Good afternoon everyone. Welcome to the JAKKS Pacific Third Quarter 2022 Earnings Conference Call with management, who will review financial results for the quarter ended September 30th, 2022. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides for today's call are available on the company's website in the Investors section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, along with highlights of product lines and current business trends, then Mr. Kimble will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening of the call for 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, margins, and/or adjusted EBITDA in 2022, as well as any other forward-looking statements concerning 2022 and beyond are subject to Safe Harbor protection under federal securities 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 the actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such 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 report subsequently filed with the SEC from time-to-time. In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measures within the company's earnings press release issued today or previously. As a reminder, this conference call is being recorded. With that, I would now like to turn the call over to Stephen Berman.

Good afternoon and thank you for joining us today. It's been another strong quarter, great shipping numbers, and great sell-through at retail. Q3 for us was a solid continuation of our story this year, centered on the team's hard work to chase opportunistic 2022 demand, while minimizing supply chain drag on our business. We shipped 323 million at the overall company level in the quarter, a 36% increase over the same quarter in the prior year. That brings our year-to-date net sales level to $664.3 million, which is 7% more than we shipped in all of 2021. We have never done that in the history of our company. It's really an accomplishment on a number of levels, both in terms of having that level of demand and the confidence from our customers, but also from our perspective of our vendor base, and internal teams working to figure out how to deliver that amount of product in that amount of time. Calendar year 2022 is on track to be our second consecutive year of topline growth around 20%. How we deliver these numbers is consistent with our story from last quarter. We worked with our customers worldwide to focus on FOB sales to push our volume through a broader and deeper range of supply chains. We've also partnered with them on addressing their specific needs around promotion opportunities and customized products. We've invested in extra to indicate additional capacity for the ranges that are significantly exceeding our expectations. And increasingly, we have focused on maximizing our international opportunities. We've onboard new team members, while taking advantage of the excitement that's been building within our business to secure more shelf space with more customers outside of the U.S. Although the outlook for the economy and consumer demand remains a bit uneasy, we…

Thank you, Stephen and hello everyone. As regular listeners know, there's a greater level of granular detail included in our release today, but I'm going to be selective in what I like have right here towards what I think merits the focused attention. Obviously, another great quarter in * sales performance across the board. As we reminded you last quarter in 2021, we had about $30 million in Q3 FOB sales slipped into October. But even taking that into account, great year-over-year sales performance here as Stephen highlighted. We always talk about how we manage with a full year worldview regardless of the quarterly check-ins. We're on track to finish the year with great sales growth, which is obviously great, especially when we see it flowing through to the bottom-line and improving our balance sheet. In unpacking gross margin, we're down just over 310 basis points in the quarter year-over-year, with a number of factors in play. Higher costs associated with importation and delivery of domestic product, particularly earlier in the year ultimately exceeded any price increases that we've slipped through. Royalty expenses are bit higher, but was in line with our expectations consistent with last quarter. And we're picking up a bit of scale on tooling amortization. Although this is an area where our capital spending is up overall compared to prior years. Year-to-date CapEx was $8.6 million compared to $6.4 million and $6.2 million in the 2021 and 2020 equivalent time periods. We're continuing to get very good scale out of our SG&A here with operating margin reaching 16.7% in the quarter, up 120 basis points from prior year's Q3. Year-to-date operating margin is 11.6% compared to 8.3% in 2021. Year-to-date operating profit of $76.7 million is more than double the year-to-date 2021 number of $35.8 million. Consistent…

Thank you, John. Q4 is always the most exciting time of the year for our business and that's certainly true this year as well. I encourage everyone to get out and walk retail over the next couple of months to see what a tremendous job the teams have done securing placement for JAKKS' products heading into the holiday season, in aisle, in caps, pallet programs, check lane, we're everywhere. It's really exciting, and we're hopeful it's going to be a great holiday gift giving season in our part of the store. With that being said, I'd like to take a few minutes to go a bit deeper to talk about some of the drivers behind our recent successes. I hope it can help illustrate some of the things which differentiates JAKKS from other companies in our space, certainly among the publicly-traded ones. As we become more focused on evergreen segments of business built around timeless play patterns that has diversified us away from signing a bunch of new toy licenses each year based on yet to be launched IP, with the hope that one or two would break out. That change in direction has meant even more work for the internal teams, as they really have to push the value proposition of what we offer to secure listings and get retailers to go with us given the wide range of options they have. That can make for a slow road to growth on a product line by product line basis. But the payoff is when it starts to work, and it could really take off from there. Without getting into specifics for competitive reasons, in 2022, we've been benefiting broadly from increased point of distribution, which in turn have been achieved in excellent retail sell-throughs more often than not. When…

[Operator Instructions] Our first question comes from Matthew Catton with Jefferies. Your line is now open.

How's it going? Matt here from Jefferies. Congrats on the great quarter and performance and execution year-to-date. So, just thinking about some of the business growth vectors stuff that you've had throughout the year, would it be possible to help us think about core versus maybe some of the booths that you've gotten from Sonic and Encanto? And how we should maybe like parse out thinking about the growth that you've experienced this year?

Great. Thank you, Matt. So, first off the basic core business of JAKKS are seasonal are boys or girls' area businesses, our girls license area of businesses, disguise, all of that really tremendous growth. The only segment that we had, say less excitement about was our bulk items at our table and chairs and our kids only moose, mountain businesses. We knew that going into the year based off of the cube and all the price considerations for shipping that that was a very difficult area for us to do business with and retailer. So, we shipped those businesses to keep the shelf space, so we could go into 2023 with better initiatives and with cost of container rates dropping materially, from $12,000 to $15,000 in the early part of the year to $3,000 to $2,000, where they're coming in now and even lower, that will look to grow, but all the other areas of businesses are Disney core business, our style collection, our role-play of everyday princesses have all had great growth. Our Ily area of business have had great growth. And then our disguise, we've had tremendous growth, which has had a tremendous amount of new additions. We entered the international market, our gaming brands of business from the Nintendo to the Sonic to Pokémon to Minecraft to Halo, just to mention a few have on an exceptionally well. And we have new segmentations like the Funko masks that put us into different areas of businesses. So, those have been doing well. Encanto still has been doing tremendous throughout the world. We see some great excitement that. Sonic -- Classic Sonic, the movie, Sonic 2 has had tremendous legs and continues to grow. And we're looking excited into the first half of next year with the Netflix, Sonic new categories of animation at Netflix. In addition, we have the Ily line, our girls perfectly cute. So, we have some really tremendous operators that did well Encanto, styled collection, and Sonic, but our everyday business of Black and Decker, our apex legends, our boys Nintendo. Just across the board, we've seen great distribution, we're getting further distribution both in North America and international territories, both in brick-and-mortar and online. So, it's been across the board of the diligence we've worked on over the last three years to really build that singles and doubles business, the brick-and-mortar -- the brick-by-brick methodology to having some really exciting things with Encanto and other content. And going into next year, there's really some exciting content coming plus some new evergreen initiatives that we have. So, we've done this over the last three, four years. And it's now coming to fruition based off of last year success and this year success and we see this continuing through next year.

Awesome, thank you. And then I guess the second question I would have, you spoke about the importance of shipping FOB and the shift from 60/40 to 65/35 this year. When we think about the cadence next year, do you expect like a similar reliance on FOB shipping? Or should we think about the seasonality of the quarters potentially shifting more back to a traditional sort of pre-COVID style?

So, as everyone would know that we started the company almost 20 years ago in January as an FOB business, and will continue to do that heavily as one of the best areas of our business. It's less use of capital to be able to do so. It benefits us and our retailers to purchase the goods overseas. It helps everyone their blended tax rate, it actually allows the loads that the retailers put on their goods to be able to utilize their loads of cost of capital, their container costs versus ours. So, we will continue to push more FOB. But that being said, we've pivoted this year based off of the container prices that occurred last year in early part to push more FOB. And we'll just monitor it as a company feel it's beneficial to ourselves as well as our retailers and our consumers to do what's right. So, if it's better for us to push more FOB, we'll look to do so or if it's better for us to bring in -- change it around a little bit more domestic, we'll do so. But we are much more an FOB company than a domestic and allows us to manage the inventory levels at retail and in our own distribution centers around the world better to be an FOB business, but whatever benefits our company and the consumer and retailer, we'll adjusted to that as needed.

Thank you very much. And then just one last one for me. When thinking about inventory, it looks like your guys' inventory management has been very strong year-to-date, but it's still elevated year-over-year, how do you guys think about where you want to be positioned at the end of the year? And how should we be thinking about that position at the end of Q4? Thank you.

Thank you, Matt and that's a great question. So, what we've done is -- we've obviously had a terrific quarter. And we now are utilizing our inventories that we have domestically around the world, to fulfill what's needed and what's projected for the remaining half of the -- remaining three months of this year. So, that inventory that we have, and we built early on to make sure that we had the right inventory, correct product lines for the first half of the year, because Chinese New Year is in January. So, we have the Ariel Disney movie launch. We have the new different areas of some other movies that will be launching in March in April. So, we have the appropriate goods were needed. So, we will look to have our inventories slightly lower by the end of the year. But we do need an ample amount of inventory, because the first part of the year will be domestic versus FOB on some of the goods based off of Chinese New Year and our planning purposes with retailers. Operator, next question?

Our next question comes from Tristan Thomas-Martin with BMO. Your line is now open.

Good afternoon, guys.

Hey Tristan.

Hey Tristan.

Three questions. So, your full year guidance be around 20% growth implies fourth quarter sales are down quite a bit. Is that what you would have expected if I would ask you this question three month ago?

Yes, we've been managing based off of the environment and the economy and the nervousness that's been happening around retail around the world, we planned internally with our teams, John and all the rest of the company of focusing on having the appropriate sales early on knowing that there's going to be inventory issues at retail based off what the retail environment has been discussing. If you look at the financial announcements based off of -- virtually almost all retailers about their inventory levels being high. So, we want to plan to have that the fourth quarter. We're going to have a successful great year for JAKKS. but at the same time, we want to manage our business and not be successful and try to achieve the highest numbers out there and then have inventory going into next year. So, we're managing the inventory levels, managing the sell-throughs at retail, and managing what we believe is we have -- to have terrific year both on topline growth, profitability, and EBITDA. So, we are managing appropriately to make sure that we have the right inventory and the right amount of sales for the year, which then will allow us to have a hopeful clean entry into 2023 for JAKKS. We're not worried about everyone else's inventory and that allows us then to have the right products that consumers need with the right product in stock.

And then could you maybe just quantify your inventory levels of retail? And then go maybe a little more in depth and kind of some of the plans for moving it?

I mean we really don't necessarily usually get into that. I mean, it's a little bit of a hard number to really triangulate, because to the extent that retailers are talking about what they might currently have in their DCs, it doesn't necessarily capture whatever they've purchased as part of the fob part of the business, which is like a big thing for us as you know. I mean, we've obviously shipped a lot of product this year. At the same time, we've obviously killed through a lot of product too. So, I don't know no beyond that, maybe not so insightful comment that there's a whole lot to be said about that at this point.

Okay, I got it. Any trends worth calling out the POS over the quarter strength, it's different price points are really just throwing product standouts?

I'd say right now currently, first, we've had the Halloween, price points vary from $19.99 to $29.99, the sweet spot of Halloween. We do have other price points in the $99 and a little higher than that, but the sweet spot for the Halloween business has been right around that $19 to $29. For toys right now, we're still in the midst of -- people have been buying somewhat early for Christmas. But while that happens, we mentioned this I think it was in second quarter or first quarter that over 50% of our items are in that the lower than $29. That's been something that we started from when we initiated the JAKKS -- incorporated JAKKS in June 1995. So, that is primarily the sales right now. At the same time, the higher ticket items that we have -- the different play houses for Nintendo and Encanto and the Disney items, just to name a few, all will actually pick up in the next two months right now to sell higher ticket items. But those higher ticket items in that our industry normally don't sell early -- as early as we're in right now. But we'll have -- we have a good portion of our business that have exclusives with some retailers. So, there's a variety of different higher ticket items that really are on sale now -- not on sale discount, but on sale now that will sell through the year at a higher rate. And then it will trickle down to spring again when the lower price points prevail.

But I think just to build upon that a little bit, to get a little bit more granular. We don't really see anything popping yet that you would kind of have an aha moment about. I mean, we do see great momentum across a range of the bigger segments from a point of sale perspective, not necessarily just being Encanto, and the Sonics, but -- the different elements of our princess business, our Perfectly Cute business, some of the other kind of more traditional evergreen parts of our business. Stuff is still selling through real well for us on a year-over-year basis. But we're not really seeing any particular trends yet as a relates to the toy side that the higher price stuff is moving faster and not moving faster or on the low end either. I think for Toy holiday, it's a little bit too soon to tell. But we are happy to see that a range of our different segments are still performing really well.

Okay, got it. Thank you.

Thank you Tristan.

At this time--

Sorry, operator?

I apologize.

So that was the last for the Q&A. We have scheduled calls from this point forward. So, we appreciate everyone taking the time to be on our call today. Wishing everyone a healthy and happy Thanksgiving and happy holiday and look forward to continuing conversations and looking forward to the next year's call. Thank you very much.

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