Q3 2020 Spin Master Corp Earnings Call
Uh huh.
The next available operator, Jamie you as CEO, the especially on tape on a push and not be hotter disposable.
[music].
Please stay on the line for the next available operator.
Yes.
[music].
Thank you for calling them the name of the coal burnt you're calling to join.
Yes.
Hi, its spin Master Corporation.
<unk>.
Yeah, Yeah yeah.
First and last name Oh.
[noise] Rachel's Smith.
[noise] Hello am I hearing you [noise].
Well.
Yes.
[noise].
<unk> company please.
[noise].
Okay, It's a year ago I E R E.
[noise].
Yes.
[noise].
<unk>.
So.
[noise].
Video games.
Themselves extremists to take talk Twitch and Youtube for others to watch.
We believe this is a major factor behind total life.
<unk> world's growth.
For total life World, We now have around 5 million daily active users and over 17 million monthly active users.
With over 42 million downloads since its launch.
In total token Boca now has over 30 million monthly active users compared to.
16 million last year.
In addition, we also saw strong growth in our Sacco many subscription business, where we now have nearly 220000 subscribers across several many world second many school and stack them any box.
Compared to just over 100000 in Q3 last year.
We are now working very hard on our next to Joel game product launches, including a new Tomoka Boca box targeted at kids five to nine.
And in multiplayer game launching in Q4 2021 called took a days as well as continuing to grow our SEKCO many subscription business.
In late June the first episode.
Of the new pop Troll theme Dyno rescue premiered on Nickelodeon.
Retailers have said that is one of our strongest themes to date for the patrol fan franchise overall.
Overall diner rescue marked the number one show on television in Q3 monks preschoolers.
Excitement is building for our first feature film and we remain on track to deliver.
Actual movie in August 21 as planned.
During the quarter.
We announced World class voice talent for the movie, including Jimmy Kimmel, Tim car Dash and Tyler Perry.
Our new preschool franchise might express launched on Netflix September 22nd this was our first.
Paul series launching directly on a streaming platform.
Let's launch is another example of our ability to push the boundaries of quality children's entertainment.
That might express toy line will launch in fall 21, following the global Entertainment rollout.
We've seen strong early levels of awareness for might express and.
And we have a solid start we view.
First ship with the show ranking in the top five you as children shows for kids two to five in its first two weeks post launch per Nielsen SBO de rent rankings set.
Second the secondary indicators are also moving in the right direction with organic viewership watch time completion rate growing and outpacing all benchmarks at this stage.
We announced earlier that we secure the global Master toy license for Dreamworks animation for the new enemy had a preschool series Gabby dollhouse, which debuts globally on Netflix this month.
Beginning fall 21, we will bring the characters from the showed a life through a new toy line that we will include Playsets figures plush games and puzzles.
And we also continue to build our presence as a toy partner for high profile brands.
This quarter, we announced a multiyear agreement to become the global Master Toy license for Riot Games League of Legends franchise, which is the most played PC game globally. We.
We will develop a toy line the action figures play sets role.
Ill say items, which are anticipated to launch in fall 21 targeting an older collector fan demographic.
The global nature of this property is also attractive.
Potentially allowing us further penetrate to further penetrate markets, where we have previously be underwritten being up underrepresented such as China.
Where the franchise is very strong.
We continue to grow our franchises with multiple partners.
On November 3rd we launched buff begun champions of Astoria, and new game developed for the Nintendo switch platform in conjunction with Warner Brothers and way forward.
I want to briefly update you on the progress we have made on.
Operational challenges, we encountered last year and Mark will add more details later.
We are already seeing the benefits of the remediation efforts, we discussed in Q1 and Q2 and we are gaining strong momentum.
We have focused on consolidation realignment and simplification, while ensuring we remain sufficiently agile to respond.
Sponsored evolving industry and retail environment.
We've used the process of addressing our 2019 operational challenges to build a continuous improvement mindset, which has become embedded in our organization globally.
We plan to continue to drive operational efficiencies in every area.
We're doing deeper and more proactive planning for 2021 early.
Earlier and more detailed than ever before.
We have also improved accountability over every line of the TNL are building operating operating procedures to ensure that we manage more consistently globally.
Let me briefly review with you so.
The changes in consumer behavior, we are currently seeing and how we are adapting our marketing.
Consumers have been more mission focused and they're shopping looking to reduce the amount of time that spend shopping in stores.
We believe retailers had this in mind when they started offering they are black Friday discounts earlier and spread them out.
Some of the consumers would not need to go into crowded shopping environments.
Consumer spending has shifted earlier, we estimate around 20% a December Pos will be pulled forward due to retailers price promotions, such as Amazon Prime day in October and pull forward of Black Friday deals from target Walmart to reduce.
And to reduce.
And sprint in store foot traffic as well as consumer concern around the supply of hot toys, given the potential cold related industry shipping delays may occur.
We expect the shift to ecommerce to continue.
Q4 to date is pacing above 30%.
For our Pos.
NPD is predicting online could represent as much as 45% to 50% of Q4 sales.
Increasing in screen time continue and content consumption continues to shift away from linear TV towards SPD gaming and Youtube.
Recognizing the parents.
Its brand parents are shopping with less kit influence near the purchase point, we've increased our investment against this audience with campaigns to help make purchase decisions compelling simple and easy.
We've transformed our approach to marketing with digital at the core building extensive in house capabilities that have helped us to optimal.
And as our plans in real time guiding kids and shoppers through this year's new Omnichannel journey.
For our fall marketing plans, we've been spending less on linear TV and more on the mix of digital including social Influencer and ecommerce.
Our fall mix, we'll see us spending around 50% of our total budget on digital first.
The modest around 35% to 2019.
From welcoming new preschool parents to the patrol years with a viral video campaign and later encouraging them.
To convert to sale.
And our new President pets lines to distributing hundreds of videos across you tube.
For social recreating the Monster Jam action with our innovative negligible on our C. Our fall plans are driving consistently stronger lifts and Pos than last year setting us up for a strong sell through for the season.
Just after the quarter, we announced that we have reached an agreement to acquire Rubik's brands limited owner over the.
The world's famous rigs Q3.
The Rubik's cube, we sold more than 450 million units since its introduction in 1983.
The Rubik's cube is an iconic puzzle that has permeated pop culture and we are excited for the opportunity to put our innovation on the entire rubik's portfolio and expand distribution through our global footprint.
We're always on the lookout for accretive M&A opportunities that complement our chronic growth strategy.
We continue to apply a disciplined approach to assessing all opportunities.
We are also increasingly focused on the entertainment and digital areas for M&A opportunities.
To conclude we remain very confident confident.
In our ability to create magic for children globally through the strength of our diversified portfolio brands entertainment franchises and digital game offerings.
We are cautiously optimistic that the Q4, given our strong toy lineup momentum in digital games revenue and consumption of our entertainment content.
We are however mine.
Well the unknowns ahead of us, including the ever evolving cobot situation.
Overall, our strategic direction, our solid financial foundation and diverse geographic platform combined with the commitment of our global teams positions us to take advantage of the evolving opportunities and drive long term success.
Ill now turn over the call to Mark.
Thanks Renee.
We delivered a solid third quarter with meaningful progress on operational improvement plan and stronger than expected revenue growth.
We reduced our inventory carryover from 2019 and significantly improved our net working cap.
Capital position.
The strengthening our balance sheet.
Revenue for Q3 was $571.6 million up 4.3% from the same period last year and up 3.5% on a constant currency basis.
Gross product sales rose by approximately 1% in the coal.
Quarter to 587.4 million, which included favorable foreign exchange of 3.2 million on.
On a constant currency basis gross product sales was slightly above last year.
On a geographic basis Europe was our strongest region with gross product sales of 115.
$9.8 million up 15.6% compared to last year.
We saw growth across a large part of our product portfolio in Europe, but especially from pulled patrol.
The strength in Europe was offset by a 2.6% decline in North America to $362.4 million and a 10.8%.
And decline in the rest of the world to $65.2 million.
International gross product sales represented approximately 38% of total gross product sales up from 36% in 2019, the relative strength in Europe offset by the decline in North America drove this increase.
From a channel.
Perspective, we are seeing a sizable shift to E commerce year to date E. Com Pos has grown 65 cents in the US as a result of the shift E. Commerce now equates to around 30% of our Pos up from 25% in Q2, the trend we expect to continue into Q4.
We believe we are growing ecommerce at a faster rate than many of our competitors.
The activities games, and puzzles and plus segment was up 13.2% in the quarter to 172.5 minute a trend that has been consistent all year. According to NPD, the U.S. games and puzzles market was up 42.
Thank you up to date and 31% during Q3, we have benefited from this trend this year with strength in our Cardinal games and puzzles portfolio.
The acquisition of Rubik's for 50 million will Mark our 12 acquisition since our IPO in 2015, and Rubik's will fall into the games.
Puzzles category.
The transaction is expected to close January four 2021.
In activities, we continue to see exceptional growth in kinetic sand, which almost doubled in Q3 over last year flush which comprises gunned continues to be negatively affected by specialty channel closures.
Related to covered in the U.S. Despite the decline in plush the segment is up 17.1% year to date.
The remote control and interactive character segment was down 24.5% to 88.6 million driven by lower sales of our lease in hedge levels, partially offset by month to Jim.
Marci and Air Hawks fan shop.
The decline had animals was in line with our plans and while the impact of the decline is diminished significantly it's still a drag on the segment.
Monster, Jim again performed exceptionally during the quarter with over 50% growth compared to the prior year.
Despite the cancellation.
Of many live Monster Jam shows in Q3 due to the pandemic. The brand continues to show strength propelled by innovation with Mega loans megawatt on store as well as the monster gym, transforming hauler, which is expected to sell out in the U.S.
Currently felled entertainment and once the jam partner.
She has recently re launched live month to jam events in the U.S.
Year to date the segment is down 26.3%.
In our boys action and construction segment gross product sales were up 27.5% to 131.6 million driven by strong performance of DC.
License products and the just launched present pits line, which more than offset the declines in Dreamworks Dragons and back to that.
I'll bet mentor sales are well ahead of those of the previous license the program. Despite this being a non movie year.
Although we sold back on shipments declined in the third quarter, but coogan a scene.
In a very strong lift in Pos following the launch of the new season on Netflix, which dropped on October Onest and the launch of the new TV item also in early October.
Pat Dugan is now currently seeing a highest Pos total so far in 2020 up 30% from the levels. It was at.
Prior to the Netflix launch.
Year to date the segment continues to show growth up 8.6%.
Gross product sales in preschool and girls declined by 10.6% 282.4 million in Q3, the decline was largely due to poor patrol and was attributable to euro the year decline.
Hi, import shipments in the U.S.
Full patrol sales in Europe, and the rest of the world showed strong growth in Q3.
The new diners theme continues to be very strong globally and retailers increased Q4 orders once they got POS reason for August and September.
We expect the strength to continue.
Revenue in October and November shipments.
Other product in the segment that decline include twisty pets candy locks in wholesome blossoms, partially offset by pre cool yeah.
Year to date the segment is down 13.9%.
Gross product sales in our outdoor segment, which.
Prizes swim ways, any roby nearly doubled rising by 92.2% to $12.3 million.
Which driven by swim ways, which benefited from favorable weather and the desire to go to pools and features after so many months at home.
Year to date the segment is up 5.2%.
Let's now look more closely at Pos.
According to NPD, the global toy industry grew 15% for the June to September post lock down period.
And our global Pos was up 20% for that same period.
In the us up.
Boys for Q3 rose, 17% compared with an increase of 21% for the industry.
We believe a big factor in this gap is the strength of categories in which spent monster does not have a significant presence such as building sets and construction or science and exploration toys.
Which were up well over 30% in Us Pos X.
Excluding these categories industry Pos in the US was up just under 19%.
We saw an overall strong rebound in our European Pos, especially in France, UK, Germany, driven by growth in patrol back again.
And other core brands.
Looking at the first nine months of the year. According to NPD Pos for the global toy industry was up approximately 12% and our Pos was up 14%.
Our Pos was particularly strong in Europe year to date approximately three.
Nine times the market Pos growth rate.
In the us our year to date, Pos was up 16% compared to 19% for the industry.
Again, we believe the outside strength in outdoor places and construction was a big factor in fact, if you only look at categories in which spun mark.
EBITDA has at least $1 million in sales year to date.
Year to date, Pos is up 18% compared to 12% for the industry.
We believe that we are outperforming the industry in the categories, where we compete.
Among our brands.
We have many showing tripled.
So digits and high double digit year to date, Pos increases, including kinetic sand games and wants to Jam RC.
I want to share some more details on patrol Pos.
Poor experienced a decline during the first half of 2020 as we entered the year with heavy retail inventory and took.
So console mid summer to get it down to a healthy position due to the cobot driven reduction in birthday parties and other events we.
We've since seen strong Pos performance globally.
Q3 patrol Pos was up 18%.
In the US Q3 patrol Pos was.
10%.
This is driven by the diner risky theme and related new fall items, such as the Dyno patrol and the adventure Bay place it.
Also in the US in September 2019, we shipped our exclusive feature supported by dedicated entertainment content.
As of this annual pour tent pole event shipped later in September this year, resulting in most of the Pos shifting to Q4 from Q3.
Q3 year to date global patrol Pos is up 7%.
Year to date Q3 pour petrol in the us.
Has led but all the other major markets are positive and the US trend is positive in Q4.
The brand is currently strong due to fresh product the strong theme and contact exposure, while retail inventory is down 18% compared to the same time last year.
In.
As we said marketing support through the fourth quarter will continue to boost for patrol and we expect patrol to finish the year at being Pos for 29 team both in the us and globally.
I also want to briefly mention a few highlights from our incredible fault toy lineup.
POS has been.
Strong on most of our key new items, we have brought to market and is approximately 15% better than the last few years.
These items include our month to jam regular Don stall and RC track for both land and water. The latest hatch, mostly duration cold Crystal Flyers, which is a hedge levels pixie.
That can be flown and controlled with one hand, the hochstein shot and present pits puppies that unbox themselves.
To conclude on Pos from a fourth quarter perspective, while industry. Pos remains strong retailers have continued to be cautious.
When replenishing inventory, resulting in Pos exceeding shipments and retail inventory levels being drawn down.
We expect Pos to continue to exceed shipments in the fourth quarter due to retailer caution around covered.
Over time, the sell in sell through relationship will balance out.
Yes, we see opportunities for this to occur in H. one 2021.
Turning back to the PML sales allowances in the third quarter were 10.9% of gross product sales. This is up slightly from 10.6% last year, mostly due to the shift in sales from North America to Europe, which has a higher sales.
Tons environment.
On a year to date basis sales allowances or 11.7%, we have seen our sales allowances normalize in tandem with our operational performance improvements and we continue to expect to end the year in this range.
We are encouraged by the strong performance of other revenue which fund.
Primarily consists of large licensing and merchandizing royalties television distribution revenue and digital games revenue, which rose by over 80% in Q3 to 48.3 million.
The main driver of the increase with digital games revenue, which more than quadrupled in the quarter compared to last year.
Most of this growth was driven by the telco line.
Life World platform, where we saw very strong consumer engagement. In addition to digital games revenue growth, we saw higher entertainment revenue from television distribution, partially offset by lower licensing and Merchandizing royalties on third party sales of products using our IP.
Given the growing importance of the other revenue line.
Driven by the growth in our entertainment and digital games businesses going forward, we will provide further details on the components of other revenue beginning.
Beginning in Q4, we plan to breakout other revenue into its two primary components comprising digital games revenue and entertainment revenue.
As our entertainment.
In digital games business continues to grow we will continue to refine our key performance metrics to better reflect the results.
Gross profit for the quarter was to $77.9 million or 48.6% of revenue compared to two a $6.9 million or 52.3% last year.
The decline in.
Gross profit margin resulted from several factors unfavorable shifts in product mix from increased volumes in lower margin products, such as Cardinal games and puzzles and outdoor as.
As a reminder, cardinal and outdoor have always been lower gross margin businesses, but there is a natural offset to lower gross margins from lower selling and marketing costs.
Yes.
The sale of inventory arising from the operational challenges we experienced in 2019, we had higher close out volume in the quarter, which is directly related to our efforts to reduce inventory and streamline our north American distribution centers.
Hi in land and Ocean freight expenses this quarter compared.
Two last year as we sold through inventory that was built in 2019.
And these factors were partially offset by an increase in other revenue.
We estimate that we incurred over $7 million in costs affecting gross profit in Q3 relating to inefficiencies arising from Q4 2019.
You may recall from our Q2 conference call that we expected that gross margin pressure would continue in the second half of 2020 as a result of our ongoing inventory cleanup, but that the scale of the impact would decline as we shipped our full line.
In Q4, we will see some final elements about 2019 inventory cleanup, but.
Overall, we expect Q4 gross margins to be in line with prior years.
As a management team we are focused intensively on ensuring that our gross margin in 2021 meets or exceeds historical levels, which have been in the low 50% range.
SGN as percentage of revenue declined slightly to 20.
7.9% in Q3 down from 28.1% last year. The biggest driver of the decline was a 10.1 million reduction in marketing costs as a percentage of revenue marketing to decreased to 4.4% from 6.4%, we intend to increase our marketing spend in the fourth quarter.
And expect marketing as a percentage of revenue for 2020 to be approximately in line with prior years.
Selling expenses were 7% compared to 6.7% in Q3 of last year due to an increase in the sales mix of license products.
Warehousing and distribution expenses increased to 20.7.
<unk> million or 3.6% of revenue up from $18.4 million or 3.4% to $2.3 million increase related primarily to higher handling charges in Q3, driven by an increased dong versus fob mix relative to 2019 as well as costs related to into warehouse transfers, which were incurred as part of the complete.
Nova ongoing operational improvement initiative, as we finalized inventory positioning under our one skew one location strategy.
We estimate that we incurred $2.7 million in additional warehousing costs in Q3 relating to inefficiencies arising from Q4 2019.
Excluding the.
The $2.7 million warehousing and distribution expenses declined relative to Q3 last year.
As a reminder, the negative cost impact of our 2019 operational issues to non emergent sold Q4 2019, so we have not yet anniversary those issues or our efforts to remediate them. This year.
We are now.
Largely set up to successfully execute our go forward distribution strategy as we have reached our goal of reducing our north American Dcs to five earlier than we anticipated.
We are now in a position to exit 2020 at a run rate that approximates our historical cost levels offset slightly by a shift towards Europe, which has a higher.
We housing and distribution cost infrastructure than North America.
Administrative expenses in the third quarter rose to $67 million or 11.7% of revenue up from $55.5 million or 10.1% last year. The increase was driven by higher personnel and professional services costs in.
In Q3.
Our adjusted net income was $95.1 million or 91 cents per diluted share compared with $93.3 million or 91 cents per diluted share last year.
Adjusted EBITDA was 139.9 compared to 150.2 million last year. The decrease reflects the decline in gross margins and higher selling.
Warehousing and administration costs offset by lower marketing.
Adjusted EBITDA margin was 24.5% compared to 27.4% in the prior year we.
We estimate that most of the 10 million dollar decline in EBITDA in Q3 relates the inefficiencies arising from the second half of 2019.
Selling.
The tax rate for the quarter was 14.5% compared to 26.4% last year as we said on our last earnings call. We expect the tax rate for 2020 to be approximately 14% well below our normal rate of approximately 26% driven by the results for the first half and the jurisdictions.
And where we expect taxable income to be earned.
For 2021, and beyond we expect to revert to our historical rate of taxation.
From a capital allocation leverage and liquidity perspective, we continue to be in a strong position. We ended the quarter with 207 million in cash at $56 million from 150.
81 million last year.
You will recall that in the first quarter, we drew a total of $350 million on our revolving credit facility and during Q2, we repaid 50 million.
We repaid the remaining outstanding balance of $300 million in full in Q3.
Given the amount of cash on hand at the end of the quarter the cash flow we expect.
To generate in Q4 and the capacity on our credit facility, we are solidly position regarding available liquidity.
Net working capital was $185 million at the end of Q3 down $75 million from 260 million last year.
Inventory was $155.9 million down just over six.
$60 million compared to $216 million last year.
Highlighting the significant progress we have made since our operational problems arose ending inventory in our warehouses and at retail is trending to be healthy and down double digits by year end.
Free cash flow for Q3 before chain.
Changes in working capital was $108.3 million compared to 128.6 free cash flow for the quarter. After changes in working capital was $96 million compared to 86.5 million.
On a year to date basis free cash flow after changes in working capital was up over 84 million.
The $1 to $108.4 million compared to only 24 million last year.
Let me now turn to our ongoing efforts to improve operating efficiency I'm pleased to say that in Q3, we continued our strong momentum towards remediating. The challenges that emerged late last year and in Q3, we began to see a decline.
In the elevated cost levels from Q4, 2019, and the first half of 2020, we made significant progress in reorganizing and simplifying the structure of our third party industry distribution Center network and are in fact ahead of schedule in the US and Canada. We began 2020 with 18 Dcs and storage locations.
We now are at five distribution centers, which was our goal for the end of the year for visa in the U.S. and one is in Canada and we believe this is now the right structure to operate efficiently efficiently, but we will continue to refine our distribution network in 2021 and beyond.
One measure of this improved efficiency.
<unk> is our SKU count as of today, we've reduced the number of our skews by nearly 44% starting the year with over 13000, skews and paring that down to about 7500 currently the simplifies our forecasting and inventory management process. In addition, one of the issues. We had last year was that we created increased inventory management.
60 by stocking skews in multiple locations, we have now implemented a one skew one location strategy.
The reduction in Skus and our fine logistics network go hand in hand, and are part of our broader drive for increased efficiency and a return to historical margin levels in 2021.
Our goal is to exit Q3.
With a more refined supply chain infrastructure and to exit 2020 at or very close to normalized warehousing and distribution run rate. We are ahead of schedule on this call.
I want to now turn to our view on the balance of 2020 as we've discussed we've taken steps throughout 2020 to remediate the issues that emerged last year and we've made.
Great progress, we look forward to showing the effect of these improvements in our Q4 results. We continue to be very encouraged by the strength of our Pos across almost the entire product line by the growth in our digital games revenue and by the progress we have made with our operational efficiency improvements that said, we are still holding off on providing.
No guidance at this time, but essentially the same reasons. We have cited earlier. This year. This includes the resurgence of covered in some markets, which could result in volatility and economic activity.
We will provide a detailed outlook when a clearer picture emerges that caution notwithstanding we have an exciting innovative product.
Portfolio and strong entertainment and digital game content, our financial FINAME Foundation, our diversified base of product and our asset light platform continues to give us a strong competitive advantage competitive advantage.
We look forward to demonstrating further operational improvement in the fourth quarter.
Formed 2021 and showcasing the platform we have built for sustainable long term growth.
Finally, I wanted to acknowledge the efforts of our team globally Twentytwenty has not been an easier on many levels and the global spin Master team has performed outstandingly well to get us to where we are now.
That concludes our formal presentation remain and I are now happy to take questions. Operator, Please open the line.
Thank you if you would like to ask a question. Please press star one.
And our first question comes from Adam Shine National Bank. Please go ahead. Your line is open.
It's a lot good morning.
I am trying to read through I guess some of the commentary around obviously some of the efficiency gains.
That have been achieved.
And yet I guess the context that the gross margin somehow is going to be somewhat flattish to a depressed margining in Q4 of a year ago.
Now that weve very much lap the issue and we've seen you know I think.
Obviously, it evolving progress certainly a material progress sequentially from Q2 into the Q3 so.
With the inventory cleanup.
With no other revenues that presumably have a higher margin.
Stepping up fairly meaningfully.
Can you maybe just elaborate a little bit further mark as to why margins would be presumed to be flat rather than up year over year in the Q4.
Hi, Adam Thanks.
So to be clear, we got kind of contrasting things going on in in the gross margin line.
Uh huh.
We have a continued inventory cleanup, we still going to see some impact on that in Q4, although we we through the vast majority of it so that will bring margins down in Q4.
We've also still got a lot of cardinal and outdoor and kinetic sand shipping, which at which tend to be lower margin.
Mine lives and those are going to be offset by increased other revenue.
In terms of benchmarking against prior years, you really should be looking at at 2018 as a benchmark rather than Q4 2019, Adam because that's.
When the United was when we started experiencing a lot of the operational issues and there was.
I am very messy difficult quarter. So if you look back at 2018, we're in the 48, 49% range for Q4, and I think Thats, where we will end up given everything for Q4 this year as well.
Okay.
All right that's helpful. Because that's it's not quite as bearish as initially implied.
What.
Go back to where and then in the context of fear the quarter outperforming your expectations was that simply a function of some of the covert stimulated outdoor and activity sort of dynamic or were there other pockets of perhaps upside performance baby, including you know some of the strength that we saw in the DC.
What are you licensed products any other sort of hidden said, what I guess surprised you.
Well I think first of all first of all here.
I think that we're going to covert year and it's just been very wonky in terms of.
Open store closures and the power of E commerce and deliberate.
In consumer Pat.
Patterns and shopping patterns changing.
So it's just been a I want here and I think that we're just very grateful that for that.
Our product lines are holding up people.
People are shopping people are spending on their kids, we're able to add our supply chains open.
Our factories are able to deliver.
Very good I mean, we can go back to February last year, where we were worried about getting products and maybe how agents just being able to hold up into what delivering the goods. So it's from a macro perspective, we're very pleased and we're very grateful.
And then when you go into the portfolio you got things like DC, which is performing exceptionally well.
The Pos a pop up.
Good doing very very well.
A franchise that is just continuing to resonate with kids globally around the world.
You have been gone, which is on an uptick again.
And again the power of the content.
As a result of the drop on Netflix connecting with the kids and the kids now knowing where to go and fine.
Overall, the show, which is something very important around discoverability, because that's one of the issues that Netflix has but now kids are getting used to having been gone on Netflix and that's driving sales.
And ER activities games, and puzzles business, continuing to do very well and thrive, but then you've got some other.
Fine business like the guns part of our business, which is down.
And ER.
Attributes, which is down so it's it's a.
On balance we're very pleased with how the overall portfolio going and then again if you look at the stuff that's happening on the digital front.
That's also.
In years in the making that's coming.
They're coming into fruition and it's going to continue coming into fruition. So we're very pleased maybe.
Maybe just one last follow up just in regards to the revenue does this become a sort of a new normal run rate.
Or was there a lot of us are of the TV distribution revenue that was incrementally contributory to pop in the Q3.
Yeah.
And I mean in in the quarter most of the growth in other revenue came from our digital games business and we saw a very significant increase in in Tokyo life World.
Revenue.
TV distribution was up a little bit how the NIM was down a little bit but.
But hopefully that is the new normal I mean, we are building that business, we're investing in that business, we growing that business. It's a strategic initiative for us and if you look at the growth in the <unk> the revenue, adding subscribers and in monthly active users and you know everything is going in the right direction and we hope to continue.
To see that happening through Q4 and 2021 okay.
Okay. Thanks, I'll queue up again I appreciate it thanks.
Thanks.
Thank you and our next question comes from George Do May from Scotia Bank. Please go ahead. Your line is open.
Hi, This is John.
John and garfinkle stepping in for George.
Just focusing on Europe, and it's surprising to see the the growth in sales there I know Paul was called out as a contributing factor or is this also as a result of an overall catch up in ecommerce sales in the region.
Yes, I think Europe Europe had a very strong Q3 across the board I think.
Europe was down further than some of the other regions in Q2 due to covered and in Europe bounced back very strongly in Q3, so we saw that across the board.
In particular, though we call that poor control back on some of our major franchises performed really well in Europe.
Yes.
Okay, and then on the rest of the World segment, which geographies and product categories or would you say like improved in which we're still struggling.
The two biggest markets in that category would be Australia, and Mexico, I would say, Australia is doing reasonably well.
Mexico is the one that is suffering the most.
Most in that area I think the whole of Latin America is down.
If you look at some of our competitors I think they call that out as well and the overall market is really a hard hit in Latin America, and we we experiencing that in Mexico for sure.
Okay. Thanks for that.
And I know it will be broken out.
Next quarter, but is it possible to get like a rough breakdown of the portion of other revenue that comes from digital games.
Yes, we will we'll start with that next quarter, we'll give you all the details.
Okay, and just one more for me and just looking at free cash flow generation, how should we be how should we think of working capital and Capex for next year.
Well you know if you look at you have to look at that over the history of 19 and 20 and so in 19, you saw a significant buildup in inventory and working capital in general and this year, we focused very hard on bringing that down and you see you see.
Working capital net working capital at the end of Q3 come down around $80 million relative to the same time last year.
We're still not at the levels that we want to be yet to be to be fair, but we are trending in the right direction. So our goal for next year would be to to continue to see note networking cap.
Capital declining to continue to improve our free cash flow, but but not at the rate that we've actually done it this year.
Okay, great. Thank you for taking the questions and answers.
Thank you and our next question comes from Steph Wissink from Jefferies. Please go ahead. Your line is open.
Thank you good morning, everyone and gentlemen, thank you so much for the additional detail that was very helpful. I wanted just unpack three comments that you made and purchase were related to consumer behavior, you talked about a 20% shift from December Pos forward into the early part of the fourth quarter. If you could just extrapolate a little bit on that.
You expect a quarter kind of by month to play out and how you're preparing for that I think you also mentioned that you are retailers are being somewhat cautious about reordering. So that would also reinforce the NPV, possibly a slightly more reduce december month and.
And then secondly on top of Troys wanted to unpack some of the things that you are seeing on a global basis Rick.
Hi, I've met the brand is far more mature in the North American market than it is in some of your international markets can you just remind us how the content flows around the world is that they end date.
On your launching the diner rescue kind.
Content around the world at the same time and following that with product or Theres somewhat of a lag and how should we think about how your plan.
Planning to manage the content and the product and merchandising assortment for that brand going forward. Thank you.
And then maybe I'll take the first one and then you'll you'll take the second part of that.
Hi, Steve Good morning.
I think what we're seeing is that.
They definitely is a pull forward from.
Mhm December in terms of Pos we think.
Firstly, Amazon with crime day in October.
With Walmart and target with a black Friday promotions is effectively.
Black Friday is really spread over the month of November now and.
And so I think with consumers a focused on covered and some of the potential issues around congestion Naughty now warehouses, but just in general with with transportation due to covert I think there is a sense that people are buying a little bit earlier than they otherwise might have.
Usually.
They would have bought in December and felt very confident that if that order the week before they could get the delivery in time for Christmas now, we're getting the sense that the consumers are actually being a little cautious and buying a little earlier from what we've seen so that from a Q4 perspective has has pulled a little bit of Pos.
Into October November away from December.
It was the context for that comment.
Renamed you want to talk about the poor patrol content flow, yes for.
For sure.
So I think.
Well, we're in or seventh eighth year pop.
Literal step and it's pretty much the same content that's coming out every year.
But the European content is matching the north American content, you know at the beginning when we started out it was it was a little bit behind but it's pretty much caught up I think some of the differences that you'll find in Europe is is where the show was actually.
Precast and in Europe, you have a much or even.
You have a more dynamic.
Broadcast platform, where you have linear and you have SPD. So in a lot of countries in Europe, you can find popped on Netflix and you can find it on milkshake, Let's say for example in the UK.
And there is multiple comp.
Brought Asians and iterations like that through different countries.
In Europe, and so you just see a different broadcaster dynamic than you do necessarily in the United States, but for the most part in terms of franchise management. It's.
It's pretty much.
Uniform throughout the World and then.
And like we've seen a movie that's coming out in 2021, it's always going to be a worldwide launch is not going to be staggered you know six months apart various different countries. So we're trying to keep everything uniform.
And and consistent.
That's great. One final question for you Mark It was really.
Really I've taken back by the amount of SKU count rationalization, you've done a 44% was the number you mentioned right around seven and a half thousand now is that the right level for you. If you think about spin masters advantage in innovation and really unlocking innovation in the marketplace is that seven and a half thousand about what you feel like is appropriate for your go forward.
Uh huh.
Yes. Thanks, I think step we will we will way way over skewed and I think that was a big part of what what happened what hurt us in 2019 without with all the other changes that we made in now.
Infrastructure, So you know.
7500, it depends on the product line to some extent.
But in that order of magnitude is about right and we'll continue to refine that and get get it even better thats all about continuous improvement now.
Yes, and I, just think goldmark comments, just build on Mark's bumped up and I think that.
You know.
One way you could look at it as you can say you know the less skews.
The less revenue, but in actuality it makes the company a one more way more efficient and gives the opportunity for the product lines that really has the most potential.
The room in the Austin, Austin oxygen to breathe and actually resonate with the consumer at the end of the day.
It makes it much better and.
Product development teams are actually much happier that we've trimmed the.
The lines and we're really focusing on what's going to resonate with consumers at the end of the day. So its much healthier way to run it.
The business.
Thank you.
Thank you and our next question comes from Martin Landry from Stifel. GMP. Please go ahead. Your line is open.
Hi, good morning.
Just wanted to touch on your so called book up platform. It looks like it performed extremely well this quarter.
Just wondering if you can point to anything that's happened.
That's been different this quarter and then let's see Q1 or Q2 for us to understand a little bit to jump there.
Sure.
Well the one thing you got to understand about.
Total life, which is the main driver right now is that it's a game.
Game as a service so it's constantly being updated iterative.
So since the last quarter, we've added a bunch of new play sets to the game one is the Bohemian house the other one of the pool Villa.
That's a good the harvest villa in the Mystic cottage cabin and.
Those are actually they have creator tools. So the kids were able to go in and decorate their environments and two other ones were placed us. So it's just a constant iteration of the game other things that I think are kicking in is the short form TV series that we created that we put on you tube only.
Two Taco life stories, and so we've seen an uptick in viewership of of.
Of that content and then we started to see a very large uptick of people, creating videos or what we call game walk throughs and posting them on tech talk and putting music to them and telling stories.
And that really shot up the amount of people that.
Became aware of the game and as a result of that went in and that started to try the game and then start to buy the different packages of game offers so I think it's a combination of multiple things happening at the same time.
And ER and that created the increase awareness and then obviously the increase of sales.
Okay, well done in <unk> and just just to be clear the I guess, there's there's little seasonality in these digital games do you expect momentum to carry into into Q4 for.
Platform.
There is some seasonality and it's [noise].
We expect to.
There is seasonality in terms of Christmas, we get a lot of.
Gift card purchases, where parents buy gift cards for their kids, and then, particularly iOS Apple gift cards, and the kids actually are able to redeem.
For that in the game. So after Christmas, we usually see a spike but if this is constant steady throughout the year.
Okay.
And Mark maybe just a question on the on the tax rate.
Wondering you know.
You mentioned that your tax rate is going to return to probably more normalized level next year.
Can you remind us again, what what explains the the wide variation in that tax rate this year.
Yes, it's really in relation to.
Three things one is.
Firstly the losses, we had in the first half of the year.
The second element is the you know the jurisdictions, where we earned income this year and thirdly, we had a onetime reorganization of IP at the beginning of the year, which has also created a.
Little bit of a distortion you know tax rate this year that will not be.
Your Pizza next Joseph wheel models, you should really be using.
Close to the statutory rate, which is in the 25% to 26% range.
Okay perfect. Thank you.
Thank you and our next question comes from Brian Morrison from TD Securities. Please.
Go ahead your line is open.
Hey, Good morning, guys first questions for Mark just a you had very strong growth that two of your three top customers. The customer want in your notes is down about 17% can you maybe reconcile the strong Pos commentary to the decline that your largest customer and does this have anything to do.
With the pie inventory commentary and the shift to Q4, you talked about.
Brian Hi.
You're referring to the breakdown of our top three and Walmart essentially I think being down versus Q3 of 29 team that really was related to one specific specific item only and that was in.
Q3 last year, we did a.
Pull movie, which was exclusive to two Walmart called ready race rescue.
And we ship that in Q3 of last year and this year, we did it with a another one of our customers.
And so that actually explained.
The year over year decline, that's almost the vast majority of the of the Delta.
Okay, and then I appreciate your comments with respect to Q4 margins. If we're just looking at a 2021, you've got your beats the issues that have forecasted you got Tokyo, which is high margin in flight your inventories clean you talk about your.
Gross margin for 2021, so are we tracking to return to historical EBITDA margins covert impacts aside I guess the question is is your S. DNA on track.
So Brian we obviously, we're not giving 2021 guidance.
Yes.
Hope to do so in March if we reinstate guidance, but but but obviously.
Goal is to get there.
You know historically.
Benchmark isn't that 18.5% to 19% zone, and we want to get back there as soon as possible hopefully we can get in 2021, that's our goal and as a team as a management team. We are working exceptionally hard to get there for 2021, both at the gross.
Gross margin level in relation to Startco gross margins and also at the EBITDA level.
In terms of adjusted EBITDA margin. So we certainly doing everything we can to get the Brian.
Okay and then last question on the on a digital platform running can you just remind us where you said the growth rate was.
Hi, how you look at the trajectory of the of the revenue platform going forward and then just remind us in terms of the business model the structure, how the subscription models working and how you get paid by things such as uploads to tick tock.
Yeah, So maybe I'll ask.
The second question business model is if you look.
Look at the token bulk of party goods, which focuses on kids that are five to 10 years old that is the games are some of the games are Standalone Oh, you pay for the game and you get the game, but where are the most growth is coming from is from typical like world, which you get to play for free and then if you want to bolt.
On certain modules like for example, the one it's like harvest Villa or the pool go a war Bohemian House, then you'd have to pay for those more.
Modules writes a free to play and then as you get into the game and you want to bolt on into your World you pay.
As you go so thats games as a service.
As it relates to tick tock the videos that are created for Vick tick Tock. There is no revenue. There is no advertising model associated with that that's just complete user generated content that people are creating and sharing with their friends.
That just creates a lot of visibility for us, which actually what that does is it.
It reduces the cost of the customer acquisition right and reduces our marketing costs. So we've actually seen we have now 2.6 billion views of Coca like game walk throughs on.
On tick tock, and so thats basically just.
User generated content and advertising.
We don't have to pay.
And that drives people to the game. So that's on the Atoka side and then on the Sag a mini site, that's a subscription based business.
Where people come in and they take 595, a month and.
And they buy your package or six month package or that or that pay month by month.
As a result.
After that they get all the aspects of the world. It's just like it's it's like a profit there a buffet and took a book has an Alec Hearts. That's how you think about it but.
But the nice thing about the buffet is that you have you have long term.
Revenue that comes as a result of that person that's a subscriber overtime.
So those are the two and then in terms of your answer but.
Growth.
I think were well share more about that as the business starts to get bigger with you guys.
And as the user base goes up but I think the most important thing for you guys to focus on is the amount.
Of daily active users. So like for example in took a life.
5 million daily active users there are 17 million monthly active users and we have over 30 million users in our network and there is a whole value to the amount of users in your network, which again goes to the ability to bring people into your games for a lower cost.
Cost on.
Because all this this whole business is based around bring users in and if your cost for acquisition for the users is high then your margins then makes a very it's a tough go right and it's hard to start again from scratch. So thats. The really interesting thing is just seeing the actual user base and the the.
Magnitude of user base growing.
And how we can actually use that in the future. So for things like token days, which is our first multi player.
Game that we're going to launch in 2021, we have the ability to tap into that 30 million monthly active users to get people to come in to get trial.
Over and above.
The marketing that we do and.
Customer acquisition stuff that we do on the side.
And then on the Sag was part of the business again watching that subscriber base and watching that go up.
On a quarter by quarter basis.
All right. Thank you guidance.
Thank you and our next question comes from.
Super Hot Khan from RBC capital markets. Please go ahead your line is open.
Great. Thanks, and good morning on the SKU rationalization that you talked about I guess can you maybe give us some perspective on what drove that was it really just the review of the supply chain and it made sense to do it in conjunction with that and then the second.
Hard around there can you maybe share which platforms or categories. Most of the SKU reduction was concentrated or.
Right.
So hi, good morning, its a.
It was really across the board, but I think.
It was also the.
Driven I think by.
Okay.
A couple of categories in particular.
Cardinal swung way some of the areas that we had actually made acquisitions in.
With a particular area of focus.
Because we had acquired those businesses, we have grown them and we have never really gone through a full product portfolio review.
We really did a very deep dive in all of that to make sure that everything else in our product line actually met certain profitability thresholds, but we didn't stop only at Cardinal and and swim waste, we actually looked across the board and we looked at every aspect of protein.
Product profitability and as were named describe.
But in order to make sure that all the products breed and get the right attention and focus we really looked at everything to make sure that what we had in our line met our profitability thresholds and also tied into our whole goal of operational efficiency.
You want to add anything to that.
I think that's great I also mentioned that guidance had.
A lot of training because they had a lot of skews that were not so profitable. So we cut a lot of that.
Okay, great. Thanks for that and then you indicated that most of the or the supply chain rationalization initiatives are largely done if we look into next year should we assume that any of the one off costs associated.
Along with this warehouse.
Warehouse and DC rationalizations theoretically those shouldn't repeat is that the right way to think about it.
Yes, that's the right way to look at its ever from this point onwards, we really talking about refining.
And continuous improvement.
The basic structure is there and we'll continue to improve it.
Got it but you won't see anywhere close to what we saw this year in terms of Remediating the problems from 2090.
Okay, and then on the remote control segment and there was some drags from hot summers I guess should we assume the olesen, how small that this point another a lot that's going into Q4 is that largely out of the system or should we expect.
For some more during Q4.
What will alleys is largely out of the system of the might be a little bit of.
Carry through from a you know into Q4 that in terms of shipments that were made last year had animals actually in Q4 is doing pretty well with the crystal Flyers item.
Item and.
Well some of the pixies items as well so so I think.
Deadline is basically performing in line with our expectations and.
Yes, it's okay, I mean, I don't think you're going to see anywhere near the kind of.
Year over year declines that you saw in 2019 for 2018.
Relatively insignificant now overall to the business, although it does have an impact on that segment itself.
Okay, and then just on cash flow and capital allocation, obviously, the cash and balance sheet in good shape, there or any thoughts on that but right environment think about M&A in or how are you just generally thinking about capital out.
Attrition at this point.
Well I think.
I think that we are very pleased with the way that our.
Cash flow has improved this year relative to last year. If you look if you look at the fact that.
Free cash flow is really around $85 million higher after working capital.
This year, it's a very significant improvement our free cash flow to EBITDA conversion ratios are going in the right direction and we think we can continue to prove them even more so we will be generating excess cash and you know as you saw with Rubik's will continue to deploy strategically so.
As renamed as described.
Or we looking now at digital Entertainment also as areas to continue to invest for minima M&A perspective, but our model remains the same which is to keep keep ourselves asset light manage our working capital very tightly generate strong free cash flow have high free cash flow to EBITDA conversion ratios and then deploy.
Okay, that's strategically.
Rene.
That's great Mark.
And then just last one for me I guess on the entertainment side, we've seen some headlines around a Batman movie for next year is there anything else on the DC comics are harder discussion going there again, just some of the uncertainty on the entertainment that movie theater side I want to get an idea.
Sure expecting on that platform for the course of 21.
Well I think the the amazing thing is that without moving the business is up.
And it's very robust and very strong doing great.
So we continue to we we we.
We will continue to see that.
Yeah, what's your expectations.
And they have a very rich robust slate of movies.
As you know the live action movie part of the market is definitely being impacted by coal bed.
And the studios are having to move things around candidates and shift things around.
So we're we're working with them.
No that's really their call to make because their IP.
But the good news is that they have a rich slate of things that are ready to come out and how they decide to market them, whether or not some of them go people I would just premium video on demand or whether they go on the theaters.
Still yet to be determined.
And we'll follow suit.
When they when they make those decisions.
Great. Thank you.
Operator, I think we can have time for one more question. Thank you.
Thank you and our final question comes from David Mcfadgen from Cormark Securities. Please go ahead. Your line is open.
Okay, great. Thanks for its business.
Was just wondering when you talk about going back to <unk>.
Previous gross margin you previous EBITDA margin and then when you look at what's happening in the industry how industry is really shifting to E commerce.
Just wondering how does that impact the ability to go back to your.
Historical margins and what does that do in terms of working capital inventory level since the instant industry keeps shifting quickly to E commerce.
So thanks, David Good morning were relatively neutral when it comes to to gross margin as it relates to ecommerce.
Yes, first brick and mortar. So they did there is no significant impact in terms of us shipping through our E commerce partners or or through brick and mortar and so that's really not a factor in in our gross margin I think really what what are the drivers are you know product mix and and other revenue.
Revenue and sales allowances as the key issues that really drive gross margin and we think looking at all of that we can we can get back to historical levels.
This year was an aberration for all the reasons, we've described and.
We're pretty confident that we can get back to historical levels next year and beyond.
Sorry, what was the second part to your question.
Does that does that are there any implications for working capital like in terms of inventory how much inventory right sorry, sorry.
So so the one thing that E. Commerce does change is a little bit of the timing of shipments. It does it does drive more of a shift from fob.
Towards domestic.
As as the ecommerce channel pulls more on a domestic basis than on an fob basis. So what that will mean is.
Really a shift towards a slightly smaller Q3 in a slightly smaller Q4 in a sorry, a larger Q4.
Right.
Ignoring covered for a second so just in a in a normal steady state business. We should see Q3 go down a little bit in Q4 go after them but.
Okay.
All right.
Thanks.
Thank you and I'll now turn the call back to Mark Siegel for closing comments.
Well. Thank you everyone and appreciate your time, we went over a little bit because we want to do.
To give you all an opportunity to ask questions and we look forward to talking to you again in March with our year end and Q4 results. Thank you take care.
Thank you for joining us today, ladies and gentlemen, this concludes our call.
And you may now disconnect.
[music].