Good morning and welcome to the Third Quarter 2018 JAKKS Pacific, Inc. Earnings Conference Call. My name is Brandon, and I'll be your operator for today. On the call today are Stephen Berman, CEO and Brent Novak, CFO. [Operator Instructions] The company would like to point out that any comments made about JAKKS Pacific’s future performance, events or circumstances, including 2018 estimates of sales and/or EBITDA growth as well as any other forward-looking statements concerning 2018 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 actual results to differ materially from those projected and 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 reports, subsequently filed with the SEC from time-to-time. As a reminder, this conference is being recorded. And I will now turn it over to Stephen Berman, CEO. You may begin sir.

Good morning, everyone and thank you for joining us today. This morning, we are going to review our performance during the third quarter 2018. I will talk about how our brands and products performed in the quarter compared to last year and to our expectations. In addition, I will talk about the steps we are taking to reduce our costs and improve our profit potential for the future. After my comments, Brent will discuss our financial performance. After that, I will review some of the things that we are looking forward to over the course of the rest of 2018 and beyond, provide an update on the process JAKKS is going through with respect to the expression of interest received from Meisheng earlier this year and then we will take questions. Our net sales for the quarter declined approximately 10%, primarily due to the loss of sales to Toys "R" Us compared to last year. Although the liquidation of Toys "R" Us was completed before the third quarter began, it has continued to impact the industry. Not only did the industry lose a significant customer, but the actions taken by its competitors during the liquidation and since have led to some uncertainty. Obviously, the other major toy retailers such as Wal-Mart, Target and Amazon are going to do their best to pick up the market share, formerly held by Toys "R" Us. As are some other small retailers looking to capture some of the share as well, such as Kohl's, J.C. Penney, Party City, T.J. Maxx and others. While we believe the loss of Toys "R" Us share will eventually be picked up by other retailers, as we said previously, we were not expecting to see this happen in the third quarter. We currently expect the disruption in the fourth…

Thank you, Stephen and good morning, everyone. Net sales for the 2018 third quarter were 236.7 million compared to 262.4 million last year. As was the case in the second quarter, the decline was essentially due to a decrease in sales to Toys “R” Us. Reported net income for the quarter was 15.7 million or $0.38 per diluted share compared to a net loss of 17.6 million or $0.77 per diluted share in the third quarter of last year. Adjusted EBITDA for the 2018 third quarter was 27 million compared to 38.6 million in the third quarter of 2017. The sales drivers in the third quarter by category were as follows. Sales of dolls, role play and dress up, plush and activity products in our girl’s category amounted to 102.3 million for the 2018 third quarter compared to 132.8 million in the comparable quarter last year. We saw positive contributions from girl’s toys with Incredibles 2, Fancy Nancy and Squish-Dee-Lish as well as from Perfectly Cute, a private label brand we produce for a specific customer. These brands were more than offset by the expected declines in a number of girl’s lines, including several entertainment, content driven lines such as Frozen, Tsum, Moana, Elena of Avalor and others. Sales of action figures, vehicles, role play and electronic products in our boys’ and other category for the third quarter were 40.6 million compared to 34.2 million last year, driven by Incredibles 2, Harry Potter, TP Blaster and Stanley Black and Decker, which more than offset declines in real work in Buddy's, Star Wars, XPV and our line of pet products. Sales of seasonal products, including licensed write-ons, ball pits, kids’ furniture, Maui outdoor activity products and MorfBoards were 24.9 million in the 2018 third quarter, down from 34.9 million in 2017,…

Thank you, Brent. Before we get to Q&A, I will share some thoughts on how we see the rest of this year playing out, starting with a few properties that will be important. Our Disguise division had a great third quarter and will continue into fourth, led by key licenses from hugely popular video games, such as Overwatch and Halo, followed by entertainment properties, including Disney Pixar, Incredibles 2, Lego and LOL Surprise with Queen Bee, leading the way and Diva in close second. Incredibles 2 has been a nice contributor this year and we expect a big spike in demand with the digital and DVD releases in the coming weeks, as we’ve seen with other animated films and we will be prepared for this increased demand through the first half of 2019. Fancy Nancy is benefiting from strong viewership of the TV content and we expect the line to perform well in fourth quarter and beyond. Our new play date segment is further product innovation that has been key to our growth in Disney Princess and we expect strong sales through fourth quarter. In addition, our 2019 extensions of this segment have been very well received by buyers globally. We have confidence in our boys entertainment business as well as we have a strong and growing core business in our evergreen master toy licenses, led by Nintendo and Black and Decker, supplemented by new and exciting innovative product lines for Harry Potter out now, Mega Man fully charged set to launch in spring 2019 and a multiple soon to be announced new master toy licenses, starting next year. JAKKS’ own intellectual properties to name a few including Squish-Dee-Lish and TP Blasters continue to be strong sellers and hit this holiday season. Finally, our seasonal category, driven by MorfBoard and…

[Operator Instructions] And from Jefferies, we have Steph Wissink.

Stephen, I have a two-part question for you, just given your long term experience in the industry. What I would like to understand is the economics of some of these new retailers, alternative retail formats that were replacing the Toys “R” Us business, how should we think about the relative spreads, reserves, promotional commitments, even into the DSOs, how are these new retailers structured to take inventory and manage inventory and ultimately sell through inventory, relative to Toys “R” Us? And then the second question, because I think something you mentioned in the prepared remarks around retailer conservatism struck me, just given there’s been a lot of public enthusiasm from several of your large retailers about how big the toy business could be for them. So maybe talk a little bit about the conservatism you're seeing on order flow versus some of the public enthusiasm, is it a bit of talk, but maybe delayed action or are they asking you to hold some of that opportunity inventory for them into the fourth quarter? Thank you.

Actually, both questions are very good. The first question regarding the other accounts, the alternative accounts, specialty accounts, drug accounts, they're all vastly different in how they operate in the toy industry, so we do a few different tiered way of development of our product. So for the math, it could be quite different in the actual margin criteria for both the mass retailers and for ourselves and for the secondary accounts, call it, the T.J. Maxx, the Kohl’s, those type of accounts, they work on a different product margin and we've then also at the same time, we develop products specifically for them that don't affect, call it, the mass -- big mass accounts and then when you get to the, call it, the third level of the dollar chains or drug chains, the product development is massively different due to their price points, primarily a much lower price point, so we develop products specifically for them, so it's a three tiered different development process based off our different category, so that in itself we don't change our margin criteria for JAKKS, although, we do change the development criteria for those retailers. So that's the way the world has worked over the last three years with the ever changing environment, but it's actually worked out over the last three years for us because a big portion of our product is under a 24.99, which really works well and bodes well for those retailers. Does that answer the question on those accounts, Steph?

Yeah. That's very helpful. Thank you.

On the other retailers, call it, not just in the US, call it in EMEA, the enthusiasm with the Toys “R” Us liquidation is definitely there. The cautiousness is also there. There is extreme enthusiasm, but you see the major retailers developing large programs for the fall, but there's also other people that have jumped into the marketplace that were normally never there before or in a strong fashion, which I’ll call it toy city or from the Barnes and Nobles. So I think the retailers are very, very enthusiastic. You can see, there has been a lot of promotional materials and advertising of how they're driving factors, not just in the toy business, but there needs to be a caution and I think I said this in March as well is that we believed TRU is going to impact the industry for the year, majority of it, and it's true. There does need to be a caution that these retailers are all getting excited and there's a lot of new retailers trying to get garnish market space, but at the end of the year, there could be additional retailers that weren't successful that have inventories. So, we're managing the sell-ins for ourselves very methodically.

And then these are two really quick ones. You mentioned weaker than expected trends in EMEA and LatAm. Just curious if you can extrapolate a little bit maybe specific markets within those regions, if you’re seeing some distortion within the regions. And then Stephen, just remind us to tariffs, because it's a topic that seems to be overhanging the industry. What percentage of your production is anchored in China?

The percentage of our business in China is probably 90% in manufacturing, but the tariffs that we are reviewing to date so far have to do with aluminum and they have to do with our kids’ only division currently to date. So in that area, we're not really concerned at this point of the tariffs having a major impact and at the same time, we're looking at, if there's anything that we have to worry about, it would be whether we have to do temporary price increases, at the same time that we're looking at resourcing or call it assembly in different territories from Mexico to Latin America. And Brent can continue on that as well?

Yes. So Steph, on the tariffs, so it impacts our kids' furniture set, which is a small portion of our overall business. It’s well below 5% of the total. So really nominal impact in the third quarter. We're not expecting much in the fourth quarter, but longer term, we are looking at moving potentially our manufacturing if these tariffs will continue and then near term of course, just like others, I'm sure, we are discussing pricing on certain of our customers. So we are taking a proactive approach.

And Steph regarding the first question, so we've had an impact in Europe just overall in certain areas more so of just certain products not being applicable in those territories. One of the major impacts we had was Mexico during the third quarter, but on a reverse side, our fourth quarter internally is higher expectations than what we had fourth quarter last year. So it's kind of quarter-by-quarter.

From D.A. Davidson, we have Linda Bolton-Weiser.

Hi. So Hasbro on their call the other day kind of talked about some of the challenges in supplying this broader kind of retailer base in the US, some supply chain issues or changes that they had to make, making a new distribution center. Are you seeing any of that and how are you handling just the challenges in supplying this diverse -- more diverse group of retailers?

So it actually sets up some manufacturers for, I think, a broader risk. We’re taking a much more conservative approach, so we manage our inventory levels and our end stock levels excessively well, because of the vast distribution from our major retailers as Amazon and Wal-Mart, Target to the Dick's Sporting Goods, to the Walgreens, and Dollar Stores, it really just varies by the retail channel of how the inventory has been taken in and how they actually manage their set date. So for us, we're just taking a cautious approach. There's a lot of people wanting to garnish a lot of percentage of the toy industry, but you've got to be very careful that people aren't over purchasing to make a first half a harder half for the industry.

Okay. And then in terms of the savings you mentioned, let’s say, I think, it was 10 million to 15 million. First of all, is that a pretax number and then what's the timeframe for full realization of those savings?

Yes. So I would say the -- that's a pre-tax number, so 10 to 15 and I would say the benefit that we're going to see in 2019 would be on kind of the lower end of that range. And then full realization, closer to the high end in 2020. So it’s 10 to 15 on an annualized basis.

And then the charges you expect in the fourth quarter would be predominantly cash charges, correct?

Predominantly yes.

Okay. And then just longer term here, I know you've kind of had a strategy to diversify into some other product areas for kids and then I think the pet area was one area you were working on and I think you mentioned that that line was down year-over-year. So where does it stand in terms of the pet and then just the broader strategy of diversifying into some of these other categories? What are your thoughts currently there?

With regard to the pet, Linda, we actually discontinued that segment of our business, it’s approximately three years ago. That was because of lot of the retailers are doing direct to retail and making their own products. We were primarily into the pet toy business with the toys that pets play with, but we discontinued that division about three years ago. The other segmentations that have done very well that we are focusing on is called in different categories, which has been the MorfBoard, which has been the wheel goods category, C'est Moi, which is, as you know the skincare business, we've been developing and building very, very slowly. It's a long process to build, but we are pleased where we're at to date and another area is the fan heads, which are for football and sports enthusiast, it has really amazing distribution to liquor stores, the campuses. So we are still a kids' consumer product company, but in just various different avenues.

Yeah. And just one comment on the pet. I mean, we did mention it in the script, in the prepared remarks, that there was a year-over-year decline. That was just working through some of our inventory, but going forward, actually in the fourth quarter of 2018 and beyond, I mean very, very, very nominal, if any sales of our pet products.

And then finally just on the Meisheng situation, do you have a timeline roughly for when you think the whole thing will be completed, like, do you think by calendar year end or extending into 2019 before that’s completed?

There's no timelines. They're working diligently and expeditiously. The special committee, as we said, authorized our advisors as well as Meisheng’s advisors to move forward. So, at this time, there's no specific timeframe.

[Operator Instructions] And from BMO Capital Markets, we have Garrett Johnson.

So obviously, a lot of talk about retailers expanding to take the TRU share, but now are about two months into the selling season, where are the shoppers going, how are they adjusting, are they adjusting as we thought, are they headed to where the extra inventory is flowing?

So again, I said this in March and I will continue to say that, it won't happen as quick as what I think other manufacturers believe and it was very similar to what happened with Sports Authority and Under Armor, looking at the analytics. So the consumer is going to all the normal places, excluding the Toys “R” Us environment, but they're going to the same places that they went over the past years, except there are -- over the last few years, prior to even Toys “R” Us becoming bankrupt and then liquidation, many other retailers have built their toy departments like the Walgreens or CVS, the Rite Aids, the Dollar Stores have all built their toy departments further and further. Game Stop has gotten into the toy industry. You saw Party City opened up toy city. So there's now just -- there's more doors, but they're smaller doors that have opened up. So remember TRU had the footprint that was a very large footprint, but now you go into much smaller footprints, but more retail outlets and I just don't know if that's going to be absorbed by the consumer this year and that's why we are very cautious with our inventories and making sure that when we go into the first half of next year, if there's any slowdown in call it the alternative distribution channels that are trying to pick up the additional samples that we’re just very focused of not over shipping those new distribution channels. And online is again a division that is growing on a much faster percentage, but still a -- not as much material as the brick and mortar.

And we have no further questions at this time. I will now turn it back to our speakers for closing remarks.

Everybody, we appreciate the call today and thank you very much for attending.