Welcome to the JAKKS Pacific Second Quarter of 2022 Earnings Conference Call with management, who will review financial results for the quarter ended June 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 investor 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 up the call for questions. Your line will be placed on mute for the first portion of the call.
If you would like to be placed in the queue to ask a question, please press star one one on your telephone keypad. 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 Form 10-K and Form 10-Q filings with the SEC, as well as the company's other reports 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. Please go ahead.
Good afternoon, and thank you for joining us as we discuss our most recent quarter and what we see coming for the balance of the year and some thoughts about 2023 as well. It's not often you get to report quarterly year-over-year sales growth of 96%, so you can hopefully forgive our enthusiasm around our latest results. With $220 million in net sales in Q2, we were finishing the first half of the year with $341 million shipped year-to-date. That is the highest year-to-date ship total through June in the history of the company dating back to 1995. I have been strongly passionate all throughout the pandemic about the team working together across offices and collaborating to deliver amazing results. This past quarter is just another example of what I've been talking about, but taken to a new level.
As we have said before, years ago, we implemented a new philosophy and approach to running our company. Within each of our divisions, we seek out a mix of strong and opportunistic licenses to build stable, growth-oriented categories. By focusing on methodically building and refreshing our product lines annually, we create the brick-by-brick foundation of our evergreen business, delivering the singles and doubles that generate our results year after year. Within those categories, we further develop items for each class of trade in which we see opportunities. In mass for customers like Target, Walmart, Amazon, Tesco, Carrefour, and more. For specialty channel customers such as Smyths, Kohl's, GameStop, Barnes & Noble, and for value drug and grocery customers like Kroger, Dollar Stores, Walgreens, CVS, Ross, Big Lots, Five Below, as well as many others.
In addition, with all these class of trade retailers, we look to be creative at retail with our out-of-aisle product placement such as check lanes, pallet programs, two-by-two displays, clip strips, and more. By redeveloping items annually, we ensure to the best of our ability margin expansion, and we always look for new opportunities in product innovations and licenses. With that foundation, there will sometimes be unique opportunities to exceed our expectations, which we are seeing this year with many areas of the company performing extremely well and contributing to tremendous performance against our plan. To name a few, toys developed for the Disney animated film Encanto and the live-action and CGI film Sonic the Hedgehog 2 are having exceptional years.
Beyond those two, we are seeing amazing continued expansion of the evergreen Nintendo IP, very strong demand for Disney Princess products, as well as our Perfectly Cute baby line. For Halloween, we have a plethora of new licenses and newly developed, really creative product costumes and related accessories. Lastly, with the international initiatives we have embarked on over the years on opening up offices to sell direct-to-retail in more markets. We are seeing tremendous growth, details of which I will highlight shortly. As we discussed last quarter, we have been seeing exceptional demand for our current product lineup. We've applied tremendous focus to enabling our FOB customers to secure product with enough lead time to avoid the supply chain bottlenecks that negatively impacted everyone in the second half of last year.
At the same time, we've done everything we could to take advantage of off-peak shipping windows to secure the manufacturing and inventories we plan to sell domestically in the second half of this year. Our quarter-end inventory level is $124 million, of which $36 million is in transit to our warehouses. Although this is a high level for Q2, it is reflective of our planning to mitigate potential exposure to our higher second half spot container rates and extended transit times. Given our strong sell-in and sell-throughs to date, and reviewing the insights into retail demand for the second half of the year, we are quickly pivoting our attention to ensuring that we exit the year with tight inventories at retail and within our own warehouse infrastructures worldwide.
There has been a lot of discussion around the outlook for the economy, retail inventories, and the mindset and spending power of the average consumer. There are several areas of business we've been focusing on. It is well known that the toy industry often shows higher resilience than other consumer areas when spending power is challenged. Current data also suggests that accumulated household savings are at higher levels than they were when entering past slowdowns, as the employment levels remain robust. Although it's true that there has been a lot of spending in the toy space over the past couple of years, it is also true that a three-year-old is now a couple years older too. To our way of thinking, both the younger children entering the toy market, as well as the older children entering different phases of development, need new and different toys to engage with.
When you layer in basic play and play patterns that are healthy for children and the surge of new content reaching households at theaters and via streaming, we believe it's still a very good time in the toy kids consumer business. At JAKKS, we have been extremely focused over the years to try to ensure a large portion of our product SKU retail price points are lower than $30. We are proud that over half of our revenue comes from items that traditionally retail for $25 or less. When you move that threshold to under $50, you're closing in on 90% of our sales.
That reality of affordable price points, in combination with the current popularity of our classic and topical brands, leaves us mindful of the current market conditions, yet optimistic that we will finish the year with the right kind of momentum heading into 2023. At retail, broadly speaking, our largest segments of business are performing best, and our sense of the market is that our velocity is as good or better than any other company in our space. Of course, we did see some point-of-sales that slowed down compared with some of the strong numbers we saw earlier in the year, but we are certainly growing faster than the market in total. Our Q2 toy consumer product segment grew 83%, with North America up 92% and international up 38%.
All of our international regions and nearly all of our top ten markets were up double digits during the quarter. We are also on track for a tremendous year in our costume business. Q2 represented the biggest Q2 ever for the business since JAKKS acquired Disguise back in 2008. Last year, some customers were late sending planograms for the Halloween season. This year, we stretched the industry standard timelines to work with our customers and factories to reduce that likelihood as much as we could, and our international expansion led to most markets shipping a multiple of the levels shipped last year. In total, we shipped $72 million in the quarter, more than double what we shipped in the quarter last year. Container costs continue to be a drag on the product margins compared to prior years.
We have been relatively pleased so far not seeing a repeat of the costs and delays we were dealing with in the second half of 2021. As mentioned, we were doing everything we could and can to keep these costs in check, inclusive of trying different routings and carriers to import the product. So far, so good, but of course, the next six months will be critical to how our year finishes. Some of our outdoor seasonal items continue to struggle from a margin perspective, given the continued challenges of tariffs and the container costs impact on the larger cube items. This remains one of the toughest parts of our business this year. There's no magical solution, but we know this is a solid segment for us, and we continue to explore all angles to get this business on a better trajectory.
Shipping in this business was down 25% in the quarter year-over-year. We are keeping shelf space for these categories of business, but shipping less than normal due to the margin impact. Retailers are also negative about big items in general, given their inventory issues outside of the toy and their general need for space for other goods and categories of goods. As I said in April, with each passing quarter, our balance sheet gets stronger. Given our recent performance and outlook for the next six to twelve months. Before the second quarter close, we just decided to make an optional $10 million pay down towards our long-term debt. This will save us meaningful cash interest expense in the second half and gives you some sense of how we're thinking about our performance and liquidity between now and the end of the year.
I will now pass the call over to John for some further discussions around our financials, after which I will come back with some more thoughts about the balance of the year and how we are starting to think about 2023. John?
Thank you, Stephen, and hi, everybody. Sticking with the idea from last quarter, I will skip reading through the various financial details included in our release today, even if they are pretty good. I'll try to touch upon what are hopefully some more insightful thoughts and observations as we mark the halfway point in the fiscal calendar. Even if there's not a lot to add, I'm not going to pass on the opportunity to say something about sales. Singles and doubles generally isn't supposed to mean nearly doubling last year's sales number in a quarter, but we'll take it. What I think you see in these results are execution against what we've been talking about the last couple of quarters.
A longer and more expensive supply chain for us translates to our wanting to do even more FOB business and to reaffirm our focus on our biggest and most popular brands and segments. It also increases the urgency to be thoughtful about inventory purchasing and to similarly prioritize our best-selling items. We've also been talking about great consumer demand for our product lines and customer enthusiasm for our current lineup as everyone gets ready for the all-important second half. Add all those factors together and layer in the great momentum of our costume business, that leads you to types of sales numbers we've seen in the first half of the year when supported by the team's relentless execution. As we've also said before, we really do manage the business with a full year view given our seasonality.
Although we love being able to deliver quarterly results like these, we really are focused on finishing strong on 12/31/2022 and then, starting all over again. I will point out as a reminder that we had about $30 million worth of Q3 sales ship out of the quarter into Q4 last year due to customer pickup delays in Asia, contributing to a much higher Q4 than we would have expected. Those dynamics are always in play given current events. Beyond that, there's not a lot more to be said about seasonality than what we've already covered. The sales performance to date has been exceptional, along with the timing of when it's happened, given that increased freight costs have eroded some of the progress we were making in gross margins in 2020 and early 2021.
That said, we're pleased to only be down less than 80 basis points in gross margin percentage compared to last year. Our product margins are holding up well, thanks to a combination of designing for improved margins and pricing. Royalty expense is tracking a bit higher, as some older agreements charge a higher rate for FOB sales versus domestic sales, and there's a product mix element in play as well. As Stephen pointed out, the narrative on ocean freight in Q2 is along the lines of so far, so good. Still unfavorable versus prior year, but it certainly could have been worse. Where this topic ends up six months from now will have a meaningful impact on our full- year results, as well as our ability to drive bottom line margin percentage improvements in 2023.
Great sales volume clearly is especially good when it leverages the fixed elements of our cost base. Operating margin for the quarter was positive and our trailing 12-month operating margin increased to 8.2%. As Stephen also mentioned, we took the opportunity to make a fee-free pay down of our long-term debt at the end of Q2. With LIBOR increasing, this represents at least $400,000 in cash interest avoidance between now and the end of the calendar year based upon projected rates. Interest expense in the quarter was $2.3 million, down from $4.4 million in the same quarter last year. The marking to market of our preferred stock liability resulted in a non-cash gain of $6 million, primarily due to rising interest rates.
We back that gain out of our non-GAAP calculations of adjusted EBITDA and adjusted EPS. In aggregate, our adjusted EBITDA for the quarter is $27.1 million versus $5 million last year. Our trailing 12-month adjusted EBITDA is now $75.7 million or 9.9% of net sales, which was $49.1 million and 8.7% of net sales at this time in 2021. Moving on to the balance sheet. You'll note with the surge in sales and our pulling forward of inventory, our mid-year non-cash working capital is very high compared to historical lows. We've generally been able to self-fund that and would expect that number to work itself down a bit by the end of the year or early next, in part driven by timing and levels of 2023 shipments.
Our cash balance at the end of the quarter was $62.3 million. Our total debt was $84.9 million, and we had no draw on our credit line. We like where that puts us, but we still have the bigger half of the year ahead of us, which isn't lost on anyone here, so plenty of work left to do. Finally, some of you noted that we filed an S-3, more commonly referred to as a shelf registration, with the SEC earlier in the month. Broadly speaking, we've intended for quite some time to get a shelf in place in case a situation arises in the next couple years where management and the board feel offering some more shares would be the right thing to do.
We consider having this flexibility to act quickly to seize upon opportunistic scenarios another positive for the company, so we were happy to get around to getting it filed. With that, I will now hand the call back over to Stephen for some additional remarks.
Thank you, John. I wanted to call out some second half retail highlights and focus areas in addition to some very early thoughts about 2023. Leading off, clearly a remarkable quarter in our costumes business, and congratulations to everyone who works on the Disguise business. Building on last Halloween's success and sell-through, we saw most customers this year wanting to both go a bit deeper into the Disney's line with a couple in particular making bigger bets. We consistently, at the Disney's, have a robust market-leading business here with an ever-expanding lineup. A return of confidence in the box office is creating additional demand as our 2022 offering is anchored by theatrical releases like Jurassic World, Minions, Disney and Pixar's Lightyear, in addition to Disney's Encanto and Sonic the Hedgehog 2.
I'm also happy to say that our first quarter of shipping the Disney business in Europe is going extremely well, and we are having a lot of great discussions with new customers and distributors as we expand our network there. Moving to our doll and role-play business. As a result of ongoing year-over-year growth, we have been securing extended shelf presence and incremental distribution for the Disney Princess franchises, generating meaningful incremental volume. That placement has been well-earned and is delivering for our customers with solid sell-throughs. Disney's Ultimate Princess Celebration is continuing and providing promotional support and attention to this important evergreen business. The Disney Style Collection line, which continues to bring new items to market, continues to perform well as early releases in this segment have. Later this fall, we're building on our popular 15-inch large doll range with a talking and singing feature doll segment.
Our launch of assortment includes Ariel, Moana, and Tiana, among others from the Disney Princess franchise, and from the Frozen franchise versions of Elsa from Frozen I and Frozen II. This new segment will be supported by 360-degree marketing initiatives, driving sales this upcoming holiday season. Although nearly three years removed from her most recent film, Elsa remains one of the most popular Disney characters, and while as anticipated, Frozen sales are down versus last year, they have been selling above planned expectations. Finally, I also wanted to mention our promoted playdate 32-in doll segment will include our new version of our popular Rapunzel, along with a new, really innovative, really fun Many Moods Maximus.
Outside of Disney Princess and Frozen, we continue to be excited about our support the Disney ily 4EVER brand, with new dolls launching in October inspired by Belle, Rapunzel, and Minnie Mouse. The line launched at Smyths in the U.K. earlier this month and is off to a solid start. As we mentioned last quarter, international expansion is happening with this business across a number of markets. When it comes to Disney Encanto, we have been scrambling since January to keep up with demand and make sure that this will be a magical holiday season when it comes to Encanto toys. The Magical Casa Madrigal has been the hot, hard-to-find toy, and we're on track to ship nearly 500,000 units. Our largest customers are planning meaningful add-to-aisle real estate in Q3 and Q4 as much-anticipated Encanto inventory makes its way to retail shelves.
Supporting Encanto, last week, Disney kicked off a 32-city tour of a one-of-a-kind concert event featuring the full-length film and an on-stage band celebrating all the record-breaking hit songs from the beloved soundtrack. The tour runs through the end of August, so look for it in a city near you. The teams are also working on several new Disney initiatives for 2023 that we look forward to telling you about in the future quarters to come. Our Perfectly Cute line of baby doll toys and accessories have continued to perform really well to date, and looking into the second half of the year, we see momentum continuing. In terms of box office and toy sales for Sonic the Hedgehog 2 movie and product line, we have exceeded our internal original forecast this year.
A new wave of 4-in figures and Sonic Speed RC will drive sales through the holidays for the movie line, and more new items for the core Sonic line are coming this fall. The Egg Mobile Battle Play Set is a feature set in the 2.5-in figure world, allowing fans to recreate the epic boss fight matchups of Sonic versus Dr. Eggman and to customize the Egg Mobile into five different looking vehicles. You can also count down to the holidays with the newly unveiled Sonic the Hedgehog Advent Calendar with four exclusive holiday 2.5-in figures and a total of 24 figures and accessories. It's a perfect way to kick off the holidays for every Sonic fan.
The item that I might personally be most excited about, or at least in my top three, we just announced at San Diego Comic-Con last weekend. It's a new entry to our Nintendo Super Mario product line. We brought together the expertise from our Moose Mountain Ride-on business to the world of Super Mario, creating our Mario Kart 24-V ride-on racer, a child-sized power ride-on version of the iconic Super Mario Kart racer. With 24 volts of power, it has three exciting forward driving speeds, setting to go up to 8 mi/h , as well as reverse. It features authentic sounds from the Mario Kart video games and an adjustable seat that grows with the driver. The racer should be on shelf in Q4 of this year. Now let me talk a bit more about 2023.
One of the exciting things about this industry is despite the fact that we normally have a long planning cycle with our teams currently deep in refining our fall 2023 introductions with new licenses and rights in the works, in addition to securing new rights for 2024 opportunities at the same time, we always have to stay in the moment, track and react to what is currently working at retail. As much as on January 1st this year, we felt we had a strong lineup for calendar year 2022, none of us would have predicted with high confidence that would all come together to the levels of success we are now looking to achieve for the full year.
The core performance of our evergreen categories and product lines continues to be supported by four defining elements that I know we discussed last year, but I wanted to take a moment to repeat. First, innovation within categories to maintain freshness and relevance. Second, in addition to being relevant brands, new and exciting IP and licensor relationships. Third, geographic expansion to reach a rapidly expanding global market. Fourth, migration into adjacent categories to fulfill the needs of our consumers and our retail buyers. Those guideposts are both contributing to our results this year, while we also benefit from the additional pop of some breakout successes and creating the momentum we have heading into the second half of the year and beyond.
Looking beyond the top line, we remain very focused on continuing to improve margins and bottom line profitability as we have consistently done since our 2019 recapitalization. Our plans anticipate improved supply chain economics and continued thoughtful overhead cost management to cushion softening in some of the exceptional success areas we're seeing this year. The windfalls from this year and any potential reductions in working capital can be reinvested in improving our balance sheet, reducing our borrowing costs, and/or enabling thoughtful additive acquisitions consistent to what we have done and been saying for a long time. In summary, we remain extremely excited about where we are and the outlook for what's ahead.
We have worked extremely hard to seize the opportunities which have presented themselves in 2022, and we remain laser focused on finishing the year strong while we uncover and develop new businesses for the years ahead. With that, we will now take questions. Thank you.
Certainly. Ladies and gentlemen, if you have a question, please press star then one. One moment for our first question. Our first question comes from the line of Stephanie Wissink from Jefferies. Your question please.
Hi. Good afternoon, everybody. Stephen, the first question for you is just to help us compartmentalize the drivers of the business. Could you separate out the growth from Encanto and Sonic from the underlying evergreen categories and product lines, just to help us think about the underlying stability in the business?
Sure. Thank you, Steph. If we take Encanto on its own had a successful launch last year in fall and also continues this year from first quarter onward. Encanto has also, I believe, helped the enhancement of the overall Princess business, as Princess, the doll role play and dress-up category, inclusive Encanto, has grown tremendously with the overall just general Princess properties as well as our style collection. The same goes for the Sonic the Hedgehog and Sonic the Hedgehog 2, the movie. That has also increased more dramatically based off the content that came out. With Nintendo and the gaming licenses, the hot gaming licenses are performing extremely well and continue. Nintendo's been growing double-digit for years. Those both enhanced each of the boys category.
Then we've had a tremendous year, almost overall in the majority of our evergreen stable businesses. As I mentioned earlier, Halloween, we more than doubled shipments in the second quarter. We have, as I mentioned, a plethora of new licenses as well as continuous licenses that have helped the growth in addition to building international that has actually helped drive growth, and we're just starting this year. Overall, excluding our table and chairs, there's been some real market drivers. The basic business and the business that we've mentioned earlier that over 50% is under $24, has really helped during this time of unique periods in the economy.
Okay, that's helpful. John, one for you. Just thinking through the full year and kind of as Stephen has mentioned some things about 2023, you know, cushioning the softening from strong trends in 2022, how much do you want us to pass through of the second quarter beat to the year? If you could just give us some sense of how much of this is timing related, how much is momentum related, and then how do you want us to model into the back half, to give you the best chance to outperform as you go through the balance of the year? Thank you.
Thanks. Hi, Steph. You know, I think most of the year we've been talking about how we see the front half of the year would be much bigger for us on a percentage basis than it has been in recent years. I don't know that I have a real clear sense to steer on that front. It's certainly the case that with some of the really hot breakout properties, that those are performing exceptionally well on a year-to-year basis. You know, the comment I made about kinda shipping early and often in so many words, certainly kinda holds true. At the same time, we still have plenty of shipping left to do this year.
Steph, I'd like, if I can add one thing to John 's comments. The goal for JAKKS and what we have been doing and focusing on is bringing more in early and making sure and ensuring that our inventory levels, both at retail worldwide and our in-transit and distribution centers worldwide, have a lesser amount of inventory going into 2023. We've been managing that at the start of this year, so it's something that we're focusing on. Even if we could have a tremendous year, which we believe we're having a tremendous year and will continue, we'll be very cognizant of making sure that we build on this year for 2023 with the appropriate growth strategies and enhancement of margin and profitability.
Okay, just final clarification. I think you had given us some direction on the year prior to this quarter. Has the full year changed for you in terms of your expectation for the level of growth, and it's just the timing? Or do you anticipate that some of the Q2 momentum continues and your full year outlook now is higher than what it was when we spoke last coming off of Q1?
Yeah. I think it's fair to say our expectation for the full year is higher now than what we thought it was, 3-4 months ago.
Okay. Sounds great. Thank you.
Sure. Thank you, Steph.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Stephen Berman for any further remarks.
Appreciate everyone on the call. We have a tremendous amount of follow-up calls after this. Thank you very much, and we're excited to have our upcoming third quarter call in October. Thank you very much.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.