Q1 2021 Spin Master Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the spin Master of Q1, 2021 earnings conference call.
At this time all participants are in a listen only mode.
And the speaker presentation that will be a question and answer session.
The question during the session and meet the press star one on the telephone.
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And the conference over to your speaker today and as Sofia.
Please go ahead ma'am.
Thank you Kara good morning, everybody and welcome to spin Master's financial results Conference call for the first quarter ended March 31, 2021 and I'm joined this morning, I heard of run and Harare spin master's co founder and director Max Wrangles spin master's and global President and CEO and Mark Segal.
The spin master's Chief Financial Officer for your convenience the press release MD&A.
And financial statements for the first quarter 2021 are available on the Investor Relations section of our website of spin master of Dotcom.
Before we begin please note that remarks on this conference call may contain forward looking statements about the spin master's current and future plans expectations and intentions results levels of activity performance goals or achievements or any other future events or developments forward looking statements are based on information currently available to many.
And on estimates and assumptions made and.
And based on factors that management believes are appropriate and reasonable and the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expressed or implied by the forward looking statements. As a result of spin master of 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 maybe 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 statements regarding forward looking.
Information contained in the earnings release dated May five 2021. Please note that spin Master reports in U S dollars and all dollar amounts to be expressed today are in U S currency I would now like to turn the conference call over to Brennen.
Thank you Cynthia and good morning, and thanks for joining us today.
I want to begin by recognizing the amazing work our team across the globe has accomplished.
Gather the rally to drive the strong results we achieved this quarter.
We're managing through the complexities of the pandemic and I am continually amazed and impressed by the effort and dedication of our employees.
Spin Master is in a very different position relative to where we were at the same time last year and me.
And the last year, Mark and I had to deliver the most challenging Q1 results and our history.
I want to compliment the team on getting the turnaround done such a quick and efficient manner.
Our toy business grew nearly 22% and the quarter and of our lineup for this fall the broad innovative and Pete.
Our performance this quarter was the clear demonstration that our operation operational remediation efforts are delivering results and markets.
The commitment to creating exceptional play experiences and engaging children's entertainment sort of three creative centers is working.
And there is still more to be done, but we are now back on track to resume our growth trajectory with new operational rigor and a simplified supply chain to meet the challenge and demands of the retail environment.
Not only did we transform our toy supply chain, but we reorganized yourselves with our three creative centers and a way the provides clarity structure and a strong platform for future organic and acquisition and growth.
The structure is another step in our journey to transform spin master from a traditional toy company.
And to the leading global children's Entertainment company.
We have many exciting opportunities and the toy entertainment and digital games universe with which to grow.
And I am excited as I've ever been a better prospects.
All the dresser leadership transition shortly the poor I do I want to talk about both digital games and entertainment.
One of the standout areas of performance of spin Master over the last nine months has been a very strong performance of our digital games Creative Center.
And Q4, we saw strong revenue growth.
You saw revenue grow four fold year over year and the continued and.
And the growth continued in Q1 revenue up 394 per cent compared to last year.
<unk> continued to engage with digital games as an outlet for creativity exploration and social connection.
The kids spending more time at home and the parents being more flexible with screen time, we grew our digital games revenue, primarily due to the growth of total light world platform.
Total like world of the game the regularly evolves with new content and place ads as well as greater tools that allow kids to express themselves and personalize their experience.
Kids are playing games video and themselves stream and the videos on platforms, such as click talk Twitch and Youtube brothers to watch.
Toco Boca has seen explosive growth and consumer engagement and we believe this is the major factor behind total life World growth.
According to the game industry got bids during the period.
Q2 to Q4 2020.
Total like World was the number two downloaded mobile game and the U S.
And among us, but it had a roadblock.
The toco Boca hash tag has now generated over 6 billion views on tick Tock and total like World now has well over 30 million monthly active users.
In total the toco Boca ecosystem currently has over 50 million monthly active users compared to $25 million last year.
In addition, we saw strong growth and our cycle of many subscription business, where we had over 285000 subscribers and <unk>.
The second mini World settlement and school and secondly, the box compared to 150000 last year.
This large monthly active user and subscriber base is of tremendous asset for us to develop a direct relationship with the consumer and to which we can market and sell new digital games as we expand our digital games offerings.
We're now working hard on our first ever multi player <unk> game Toga days planned to go live in Q4, 2021, which expands <unk> market to a wider and slightly older audience with deeper and more complex experiences.
We'll be able to play and socialize together from multiple locations at the same time.
Total days Leverages, the trend of kids using digital games with far more than entertainment alone, but of the key part of their social lives.
We're continuing to make progress on the opening of Noyd, our new studio and Stockholm that will focus on developing digital games, leveraging our own IP.
The studio should the operational by end of this year.
Finally, we were actively looking for digital games acquisitions to complement and expand our current offering and further grow our presence and the space.
Turning to the entertainment at the heart of the Creative Center is our commitment to exceptional storytelling and engaging the enduring characters that resonate with kids around the world.
And I'm constantly impressed by our team's ability to create original and compelling content per screens of all types from short form content on Youtube to long form series for screening platforms and traditional broadcast all the way the theatrical film releases.
Taking a multifaceted approach to content creation and engage with kids.
The team also has a rich slate of new TV shows and feature films and development and are staying true to our commitment of introducing once and do.
Entertainment properties a year.
We're on the brink of one of our most exciting milestones and our history with the much anticipated launch of our first feature film produced in house.
<unk> patrol the movie will be unleashed and theaters on August 20th distributed by Paramount.
The types of complemented by a star studded Boyd cash and dynamic music.
This past Monday, it was announced that Adam Levine, we'll be writing and performing and original songs of the movie watchful of the trailer dropping on the 17th.
Earlier this month, we completed a leadership transition plan.
Max we joined US as our global President and January has now expanded his role at the global President and CEO.
You will hear from them shortly.
I've shared with you before the many strength and experience as Max brings the spin master from his ability to mobilize teams and harness the potential of individuals to the leadership of complex global businesses.
We are already witnessing the impact Max is having across the master's business and <unk>.
The school confidence and and his ability to lead and deliver on the business priorities for 2021 and beyond.
We are highly energized by our vision for the future focused around becoming the leading global children's Entertainment company.
What makes our growth story. So compelling is our vision is underpinned by solid operating and financial platform, our deep creative talent.
The robust content and product pipeline, driving our franchise and plans and.
And an exceptional leadership team.
We believe that the three creative centers and work together to create a holistic play experiences for kids wherever they are and to deliver significant long term value to shareholders.
Thank you for your continued support.
Let me hand over to Max.
Thanks.
Thank you Ronen and let me begin by saying that I'm very pleased to be joining all of you on the call today I am very much looking forward to getting to know you better and.
And to help build spin master into the leading global Children's Entertainment company.
During the past few months I've spent time with the team.
Learning and understanding of the industry.
Wondering if share with you a few of the things that I am most excited about as I look forward. The first of all spot patrol and the upcoming movies scheduled to debut in theaters and late August telling.
Telling stories, and creating engaging and enduring characters that resonate with kids around the world is important to us regardless of what screens kits are watching.
And in conjunction with the movie. We are also very excited for the toy lineup, which will be available in August.
And we'll be able to recreate their favorite movie of rescues to the.
Chase transforming citigroup, Sir the total city, the rescue placement and the ultimate the CD tower. The biggest tower, we have made to match the biggest adventure the pops have ever gone on.
Lee and I'm excited about the strength of our international platform is.
He's helping us grow and he is helping us win licenses in relation to our global distribution capabilities, we are growing our international footprint with further expansion into Europe.
Establishing direct operations in Spain, and beginning to sell directly to leading retailers and Spain, starting January one 2020 true.
The opening of the spin off of this will mark the 29th Global Office Foreseen Master and we will continue to convert third party distributor markets to direct sales, where it makes sense strategically.
Finally, I am excited about our INO very innovative toy lineup for this fall.
Many of you had the opportunity to see our lining March at our Investor Analyst Day. In addition to Paw patrol I am proud of the team for driving strong innovation on first pets be luscious, the bat my mind, including the transforming placement as well as the Sonic and football and.
We will strategically deploy increased marketing spend in line with our inventory of recovery to support the fall lineup, particularly in the U S. We have transformed our approach to marketing starting with step changing our consumer centricity to enable and interest driven approach sort of franchises and brands engage with our fans where we are.
Building and extensive in house digital capabilities that will help us optimize our plans and real time guiding kids and shoppers to their Omnichannel journey.
For our full of marketing plans, we will spend less on linear TV and more and we're eyeballs are moving too including digital over the top media like S. V O D Youtube, social Influencer and E Commerce, our marketing spend will be prioritized to the lever sell through goals grow momentum brands capture share occur.
<unk> e-commerce, and retail penetrate high growth segments and drive international growth, we wanted to create a seamless shopping experience using digital tools and data to gain better insights and shoppers and guide them through their path to purchase in addition to.
Of the areas that I'm spending time on our refining our strategy is to optimize the portfolio and brand growth and building on our innovative marketing platform to enable our retailer omni commerce strategies let.
Let me now turn to our Q1 performance and Mark will provide more details on our Q1 shipments.
For most of the past 18 months, our P. O S was significantly higher than our shipments in Q1, and this trend reversed our shipments exceeded P. O S. According to NPD, our global P. O S and Q1 was up 9% and in the U S. B O S grew 7% the.
And the industry grew faster than all of us against both of these measures.
For those categories were spin master and had over $10 million and annual sales and 2020, our Pos was up 11% compared to 30 per cent for the industry.
Internationally the spin Master of continues to grow we grew 9% in 11 of the largest countries as measured by NPD we.
We saw strong growth and Australia, Benelux, France, and Germany, all which performed ahead of the industry. We are a top 10 supplier nine of 11 countries.
Let's turn specifically to Paw patrol globally Paw patrol Pos grew 29% in Q1. According to MPD Paw patrol is now the ninth largest toy property globally across the GE 11, and was the number one property and infant toddler preschool toys.
POS gross with specialty stronger across most countries in Europe, driven by strong engagement and brought content distribution in the U S and Q1 Paw patrol Pos was up 27% and improved sequentially through the quarter by March Paw patrol. The U S was growing close to 60 per cent well ahead of the overall of 20.
Industry growth was driven by both the core items and spring and media supported items. The growth of core items was mainly due to lower price point impulse buys which recover from the declining sales due to the pandemic as foot traffic to stores improved now looking at P. O S for other key brands Bakugan and grew 5%.
And Q1 and was the number one property in battling toys, and France, the U K and Italy with.
With increase and reopening of the economy, Bakugan and was up 1% in the U S in the quarter, but according to our data 68% over the last five weeks.
P O S.
And the games and puzzles category in Q1 was down 7%, we saw demand for our games and puzzles start to normalize of stores reopen and we started to lap the COVID-19 spike in demand last year.
Global kinetic sand P O S performed well growing 27%.
Global Pos for all of the C coming products, including Batman grew 113% due to the strong performance of book, both core items and spring metered supported items as well as from increased global distribution.
Monster Jam Q1, Pos was up 33% globally, and 26% and the U S is both the court and RC lines performed well.
Let me give you some important context for our performance relative to the industry, our Q1 GAAP to the industry and the gap between our shipments and our P. O S is driven predominantly by U S inventory constraints.
As we recover from the significant supply chain issues in 2020 driven by what happened in 2019 and focused on restoring profitability our.
And our approach constraint outside of potentially in Q1, we work extremely hard to get our inventory clean at the end of 2020 and we started the 'twenty one with low domestic inventory levels in our U S warehouses.
We also ended 2020 very clean at retail and the U S driven by strong sell through if you recall in Q4, we said we were out of stock on several key items and early December and lost about $20 million and potential sales consumer demand was strong through Q1, our properties that performed well and Q4 continued to well and Q1 inventory and the.
U S is down 20% of retail in the U S. There were over 40, Skus and supply allocation at the start of Q1.
And they have solid through solid performance and above expectation results and Q4. So we estimate that we incurred to incur a further $15 million to $20 million of lost sales in Q1 from low stock levels at retail.
In addition, we played catch up in Q1 due to the strong demand combined with global logistics issues Asia transit lanes through the West coast of the U S. In Europe, where the late two to three weeks through Q1.
We are now focusing hard on eliminating out of stock positions and our operations team is doing what we can to ensure that we minimize any industry shipping and logistics disruptions.
We expect that we will continue to be filling the pipeline and Q2, which will drive higher than normal replenishment and expect to get inventory at retail and normalized and cut up by approximately end of June spin.
The spin master thrives when stores are open for example, according to MPD with the Uk's reopening of the week of April 17, we recorded the best perform some of the top five manufacturers with 65 per cent Pos growth overall, we expect to see share gain based on the strength of our innovation adjustments of the inventories.
And marketing we are confident that as the pandemic uses momentum will further accelerate for our brands in summary of what happened was due to retailers being short on the inventory and demand being high.
They are now chasing inventory versus burning it off we always set the U S relative to shipments of these forward looking to what shipments will ultimately be to.
To conclude we are confident and the success of our strategic direction execution of our growth strategies and are proud of our global teams with their commitment to delivering our success our brands partnerships franchises and digital game offerings are resonating strongly with consumers.
I am looking forward to the remainder of 2020, one and beyond.
With that let me now turn it over to Mark Mark.
Thank you Max and welcome to your first earnings call of spin Master.
This quarter, we delivered strong and encouraging improvements and our financial results Roque.
The robust revenue and gross product sales growth and.
The significant increase in gross margin and management of operating costs, all combined to produce and other 35 million dollar improvement.
The year, adjusted net income and Jeff and the $17 million year over year adjusted EBITDA.
Our gross product sales and the quarter Rose 21, 6% with a favorable foreign exchange impact of $4 1 million.
On a constant currency basis gross product sales were up 19, 9%.
Total revenue soared by 39, 3% to $316 6 million up from 227 three.
Our diversification efforts are bearing fruit.
Proximately, 80% of total revenue in Q1 resulted from gross product sales and 20% from digital games and entertainment revenues.
The gross product sales increase was driven by almost all geographic markets and double digit sales growth and preschool and girls boys and outdoor product categories and the rest of the world gross product sales were up 44, 6%.
Gross product sales in Europe were up 21, 2% slightly more than the increase in North America of 18%.
International gross product sales represented 42% of the total and Q1 compared to 40%.
Our pre school and girls segment grew by 33% and Q1, driven primarily by strong sales of pulp patrol, which more than offset the declines and twisty petz candy locks and several other lines.
Gross product sales and the activities games and puzzles and plush category Rose nine 2% driven by sales of kinetics, and obese, rubik's, and influencer and increases and games and puzzles.
Invoice gross product sales were up 12% driven by higher sales of Monster Jam Bakugan and tactic.
As Matt described earlier with COVID-19 restrictions easing and the U S. This year, we've seen of strong uplift in Baku Guy.
Gross product sales and our outdoor segment rose, 48%, reflecting the introduction of exciting innovation and our swim waste spring first line and the return to outdoor activities and the U S from the warmer weather and the vaccine rollout.
From a channel perspective, the shift to ecommerce continued this quarter, our global E. Commerce Pos grew 30% in the U S.
Turning back to the P&L.
Sales allowances and the quarter with 13, 3% of gross product sales down from 15, 2%.
Our operational improvements and 2020 drove a significant reduction in noncompliance charges and penalties over last year, and our improved inventory management reduced markdowns.
This was offset to some extent by continued growth in Europe, which has the higher overall sales allowance rate and the global average.
The material contributor to our revenue growth was the increase in other revenue, which grew 39 1 million or 179% to $61 million.
Growth both primary components of other revenue entertainment and licensing and digital games was strongly up and.
Entertainment and licensing grew 79% driven by growth and TV distribution revenue as well as kind of the NIM income and digital games revenue was up 394% driven by continued growth and talk of life World.
Gross profit for the quarter was $157 4 million of 49, 7% of total revenue compared to $19 8 million of 39, 9%.
980 basis point increase in gross margin was the result of the growth and digital games and entertainment and licensing as well as the year over year of cost reductions from our operational improvement initiatives.
These include lower scrap and obsolescence reduce closeout sales lower freight reduced reconfiguration costs and lower sales allowances.
Recall in Q1, and 2020, we incurred approximately $14 million and costs related to inefficiencies from our Q4 2019 operational issues.
Selling general and administrative expenses decreased as a percentage of total revenue to 43, 9% down from 64, 5% last year.
The 20 percentage point reduction was primarily driven by lower distribution costs, which declined by $11 7 million to five 3% of total revenue compared to 12, 5%.
The sharp decline and distribution costs was the direct result of all the initiatives, we implemented to remediate the supply chain issues in 2019.
Marketing costs were flat in dollars compared to last year, but down 344 basis points to eight 3% of revenue.
We expect our full year 'twenty, one marketing spend to increase to approximately 10, 5% of revenue about 50 basis points higher than I'll spin in 2018 and 2019.
We will increase marketing strategically to support sell through share growth brand momentum and channel country mix goals.
And Q1, we reported net income of $3 2 million or three cents per diluted share compared to a net loss of $26 7 million for the loss of 26 cents per diluted share.
Adjusted net income and the first quarter was $8 4 million or eight cents per diluted share and improvement of $55 2 million when compared with an adjusted net loss of $46 8 million or a loss of 46 cents per share.
Adjusted EBITDA was $36 7 million and the quarter compared to negative $32 3 million and improvement of nearly $17 million.
Adjusted EBITDA margin was 11, 6% up from negative 14, 2%.
From a tax perspective, we had and income tax expense of 1 million dollar and the quarter compared to an income tax recovery of just over $48 million last year.
<unk> from a onetime internal transfer of intangible property.
Free cash flow and Q1 was negative $6 5 million compared to negative $27 8 million driven by higher cash flow from operations, partially offset by cash flows used and <unk>.
Vesting activities, which reflects the acquisition in January of the Rubik's.
We formally closed the acquisition of Rubik's on January of the fourth and the integration has gone very smoothly.
Inventory ended the quarter at 104 million compared to $102 million at the end of 2020 and was down by $52 million of 33% compared to 156 million and Q1 last year.
Our results this quarter reflect the completion and benefits of the yearlong restructuring of our North American supply chain, which was aimed at driving structural cost savings and improvements to get our margins back to where they belong.
Reflecting on the last 12 months, we have optimized our warehouse network and North America by simplifying the structure, reducing the total number of Dcs and the number of shipping points to customers.
Reducing our customer of noncompliance charges, and eliminating cost drivers such as prepaid freight and loading delays the merger charges and into warehouse transfers.
We have improved our processes to reduce storage requirements and reduced our SKU count by eliminating those not profitable enough.
We have driven improvements and IP systems, especially connectivity with customers and warehouses and focused on improved data accuracy.
Our global operating platform is stronger than it has ever been.
We are raising our outlook for 2021 to reflect our performance in the first quarter and continued optimism for 2021 based on orders on hand, and retailer promotional and lines of support.
We now expect our gross product sales growth to be high single digits compared to our prior outlook of low to mid single digits in March.
In terms of phasing, we expect the splits between H, one and H two gross product sales as a percentage of full year gross product sales to be approximately 35% to 37% the H, one and 63% to 65% H two.
The shift towards the H one reflects the demand we see from filling the inventory pipeline at retail and shipments we expect to make late in Q2 for the launch of the poll patrol movie.
The cadence of other revenue from both digital games and entertainment and licensing is not exposed to the same degree of seasonality of gross product sales from choice and the split roughly equally between the H, one and H two.
We now expect total revenue, which includes gross product sales as well as digital games and entertainment revenue to increase low double digits compared to our prior outlook of mid to high single digits.
This is mostly driven by growth and our digital games business.
With regard to the pole movie and.
In early Q3, we expect to reflect approximately $12 million and our results related to distribution revenue from Paramount and approximately $11 million of amortization of the capitalized intangible asset.
There will be additional amortization of relate to the remaining capitalized intangible asset that flow through in later quarters.
Licensing and merchandising revenue from the movie will flow into Q3, and Q4 and into 2022.
Finally, depending on the movies ultimate box off of success additional revenue related to our share of the movies box office receipts at the Paramount test recoup the distribution and promotion and advertising costs may be received later in 'twenty, one, but more likely in 2022.
We are seeing increases in input costs, primarily from plastic resin and ocean freight.
We are also seeing delays shortages and cost increases in the chips, we use and some of our product lines.
We have implemented stringent cost containment and productivity programs to offset these cost increases.
And when necessary, we are implementing price increases to help us offset these inflationary pressures.
We expect to remain.
March and neutral in this regard, but it is something we are watching very closely.
We will have the benefit from improved gross margins from the remediation of the operational issues as well as digital games revenue growth and productivity programs related to Cogs.
Taking all of these factors together from a profitability perspective, we expect 2021 adjusted EBITDA margins to be in the mid to high teens range, but towards the higher end of the range.
In addition, we expect full year depreciation and amortization to be slightly higher than 2020.
Capital expenditures and our effective tax rate I would expect it to be consistent with previous guidance.
After the end of the quarter, we completed an acquisition of certain assets of the toy product invention and development company in the U S.
In conjunction with this acquisition the principals and employees of the company became employees of spin Master.
This team will complement our toy innovation and development capabilities.
To conclude.
As we look to the balance of 2021 and I'm delighted with the broad progress we have made across our three creative centers.
We are committed to our long term financial framework for value creation underpinned by a formula for innovation and global growth across toys Entertainment and digital games.
That concludes the formal part of our call. We will now be pleased to take questions. Operator. Please open the line.
And as a reminder to ask the question you need to press star one on your telephone.
And your question press the pound key.
The standby, while we compile the Q&A roster.
Your first question comes from the line of Stephanie Wissink with Jefferies.
Thank you and good morning, everyone and run and I'm going to start with you. So I don't overlook the at this time and.
And my question is regarding Paw patrol and the movie and just could you help us think through the scope of licensing partnerships. The globalization of that franchise now and maybe relative to where it's been and the last few years and what you're expecting in terms of the list.
To the products business.
The movie and the Halo effect of the movie.
Rene and Youre on mute.
Thanks, Mark and Stephanie how are you.
We've had for the last week.
We've had for the last seven eight years over 200, licensees and incredible partners and.
The full range of categories of apparel too.
And the betting et cetera et cetera.
And all of those partners are Super excited and engaged to come out with the new breath of of product and offerings based on the movie. So theres full engagement from all of our partners.
And that have been our partners of the last seven or eight years.
And the excitement of retail is very high and.
And talk a little bit to the to the promotions of happening at retail and the support that we're getting around the around the world.
But it's very consistent with our strategy, which as you know you have core Paw patrol, which we refresh every year you have the themes.
That we bring every single year that expand the universe and now its expanding the universe with a feature film.
That has its own theme within the film.
And so going into the kind of.
Take a look at it and you see the toy line when you see the big huge.
And Thats in the city and you see the.
And your refresh vehicles and the way of the pumps luck and and all the features and the vehicles. It gives a lot of material for the the.
The license fees of which to work and present Paw patrol and AR and the new fresh and wait for them for the kids and I think the the.
All of the license fees are seeing globally, all the retailers and embraced the film people are very very excited about it.
Okay.
That's great if I could just mark a question on the cost structure, you've done a lot of work around the operations and the network of operating.
Areas and the and I'm just curious if you can share with us a little bit of where you are I think you are near completion, but what should we look for in terms of the leverage potential on the sales base that you are forecasting for the year.
Hi, there thanks.
Yes, I would characterize the actual turnaround a.
That we undertook at the beginning of last year to be largely complete in terms of the remediation of the immediate pain points that debt, we suffered which caused the turnaround and the first place, but we were not where we want to be in terms of our margin structure, we still think there's room for improvement.
Particularly you know and our gross margin line. If you look for the quarter, we landed up with 49, 7% which is.
The significant increase out of the way, we would Q1 last year.
The rate of improvement is obviously not going to be sustainable at those levels, but but we do see opportunities to continue to increase our gross margins.
We kind of focus on reducing sales allowances for the al our Cogs improvement programs and increasing our digital games revenue and the mix, which is high gross margin those of all the things that we're going to continue to focus on to get it into the fifties and and and to get at the highest possible and and that will drop down.
And to <unk>.
Just the EBITDA margins as well and as volume grows we will continue to focus on our cost structure to drive operating leverage even though we've done a significant amount of work kind of distribution structure, we still see opportunities for further refinement, there and we kind of continue to refine our cost as much as we can to keep both the gross margins and adjust.
EBITDA margins going up.
Thanks, Mark and final question for you is just on your performance versus the industry you walked us through kind of how it how the business performed in 'twenty.
Performed year to date, how would you characterize your guidance for this year and your expectations relative to what you expect the industry to deliver do you expect to be taking back share in 2021. Thank you.
And Stephanie.
Thanks for the question. So we are absolutely geared for a stronger back half in terms of.
POS performance for our brands.
And we've got the segments that we actually have now strengthened we have a lot of new marketing tools and we're going to basically leverage we have great great in store support by our retailers and very great Omni commerce plants as well that we actually have put together. So I expect that we will claw back and our share for spin master brands and the back half of this year and that's what we're we're.
Looking towards.
Thank you all very much appreciated.
Your next question comes from the line of Martin Landry with Stifel GMP.
Hi, good morning.
My first question is on the on the Paw patrol as well.
And I was wondering if you can help us get more visibility on.
The number of Skus you plan to launch the surrounding your movie this year and and how does that compare versus previous years in terms of the number of Skus for Paw patrol.
I'll take that one.
So the.
We have basically a slate of skus to support the the movie and Brian has actually of tested through the out already.
And if I were to tell you that basically we have had over the last number of years and quarters.
Close to mid Thirty's, and the number of Skus and we actually chocolate velocities for dose as we actually look at the movie will bring another four of five very strong skus to complement that we've described three or four of those and we believe that the support and we're putting behind that as well as some of the core items will actually help bring paw patrol Pos to even the new heights.
And so we feel very strongly about that.
Okay. So is it fair to say that you also.
On top of you know new Skus, you also expect a higher velocity of of your existing Skus.
Well I think we will.
That's the fact and so it's actually we look to replenish inventories and we actually look to actually support not just the new items, but the core line of call control.
We are very confident that the whole line will flow it off and so we're actually looking forward to helping.
Helping consumers and shoppers find those items and they're in their search. So we're super excited about the marketing that we're going to do and it's not just US right. We have a great marketing plan and also supported by Nickelodeon and Paramount and so we're super keen to get into it.
Okay. Thank you.
And I'm wondering if you can share any details on timing of announcement of and new properties that youre developing internally I believe you expect to release.
One property of year last year was the Mighty Express so just wondering if youre still on track to lunch and a new one this year as well.
Yeah. Thanks Martin.
Yes, probably in the ER.
And our call later in the year, we'll be able to give you guys more color.
On the properties that are.
And launching I can tell you that we have.
Two properties are actually Greenlit and in production right now as we speak.
But we just havent come out to the public announcements yet so stay tuned.
Okay.
Okay and then my last question is on your acquisition I think you've acquired some assets for $22 million post quarter and or is are these.
Revenue producing assets or it is just the team of people can you just give us a bit more color on what that is that you're required.
Yeah. So.
The announced the purchase price of $22 million that is kind of get paid out off of five years, the initial payments, which youll see and Q2 was the seven and a half million dollars.
But it's mainly a.
The team of people, it's a really strong capability some IP, but it's a very strong team of people that all of it.
And very much in the industry are focused on developing twice and inventing choice and this is a very strong complement to our innovation pipeline. As you know innovation is part of our DNA and this is just another way of building up al how global innovation pipeline and so we're very excited.
And about what the ideas that they will.
<unk>.
Okay perfect. Thank you.
Your next question comes from the line of Adam Shine with National Bank.
Thanks, a lot so welcome Max and congratulations for it and on the turnaround.
Mark talked about logistics issues being resolved from a year ago. Within obviously you continue to do simplification efforts for added savings, but maybe for you run in and or for you Max any material areas of reinvestment in the business or pockets of material spend to be done to further still.
And be late perhaps post 2021 growth.
Yes.
Adam first of all thanks of the complement.
And while that's why the share.
And.
I'm kind of I'm going to pass that the Max Max why don't you are wanting to take that.
And so Adam and thanks for the well wishes.
And we're extremely excited about supporting our brands more this year. So that was one area of investment and we're Super excited about also supporting our future facing capability with some very important digitalization capabilities, we're bringing to the company go sort of two of the more important investments, we'll make and one is immediate and one is really more.
Mid and longer term.
If I look at what we're doing and marketing we will be able to reach about 192 more eyeballs. These next fall with about 135 million more impressions were going to basically be investing more dollars, where eyeballs are going particularly and gets digital.
And we're going to do that are of lower cost. So all of these digital change changes, we're making and investments we will reach audiences, where they're most receptive and.
I think we're going to leverage marketing and innovation to win new accounts as well. So we're super keen on that and that's where we're spending quite a bit of time and bringing more money to the table.
Digitalization, we're trying to basically get ourselves.
Place, where we're actually tracking our performance and operations digitally so we can react in real time, and so you can expect and operational.
Advancement from the great work that the team has done over the last 18 months, we're just simply taking that forward and those are two areas that I want to emphasize.
Yeah.
No. Thanks for that and maybe just from Mark I mean, obviously acknowledging the very strong start to Q1 and some of the comments made earlier in regards to how some of the paw patrol dynamic will ensue in the Q2, perhaps maybe a bit of a.
Timing dynamic that pulls through a little bit from Q3 into Q2, but nevertheless.
Usually you guys are delivery guidance updates around the Q2.
Dynamic so as we think about some of the optimism that Max is talking about for the product lineup and the H two are.
Are there any other particular elements regarding the.
The second half of the year, where youre still sort of not entirely sure in terms of line of sight, whether it's necessarily freight or other other.
Inventory of other issues to consider.
Yeah, So Adam.
You're right in terms of al in terms of our outlook cadence. So our guidance cadence we always start in March we update and in May and we update again in August as we as our visibility improves through the euro and we will continue to do that.
And we are optimistic about the balance of the year and H, two driven by our retailer promotional support and the strength of our line and the orders that we have but obviously they are announced that are still relevant now cost inflation being one.
COVID-19 being another and and as always this there's the replenishment cycle light and Q4 that we can't predict even in November when we when we released Q3, there's always that element of the unknown as it relates to the final six weeks of replenishment cycle of the year. So.
I would characterize our guidance as is reasonably optimistic but also of prudent given that we're in may and that the or other things that are coming down the line and if we just started all of that so that's the way I would characterize it right.
Great I appreciate it thanks a lot.
Yeah.
Your next question comes from the line of Jamie Katz from Morningstar.
Hi, good morning, Thanks for taking my questions.
And I'm wondering how much of the on being.
And you guys are seeing will be mitigated by price increases rather than cost savings over the rest of the year I don't think that's something that has been <unk>.
Mentioned.
Yeah. So.
We were seeing inflation in three primary areas of plastic resin.
Ocean freight and in the chips that that many of you have heard about and the news recently.
And not the exact same chips, obviously that the automakers are using but the most simple versions of that.
Our primary goal is to offset any inflationary pressures through cost containment programs and initiatives, but to the extent that we cannot do that we will then go out and seek price increases in order to remain margin neutral and that's exactly what we're doing right now I don't want to publicly.
Express the.
The the relative proportion of cost containment first price increases, but I will tell you that our first goal is to contain our costs and then if we cannot because of the scale of the inflation. We will then seek price increases and we're out there now implementing that strategy.
Okay and.
And I believe you said earlier and the prepared remarks.
And the inventory at retail would be true it up by the end of June I'm wondering what assumption implies for industry growth over the back half of the year and your.
Your outlook.
Well just to be clear and I'll pass it back to Max and the second but just to be clear the debt that was one of our assumption was in terms of our retail because of the issues of Max described so that wasn't a comment on the industry per se. It was in relation to spin master the Max why don't you. The why don't you comment on that as well.
Yeah.
Very good question and as we talked to retail the partners and we've seen obviously and I'm going to comment first and the U S. The the impact of obviously all of the stimulus and the continued strength of the toy industry.
Everyone's really also excited and I'm talking about retailers in general about the back half and the toy season, once again continuing to be very strong this coming fall.
So we're planning against that and so far we have not seen a drop off and we see continued support by consumers getting into the category tribute to the light children and families. So we feel very strongly about the second half of the year as well.
Okay. Thank you and lastly.
The.
Way that it was articulated that there was room for EBITDA.
Improvement.
Going forward it would imply that you guys are looking toward above the two.
20% EBITDA margins over the long term is that the right way to be thinking about the metric.
Electric.
Yeah, we.
And we guided this year to mid to high teens, we narrowed our guidance to the higher end of that range as you know.
And as it relates to both gross margins and EBITDA margins.
We have of diversified platform now with digital games, and entertainment and licensing as well as a choice and so we think we can continue to grow our EBITDA margins our goal.
If you go back to our historical commentary has always been two of but to be above 18% and I don't want to quote a specific number of where that can go but we obviously want to get back the firstly as the first goal and then to continue to grow it from that point onwards.
Thank you very helpful. Thanks.
Okay.
Your next question comes from the line of alone.
Mechanical.
Yeah. Thanks, Good morning, I wanted to expand.
A little bit just on the digital segment here.
I'm curious and or the players who engage with you on your on your took a book of your total life Your circle of many.
Platforms are they already playing other games like like Minecraft and roadblocks. For example are they knew the gaming and general and if that's the case what is sort of the how do you view those offerings fitting in with Goldman So there.
And we will call it bigger multi player games.
Yes, Thanks, Great question.
And they are definitely playing other games there definitely are.
On the roadblocks and playing Minecraft.
I think the where toco Boca differentiates itself from those two offerings is.
It's all about creativity.
And we started to build what we call creator tools, which give the kids the ability to decorate their homes and decorate their environments.
And Oh, and then also express themselves as characters in the game.
So it's a lot of the creativity.
It's a lot about storytelling a lot of a lot of the players.
And are expressing themselves through what they build how they design themselves and then the what they'll do is they are actually video of the games and.
And then upload the tick tock and tell the story of what their characters and with the home environment that the adult.
Whether it's like the new mansion and or the Neo Rainbow.
Or the fancy restaurants, et cetera, et cetera, so it's much more of a.
I would say a storytelling creative homebuilder place debt.
Universe that's of course.
And ever expanding.
And that gives us differentiation and the difference.
Tone and tenor versus some of the other games, but they're there.
And there was definitely the crossover.
But I think it's very complementary because if you like that type of play and you like the express yourself and that way.
It gives you a place to go in and do that.
And then when you're talking about sago mini secondly, and he is very different because it's it's truly for preschoolers.
More of two to five.
And I think I kind of stands on its own. It really is what we're building to be the the the number one digital preschool brands.
On the planet and that's what we're going towards and it's slow and steady and.
Theres Sag of any school, which has got an educational component to it and at the edges.
<unk> and light.
And then got sago mini world, which is the spun and and and.
And easy and there's so many different worlds and again ever expanding and then again it's it's.
The subscription based service. So you look at things like roadblocks or Minecraft.
They don't have actually minecraft pads and subscription, but the roadblocks non subscription based service. So it has got a different zone.
Monetization and longer.
I would say.
Yes.
And for monetization.
And the other ones, but again the the distinguished distinguishing features of the focus on the free scores.
Got it that's helpful.
And.
And when you think about the exposure of that both of those sort of platforms of properties of the exposure that those would've gained.
Today has it been mostly you talked about the the hashtags on Tech talk you talked about.
Well and Twitch and does that all been organic exposure you also engaging in.
Sponsored streams for example, like is that factored into that elevated marketing spend.
We're very very fortunate and we do a little bit of marketing, but the majority of it is user generated content.
Got it.
Last one for me.
Switching gears to I guess your broader e-commerce penetration I believe you commented on the last call that it was close to 30% maybe is it a little bit higher than that and Europe I'm just curious to know what the cadence of that was.
Throughout Q1, and sort of where it stands today.
So we continue to it continues to perform close to that same level evict vary throughout the quarter right on and so basically the U S began to ease restrictions, we saw a bit of a pullback and the U S. But in Europe that continue to be very very strongly and the U S. We really remain high as well I just want to make sure I'm clear about that.
But we saw more participation and and quite frankly, we're very encouraged how we've performed very well.
Cross through the <unk>.
Space.
And and continue to believe that as we get into the back half of our E. Commerce plans are very strong not just for pure play E. Commerce. So it continues to be a critical component of our plan.
Okay. Thanks for the color.
Your next question comes from the line of Brian Morrison with TD Securities.
And good morning, a couple of follow up questions guys.
With respect to the acquisition.
Mark and Max I'm, just trying to understand why you felt the need to bring innovation and talent and houses of the economics of that the ability to capture the capitalized or isolate talent to the prior relationship with his team.
Hey, Brian and I'll jump in.
This was the first of all how are you.
Good thanks.
Okay.
This is such a unique opportunity to.
<unk>.
And collectively I would say.
You are talking about hundreds of years worth of toy development talent on the team.
And the team has the ability to produce.
The very high complex.
Twice and they were actually.
One of our partners on the hatch malls and.
And they're they're just their technical competence and.
Is this the best and the best in the industry and the ability to.
This was just really a once in a lifetime opportunity and there was the once in a life of point of opportunities to bring it into the fold.
Right climb for those individuals to make this transition the right time for us and it's just kind of really complement and bolster up our innovative and technical capabilities and.
Give us the ability to actually bring out.
More technical products of the marketplace and also the speed to market is going to be accelerated so we're ready and we've already noticing and a short amount of time, we have products that were.
I would call them stuck in the pipeline that now are unstuck as a result of this acquisition.
And they will come to market, probably in 'twenty, two versus kind of out of 23.
We're already seeing the benefits and and the toy industry like the knowledge and and how teams function together, it's a very fine balance.
So.
And for us to bolster up our innovation, which we are known for and and see that cascade out to all of the various different.
Gpus, whether or not the preschool or whether on some boys of whether or not some games and.
Infuse our brands with that innovation and that's just it's just right on strategy for us.
So we didn't.
Hey.
Okay I appreciate the rent and maybe while I've got you I.
I think you mentioned that you expect the timing of annoyed to open up this year when can we expect to see your own IP characters, such as Paw patrol and digital platform for consumption.
It's a great question I mean, we we've already brought into amazing.
Individuals', which we can share with you later on and other calls.
The the ops will be fully operational by the <unk>.
And of the year and I would probably say.
Because of its stuff takes time and I'd, probably say in 2023, Brian.
Okay. Thanks for that and then one last question and this is probably for bonuses for Mark.
Mark can you just walk us through sort of economics 101 for for the forthcoming film you did give some metrics with respect and I'm just talking from a qualitative perspective, you talked about the financial contribution and expenses expenses forthcoming and in Q3 can you just walk us through how that works and what we should expect in terms of 2020.
Two in terms of sort of the profitability share works as well.
Sure Brian.
So everything that's happened up to this point on the movie has been really capitalized on our balance sheet. So all of it all of it actually stays on our balance sheet until the movie gets the love it which will likely be very early in Q3.
And in anticipation of the launch at the end of late August and then at that point as I say to you we recognize around $12 million of distribution revenue from Paramount.
And then we also amortize the costs associated with that which is really the share of all of the costs and then we will still have of remaining piece of intangible property on out of balance sheet, which will amortize pretty much over Q3 and Q4, maybe is coming into 2022 in line with the revenue streams that come out of it.
Moving now.
And now those revenue streams are going to be primarily choice as you as you know we will start shipping the toy line in late Q2, we will ship. It in Q3 will ship. It in Q4 will also generate licensing and merchandising all of the bidding shoes and apparel all of the Ela name that Renee and talked about earlier will start flowing through in Q3 and Q4 and.
And into 2020 two the.
And final element of this is the box office, which is.
Al potential share of box office receipts should the movie really become successful because keep in mind that Paramount has the right to recoup the distribution costs and the PNA cost, which is essentially the marketing cost of the movie before we share in that but if the movie does really well globally than the <unk>.
Waterfall will cascade hopefully towards the us and we will get some share of debt of that box office receipts revenue it will likely be and 2022 debt.
That will flow.
But it will possibly be and late 2020, one as well so that's basically how the movie works.
That's very helpful. Thank you all for your answers.
Your next question comes from the line of SAB of hat.
Juan.
And with RBC capital markets.
Great. Thanks, and good morning, just one question on the margin discussion that was happening earlier, I guess, you called out operating leverage and some favorable mix, helping in future years is there anything else, we should and I.
And keep an eye on or is there any cost reduction initiatives you can undertake the sort of thing of the big picture of drivers over the next few years.
Yeah, I called out I pulled out most of the server, but keep in mind that and our operations team in Toronto, and and Asia is still very focused on improving cogs as much as as much as possible. We have a number of productivity programs that all of that all in operation and Asia, and in Vietnam, and India, and Mexico, which relate to strategic.
<unk> sourcing, which relate to volume rebates, which relate to value engineering all of those things will continue to go on.
That will continue to improve gross margins and.
Well as increase the <unk> digital games.
<unk> and sales allowances.
<unk> based pricing all of those areas that I touched on earlier.
Okay, and then just kind of sales allowances I guess the stroke of range has been kind of 10% to 12% of what some variation around that I guess, what's a good range you can think about over the long run or does it really just depends on the type of products to sell and any given year.
Sorry, what was that question in relation to sales and ounces.
Yes, okay. So the other historical range of cyber that we've been at just being 10 to 12 I would say to you for your model you should be thinking towards the higher end of that range of.
12% and in that zone and the reason, it's not because sales allowances are going up per se. It's just because as the Europe continues to grow from a geographical mix perspective, they have the highest sales allowance structure. They also have higher pricing.
But if you just look at the sales allowance line as Europe grows and it's growing fast sales.
Allowances will tend to kick up a little bit so I would say around the 12% so good enough.
Okay, and then the commentary earlier on marketing indicated that it was going to be quite of bit broad base can you maybe help us think about other specific franchises that you wanted to invest behind or was it just the wholesale review of the marketing spend and you felt that there was more one way to make an impact there and just some additional color.
Yeah.
So how about great question. So I think the way, we think about our brands basically half of franchises, we have core brands and obviously everything else and we are basically the gearing our marketing incremental spend to first and foremost as opposed to support our franchises and core brands and when you think about that you have to be thinking about obviously the kinetics.
And about Rubik's, you'll have to be thinking about the gun and those brands and we actually.
Call core franchises, besides paw patrol and definitely might be express. So we are first and foremost making sure of those brands are supported and and that's the way we're going to do our our expenditures and the second half.
Okay, and then just one last one from me.
Years ago, there was a shock to the retail system with the exit of toys R us and malware and a new world with ecommerce being front and center I guess and as we come out of the pandemic just a broad question given that you're a bit more north American exposed and some of your peers. How do you feel the retailers and a good place and E. Commerce, maybe stepped up to filling the void or do you still see there's an opportunity from maybe.
The specialty retailer of the industry could still benefit flow.
Well, let me start and then I'll I'll.
Mark of run out the complement given the experience, but I I actually feel very strongly that we are seeing.
Most of it would be part of the the whole channel work to strengthen their plans as the industry comes back on stage of float. So I feel very strongly about our e-commerce plans and continuing to be very very important part of the of the mix.
The retailers have brick and mortar and retailers are benefiting tremendously from we see reopening and.
A copy of the restriction easing and traffic flow back to the stores and.
And I believe that will continue to play a role and I think our consumers will be very excited to go back to the stores basically see the toys and with regards to our two specialty some specialty players and we've seen some in Europe, particularly our incredibly well poised to come back and play a strong role they've complemented their efforts with <unk>.
Obviously, you know click and collect and some things.
Curbside pick up programs and so they themselves are moving and pivoting to that so I believe you're going to see them playing a very strong role as the season unfolds coming up and the fall.
And then is there anything you want to add to that.
No I totally agree.
The only thing I would add to that but it's just we.
We are seeing some of the specialty and the U S, particularly guns and starting to come back and stabilize now and also in countries like.
Italy, and Germany, and Europe, and France, as well, which have strong specialty markets. Obviously, a lot of them suffered in 2020, but the stability.
Stability, returning now and we are seeing a pick up back there.
I think we had and.
I think we have time operator for one last question. Please.
And your final question comes from the line of C.
And with <unk> Securities.
Hey, guys. Good morning, Thanks for taking my question, maybe Mark can take this one so just on the digital games, where and I think you disclosed in your prepared remarks that the number of cycle. Many subscribers at the end of the quarter were around 285 K.
And then based on my understanding I think the ARP one of the subscriber is around $8 a month from the high and so thats around I think $7 million of quarter and revenue and digital games revenue during the quarter was around $34 million. So should we assume that the rest is driven by talk of Boca and in App purchases, rather and saga and many of our toco Boca.
Just wondering if you could just provide a bit more clarity on that line item. Thank you.
Yeah. So we don't actually break down the individual components of the digital games revenue, Yes, I mean that is something that we are considering doing.
As we go forward and also.
Breaking out gross margins and profitability for digital games and entertainment. So overtime, we will enhance our disclosure to you guys to try and make it easier for you to understand the business I would say that your pud number was a little bit high.
The cycles revenues are not at that level.
But most of the revenue right now is coming from Tokai and took of life world, but certainly cycle is contributing but not necessarily at the level that you are.
The described.
Sorry, just one follow up on that sense of so let's talk of Boca is not subscription driven do you expect this revenue to be stickier and the back half of the year given that the the whole of reopening and maybe kids will be spending less screen time.
Just wondering your outlook on that.
Well.
And the seasonality of the digital games business is far less than twice, it's typically around half and half of the is some seasonality of essentially driven around the launches of new products that arent and described and also around Christmas and in early January around.
Gift cards, and the redemptions of gift cards, but it's really not of seasonal business and and and obviously the stickiness is driven by the <unk>.
And the engagement levels with the game itself.
And do you want to add anything to that.
Yes, I think the one thing and you have to think about with the talk of Boca and the cycle like World is this and ever expanding universe.
And every single month we.
And the feature into the game the.
The kids can actually.
Get for free or they can actually buy and so theres constant engagement with the consumer with the freshness and newness.
All throughout the year and I think that's the really important thing that you guys and everybody needs to focus on is that it's and expanding universe of it's not like when we grew up with kids.
You've got the cartridge and that was the game business and expanding universe of its constant expand and so if you play the game today, it's going to be feel and look different and 12 months time from now and it actually feels and different feels different every single month.
And I think that is the.
And the.
The it's a long term slow.
Building.
System, and if you look at things like roadblocks and the roadblocks to 10 years for it to really get the floating but once you get your footing. The you get you get critical mass you get scale, you get 30 million monthly active users you get and the users posting their stuff up to to tick tock, telling their stories.
And so you create the flywheel effect. So there's both the flywheel effect and the all the features that are put into the game on them on a monthly basis debt.
We feel driving engagement with the consumer and so that's really what we're focused on.
And just and.
How would you say the lighting and exciting the consumers every single month.
Okay. Thanks, that's great and thanks for squeezing me in.
Pleasure.
Okay. Operator, I think we can conclude the call at this point. Thank you very much everybody for joining us today and and we look forward to speaking to you again in August with our Q2 results.
You very much.
This concludes today's conference call you may now disconnect.
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