Good afternoon. And welcome to Funko's Conference Call to discuss Financial Results for the Second Quarter of 2021. 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 Ben Avenia-Tapper, Director of Investor Relations to get started. Ben, please proceed.

Thank you, and good afternoon. With us on the call today are Brian Mariotti, Chief Executive Officer; Andrew Perlmutter, President; and Jennifer Fall Jung, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this conference call management will discuss forecast targets and other forward-looking statements regarding the Company and its financial results. Well, 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 highlighted 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 U.S. 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 website, investor.funko.com. I will now turn the call over to Brian.

Good afternoon, everyone, and thank you for joining us today. We are pleased to deliver an exceptional second quarter highlighted by our largest top-line performance in company history. Net sales came in at $236 million up 141% compared to last year, reflecting broad-based strength across our brands, product categories, channels and regions. We are now above pre-pandemic tail levels in all our major geographies. Our ability to drive this level of performance while navigating the fluid macro environment, because it's tremendous execution by our teams. I am extremely proud of what we've accomplished during the last 18 months. We have become a more resilient and dynamic organization and found new and exciting ways to delight and engage our fans. The evolution of our virtual conventions is a great example of this. I spent the earlier part of the week at our first annual FunKon event, a hybrid virtual and physical events that we think represents the future of fan engagement. We had virtual conventions in the past. In fact, there are seventh virtual events, but we've managed to elevate the scope and the success of these online and hybrid events in a massive way. Hosted out of our Hollywood store, we developed a mix of live and pre-recorded content for both live bands in the store, and 10s of 1000s of additional fans online. This week, we've featured prize giveaways, opportunities to go behind the scenes and meet Funko artists, and celebrity features among a whole host of other fan engagement events. What we've unlocked with virtual and hybrid conventions today format to provide a more tailored fan experience with greater brand control, and similar revenue potential. When compared with our traditional convention calendar. The event is only halfway done, the initial steps have been extremely positive, we are on…

Thanks, Brian. Let me start by saying how honored I am to assume the role of CEO next year. Brian and I have been working together for more than 10 years, and I look forward to working with him for another 10. This is a very special time for Funko. We have amazing opportunities in front of us and I know that with Brian, as our Chief Creative Officer, our future will be bright as other. Our record quarter was driven by success in each of our four strategic growth initiatives. Q2 was an exceptional quarter for the pop brand, which generated triple digit growth and exceeded 2019. Brian highlighted, our successful evergreen properties, which are now being complimented with a robust movie slate. Within our evergreen property sports, music and anime continued to gain momentum. Three animate properties made it into our top 20 for the quarter. Our new Vinyl Figure platform targeting sports and music fans goal is set to hit shelves this fall, and we have more programs targeting new customers and fans on the way. Our product diversification initiatives saw similar success. Our non-figure business also generated triple digit growth and success across all categories. Loungefly continue to with the exceptional growth trajectory. This is driven by a strong recovering specialty DUC performance and growth in Europe, a combination of exclusive programs, higher average price points and a more focused product mix for all factors in our success. International continues to be a growth area for Loungefly. When we originally acquired the Loungefly brands, it was mostly a domestic business. Over the last few quarters, we've seen accelerated growth in Europe, as we've expanded our footprint. In our youth collectibles category, we continue to make strides in new areas of the store, reaching new customers. Smash…

Thanks, Andrew, and good afternoon, everyone. We're pleased to report record second quarter results highlighted by net sales growth of 141% over the prior year, reflecting the very strong second quarter demand and broad based strength across our product categories, geographies and channels. The over performance relative to our expectations was primarily driven by our Loungefly brand in Europe as well as strong mass market results. All comparisons are the second quarter of 2020 unless otherwise stated. Net sales in the U.S. increased 110% to 163 million, while Europe grew 393% to 52 million, and our other international markets increased 117% with growth in all of our larger reasons. Begin with active properties in Q2 was 795, an increase of 23% from prior year. Net sales for active property were 297,000 in the quarter, an increase of 95%. For a list of our top performing properties in the quarter please see the accompanying earnings presentation. On our price category basis, Q2 net sales figures grew 142% to 187 million with Pop branded product increasing 137%. Non-figure product sales increased 136% to 49 million, primarily driven by our Loungefly brand, which grew 132%, but with strong contributions from accessories, game, plush and action figures. Second quarter gross margin was 39.1%, an increase of 250 basis point versus Q2 of 2020. This improvement primarily reflects our healthy inventory position and lower clearance activity in the quarter. While we were able to largely offset the writing of shipping and freight costs in the first and second quarters, we've seen a sharp acceleration in July in shipping and freight to remain a significant headwind throughout the second half. SG&A came in at 55 million slightly lower than anticipated due to do the timing of on-boarding new talent and a shift in marketing spend the…

[Operator Instructions] And our first question comes from Tami Zakaria from JP Morgan. Tami, your line is open now, if you'd like to proceed with your question

Hi. Thank you so much for taking my questions. So, my first question is regarding your comment that the Delta variant is beginning to weigh on consumer sentiment. Could you elaborate on that a little bit? Is that based on what you've seen from retailer order trends or the end consumer holding off on purchases because of the virus?

Hi, Tami. How are you? This is Jen. Thanks for the question. What we're really describing there is what we're hearing externally. Our demand has never been stronger. We feel really good about our Q2 sales and about our outlook. It was more just to acknowledge that, this pandemic continues to weigh on consumer sentiment. So, we'd be remiss not to mention that.

Got it, got it. So, it's not nothing specific to Fanko's quarter-to-date trends rather more of a macro sentiment. Okay. Got it. Got it. That's super helpful. And then, I think your previous full-year guidance contemplated like a low-to mid double-digit sales growth in the back half. And now, I think you're raising it to like mid-teens to high-teens sort of a range. So, can you help us understand what that means for the third quarter versus fourth quarter? And then whether this increase implies any contribution from the NSP that you launched recently?

Yes. So, the way I would think about our quarter is we have a fairly stable, normal, quarterly basis. And I think looking at just some of the history, if you remove 2020, of course, would be helpful. As we talked about in our last call, we feel really good about the NSP results. We just launched our first one officially on Tuesday, which was exciting. At this point, it's an evolving industry and we're new to it. So, we have not baked that into our numbers at this time.

Okay. Next question comes from Erinn Murphy from Piper Sandler. Erinn, your line is open now, if you'd like to proceed with your question.

Great. Thanks. Good afternoon, and congratulations, Andrew and Brian to the announcements this afternoon. I guess my first question is on supply chain, 70% I believe you produce out of Vietnam. Could you share a little bit more about what you're seeing in terms of factory downtime? How flexible you can be in terms of moving product out of Vietnam or into China or just elsewhere? And then you talked a little bit about freight expense in the back half, really starting to pick back up? What's embedded in the outlook right now? And are you having to tap into air freight?

I'll take the first part of that. As far as bandwidth in terms of capacity for our factories, we're in great shape. We still have as you said 70%, 75% is still in Vietnam. But, our ability to keep up with demand is not a problem in factory capacity. It's more about container space, that's where the bottleneck is for us. And just about everybody else, we continue to work with either some of our biggest retailers in the world about moving Appleby product to them. They're having the same constraints that we are, but I'll let Jen answer the second question.

Yes. We've -- as you, I'm sure you've been reading as well. It's constantly evolving that the situation with the containers and the freight costs. We have tried to look forward to see what we anticipate based on what we're seeing out in the marketplace and bake that into our guidance. That's why we feel really good about our EBITDA margin guidance. But, if we were to actually exceed our sale with the margin pressure on just take them over staying out there, but we have contemplated those freight increases in our guidance.

Okay. And then Brian, just a follow-up just to make sure I understand. So are you not being impacted by any of the factory downtime? I know a lot of athletic manufacturers, right now, were kind of moving on to week five or six downtime in factories. So just wanted share your thoughts?

Not an issue for us at all, Erinn.

Okay, great. And then a couple follow-ups, maybe Andrew for you. I'd love to hear how your view is of back to school thus far? And what you're seeing in terms of your Concord channels? It sounds like math was part of the outperformance in Q2, is that continuing into third quarter, and maybe what you're seeing in digital versus specialty as well?

Yes. Hi, Erinn. Yes, so we are seeing, we saw strong results in the mass market. In Q2, as we've been building pretty significant programs in that channel for quite some time. And that channel fared the best over the last year, and so it continues to. So although back to school isn't traditionally a very big event for Funko, we do obviously get a little bit of the foot traffic that's going into the stores for back to school, supplies and things like that backpacks, but that there are more of the targeted back to school. So yes, I mean, we're thrilled with where we are right now and we think that we're benefiting maybe a little bit from the foot traffic, but I wouldn't say it's anything over and above what see normally.

Okay. And then last question is following up on NSP, very exciting to see that that came out earlier this week. Can you share a bit more about the user experience you've created and how should we think about frequency of launches going forward? Thank you so much.

Yes, great question. I would tell you that we didn't create a user experience. We definitely piggybacked on WAX's marketplace, and we certainly worked with them and-in-hand to try to enhance maybe previous releases on that platform to try to make it more like a phone call family expected. I think they did a really good job. With that being said, it is in our plan and WAX is aware that we are building our own marketplace and we will end up controlling the end of that fairly quickly. As far as cadence is concerned, I think we're not going to be as aggressive as we originally thought with the once a week releases. We talked earlier and Andrew and Jen did a road show about the difficulties in the licensing space with the legalities of the boilerplate contracts, because it's just new and there's a lot of outside counsel on outside counsel on them trying to come up with that. I also think that there was a lot of learnings despite amazing initial launch. There are things that we want to do to better the overall stress. But my guess is you're going to see things on an every three week cadence with a couple ones. It'll be a little bit shorter than that, but throughout the end of the year, I think as we continue to ramp up, our contracts are taking a little bit longer than we anticipated. I think you'll see a more robust where the schedule in '22, but so far we're really, really optimistic and thrilled with the initial release.

Our next question comes from Steph Wissink from Jefferies. Steph, your line is open now, if you'd like to proceed with your question.

Thank you. Good afternoon, everyone. And I'll echo Erinn's sentiment and congrats to the team on the transition. My question is actually on Loungefly. If we could just unpack that a little bit over 100% of the quarter, has that been some incremental distributions sounds like Europe was part of that? What do you seeing about that customer relative to your core business? Is it bringing a new customer into the Funko family? Are you seeing that as an overlapping customer that's already buying some of your figures as well?

Yes, I'll start up and let guy chime into. I mean, we're obviously seeing, we like to say that the thriving of the mom and pop or the specialty retailers are really driving a significant amount of growth. They're being able to order more. They're being able to carry their own exclusive content that marry with obviously the parks going back in into play with Disneyland, Disney World and the resorts, Universal Studios as well. The D2C Channel continues to thrive and again, more dedicated resources to creating more interesting online exclusive content for the D2C is also thriving. And then the part of what Andrew and I promise Loungefly when we acquired on, which is more licenses and more help with distribution. I think all of that is really just -- it's just been phenomenal, the growth story there. But we just think we're just honestly scratching the surface with that brand. We think that we're capable of so much more. And we've really been able to put some talent around that team. And it keeps, we keep investing in Loungefly. And it's obviously paying off at all. But I'll let Andrew and Jen add anything to that.

Yes, I'll just chime in quickly on the customer mix. I would say that we're seeing sales from both existing Funko fans, but we're definitely bringing new people into the Funko ecosystem, as part of the furthering becoming a pop culture lifestyle brand. And that's just one more category where we can talk to people that we weren't talking to before. So, I would say, there's obviously Funko fans that are Loungefly fans, but we are bringing new people into the funnel.

Yes, Steph one, just one key metric, we brought our key person on over from Disney to run Loungefly marketing, we've never had a decade of resource before. And she's nearly doubled, the Instagram followers, and we're now over 700,000 Instagram followers. The leading, I guess leading competition in the space, which is a much larger company than we are has 24,000 fans on Instagram. So, they're more commodity based and Loungefly is more, high end brand pop culture base. So, I think that as we continue to build out that brand, the appetite we're seeing globally is just phenomenal for the brand. And we're excited that we're actually starting to properly market the brand in new ways we've never done before. So again, this kind of leads us as we just kind of scratching the surface content, we really are excited about what that future is for them.

That's great. And then one for you, Jen, really quickly, I wanted to just reconcile the EBITDA being unchanged. You mentioned gross margins coming in a little bit lower. But then I think you also said something around shifting and marketing to the second half. So, there might have also been a timing factor. Can you just give us a little bit more color there, please?

Yes, that's absolutely correct. We did have some of our marketing that we anticipated originally spending in this quarter and that will shift to the back half of the year to align within the product launches. And then secondly, from an SG&A perspective, we did have a slower ramp of our challenge than we anticipated, but we were still on track to continue to add the talent that we've been talking about on these calls. So adjusted EBITDA margin or reiterating our guidance there, but overall, the adjusted EBITDA obviously with the increased sales will go up.

[Operator Instructions] Our next question comes from Linda Weiser from D.A. Davidson. Linda. Your line is open. Please go ahead.

Thank you. So, I was wondering if you could just talk about things a little bit longer-term kind of even beyond this year in a general way. As business continues to grow rapidly and ramp up, what are the next big sort of infrastructure type investments or initiatives that you need to undertake in order to ensure continued health and growth of your business? And in general, like what would be the CapEx requirements over the next few years? Would the ratio as a percentage of sales stay constant or are you expecting some big investments in the coming years?

Hi, Linda, this is Jen. Yes, so, I think, as we come off our Q4 call, we'll give a little bit more guidance to what we're seeing in 2022 and beyond. What we'll say that, as we talked about our previous call, we're in the middle of investing in infrastructure right now. We do have our ERP project that's in the midst that we are looking to implement next year. So, that's really one of our main focuses right now. And from -- we will have continued to have some infrastructure to invest in, but really a majority of our capital is our tools and molding and that should remain relatively consistent go forward.

Great. And then, you mentioned that, the situation with the containers that there could be some shifting more towards the mix of FOB sales. Can you remind us generally normally what would be your percentage of sales about of FOB? And do you think that that's going to shift some sales like into third quarter from fourth quarter?

I was going to say, hey, it's Andrew. So when we're talking about that, we are having conversations with our customers right now, Linda, about container availability, right? Whether it's -- we're working our resources to find more containers and our retailers are as well. As you probably know, right, even companies like Walmart and those large retailers are having trouble finding containers. So, those are the conversations that we're referencing around trying to find ways to move products that might not have a home on a container yet. And so, we are in dialogue with our customers. Most of those were already doing some FOB with. So, we're utilizing that as much as we can to move as many products as we can. As far as what percentage of our business is FOB, I think it's around the 25% to 35% when you look at both the U.S. and Europe combined. But I kind of have to go back and really look at that to confirm.

We have no further questions, so I can hand back to Ben, Brian, Andrew and Jen to conclude.

Hey, guys. I want to thank you everybody and our investors, our shareholders and the Funko team for supporting another great quarter for Funko. And we're looking obviously forward to the rest of the year.

This concludes today's call and you may now disconnect your lines.