kind of look in terms of year-over-year growth rate for each of the quarters? Because the comparisons would suggest you'd have a better third quarter, but that kind of goes against Hasbro and what they said about the shifting of sales later. So can you give a little color on that?

Yea, I believe that - I think Brian from Hasbro mentioned it that fourth quarter will have a little bit of a shift of more sales. And were seeing that as well, based off planograms and based off of the plans that are done, I would say globally, not just in North America. So we're actually seeing a shift with promotional programs, with set dates for a little bit more in fourth quarter than in third quarter from the past prior years. So what Hasbro said, we're seeing the same thing.

Right. But for you, your third quarter is just usually so much bigger. It still will be a bigger sales quarter, right, for you? The third quarter?

Yes. The third quarter will be a much larger quarter than fourth. But we still - as I think I just answered what Hasbro said, to be in sync, there is a pickup in fourth quarter as well, but our third quarter will definitely be bigger than our fourth.

Got you. And then I think that you had mentioned some of the pricing pressure or something in pool toys a couple of times now. Is that kind of a long term phenomenon? And how big of a business is that for you?

It was actually that the pressure we felt was in our seasonal area, the Funnoodle business. And it actually just fluctuates with oil prices and also demand and manufacturing capabilities, as there's less manufacturers. We saw this year, a little bit more pricing pressure that way, more on the manufacturing side. But it fluctuates throughout the last 14 years, it fluctuates year by year. So I think we've seen the bottom of the lower margin aversion in that area.

Okay. And then can you talk a little bit about the situation with the converts? Because I think there's still a balance outstanding and would that become a current liability on the balance sheet in August? And what does that mean? I mean, does that affect your ability to borrow under your revolver? Or can you just kind of talk about what that means for that to become a current liability?

Yes, Linda, with all the exchanges that we've done in Q1 and Q2, the current principal amount on the 2018 is $42.7 million. It does become current August 1. So to the extent that no others are exchanged and retired that would become current. We have no real concern about that. There's no covenants in our credit facility. We're very much aware of the maturity coming up. And as we mentioned in the call and previous calls that we're dealing with those and we expect to do it in ways that are positive for the shareholder.

Okay. And then just on your operating cash flow. I think for the first half, it looks like it's kind of down year-over-year, but I believe you're probably expecting positive free cash flow for 2017. In case something happens with Christmas, because it is a difficult retail environment, if something happens with Christmas and your cash flow is more neutral like it was last year, what would be the plan then with regard to dealing with the rest of your converts outstanding?

Well, I think the order of magnitude regardless of Christmas wouldn't be that great. We started the year with a lot of cash. We're expecting - we planned for many different contingencies and we still expect to be able to take them out, like I said, in shareholder friendly manners. This year, a lot of what is going to drive the back half is continuing. The working capital will be a source of cash as we work down our inventory levels. Also, in Q4 being one of the low quarters from an overall volume perspective. We generally throw up most of our cash in the fourth quarter. And we don't expect that to change and given the conservatives within the forecast, that's all basically factored into the plan that we've articulated.

And Linda, just also add to that. Primarily, I think it was an question, a lot of - majority of our businesses is done on an FOB basis. So that those orders are all in line and we have a great backlog. So that really, I think we don't have as much pressure as normal due to the retail environment. But by the way, the retail environment and at least call it kids consumer goods and toys, the sell-throughs have been terrific to date. So that's a good comforting feeling.

Thank you, everybody, for the call. Those were the last Q&A questions. We appreciate the time and we're looking forward to our third quarter conference call coming up in October. Thank you again.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.