Q3 2019 Earnings Call
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At this time I would like to welcome everyone to the spin Master third quarter 2019 earnings Conference call.
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Thank you Tiffany good morning, everybody and welcome to spin Master third quarter 2019 financial results Conference call I'm joined this morning vibrant in Harare Co Chief Executive Officer, then get bought President and Chief operating Officer, and Mark Siegel, Chief Financial Officer Spin Master for your convenience the press.
Released MDT UN audited interim financial statements for the third quarter 2019 are available on the Investor Relations section of our website, that's been master Dot com and on SEDAR.
Before we begin please please note that remarks in this conference call may contain forward looking statements about spin master its current and future plans expectations intentions result levels of activity performance goals or achievements or any other future events or developments.
We're looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable and the circumstances. However, there can be no assurances that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from.
Just one implied by the forward looking statements.
As a result, as a result spin master cannot guarantee that any forward looking statements will materialize and you are cautioned not to place undue reliance on these forward looking statements.
Except as may be required by law spin Master has no obligation to update or revise any forward looking statements, whether because of new information future events or otherwise for additional information on these assumptions and risks. Please consult the cautionary statement regarding forward looking information contained in the company earnings release dated November 5th 29 team.
Please note that spin Master reports in U.S. dollar and all other dollar amounts to be expressed today or in your with currency I would like to now turn the conference over to run it.
He Sofia good morning, and thanks for joining us on the call today.
Our strategy is designed to achieve long term growth and we're delivering on that strategy.
Since 2015, we have generated gross product sales growth of 20% and 10% over the last 10 years.
Well in excess industry growth rates.
Our team remains diligently focused on successfully executing against our growth pillars.
Right and over an ever evolving twin content.
Consumption landscape, we remain focused on execution of our plan.
As a result, the strength diversity and depth innovator brand and entertainment franchise portfolio gives us cognizant delivering our long term organic gross product sales growth target.
Mid to high single digits.
This is evident in 2019 as we have grown the business, 12%, excluding the significant decline in hatch most from 2018 to 2019.
The traditional twin games industry, representing an approximately 80 mill 80 billion plus global market is stable and growing at a compound growth rate approximately four to five per cent per year.
In the last few years, the U.S. market has faced challenges that have created disruption and change but also opportunities.
We've had a major retailer tier you exit the market.
In 2018 and in response.
Volume has been redistributed to new customers and channels, creating changes in order patterns distribution requirements.
The growth and trend towards online purchasing weapon brick and mortar has continued to accelerate.
The content landscape.
It's continued to ship from traditional intermodal that's beauty.
And he bought and digital mobile platforms as.
Oh this is correct.
In a political environment characterized by trade tensions.
Between the U.S. in China with ever changing Rick.
Risk of U.S. tariffs.
Through all this change we remain focused on executing our strategy.
Expected overall growth.
Topline double digit growth of our product portfolio for to my team. Excluding the decline attachment was a testament to help and overall brand portfolio as well as our ability to adapt and change.
We plan for Clinton hatch most in 2019.
Sure we have.
Had a broad and diverse portfolio, including new product introductions, such as how we as you know my baby elephant partnerships such as most for Jim had a trainer Dragon and entertainment franchises, such a bucket on cultural that are driving revenue offsetting the decline.
Our growth is driven.
In driven by our ability to identify developed and acquire new and innovative products and brands.
Great and life Evergreen entertainment content and grow internationally in partnerships with inventors broadcasters production sale studios distributors and license source.
In 2010 operated only seven of the 11 categories in the two industry as tracked by NPD today, we have diversified the business with representation in categories and now operate in all 11, providing solid diversified base and positioning us for future growth.
Continued to go deeper in our categories through internal innovation strong partnerships and acquisitions costly fueled by artist disciplined 36 month brand innovation pipeline.
Innovation at the core of our success.
He is at the core of our success and we'll continue to be a significant contributor to our future growth.
Demonstrated their where we're able to excite kids and we remain confident that we will continue to bring innovative hip products to markets.
We've been able to generate highly successful properties, such as cockrell hatch, most and Buck a gun, which contributed significantly to our growth and then generate the resources that we can reinvest in future growth opportunities.
This allows us to diversify and build broader recurring revenue streams across her toy entertainment content in mobile digital direct to consumer markets.
At the core of spin Master is our ability to create and Cajun kids storytelling for multi platform construction.
Through the success properties, such as Cobb, CRO and others, we have proven the creating evergreen compelling and engaging kids content and combining that with the retail initiatives such as toys helps optimize brand equity and in turn price higher growth alternative revenue streams for licensing and merchandising and higher margins.
In Q2, we launched a new season, UPOP CRO franchise and products braced based on the season six muddy Paul theme.
Since the launch Paw patrol has grown through the third quarter.
After all has higher consumer engagement than ever before this is a testament to our strategy of refreshing themes keep the characters and stories relevant.
Progress continues for the first ever theatrical enemy to pop cruel film.
Which we are targeting for release in 2000 in late 2021, and we believe <unk> set the foundation for other properties to follow onto the big screen.
Regarding bucket gun, we're taking a long term multi generational view of the franchise.
We're pleased with the responsible to Buck the gone in the first service relaunch.
We relaunched in Q1 in North America in Australia, and Japan, UK and Germany in Q2.
We continue to roll up the rest of Europe and internationally during the third quarter and by the end of 2019, we will be in full distribution globally.
We have worked their partners a cartoon network to build a multi channel content approach and make content available on television SBO D and you too.
During the third quarter, we watch bucket going on Netflix, which is accelerated its awareness and growth trajectory.
This multichannel approach helps us to ensure that we reach as many kids as possible.
We have strategically invest into focus in all areas of content consumption, which includes our mobile digital presence with token spoken sacco many.
For years, we've been studying play patterns, which have been converging between physical brands entertainment franchises in mobile digital platforms.
Children are increasingly accessing consuming entertainment content on mobile devices. The acquisition token Bocom Sacco. Many three years ago provided us with a strong brand presence in the digital mobile space and allowed us to develop a leadership position in the kids mobile app and direct to consumer space.
Today talk about Consagro money average over 20 million monthly active users on a combined basis globally.
Giving us a strong base of users to expand both app sales and direct to consumer subscription based products.
In 2020, we'll be enhancing our offering from one for subscription products.
These will include cycle, many world and Sagel School.
Along with an innovative subscription offering a sag on many physical boxes, which integrates with the digital worlds.
We continue to actively look for potential strategic acquisition targets, while maintaining a measured and disciplined disciplined approach.
While we.
Well, we will only acquired assets that fit our long term strategic and financial criteria and are able to generate value for shareholders. We're currently observing in inflation acquisition multiples for companies that are targets. This is being caused by the entry of private equity players into the mid to large size twist space.
We believe these multiples are unsustainable and will not create value overtime. We believe these companies will come back to the market at more reasonable multiples in line with their true underlying growth potential.
Our brands partnerships entertainment and mobile digital franchises are resonating strongly with children were confident that's for strategic direction and I'm proud of our global teams for their commitment to delivering our success.
With that I will now turn it over to Mark.
Thanks, Randy and good morning.
Q3, gross product sales were down $75 million were 11.4% compared to last year and all the currency adjusted basis with down 70 million well, 10.6%.
The gross product sales declined this quarter was driven primarily by the difficult year over year comp hatch animals in the radio controlled and interactive characters business segments.
Excluding had tools, which declined over 69% in the quarter.
Gross product sales increased by over 10% led by the strong performance of the boys action and high Tech construction business segment.
[noise] at a high level, we sold four key factors affecting Q3 results and the cadence shipments in the second half of 29 team which include.
One of decision to manage our portfolio of brands more tightly using domestic replenishment.
Secondly, the evolving retailer trend away from Fob on direct import orders towards domestic orders due to a combination of the demise of toys R. US the threat of U.S. tariffs and increased online purchases that drive more just in time shipments later in the euro.
Thirdly, we saw increased inventory levels arising from our decision to bringing inventory earlier to avoid U.S. tariffs and finally.
I'll U.S. East coast warehouse consolidation from full warehouses into one cause short term disruption and created congestion in the U.S. supply chain.
This shift that approximately $14 million of Q3 shipments primarily in the U.S. from the last week of September too early October in Q4.
Ben will explain these dynamics in more detail in a few minutes, but I want to just take a moment to review the seasonality of that business and how the fact is about have affected and we'll continue to affect the underlying sorry, the timing underlying financial results.
The toy industry operates on two seasons spring and fall, which corresponds H, one an h. too from a calendar perspective.
So people toy industry sales seasonality is around 30% to 33% H, one and 67% to 70% 82.
This half your perspective is the way both we end up customers manage the toy business.
Having emphasize the H one age to split the awesome dynamics around the quarterly split with the makes to which we need to explain further.
Historically, we actually most of our age to sales in Q3 on an fob or direct import basis.
Well customers take ownership of the goods directly at the Port in Asia.
We rely less on domestic replenishment using our own distribution network, which would then weighted to Q4 sales.
It's always a rush in particular was historically a launch fob purchases from us in Q3 as they wanted to manage the full purchases earlier indirectly through their own distribution network.
Q3 was April typically a much larger proportion of our age to sales than those about logic competitors, who emphasize more domestic replenishment.
It will be shipments, which are priced lower as the retailers taking inventory risk say this cash flow, whereas domestic sales at higher prices office net incremental margin due to high pricing with some offset from increased inventory carrying costs and high working capital investments due to increased inventory and longer receivable payments.
Yes.
Well the results described above.
Through our own decisions related to the management about product line and because of industry changes over time out Q3 will decline in size and Q4 will increase correspondingly.
We are seeing this play out meaningfully this year.
Wow quotas one important in public markets. We do encourage you to also remain focused on measuring all performance on a semi annual basis.
<unk>.
This quarter in the boys action and high Tech construction business segment, we have seen solid performance from the Bakugan franchise. Following its debut on Netflix and continued strong performance from once the job.
With bucket guns expand expanded global rollout, we view this property as a driver of growth going into 2020 .
In preschool and girls I call brand showed strong double digit year over year sales growth led by twisty pits and pull patrol up 6% in Q3 and sales of candy locks in pre cool.
Offset by sales of party parties in Q3 2018.
Which was unsuccessful and did not carry forward into 2019.
As expected we continue to see declines in the remote control the interactive count This business segment, largely driven by had shipments year over year animals declined over $120 million in Q3 and over $200 million year to date.
As we've said for some time the decline in had tools has been expected claims and we are sharing this detailed information with you, which we did not normally do to put our Q3 results seem to the profit perspective.
Gross product sales in activities games, and puzzles and plus saw a slight decline as most of our significant new product launches began in the back half of the quarter timed with movie releases, such as frozen to toy story, four and the Lion King.
Geographically gross product sales in North America declined 15.3 per se.
One primarily by the decline had shovels.
Excluding had symbols gross product sales in North America increased 6.6%.
Gross product sales in Europe increased 1.6%, while the rest of the world was down 12.1%.
The decline in the rest of the World is partially attributable to the move of Russia, Switzerland, Greece in Austria into direct markets in Europe , which were previously reported in our third party distributed category in the rest of the world.
Overall international gross product sales in the third quarter was strong growing to 36% of total gross product sales up from 33% last year.
Sales allowances as a percentage of gross product sales were 10.6% for the quarter compared to 9.7% last year.
As a reminder, sales allowances are typically between 10%, 12% annual gross product sales and very Blackwater due to the timing of promotional and locked down spending.
Other revenue, which includes television distribution income merchandise royalty income as well as F. revenue from talk about can save them money increased by 3.4% driven by high licensing in merchandising income and high EP sales.
X. toward time launching brands and the Navy impact of high other revenue.
This was partially offset behind ocean freight costs arising from the uncertainty caused by the U.S. China trade dispute.
As we discussed as part of our risk management program weeping diversifying our manufacturing footprint for several years, we continue to accelerate the supply diversification program out of China, resulting in higher than normal supply chain costs, which we expect to normalize over time and generate cost savings.
S G.N.A. expenses for the quarter remained flat the overall compared to 2018, we saw highest selling expenses from increase sales of licensed products increased marketing expenses, hi distribution experiences, resulting from increased infantry storage cross.
Hi, inventory levels and cost associated with a distribution center consolidation in the U.S. offset by improvements and administration expenses related to lower employed costs.
As a percentage of revenue S.G.N.A. increase to 29.7% from 26.2%.
Increase was mostly driven by lower sales volumes.
We expect to see improved operating leverage in Q4 .
I want to emphasize two additional points and distribution and selling costs.
In the long term investments we've made in U.D.C.'s located in the East Coast U.S., Hungary servicing I expanded eastern European market and Moscow are largely complete.
Expect on you supply chain infrastructure will enhance operational efficiency is in the long term improve customer service levels and drive operating leverage.
Selling expenses increased as a mix of licensed products, including wants to jam and how to train you drag an increase resulting in higher royalties.
We expect variable selling expenses to be slightly higher throughout 2019 due to the success of these properties and remain at these levels in 2020, as we rolled out the D.C. comics product line.
Adjusted even for the quarter was 150 million compared to $180 million lost your primarily as a result of the load cause product sales and higher distribution and sending expenses.
Adjusted even the margin was 27.4% compared to 29% last year.
Please note that adjusted even tougher Q3 2018 was not restated bar is 16 and would've been hired by approximately 3.4 million if adjusted.
Their income for the quarter declined to 92.1 million from 107.9 million to pry your adjusted need income for the quarter declined, but 24.5 million to 93 million.
On a two three year today basis.
Product sales are down, 8% or 102 million.
However, excluding had troubles grows product sales grew 12%.
This growth in a broader portfolio more than offset.
Said more than half of the had troubles to climb so far this year and this will accelerate further in Q4 .
Despite the euro to date declining gross product sales October orders and shipments have been strong.
And include approximately $40 million of shipments that shifted from September to October as I described earlier.
Importantly, as at the end of October our sales for the month together with Shippable October orders have more than recovered Oh, you're over your two three you up to date grows product sales decline.
Turning to our balance sheet soul mate working capital as a percentage of revenue at the end of Q3 increase to 16.7% from 14.9%.
This was primarily attributable to increase imagery levels arising from our decision to bring in in Richie earlier to emphasize domestic replenishment to mitigate U.S. terrorists in together with the impact of a U.S. east coast warehouse consolidation.
I'll call working capital comprising trade receivables imagery and trade tables increase the 19.5% of revenue compared to 18.6%.
Overall cash conversion cycle increase by 10 days to 33 days, mainly from higher days inventory on hand.
Free cash flow was 128.6 million declining from 149.8 million in the prior driven primarily by low profitability and investments in entertainment franchise development.
A balance sheet remains very strong and we ended Q3 with 151 million of cash 56 million compared to 2018.
We do not see any change to our outlook for gross product sales for the full year 2019.
As I described earlier.
Orders and sales at this point of further ahead than last year at the same time, giving us confidence that we remain on track to grow grows product sales for the full you have low single digits compared to 2018 as previously guide.
To be clear, we still need to perform well during the order replenishments cycle in November and December as is the case every year, but we are confident that we can achieve our sales outlook for 2019.
It is important to reiterate that had troubles started to decline in the fourth quarter 2018 and continued through the first three quarters of 2019.
As such we expect any further decline in <unk> to have less impact on the fourth quarter 2019 that it has so far you up to date in 2019.
With regard to adjusted EBITDA margin, we continue to be focused on cost management productivity initiatives, given some of the distribution and supply chain issues described earlier. We now expect are adjusted EBITDA margin in 2019 to be slightly below the adjusted EBITDA margin, we achieved in 2080.
To conclude we remain committed to outgrow strategies and long term financial framework, which targets organic gross product sales growth of mid to high single digits.
While we acknowledge the short term uncertainty caused by the various factors, which affected this quarter spend Martha's.
Track record of generating growth backed by a diverse portfolio and healthy balance sheet gives us a strong position to take advantage of growth opportunities.
What's that Oh, now turn it over to bench.
Thank you marking good morning, we remain confident in the underlying strength of our business. The health of our portfolio operational model with built which enables us to move quickly and aligned to changing industry dynamics.
At a high level as Mark mentioned, we sell for key factors affecting the second half of our year and which resulted in a significant chip Bob shipments and order from the third quarter to the fourth quarter.
Let me walk you through this in a little more debt as it is important to understand our Q3 performance and build confidence in Q4 four year old look.
We have about all we have evolved toward a more domestic replenishment model to ensure our collectible product lines, such as back who gun monster G.M. and collectibles, which are a big part of our business in 2000 in 19 remained fresh on shelf.
Strategy gives us more control to ensure that we have the right product mix on the shelf at the right time.
Keep in mind further that as we continue to increase our European presents the proportion of domestic orders increases as Europe largely operates on the domestic order fulfillment model.
The absence of toys are us in the third quarter had an import underlying effect on the industry. This year.
Here are you with a large direct import or Fob Asia buyer and purchased most of their goods early for the fall season into three.
This ship the volume more domestically and added to the pressure on ours and industry supply chains.
I also would ever growing e. commerce penetration retailers order lead times have narrowed shifting the buying pattern closer to the holiday season and Q4 .
The on again off again on again, but less items news on tariff on list for items, including toy during Q3.
Disruptive to ours in the industry supply chain at times, we saw some retailer facing stretched domestic warehouses capacity issues as they also employed mitigation strategies on unrelated less one through three tariff product clients.
The situation caused a degree of uncertainty in retailers order patterns as retailers shifted orders in anticipation of the tariff implementation, which 10 put pressure or our supply chain as we brought in as we bought it brought in inventory earlier and domestically in order to avoid terrorists.
With long lead times from Asia, we could not flex as quickly as the news on folded and as a result, we try to maintain a measured approach whilst at the same time continuing to diversify production outside of China.
As we discussed in Q. too, we consolidated distribution into an east coast D.C., just sort of our customer better and at the same time consolidated gun, Cardinal and swim way warehouses into the new D.C.
This was disruptive to our third quarter shipment flow, but it's the right long term strategy to advance our supply chain and gained costs energy, it's a lot acquisitions.
We estimate that approximately $40 million worth of shipments war delayed from the last week of September two early October .
Even though this will have a short term cost impact we have now invested in additional capacity at many of our warehouses to ensure all product ship on timing queue for.
Furthermore.
More which has been one of the more successful product launches in our history exploding in popularity in 2017, and 18 continuous declining Q3, which began at the end of 2018 and was fully anticipated by us.
Including hatch them old we grew grows product sales, 12% for the year to date, which is due to our relentless focus on our 36 months Brown innovation pipeline.
Our performance has remained strong through October driving orders and shipment to date ahead of where we were at the same time last year on an October year to date basis.
We now have orders and shipments that have made up the decline of 8% in Q3 year today gross product sales.
We still need to perform well during the order replenishments cycle in November and December but are feeling confident we can achieve or low single digit growth product sales outlook for the year.
From A.P.O.S. perspective, our overall performance as quarter was solid with highest single digit growth of 8% globally. Despite the decline of <unk> <unk>.
Globally appeal S., excluding hatch remote what's up 19 per cent of this quarter year over year.
<unk> growth ultimately leads to shipman growth, but for the first three quarter are 2000 of 2019 are key U.S. retailers, we're right sizing inventory coming out of the 2018 raise to capture a t. or you share.
Total Q3, U.S.P.L.S., including Hatcher Mole was up 6% an inventory retail inventories were down 7%.
Pleasing to C.U.S. Q3, P.O.S., excluding <unk> the territory in which hatch them all had the highest proportional loss show <unk> up 17% year over year.
At our top three U.S. customer Q3 year to date, Pos was up 12% and M. and Tory with down 5%.
Elementary or down 5%, we continue to see positive momentum internationally in Q3 in many key market in Europe , we saw strong double digit P.O.S. growth overall in Germany, we <unk> growth of 33% here today.
In the U.K., despite the turbulence of the market due to breakfast, we continue to see low single digit P.L.S. growth compared to a double digit decline in the toward market overall.
Par continues to be the leading preschool license globally, we saw a positive growth in Europe , and especially strong P.O. as growth in Germany, Russia, Poland and Slovakian particular in Asia. The launch in Japan continues to gain momentum into three.
In the U.S.P.O.S. to patrol declined mid single digit we saw an impact on P.O.S. due to launch of toy story for which both targeted the same consumer.
Overall, however, we expect pop U.S., the growing queue for with the launch of the new higher price point item, including the Mighty Lookout tower as well as the fire truck and yet.
The last few quarters, we discuss various initiative, which we have undertaken during the year aimed at driving long term efficiency.
Briefly.
The integration of gun Cardinal Ellie game and swim noise into one office in New York will drive increase innovation, better communication and significant cost saving as we move into 2020.
Or diversification program out of China accelerated this year due to the U.S., China tariff dispute.
Although new factories in Vietnam, India, and Mexico will drive cost savings in the near future. We have incurred additional costs. This year as we expedited the changes.
We expect to be below 50 per cent source from China by the end of 2020 down from 70% from over 70% two years ago and over 90% more we went public in 2015.
From a business segment perspective.
The activities gains in puzzles and plush segment is a strong platform for spend master.
<unk> candy logs in our innovative carmaker gold land nail painter and generated a lot of excitement. So far we launch gave them puzzle aligned with the release of frozen to toy story for and the Lion King.
In the remote control in interactive characters segment, we launched Juno My Baby Elephant and how these and interactive flying pet.
Retailers are excited about these products and initial order, it's I've been very positive.
Juno and all these are both a testament toward teams ability to continue to innovate in this high tech space and merge technology with great play.
We are very happy with the performance of our Monster Jam R.C. trucks.
And in <unk>, where we have over 90% brand awareness with U.S. mom and closer to same level with kids, we are continuing to innovate and stretch the brands hatch more pixies is a cross between a collectible and a doll house in an egg and has allowed us to break into the small dog category.
The boy action in high Tech construction category with our strongest performing business segment, we continue to see momentum and solid contribution from the three major launches this year how to train your Dragon Monster Jam and Bakugan are performing well from the T.U.S. perspective regarding Bakugan, we started seeing.
Growth happening in the USA in mid September we starting acceleration in the growth happening in the U.S. in mid September around the net flicks lunch.
Press U.K., Germany are leading our strong ended after lunch result, we have great placement in Nepal category line up and very strong positive brand feedback.
Innovative product line for months to Jam was introduced in January and continues to show very strong P.O.S. results globally, especially in Mexico in Australia. In addition to the U.S.
Beginning spring 2020, we will be the new toy licensee for the D.C. Entertainment Boy action category, including remote control and robotic vehicles water toys and games and puzzles.
Scenes already hard outward developing the line for 2020 and initial customer reaction has been very positive.
The preschool and girl category and girls categories are strong performance driven by fresh themes and patrol and innovative new product lines in Q. too we began shipping the new Mighty Pops line and volume group globally. In Q3. This fall we introduce the ready race rescue TV special and new toy items.
That brings the theme to life.
Overall, we seen significant growth in views of our content.
The Mighty Pops trailer with our top performing patrol content ever with 34 million views.
We are excited about the launch of our lower price point Die cast line, which was successfully launched at the beginning of Q3.
We remain competent and patrols prospect for 2900 and beyond based on upcoming content, new things and innovative product.
To conclude.
We are confident in our projected performance sort of Fort quarter, we have built a strong diversified portfolio of product some brands and entertainment franchises that are resonating well with consumers.
Our team remains focus and we are proud of the effort and resolve their employer delivered around the world. We also remain focused on driving growth and value through our four key growth strategy that you are familiar with.
Then mark an I.R. now please to take question operator, please open the line.
Thank you.
<unk> to ask a question you will need suppressed star one on your telephone.
Are your question his press the pound or hash key.
Our first question. This morning come to my line as <unk> from RBC capital markets. Please go ahead.
Alright, Thanks angle morning, I'm, just starting with the top line or I, just want to clarify comment you made earlier around.
You've already made up the cute three drag here to date, so you're sort of flying over here is up there I what I read it and then also second part can you maybe talk about at this point of the year. The kind of visibility you have to your orders for the remainder of Q4 and I guess, what part of those orders store variable or is it. The replenishment you don't have a lot of it.
We're just trying to understand.
Seven weeks, what kind of visibility your habits from this point onwards.
Good morning, Sever I'll take the first part of the question then I'll pass it over to them for the second part.
<unk>, what I said in the script was that as at the end of October we have actually shipped during the month of October .
Significant increase over our previous October and had shippable orders in October that will actually landed up shifting in November but if you actually take those shipments plus the shippable orders for October we've essentially caught up 100 million dollar.
Climb that you saw you know cumulative top line at the end of Q3 or today.
Is that clear.
Right, but Alps, Okay, right, Okay, and then Sabah good morning for the for the second half of your question on our on our confidence I'll build into what Marcus said is.
The way the way, we manage our forecast we look at it monthly in terms of a phobia orders and domestic orders, we do global rolled up at the country level, So where we where we review all the plans with every one of our countries and then what we're able to see as we track the order.
Errors on the books this year versus last year, and what and as Mark said is when we exited Q3, we were down approximately 8% to last year or $100 million and in October . We recovered. These hundred million dollars of shipment and orders and now we look at November and December we can say with confidence but are going into.
Much detail that the orders are ahead aboard the word last year at this time and in order for us to achieve our our our queue for.
<unk> and we and our portfolio is been doing welding Q3, and Armentor is that retail as we mentioned at the end a few three in the U.S. alone with down 7%, our our retail inventories. So we continue to see very healthy order pattern as we speak now.
Okay. Thanks, and then just on the immersion side I guess, the goddess or version.
Two slightly lower margin the commentary in the press release was around just being attributed to hire shipping and storage costs just want to understand if you could provide some color on you know maybe the magnitude of the expensive that you realize that were unexpected and then you're visibility I guess for the rest of Q4 you know they're flexing your expenses to ensure that you come more than this new kind of.
I understand your visibility to the I guess the margin side for the rest of there as well.
Yeah. So so the reason for the the margin revision Sabbah was primarily due to two two factors one is supply chain costs, and that's really warehousing increase or each costs from high inventory average levels. We've also put on more shifts we've increased compare.
Theodore warehouses to make sure we can shift the higher.
Amounts that are going to fluttering queue for there is also transportation impact around increase volume and expediting some of our freight. There's also some impact from Asia, where we've we've got a diversified procurement activities going on now, which we accelerated because of tariffs and then finally, the tariff impact, which we estimated queue for was around.
$3 million is part of that guidance revision.
As to as 12 visibility, we feel comfortable that that that.
Margin revision gardens is reasonable.
You don't you know these these things costs, obviously that that we understand very well, but we think that the pressure on cost that we've described to you.
Supply chain and tariffs are going to be the primary drivers of of of the margin.
Acuform for the full year.
Okay, and then as you I guess look forward into 2020, and you think about the dynamic now where the bit more direct shipment versus prior years I do feel that I guess, you indicated you get a higher price from your customers because they're not picking up the product manager is basically got enough to offset the additional costs.
How do you think about the or managing those incremental supply chain costs go forward, if more retailers are taking domestic shipping.
Well look we'll we'll get into 2020.
More detail later in March, but but we will obviously build that into to out thinking in general domestic is high pricing. They are higher costs associated with that through the inventory carrying costs and and and you know we carry receivables longer as well, but overall these a net incremental.
<unk> benefit to that but they use a negative effect on out cash flow. So all of that kind of has to get all set.
But but overall we feel that.
We're okay in terms of our guidance for 2020, nothing is going to fundamentally change and we'll get back to you in March when we are normally do around our balance for 2020.
Thanks, and then just one last one on D.C. Comics I'm just a two part I guess is it fair to assume that even in non movie or is you're able to make products for a character that may not have a movie out and then the second part being I guess is there a difference in the Royal to you pay. So for example, say there's a Batman movie is there are different royalty when you make extra later.
<unk> movies versus just generally putting out D.C. comics products in the market started uncharted dynamics and movie years versus non movie years.
Yeah.
That question the royalty remains the same during the course of movie years and non movie years, It's just a flat royalty rate and obviously during the movie years, you're going to see a spike in sales.
But D.C.N. Warner Brothers works very hard to generate a year round business.
With other promotional activities and other marketing to keep their characters top in mind with the kids and so we're able to benefit from that so there was a base business and then there's definitely a spike in the business.
<unk>.
Great. Thank you.
Your next question comes from a line of stuff. What's next let's Jaffray's. Your line. This out then.
Hi, Good morning, everyone I'm wondering if they can.
Catching on to the to call people that you've got the iconic and Bible larger scale form factor peace and then the underlying piece that is the collectible.
Oh, how they got more peace. If we can look at those two pieces <unk> trying to understand Keith reversal queue for it looked like the comparison in Q4 to that iconic skew it much easier, but how should we think about the longer term value of the underlying or foundation on business and he moved through a coupon and them to 2020.
<unk>.
Step I'll take this one good morning, so I'll just reiterating what Mark just pointed out in a in our script is our our largest shipments last year for <unk>, three and mainly Fob and as we just pointed out our sales who are down 69% foot of branding.
Three which was by far the large attach more water last year. So you're so when you look at Q4, we already started the brain already started to declining queue for last year. So the year over year calm quarter of a quarter will be a significantly less or in Q4 and as far as the the qual.
Potatoes between the call it the big egg and this is a leg the big egg as seen the the the larger part of the decline and collect collectible. The the small that continues to be a good business, but also declining but Furthermore, this year, we we lost our new Pixie lines, which is performing well and.
According to plan and where we're very pleased with it. We're also launching a higher price point item in Q4 the hatch you. All that you you most likely have seen already and this year, we're launching the week of wall marketing campaign.
But our expectation overall for the brand are more modest than pry here in order to reflect the brand maturity, but we do we do believe and we do in terms of how we innovate our portfolio. There's plenty of new innovation that will come out with the hatch them all brands and we.
Remained very confident in the brand it won't just be more at a at a smaller level than what then call that the toy <unk> level that we have that we've we've been lucky enough to experience in the last few years and last last but not least I think it's important to.
Talk about the fact that even outside of hatch them, all with our P.L.S. was up 17%, which is truly a test them into our 36 months brand ovation pipeline. So we're we're continuing to keep actually more fresh, but we also having other segmented a portfolio, where we're launching a lot of new innovation that is resonating very <unk>.
Well so does that answer your question <unk>.
It that's very helpful. My second question is just an inventory and like maybe this is a one for you.
It just looking at the inventory at the end a cute reverted way current inventory would stand kind of into a quarter. If we assume that you were able to recapture that or to carry over into account for are you also managing your own inventory more tightly at the current.
Hmm, maybe where you were at the end of the quarter, how should we think about your own inventory management throughout the course acute for.
Yes, a step when we when we talk about domestic inventory and we talk about the shift to dawn that effectively is alley inventory on out books. So as you saw the end up to three.
You know even tree was $67 million and that reflected all the factors that we just discussed already on the color, which I'm not going to repeat.
And then we will be managing that at the you know a high degree of vigor throughout queue for the goal.
Is at the end of the the fourth quarter to be down at the same levels that we would have been asked you know if you compare us to historical levels. So if if all goes according to plan and and we shipped through what we need to ship through in Q4 U.C.L. imagery on out books, which is domestic imagery effectively getting back down to.
Normal levels in relation to two priors.
Yeah.
Okay very helpful. Thank you.
<unk>.
[noise] here next question comes to mind instead of doing this <unk> your line is helping.
Yeah, they're just in terms of the shift into queue for for each play the the 40 million in sales.
That were pushed into couponing <unk> outside of that should we continue to expect this sort of ship from Q3 thousand a cue for going forward like is there something you would expect to happen and 2020 or again.
Yes, I think Derek we are seeing the chefs like we've described previously.
Re occurring in in in future Yours, obviously, there's some degree of variability around this it's not a precise formula and to some extent the or product lines that that 10 more towards dambrosia for be this year. We we had a strong per domination of of domestic lines that actually.
Boosted that percentage, but going forward, the or secular and industry shifts that we see happening and both been and I described earlier that I think are going to continue and will actually make queue for a larger proportion of value or then it has in the past when you want to get the only thing the only thing.
To add is that the the benefit of domestic orders is that when you look at our portfolio, which is this year for example, more geared toward collectible and mixed management an assortment.
If you ship it from Asia, you you pretty much have a can of sort of it and when the product sales differently on the shelf you end up with a lot of stuck out and sometimes more mentor into different characters than others and it creates some retail issues would ultimately affects P.L.S. so for us.
Managing our product line more than domestic basis.
I've, Marc said, a move the sales to queue for but ultimately at it allows us to manage the mixed at the retail shelves in the way that we can always replenish the shelf what what is exactly needed at the time would in a few days so and we believe that ultimately this war this will drive P.L.S. and it's much better for Brennan franchise in that.
Judgment, and a and life cycle of our of our innovation.
Okay, and then as it relates to the thing is that when you call. It the congestion in your supply chain relating to their the roll out of the new D.C. or are you predominantly through those growing pains, a as a as of November .
Yeah, Yeah, so what what what I can say is because as we describe we consolidated for D.C.'s into one this year and then with the and we had plans for an order a pattern dealt with.
Probably more spread out during the quarter. So we've noticing Q3 that.
The the orders came in later than planned and then as Mark described we made the decision to bring in more inventory to mitigate potential tariff terrorists issue. So what happened is all all at the same time, we experience a significant bottleneck and that and you D.C. and as a new D.C. and more still ramping up and.
We just we just couldn't handle the ramp up at the end of September . So it was a bit of a perfect perfect storm and you were quite disappointed what ourself into the performance and the <unk> at the end of September , but but what we did we turn around in October and we add our highest domestic shipment in a in the history of the company.
We're getting ready to beat that again in November we've added a resources and capacity into this into this warehouse and we feel confident that we'll we'll be able to deliver and and it was it was very hard learning lesson for loss.
Okay. Thank you very much.
Here next question come through line of Brian Morrison with P.D. Securities airline is open.
Yes. Thank you get mine <unk> I think it conveyed the gross product sales shortfall in the inventory increases essentially timing related but it's running notable product line that was disproportionately impacted relative to your expectations.
A good morning, Brian No. There wasn't it was really it was really more blanket. It was it was truly a lot of it was truly caused by the just the d. Si not being able to ship product on time, which was of you know as if any one of our customer order they place orders across multiple.
Product categories in our brand so it was pretty much across the board.
Okay, and maybe just change gears here run and you talked about the opportunity with <unk> just from a higher level with the adoption of five Gee I'm wondering what you've done in terms of preparation for its adoption and maybe just qualifying quantify the opportunity on your digital front as the streaming becomes much more popular.
Yeah. Thanks, Thanks brought I didn't think I get any questions today, but.
You know five she really opens up a lot of possibilities worse I think the roll out of five p. is going to take a while it's gonna you know 36 months to 56 months away.
But the greatest thing about took a book on so many is that.
The the acquisition has given us to incredible mobile gaming studios have wished to build out games for kids you know one in Toronto and one in Sweden and both of them. Both those studios are located in probably.
To the best talent hubs for digital gaming on the planet.
And you know we'd been very focused on.
Out of a diverse strategy for both token Boko ants sat Romanians So talk about goes focused on.
Games for kids five to nine and the five G. what that enables us to do is you'll be seeing in the future multiplayer games that we're developing similar to fortnight or roll bars or mine crap that give kids the ability to play together.
To not only play together, but the share what they're playing and to share that with a wider audience.
So that's that creates a lot of opportunities for us and then on the on the.
Tag on many side of things you know sort of a different approach you know what to talk very my comments, which was <unk> around subscription and so we're seeing a big shift you know we were looking at some data the other day and 22% of us households, all have subscription based products.
In their homes and a lot of that's focused in around yes.
So we're going down that road were building out subscription based products that have monthly re occurring revenues lifetime values of the customers, it's quite different towards our regular businesses and it's still at the early stages, but we're very excited to share more with you guys in 2000.
<unk> around that roll out.
Opera, we have around somewhere.
Hello.
Yeah go ahead, Brian did you have a far sorry, it's just a little bit of cutting out there yeah. No I appreciate that the last question I had is just a with respect to back on that and how it's trendy and you mentioned with respect to it's [noise] introduction net flicks, maybe can just share any data on how a you've seen the benefits once it was placed upon this channel.
Yeah, Okay. So I can take this one Brian so.
I I'm going to say the overall with Bakugan, we're continuing to see nice growth and mold and momentum building into franchise on a global scale. The the recent launch in France, U.K., Germany, Australia, Belgium, just to name if you have been very strong and and in some of these countries a franchise.
Is already in the top five boys property and it and it continues to build a very nicely and all of the auto market in the USA as you reference the the Siri launch on net flicks in mid September and you really accelerated the growth rate in the franchise and we've seen very positive results from the additional export.
<unk> overall overall, we remain very positive for the for the Buck begun franchise to keep building globally and Q4 and also in 2020 based on our current market reads and and the continued momentum that we're we're experiencing I know everywhere globally.
Okay.
Alright, thank you.
Thank Brian .
Your next question comes <unk> in debt Bolton Lifesavers, David Davidson Your line is open.
Hi, Thank you so not to be to haul.
I'll be issue two cats, but just I was wondering if you could shed some light on exactly why Mattel.
Experience. The same issue is it just simply what you said that they have just much less reliance on Appleby already then you and then secondly, I think it hasbros comments, they actually said they expected this issue to shove some revenue from the fourth quarter to the first quarter as well so is that.
Something that you're thinking as well because it doesn't sound like that's the case and then finally I just was curious if you could give.
Break down very roughly.
Channels that you think picked up.
So do you think it's like 80 per cent that big three or 50% the big three and then grocery and food something out you know for dragging mass can you give some kind of rendition of where you think the distribution once.
Good morning, I'm going to try to I'm going to try to answer them all.
So so when you look at our changes from Fob to domestic and you compare us to some of our key competitors. If you actually need a cue three Q4 that Dave had historically they have already been much more skewed toward.
Before well we were wanted a company that had the highest probably fob percentage in Q3, so what you're actually seeing now is using our company evolve as we mature and how we manage our brands and franchise toward more of that modeled as well. Okay. So so I think this is so I think that's what you see.
As far as far as order from Q4 to Q. wine I can say that we are not seeing any order cancellation, so far and what what <unk>, what we're actually seeing as we've obviously seen some shift from Q3, two Q4 as we describe but we're not seeing any order cancellation.
Would be material.
And then from a from a distribution channel I think which was the last question was who's kind of gaining and picking up his.
There's something that I haven't heard anyone talk about yet and this owning season is that last year, what actually happened in Q3 is although toys R. US was gone there was a significant race them a retailer standpoint to either enter.
Or or a gain market share and the toy industry and that Korea also created a bit of of an inflation include three for the industry and we're not seeing that this year, which also has a it is a factor.
That that I think impact the industry in in in in a in the U.S. This year so.
As far as who is gaining is which so far we do continues to see the the you know the big three to Walmart target, an Amazon continuing to growing continuing to pick share.
Thank you very much.
I last question comes from a line of Adam Shine with National Bank Financial your alignments out then.
Thanks, a lot maybe one for you bet and the next one for Mark then you know you touched earlier on lessons learned I think this year.
Some of the supply chain dynamic and then last year. Just you know terms of how much of avoid was thought ultimately filled in the absence of toys are us as we look into 2020.
No other more lessons to be learned or is there a big five relief that frankly.
God The school, it's a new paradigm and you've adjusted to that reality and there's no greater shocks the system next year.
Yeah, Good morning, Adam So yeah. So.
But I'm going to start by saying that overall I think what we've accomplished this year is we've we've undertook significant amount of restructuring in our business. This year, where we've been solid dated and close down our guns office and.
We consolidating clothes are swim way office, we have consolidating a consolidated our games business into our and we opened up our new long Island City office, we open a an office and the D.C. in Russia, We open a D.C. in Hungary and we.
Have significantly accelerated are Asia diversification plan to be to be below 50 per cent to protect the company going forward based on these terrorist threat. So I think we've we undertook a lot this here including the.
Consolidation last but not least of these four D.C.'s into one and and we did not anticipate this I guess call. It the perfect storm to hit the D.C. and a matter of a few weeks so.
So we don't expect that to repeat next year, we don't have any well not opening any new D.C. is next year and we're not we don't plan on on any further consolidation of offices and I also believe that we've made tremendous amount of progress this year, and our and our supply chain diversification and.
Into well, we opened a lot of different vendors in Vietnam in India, and Mexico. So I think I think the team did a pretty good job and now we had a salad bowl for a few weeks in in the D.C. and just as a fun fact as a fun fact, Adam is our troops into D.C. now as we speak is approximately 250 per cent.
It is on a daily basis and what it was in September So we definitely reacted to the issue and now and are dealing with it.
Okay.
One for Mark in regard to maybe a little more clean up and visibility you know around guidance with respect to sales allow it to see the the conversations previously have really been around to you know maybe upper end divot, 10% to 12% historical rage do we still stick to that or you know was already concern of.
Further slippage to the up side.
So you you're correct, Adam 10% to 12% is has always been the range that we've talked about I would say for for the purposes of modeling and thinking about going forward I would stay towards the high end of that range.
And it particularly in actually a geographic mix issue because in Europe as our business grows Europe is a higher price higher allowances structure and in purely mathematically that's going to push out average of now once a rates up.
There isn't any fundamental change to the way that we actually handle sales allowances in the business, but certainly as a European business grows at at a high allowance structure higher price structure that allowance right cool tend towards the higher end of that range.
Okay.
We should also think about just by virtue that European dynamic continuing you know, obviously post 2019 as well.
Correct.
Great. Thanks, a lot.
Thanks. Thanks.
Yeah, Thanks, everyone much appreciated.
Appreciate your time and we look forward to talking to you again in March with Al Q4, and full year results and in New York and in New York. That's right. Thank you airline. Thank you bye.
This includes today's conference call you May now <unk>.
Hmm.