Funko, Inc. (FNKO) Earnings Call Transcript & Summary

Good morning and welcome to the 2020 Annual Meeting of Stockholders for Funko, Inc. I will now turn the line over to Ken Brotman. Mr. Brotman?

Thank you, operator. Good morning, everyone. I am Ken Brotman, the Chairman of the Board of Funko and the Chairman of today's meeting. I'm happy to welcome you to our 2020 Annual Meeting of Stockholders, which we are holding virtually in light of the COVID-19 pandemic. Apologies in advance if this remote format causes audio issues. On behalf of Funko, the members of the Board and company management, I hope everyone is safe and healthy. Before I call the meeting to order, I'd like to introduce to you the other members of the Board and the officers of the company, who are with us today. The other members of the Board in attendance are Brian Mariotti, our Chief Executive Officer; Gino Dellomo; Charlie Denson; Diane Irvine; Adam Kriger, Sarah Levy and Michael Lunsford. In addition, participating today are Andrew Perlmutter, our President; Jennifer Fall Jung, our Chief Financial Officer; and Tracy Daw, our Senior Vice President, General Counsel and Corporate Secretary. I would also like to introduce Chad Miller of Ernst & Young, the company's independent auditor, who will have the opportunity to make a statement and will be available to respond to appropriate questions during the questions and answer portion of the meeting. This meeting will now officially come to order. We will proceed with the formal business of the meeting as set forth in the notice of annual meeting and proxy statement. The polls opened today, May 27, 2020, at 9:00 a.m. Pacific Time for voting on all matters before the meeting. If you have not already voted and wish to vote, the polls will remain open until we finish presenting the proposals and close the polls. You do not need to vote during the meeting if you have already voted and do not wish to change your vote. On the virtual meeting web page, you will find the agenda for the meeting. You will also find the rules of conduct for today's meeting. Please review these rules carefully. Note that only stockholders, who are logged into the meeting using their 16 digit control number, will be able to vote and submit questions at today's meeting. The corporate Secretary will file the proof of mailing of notice of the meeting with the records of the meeting. All stockholders of record at the close of business on April 3, 2020, or holders of a valid proxy are entitled to vote at the meeting. A complete list of the holders of record of the outstanding shares of the company's Class A and Class B common stock on the record date for the meeting is available on your screen, if you have logged into the meeting using your 16 digit control number. At this time, I'd like to introduce Steven Tollefson, a representative of Broadridge Financial Services. The Board of Directors has appointed a representative of Broadridge to act as Inspector of Election at today's meeting. Steven has signed the customary oath of office to execute his duties with strict impartiality. We will file this oath with the records of the meeting. I have been informed that a quorum is present. Therefore, I hereby declare this meeting to be duly constituted for the transaction of business. We will now proceed with the formal business of this meeting. There are 2 proposals to be considered by the stockholders at this meeting. The company recommends that the stockholders vote for each of these proposals. The first item of business is the election of Ken Brotman, Diane Irvine and Sarah Kirshbaum Levy to serve as Class III directors of the company for a term of office expiring at the annual meeting of stockholders to be held in 2023. The second item of business is the ratification of the Audit Committee's appointment of Ernst & Young as the independent registered public accounting firm of the company for the year ended December 31, 2020. Chad, would you like to make a statement?

Okay. That was the final proposal for today's meeting. If you wish to vote and you haven't already, please vote now by clicking on the voting button on the web portal and following the instructions. You do not need to vote electronically if you have already sent in your signed proxy or if you have voted by telephone or Internet. We will pause for approximately 30 seconds before closing the voting polls. [Voting]

The time is now 9:05 am on May 27, 2020, and the polls are now closed for voting. Thank you very much.

I have now received the preliminary report of the Inspector of Election to be kept with the company's records of the annual meeting. Based on this preliminary report of the inspector of election, one, Ken Brotman, Diane Irvine and Sarah Kirshbaum Levy have been elected as directors; and two, the appointment of Ernst & Young as our independent registered public accounting firm for the year ended December 31, 2020, has been ratified. The final tally of the votes will be published within 4 business days in a current report on Form 8-K to be filed with the Securities and Exchange Commission. This meeting is now adjourned. I will now turn the floor over to our President, Andrew Perlmutter, for a short presentation on the business.

Thank you, Ken. I'd like to go over a few of the 2019 fiscal year highlights. I'll start with the fact that we delivered strong top line growth of 16%, achieving net sales of $795 million, continued to enhance and build on our -- upon our Pop! platform with new strategic partnerships, grew international sales 23%, primarily driven by continued success in Europe, successfully grew sales of Funko products more than 60%, completed the strategic acquisition of a world-class game studio Forrest-Pruzan and successfully entered the board game category, unveiled an enhanced mobile app with robust features that rolled out and also rolled out a fan loyalty program as well as opened Funko's second flagship store in Hollywood, California. In 2020, there are 4 key priorities we'd like to talk about. First, grow the core pop culture business, leverage Funko's strength in building fun and nostalgic programs at retail that utilize evergreen content, target underpenetrated genres to expand our addressable market; second, diverse our revenue streams, expand in children's toy category through Funko's own IP, build out Funko's game portfolio of licensed and nonlicensed games, and continue to create new, fun and exciting creative figure lines; third, extend Funko's global reach by expanding Funko's global brand recognition, continue momentum in EMEA and focus on building under-penetrated markets; and fourth, increase our direct-to-consumer business by strengthening our e-commerce platform and fulfillment capabilities, continue to build meaningful connections with our customers and drive traffic and conversion. With that, I'll hand it over to Brian Mariotti, our CEO, to take us through some updates on the rest of the business.

Thank you, Andrew. First of all, we like to talk about our response to COVID-19. Funko's top priority was ensuring the well-being of our employees, our partners and our communities. To do that, we closed all of our corporate offices and our 2 flagship retail stores. We implemented practices and procedures to safeguard orders at distribution centers. We took swift actions to increase our financial flexibility and preserve liquidity. We reduced expenses and capital expenditures. We proactively managed working capital and reduced inventory. We completed an amendment to our credit facility to increase our financial flexibility. And we've also adapted to a new environment where we focused toward key priorities. We accelerated the expansion of Funko's e-commerce platform and capabilities and we are evaluating opportunities to increase efficiency and shift resources toward those key priorities. And now for the fun stuff, we're going to talk just a couple of minutes on some of our initiatives that are new for this year, some new product introductions. First, with figures. We've introduced about 3 months ago, the Funko Vinyl Soda! line. It's off to a phenomenal start. We launched this at New York Toy Fair. The products continue to sell-out. And we're excited about a new format that is engaging our core business. A new line also tends to broaden our collector base and expand our marketplace is our foray or continued foray in the music. Pop! albums is a way to expand into the marketplace for music fans by putting a pop in with a mini album cover. It is either able to be put on a shelf or hung on a wall. Very excited about the response to that. We'll be also releasing comic books and iconic arts are in the same format this year. Our initiative in the toys is still on board for the second half of 2020, highlighted by our Snapsies line aimed at a grow demographic of around 5 to 9, our boogie monsters and Gashouse Gang lines aimed at boys 5 to 9. And then our third and off to a phenomenal start for our first half of the -- of last year or last half of last year and the first half of this year is the Funko games line, highlighted by our Funkoverse titles, which debuted last fall, but also our foray into non-licensed games and licensed games, highlighted by a Marvel Battleworld, a micro-collectible meets card game that we're very excited about that's going to launch in August with an introduction to target nationwide. And with that, we'd like to take any questions and answers that anybody might have.

Okay. Brian, thank you. There are no questions, so you can proceed with your closing remarks.

Thank you, Tracy. That concludes our annual meeting, and we appreciate everybody's support during these times.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.