Q1 2020 Earnings Call

And timeline to match, the new release schedules and for items that were already in production will be holding them at our factories and it or warehouses.

While we do expect these movements to impact the timing of revenue what a funko key strengths is its ability to produce it gets evergreen properties, which we will continue to lean on.

While we are confronting the challenges in mitigating the impact to co bid we remain committed to our key growth strategies, which we believe are critical to our long term health and value of our business.

On our yearend conference call in March we outlined four key strategies for 2020, let me provide you with a brief update on each of these priorities.

Our first strategy is continuing to expand our pop culture business.

This includes building fun in L. static evergreen programs at retail as well as expanding within the unpenetrated genres in the first quarter, our evergreen properties made up 58% of our total sales compared to 45% in the same period last year. This was driven by solid execution against some of our mainstay properties such as.

Star Wars Classic Harry Potter DC Comics and Marvel. We also saw positive initial response to both new and expanded lines, our new Marvel minimize line propelled maximum benefit in the number eight spot on our top 10 property list for Q1.

Our expanded offering of poking on performed extremely well, making it our second largest property in the quarter and the mandatory in was our third largest property driven by shipments of our first products of the child, we saw tremendous demand for these items, which included pop final T shirts, and accessories and we're building on this in the coming.

Orders.

Our second area of focus in 2020 is driving continued product diversification, we are launching new products and building on current platforms to create new revenue streams and expand our consumer base.

In the first quarter, we saw positive initial response from both retailers and fans to our launch of vinyl soda, which was our fourth largest figure line in the quarter also our allowance by brand continued to perform well growing 4% compared to last year as consumer shifted their purchases toward stayed home activities.

We also saw seasonally strong pickup in consumer demand for our funko versus four games, while the board game business is still nascent for funko. We're excited about the opportunity in front of US we're moving aggressively to launch our new games and toys into the market. During the latter part of this year, we'll be releasing dozens of new offerings from funky.

So games, including new Funko verse titles as well as license and non licensed board games.

Late in the second quarter, we'll be launching our first ever battle inspired game, there will be targeted in younger demographic and mixes co-operative game play and micro collectibles. Additionally, our new loan license 20 offerings snap sees bogey monsters and gatehouse gang are all expected to hit toy sales in the second half of 2020.

Our third area of strategic focus is international expansion most of our overseas markets have been hit hard by coded and we expect to see greater impact on our business internationally than domestically as I noted earlier, we are limiting the shipments of the new items in Europe in Q2 to preserve demand while our stores remain closed however, we are in.

Courage to see the countries, such as Spain, and Germany are beginning to relax guidelines. We continue to believe that there is significant opportunity to expand internationally and at the global economy begins to reopen and recover we will be focused on capturing more international business across Europe, Latin America and APAC.

Our fourth area of focus, which we view it and increasing priority is expanding our ecommerce business. We are accelerating our plant and investment to build a robust online platform and enhance our digital capabilities the size and scope of our E. Commerce business is evolving as we focus on transitioning to a more powerful selling model and ensuring that.

We have the operational infrastructure to build scale as demand grows in the first quarter, our ecommerce business grew more than 50%.

But represented only a small percentage of the overall business, reflecting the significant opportunity in front of us.

In early summer, we plan to relaunch funko dotcom to provide our fans with a more expansive ecommerce experience. The redress site will allow consumers to shop across new Phantom categories, such as movie Anna May sports and music as well as broader site catalog, which has grown significantly since January and.

Additionally, the site will feature a recommendation engine that showcases related products to increase depth of purchase.

Helped drive traffic, we will be offerings special promotions to our fan club and App users and collaborating with our studio partners and Influencer communities through social media and other digital campaigns.

Sure, we have sufficient resources and capabilities to meet demand, we are converting existing warehouse space in the west which will be dedicated to our direct to consumer business. Additionally, we are planning to accelerate the expansion of our ecommerce capabilities in Europe. Later this year as we focus on leveraging the significant D to C opportunity.

In front of Us I'm, particularly excited to tell you about our new Chief marketing Officer, Ginnie Mccormick Genie comes to bunker with 15, plus years of toy industry experienced substantial expertise as a global brand leader and two decades of digital transformation work.

And he was most recently head of global media for Hasbro and joined US in late March we couldn't be more thrilled to have ginnie onboard as we continue to strengthen the funko bran expand our reach of consumers and broaden our product offerings, while ensuring we are surprising and delighting our fans.

We believe our initiatives to diversify funko revenue streams, coupled with the strategic acquisitions, we've made over the past three years will pay dividends over the long term, we believe funko competitive advantages will provide resiliency in a challenging macro environment diversity of product licenses consumers and channels as well as low.

Price points speed to market in connection to key secular trends, we believed in the rise in pop culture, and Phantom will endure as entertainment and content continues to become ingrained in everyday life in Funko will continue to create products that connect fans to the content They love.

Your operating and planning our business conservatively, but we are remaining nimble and acting decisively to ensure that when the economy begins to reopening we're prepared to ramp up as quickly as needed before I turn the call over to Gen.

I'd like to offer a huge thanks to the entire funko team as they have taken every challenge head on and adapted quickly over the past couple of months, we would not be into position. We are today without tireless efforts of everyone in our organization.

Also we are grateful for the continued support of our partners and our shareholders as we navigate these dynamic time and finally, a big shout out to our fans will continue to be the lifeblood of funko, we will always be committed to our fans and connecting them to the properties. They love ill now turn the call over to Gen.

Thanks, Brian and good afternoon, everyone before I review, the first quarter financial I'll begin my outline steps, we're taking to manage expense and preserve cash and responsible closing price it.

Equally week, we've made a number of strategic thinking that enable us to increase flexibility reduce cost strengthen our financial position and improve overall liquidity.

Lets recently, we successfully amended our kind of deferred is to provide greater near term flexibility, which most notably include the financial covenant waiver for Q2 in Q3 this year.

Recently implemented cost cutting initiatives across the business. We further in roughly 40% of our global workforce executed 20% salary reductions for the executive team and other members of upper level management.

We do sporting director's compensation by 20%.

Clinton hiring freeze and deferred merit increases.

Additionally, we significantly reduced expenses across several other buckets, including marketing travel professional fees and contract labor.

As a result lean initiatives, we expect to capture approximately 15 million questioning savings in the second quarter 2024 perspective hit your question in dollars are now expected to be down moderately on sequential basis. So one.

As we look at the second half 2020, we're planning a business again multiple recovery scenario and will be managing our expense base with the goal of maintaining our new minimum liquidity covenant at $30 million.

In addition to cost reductions. We've also taken several actions to preserve cash increased liquidity first we did down approximately 29 million under our revolver in late March to increase our cash on hand at quarter end, we had approximately 46 million of availability under the revolver.

We again non product development capital expenditures cutting total capex spend by approximately one third for the year and third we have been proactively managing working capital by reducing incoming inventory to realign anticipated demand.

At the end of April we had over 60 million of cash on hand, and $46 million availability under our revolver, resulting in over 106 million of liquidity.

We believe the underlying strength in the business in our financial flexibility will enable us to navigate the impacts of Cowen.

That said, we believe is prudent to explore opportunities to secure additional liquidity and we're continuing to evaluate options.

Now turning to our first quarter financials.

Our top line results reflect the combination of tough comparisons to last year as well as various impact apparent during the quarter, particularly the past two three weeks of March.

As we previewed on our year end earnings call, we experienced manufacturing disruption and delayed shipments throughout the period. Additionally, we saw incremental pressure on our business and finally for the quarter as retail store closures and social distancing measures took effect.

First quarter net sales came in at 137 million down 18%.

As a reminder, we're comping against a number of high performing properties in Q1 of 2018, including fortnight vendors on game Captain Marvel The final season that payment trends in toy story four.

The number of after properties in Q1 increased 11% to 681 and a net sales per active property for 201027% year over year.

In the quarter, our top 10 performing properties where.

Our worst classic looking on.

And then Delorean Avenger endgame Harry Potter.

The retail DC Comics Nason, then dragonball Lee import night.

We continue to see underlying strength in the evergreen categories, including diversity of products and number of properties.

As a percentage of our total mix evergreen properties accounted for 58% of net sales, which increased 13% compared to last year.

Our stronger performing evergreen programs in the quarter included Harry Potter Starwood classic poking fun.

Next invented in DC comics.

In the first quarter net sales in the U.S. decreased 10% <unk> international sales decreased 34%.

During the negative effect as Colin on overseas market, particularly Europe within the quarter.

On a product category basis, Q1 sales figures were down 18% to 111 million, but other sales decreased 18% to 25 million.

Sales of our pop branded products were down 16% in the quarter and managed pilot that part question.

The first quarter gross margin came in over 40% of 240 basis points versus a year ago. The increasing gross margin as a result of improved product margin and enhance inventory management processing implemented in the later half of 2018.

The strength of product margins in the quarter was driven by higher average selling prices driven by mix shift towards DTC sales as well as higher margin lounge by product and sales to our European customers.

We expect gross margins to remain strong in 2020, but also I anticipate that all the puts and takes throughout the year due to a variety of factors such as lower sales and volume.

Changes in purchase orders that focus on our ecommerce business and our launch of higher margin gain and non licensed toys later this year.

Selling general and administrative expenses increased to 47 million, primarily reflecting an increase in head count written facility costs as well professional fees.

We anticipated SG nine to leverage as a percentage of sales coming in at 34.6% versus 24.2% a year ago.

From an earnings perspective, adjusted EBITDA came in at 11 million and adjusted EBITDA margin was 8%.

Net sales were pressured by tough comparisons to last year and the impact of Covance gross margins remain strong and we carefully manage expenses throughout the quarter.

Turning now to the balance sheet and cash flow. We ended the first quarter with cash and cash equivalents at 55 million and total debt of 243 million.

Inventory totaled 53 million down 30% versus a year ago and 14% from year end.

We generated cash flow from operation of 37 million and capital expenditures totaled approximately 5 million.

As I mentioned earlier, our liquidity as of April Thirtyth with over 106 million.

As Brian discussed we currently expect the second quarter will be our most challenging quarter in 2020 as many of our retailers stores remain close and consumers in here to stay at home orders and social dispensing guidelines.

We also anticipate continued to be heightened pressure within international markets.

Oh, you're beginning to see some states. We opened this week in light of ongoing uncertainty both here and abroad, we're not providing full year outlook at this time.

We appreciate your time this afternoon.

Brian Andrew and I would be glad to take your questions.

Okay.

At this time, we never conducting our question answer session in order to ask the question. Please press Star then the number one on your telephone keypad. Your first question comes from the line of Erinn Murphy with Piper Sandler Aaron Your line is open.

The and safe. My first question is really just to dig into the international business a little bit more could you just maybe shared how it progressed throughout the quarter. So starting in January February March and then as you think about Q2, you, obviously reference Europe, you're gonna have minimal shipping but curious.

If you can just share what you're seeing in Asia Pac Canada, any other kind of Lake region for you.

Yes, Hey, our analytic.

Yes go ahead.

I wouldn't start error I think that.

Reducing and chasing them they will over producing and I think that is where our relationships over the years are going to allow us to quickly reap you know replenish if we have to and not leave that overall <unk> revenue up limped without the risk having the <unk>.

Paint thinking <unk>.

Yeah next question comes from the line I Fucked me <unk>.

Yeah like that then.

Thank you could afternoon, everyone I'm just so could follow up on your question on in been trained wondering if he can talk a little bit more about the flow of good to hear retailers and how the infantry position is at retail or should we think about any sorta order risk as we move to the next couple of quarter is based on the inventory already and channel.

<unk> why don't you start with that the first part of that.

Okay, great Yeah, So I'll I'll say that you know as the onset of the Covanta effects took took a hold of a retail you know we were we were pretty aggressive with our retail partners to ensure that.

You know, we we weren't sort of like hoping for the best we were having a very real conversation with them about what they needed when they thought they were going to need it where they're going to close down where they're warehouses going to be you know running partial cruise because they were just doing e. commerce and no stores and we quickly saw that the you know the store.

<unk> closures escalating and we took aggressive actions to either stop producing product for them during that time window or of the product was already here or on its way reallocating. It to other retailers who were open for business. So I would say that a lot of our retailers have country.

A new to ship their dot coms, which has been very successful for most of our mid tier specialty customers. We've seen a lot of traction more so than we probably would have expected. During this time. So they were able to move on a lot of the inventory to add coming in for stores do you know we have gotten the question.

Do we think that the inventory's going to be stale when they open their stores back you know in a couple of months and we think the answer that no.

And there's two reasons why one you know I'll remind me that 58% of the the inventory that was shifting to the channel Q1.

Is what we consider evergreen it was ever green products. So that that is a problem just not tied any specific.

You know movie or T.V. show release or anniversary you know that that's an evergreen cells every single day items about 58% of the the inventory that's part of it and the other part of it is the truth is that we don't believe the stores have been closed long enough to cause our <unk> our products to get stale. If <unk>. If their stores you know didn't know until August maybe that'd be a different conversation, but we see.

The majority of our store starting to open right now and and we think that you know barring some states that really push the the open date beyond we think that the majority of them will be open up by June.

Okay, Great and then one for you generally quickly just on your comments on S.G.N.A. I think you mentioned $15 million savings.

Quarter on quarter.

I should be think about the permanent some of those savings.

The trade nature of the situation ran and investing back into some of those areas in the back half ring. The following year ones to business starts to recover.

Yeah. Thanks, so in terms of S., Jeannie, however, really thinking about it and we are managing to multiple scenarios of course, you know I mean <unk>, we have a good forecast in terms of how we are going to projecting here, but that being said you know we all know there's a little different presentations I can come from.

Currently experiencing I would say one thing we have learned from this is our barely need to do more with less <unk> definitely <unk> and so on our organization per per Brian's common yeah. Some of the other areas you know in terms of indefinite whether it be marketing or.

Other areas within a S.G.N.A. liberal I'll be determined upon how fast rate or how quickly the book and swims backup right. Now we are just making sure that we are being as as responsible as possible given the blue any of the situation. So we have great Grand.

It's currently cannot the other side of this for 2020, but obviously as far as <unk> adjust accordingly.

Thank you.

Your next question comes from mine, if my claim at Goldman Sachs Michael in 97.

Great. Thank you very much for the question I just try to follow up on the second quarter sales outlook with the shifting of products from two to three q.

That's true Europe or is that something you're doing globally and.

<unk> help us think about what the geographic breakdown of that 60% decline could could look like it is it.

Largely concentrated in international and unless so domestically or will books geography see similar declines. Thanks.

Yeah, and you want to start with the first part.

Sure Yeah, so as we look at and I can't too and you know keeping in mind you know we're into May now and most of Europe has been close down for the court. Her we don't anticipate you know me specifically made the decision to shift the goods into Q3, so we'd give expect to see and some really tough business for.

Oh, Yeah, Oh, Oh, Oh corner Apple set our special report I have been close edible that's where most of the choir as well.

So both channels you know <unk> on the top line, but definitely will see a little bit more challenging the airplane.

Great. Thank you very much and just as a as a quick fall off.

Could you cried any help around how we should think about operating cash flows for the year or maybe the quarter. Thank you.

Yeah, we feel you know really confident about where we are from illiquidity standpoint, yeah. We don't typically you know give out what our cash flow forecast is on a quarterly basis, but we are managing to multiple for <unk> as I mentioned earlier you know if we see continued pressure versus where we are today you know you know.

I would say at this point it looks as though you know retail stores are starting to OPEC open backup if we see a relapse or something else happened within the economy. We are prepared to take additional adjustments to continue to preserve cash and maintain our liquidity.

Great. Thank you so much.

[laughter]. Your next question comes from a line Alex Perry Bank of America, Alex Nice open.

Thanks for taking my question.

I hope everyone is doing well I guess first maybe trip, Brian I'm, a little higher level can you talk about how you'd expect to business to perform in a more recessionary consumer environment in any historical perspective, you could provide.

Yeah, Alex Great question. It look I I would only tell Ya [laughter] I've been doing this 16 years with Bronco and we've grown every year. So did it took a global pandemic for funk or not that not to grow so I'm gonna I'm gonna.

You know say that we've done a great job as a company year after year and then that that'd be there were some time toward economic times in 2008 910.

But we look at our products yeah impulse there the average price of our products about $8 and it's tied to things that need a lot to people. So maybe someone using them to be go rushing back to the movie theaters anytime soon because.

They just don't want to deal with that the drama the headache or the potential you know danger of going to the theater Ah, but they they watch something on on demand or they watch some big on death like and we we offered them an opportunity to hide things that are really important that are like the pop culture moments the sports moments the music moments the video game moments or not a lot.

Money and and and we've proven through 16 straight years of growth that we can handle bad economic times and still grow as a company, but it didn't take the global Panda [laughter] for us to break our streak this year, but we like river at you like the fact that we we have a very to sense of.

A a products that that region ton of different people on a global basis for not a lot of money and these things bring joy in times. It that that we're we're where things are tough in I I.E. The through the continued demand in support of our products being purchased as we go through this global pandemic and the the the the reaching out of.

Our customers and the engagement of our fan base a while this is going on they still love pop culture more never and this is probably the most on president time, if people consuming pop culture as everybody's binge watching show after show in in in reality movie after movie and there's going to be a heavy appetite for our park coming out of it. We're we're certainly that.

That's really helpful.

And I guess, just my second one can you talk a little more about how the contents late for 2020 has evolved versus your original expectations, maybe nine weeks ago. When we heard from your last thanks, Yeah look it it shifted and I'll tell you. Thank goodness. Some studios made some really quick decisions.

On Black widow Wonder woman 1984 at some other minions movies, where they push some of the bigger initiatives that we had planned back into the second half of this year when hopefully the world.

<unk> remains a little bit more it gets back to normal hopefully and in the 21. So I will tell you that is weak to to see each and every week just a little bit a glimmer of hope that that that volume is coming in and doors were back opening again, we're gonna see and stronger second half compensate than pre.

<unk> would've indicated and then we're going to see.

Some of those ships from 2020 to 2021, Oregon tack onto it already eight plus content year and we're already looking at 2022 believer not that was already a pretty strong year and now some of the stuff. That's been shifted from 21 to 22 is going to make that a stronger years old.

We we really like our position coming out of this once again went once his thing hopefully goes away. We are 100% convince the this business is going to go back a thriving into People's Love up pop culture. In entertainment is is only going to be hiding from all the time they've had to consume it and.

Good content slate looks better now pre go bad in the second half of the year and and 21, and then 22 than than we originally thought so.

Thank you that's very helpful plus luck going forward.

<unk>.

Okay.

And again, if you would like to ask a question. Please press start picking up a one on your telephone keypad. Your next question comes from my opinion, the carrier J.P. Morgan Chase Kenny you're nice open.

Hi, Thanks for taking like quest and so I wanted to understand the gross margin performance in the corner better did the invented write down you took and the fourth quarter benefit <unk> quarter, and how are you thinking about close my eyes, and and the second order and should we expect.

Leverage similarly versus the first quarter.

Mm.

I think Sammy so essentially what you saw in the first quarter, let's see things come to light as weak I shifted are channel next to be more heavily data see oriented as well as you know, we'd just be strong growth and some of our higher margin categories like games, we did see a benefit from the sales next shift in the corner.

Accounting for roughly about half of the improvement and I would say the other half as relates to a lot of our <unk> practices that we've been putting into place at the end of last year to learn to spend a little bit higher on inventory as we move through <unk>. So that's what you're really saying there as we look forward to gross margin.

Well the strongest Marshall proper word that made fun, there will be put the tape and each of the corners as different things and impact of business, whether it be a fancy look shifts.

From one product category.

Or whether there's unforeseen circumstances you know.

[noise] accompanying and a cousin crisis that we have to take other actions. So that's currently have a thinking about bush margin on on the air.

Got it that's really helpful and very quickly he knew.

On the margin defensive scene.

Your D.T.C. sales versus retail partner sale.

Yeah, we don't typically like those out but you know if you think about it.

Getting on our on our own ecommerce website, we are getting for me tell for those that's what we fell than you know wholesale to our our retailers where they get the retail price. So obviously there is a different there, but we don't typically break that out and you have to keep in mind, our own E. commerce d. They seem growing very rapidly it's still a small piece of our business.

God it. Thank you so much.

Absolutely.

Yeah.

Your final question comes from nine S. guarantee Johnson B.M.O. capital markets scared Yeah mine is open.

Okay. Good afternoon. So you know a lot of your customers I don't know if it's a lot I really don't know how many of your customers are small business owners fun I'm, assuming are quite a few hobby shop Sokol toy stores and so forth did you can tell us how big of a.

Per cent of of your total sales that might be and I'd I'd assume some of these guys are under some stress. She just curious as to you your exposure that channel that too.

Yeah <unk>. Good question like you know obviously, what what makes this unique is that we do read so many doors right on a global basis, and and a lot of that does com.

From from smaller customers. Thank goodness, a lot of those customers do have websites. They do you have online sales, but some of them are now going into curbside drop off products you know, but.

For every small customer baby does it make it through this the idea that were Bunko average 13, 14 15 per cent total business in the mass channel. It I'll be combat that and I think that there's so much room when white space for us to grow with Walmart targeting Amazon we purposely.

Kept that artificially low so it's not everybody's going to make it out of this pandemic, we understand that but for us to be.

Even pretty cold bad it.

To beat up with Walmart is dramatically as b. or.

Content year over year compared to what we would mark <unk>, Marvel vendors and gaming and captain Marvel and Spiderman, all that called Gamma drones content. All the something was happening in 19 to have less or content, but to actually grow that business through this pandemic. It is obviously very encouraging for us so yeah, you're right not every.

<unk> that is that we sell to all these stories will probably make it through there, but there's so much room to make that business up and then some by by putting a little bit more emphasis on some of the bigger channels will be support.

Okay, great and and all the products that you wanted to ship for the fall, particularly in your games segment everything there is on track.

Yeah, absolutely all the game, it's way initiatives will still be absolutely.

Okay, great. Thank you.

<unk>.

But isn't that it can click today pompous call.

You may not disconnect.

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Oh.

Uh-huh.

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