Q2 2021 Spin Master Corp Earnings Call
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Thank you and good morning, everybody and welcome to spin Master's financial results Conference call for the second quarter ended June 30.
'twenty 2021.2021I'm joined this morning by Matt Frankel Spin Master is global President and CEO and Mark Segal Spin Master Chief Financial Officer.
For your convenience for press release, MD&A and unaudited condensed consolidated interim financial statements for the second quarter 2021 are available on the Investor Relations section of our website at spin Master Dot com and on SEDAR before we begin. Please note that remarks on this conference call may contain forward looking statements.
Spin Master is current and future plans expectations intentions results levels of activity performance goals or achievements or any other future events for development forward looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate.
Preet and reasonable in 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 spin master cannot guarantee that any forward looking statements will materialize and you are cautioned not.
To place undue reliance on these forward looking statements, except as may be required by law spin Master has no obligation to update or revise any forward looking statements, whether because of new information future events or otherwise for additional information on these assumptions and risks. Please consult the cautionary statements regarding forward looking information.
Contained in the company's earnings release dated August for 'twenty 'twenty 1.
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 Max Randall. Thanks.
Thank you Sofia.
Everyone and thanks for joining us today this quarter marks our second consecutive quarter of increased profitability for spin master, resulting in a very strong first half for the quarter gross product sales grew over 27% and total revenue climbed by 39% to over $390 million.
In reflecting on our performance what stands out is the diversity of the growth we saw across all of our creative centers and all of our geographies. The efforts we've made to grow our global footprint develop our entertainment capability as well as the early investment we made in digital games through the acquisition of Toco, Boca and single meeting are paying off.
Proximately, 20% of our Q2 total revenue resulted from digital games and entertainment.
Much of this success, we are seeing is due to the passion that our global teams have for our addition of creating magical experiences for children and their families I want to thank all our employees around the world, who have helped us achieve and exceed our revenue and operational targets, while working under very difficult circumstances caused by the pandemic.
Digital gains growth was driven primarily by the Taco life World platform and our sago mini subscription base. The sharp increases in growth we experienced starting in Q2.2020 have been sustained.
Future spending more time socializing with their friends in these expensive digital playgrounds through the new content releases and tools that allow them to create connect and share.
For life World is a game that regularly evolves with new content, new playgrounds, and creator tools that allow kids to personalize their experience and keeps our plane and creating games video in themselves and streaming these videos onto tick tock Twitch and Youtube for others to watch soccer life World has seen explosive growth in <unk>.
Consumer engagement and we believe this is a major factor behind each growth.
Life World has now over 38 million monthly active users and the entire took a world ecosystem has over 57 monthly active users compared to $33 million last year, we are seeing growth in core markets such as the U S and western Europe, but also increasingly in countries such as Russia, Mexico.
<unk> in Brazil, and in eastern Europe as well.
The second media subscription business also grew to over 294000 subscribers across signal many world Sago Mini school and sago mini boxes compared to 184000 last year. The continued expansion of our monthly active user and subscriber base provides us with a tremendous asset to develop a dearth.
Relationship with the consumer further deepening our relationship with them and expanding their loyalty with our digital games offerings.
We are continuing to make progress on the opening of Noyd, our new studio in Stockholm that will actually focus on developing digital games, leveraging spin master's own IP.
We have already hired a general manager in some key talent and are actively recruiting in Stockholm, well known for its density of game development talent to complete the team we expect noise to be operational by the end of 2021 and will begin developing digital games during 2022 for launch in 2023.
1 of our key 2021 priorities.
<unk> to accelerate digital games through acquisitions.
Parents and teachers are increasingly turning to engaging digital solutions. When it comes to education, we see an opportunity to expand our presence in the digital games edutainment market an area that has been the primary focus of single meeting.
This past quarter, we took a step forward in this direction with the acquisition of originator Inc.
Originator is a digital game studio based in San Francisco, and he's a creator and publisher of Entertainment education mobile apps for kids and families.
All of which have reached the number 1 position in their categories in the Apple App store.
This acquisition will complement and Sigma meetings edutainment offering while leveraging our substantial subscription user base to expand the originator apps to new audiences. We.
We continue to actively look for further accretive digital games acquisitions and investment opportunities globally now.
Now turning to our entertainment Creative center, telling stories, and creating engaging and enduring characters that resonate with kids around the world is important to us regardless of what screen Keiths are watching we are rapidly approaching a major entertainment milestone with a highly anticipated release of our first ever feature film on August 20th.
The excitement for Paw patrol. The movie is really building on August 20th the film will be unleashed in theaters distributed by Paramount Pictures and on Paramount flow streaming in the U S. P.
Paramount has begun an extensive global marketing campaign and in partnership with Viacom, we have over 200 consumer goods partners, leveraging the puppetry movie and franchise.
In addition to our feature film debut the Entertainment team continues to work on the development and production of new content Paw patrol would be entering its ninth season. Our Nickelodeon. This September and continues to be rated us the number 1 preschool property broadcasting 160 countries.
350 million homes.
We continue to take a multi pronged approach to our entertainment content creation.
Led by exceptional storytelling that we know will resonate with kids globally. The team has a rich slate of New Entertainment series and feature films in development and are on track to produce and introduce 1 to 2 new entertainment properties a year.
We continue to expand our distribution strategy to ensure that we touch multiple screens and platforms to reach kids wherever they are consuming content finally within our toy Creative center as mentioned earlier, our retail customers have responded positively positively to our portfolio of propelling our growth product sells well.
Above the same quarter last year.
Gross product sales in the quarter grew to over 20%, 27% I'm sorry. This increase was driven by preschool in girls and boys and can be attributed largely to our evergreen brands, including power patrol and bakugan as well as kinetic sand and activities.
Mark will provide more detail on our category performance.
I will now provide perspective and details on our Pos when we look back to last year's second quarter. We were at the height of Covid Lockdowns globally kits werent going to stores with their parents.
We're in going to school in most cases, and the transitional social gatherings like birthday parties were not per meter.
As a result impose rate through related items and those more aligned with social play experienced a negative impact of Pos.
A year later, we've seen this line's rebound according to MPD in store sales in the U S have not only recover from 'twenty, 1 but are ahead of 2019.
Toy industry growth continuous but is slowing as we lapped the first for COVID-19 quarter in 2020.
Our data suggests that globally. The toy industry is up mid teens on a quarter to a year to day basis, which has slowed since Q1 in comparison, our global share and growth is flat on a year to day basis International internationally for MPT, Our Q2, Pos is up 10% year over year.
Well ahead of the industry on a year to day basis internationally. We are ahead of industry growth at 8%.
In the U S. Our Pos declined 12% for the quarter due to retail inventory gaps in Q1 and Q2 that we described in May we.
We expect it through Q2, we saw continued guidance and inventory at retail, but we are now seeing strong signs of recovery with in stock levels rising.
Which will improve further as the new fall line arrives at retail.
Despite lagging the industry growth rate in the U S momentum continues to accelerate on our core and franchise brands for petroleum Q2 was up 5% globally and flooding in the U S year to date for MPD boys up 17% globally and 14% in the U S.
This bodes well for the health of the franchise long term and in advance of the movie launch later this month.
<unk> continues to drive the battling toy segment and has grown by over 50% year on year every week.
For Bakugan in the second quarter increased 62% on a global basis and over 80% in the U S per NPD.
Back again strong growth in the quarter was driven by an integrated content and marketing plan that included an innovative new gaming experience and roblox.
Which has now seen over 68 million placed since April the.
The combination of the new Netflix content media and roadblocks gaming yielded significant Pos lifts that is driving back against growth.
<unk> will go into deeper meta versus fall with and will become the first ever property to Premier Our full line series episode of roadblocks.
An interesting data point in the voice product categories stacked deck. According to NPD in Q2, Pos increased 76% globally and 49% in the U S in anticipation of skateboarding, making its Olympic debut.
Which is sure to incite more skateboarding and fingerboard fandom from a DC comics licensed perspective in Q2, our D C or D. C universe, Pos was up 41% globally and up 15% in the U S.
We have successfully implemented price increases for our full line of effective July 1 that provide a partial offset to the sharply rising input and ocean for a cost that we are seeing in addition, we are seeing logistics disruption driven by congestion in key ports combined with rising Covid cases in some areas of Asia.
The supply chain team is doing tremendous work with our partners from manufacturing to logistics to our retailers to ensure we deliver product to meet the man this macro supply chain and cost pressures are meaningful but given the actions we have taken and continue to take.
Believe we can meet our full year customer commitments as a reminder, approximately 20% of our revenue that comes from digital games and entertainment is insulated from the impact of supply chain disruption Mark will speak to these in more detail in a moment.
As you know spin master is renowned for its innovation.
While we have successfully built evergreen brands like Paw patrol Bakugan and kinetic zone, what sets us apart is our innovation mindset and our ability to as our price gets with magical experiences. This season. Our team of designers have created a terrific line that will spark imagination, while leaning into current trends and evolving play patterns some of the most <unk>.
Innovative items launching this fall include per first pets and interactive fashion accessories that you can wear and play with our new Sonic between football, which was feature on the today show with our ambassador NFL quarterback Russell Wilson, our new fashion forward plush line from gun be luscious has shown.
Very strong Pos so far.
We believe we have several strong top toy contenders.
In addition to our intellectual property. We are also launching several newly acquired license storylines in the back half of the year. In addition to Monster Jam and DC Comics, which continued to perform really well.
Our total lineup Gabonese Dollhouse top 10 preschool show on Netflix has already debuted it at retail and initial <unk> results show strong pent up demand for the toys.
Our taken Wizarding World in partnership with Warner Brothers is also hitting shelves this month from.
From an interactive Hedwig to <unk> castle replica, our new range of toys celebrates and re <unk> the beloved characters from the Harry Potter film series.
Finally, this fall we are launching our line of action figures play sets and role play items from riot Games League of legends. The most played PC based game in the World. We are excited to moving to this category to leverage the attention of these loyal and international fan base and capture our share of sales in this rapidly growing key adult.
Market.
We continue to evolve our approach to marketing starting with a focus on consumer centricity to enable an insights driven approach, we expect consumer behavior to continue to be dynamic through the balance of 2021.
We're keeping an eye on the following key trends for.
First the economic recovery, while there is no expected future COVID-19 related stimulus the U S child tax credit and lower unemployment could contribute to higher consumer spending we are focused on marketing spend to capture interest in new items and increased presence in our brands.
Of course much of the World children will return to school this fall, which will see a return to word of mouth on the playground and a craving for newness. We are focus on early execution around the back to school season, leading into holiday.
We will benefit from the return to physical retail as we are over indexed in brick and mortar we will continue to mix our spin against both kids and shoppers in line with shifts we've made lost share to support an omnichannel experience for many families. There won't be a full return to work with parents increasingly given hybrid work options for those still working.
From home they'll need toys to keep kids occupied.
2 comp strong early promotion in 2020, we expect retailers to begin early price promotions you can store traffic growth continues to see some good extend later into December with last minute shoppers, having the option to buy in store.
We are continuing to build our digital first in house capability with 50% of our U S marketing focus on digital channels, we have an e-commerce omni channel focus evidenced by a substantial increase in income marketing spend with a strong physical retail program to complement it.
We are focusing on creating innovation on programs like Bakugan and roadblocks lifestyle ecommerce experiential retail tictoc co creation and location based mobile advertising.
To conclude.
We are extremely proud of our global spin Master team, our founders have set a clear vision for our future as a fully imagined children's Entertainment company and this vision has been realized we are very well positioned entering the back half of the year with an amazing toy lineup strong momentum on our digital games offering and the highly anticipated release of our firm.
First feature film in less than 3 weeks looking.
Looking to the future we are ready to adapt to the changing dynamics of play through innovation customer driven decision, making partnerships and a relentless drive to re imagine where imagination can take us with these goals well in our sights, we will deliver profitable growth and continued valued for our shareholders.
Now I'll turn it over to Mark to provide some further detail.
Thank you Max and good morning, everyone.
We started 2021 with strong financial results and extended these improvements through the second quarter.
Q2 reflected the continued strength of our diversification efforts with very strong digital games and entertainment growth significant improvement in gross margin and continued operational improvements.
These factors combined to produce a $16 million improvement in our Q2 year over year adjusted EBITDA.
In addition, we continued to strengthen our balance sheet, ending Q2 with net cash of $311 million.
Our coal business is healthy and we continue to actively leverage our assets to deliver value to shareholders.
Gross product sales in Q2 rose 27, 2% to $359 million with a favorable foreign exchange impact of $6.5 million.
On a constant currency basis gross product sales were up 24, 9%.
Total revenues, including other revenue climbed by 39% to $319.8 million.
From $281.1 million.
Other revenue for the quarter grew $35.9 million or 126% to $64.4 minutes.
Both primary components of other revenue entertainment licensing and digital gangs were up strongly.
Entertainment and licensing grew 50% driven by growth in TV distribution revenue as well as for licensing and merchandising income.
In Q2 digital games revenue increased 262%.
For $36.9 million driven primarily by growth in total life World and Ah Sago mini subscription base.
On a year to date basis digital games revenue grew 315% to $71 million from 17 million for the same period last year.
The gross product sales increase was driven by all geographic markets and exceptional sales growth in both pre school and girls and boys.
On a geographic basis, the rest of the world was the strongest growth region as gross product sales rose 58, 2% and in Europe, and North America gross product sales were up 23, 7% in both regions.
International gross product sales for the quarter represented approximately 30% of total gross product sales up from 28%.
Our preschool and girls segment grew by $56.1 million or 60% to $149.6 million in Q2, driven primarily by strong sales of pulp patrol Gabby stole house and present pets.
Whole control is performing well accounting for a significant portion of the growth.
Retailers are extremely enthusiastic about the movie toy line, while the coal line continues to perform.
In boys gross product sales were up approximately 44% driven by higher sales of Bakugan Monster Jam and technique.
This increase follows a year, where we saw a decline in action figures and collectibles, which was affected by restrictions from Covid.
Gross product sales and the activities games, <unk> puzzles, and plush category declined slightly by 1.8% to $98 million.
The decline was driven primarily by the games and puzzles portfolio, which had unprecedented growth in Q2.2020 during the height of the pandemic.
Relative to 2019, our games and puzzles business is strongly up.
Sales of kinetic sand obese and influence are all positively contribute to sales.
Included in activities games, <unk> puzzles and flush for gross product sales of Rubik's Roomies product of just under $5 million and $7 million on our Q2 and year to date basis the spaces.
From a channel perspective retail is experiencing a shift back to install and online growth while still strong is moderate.
As Max mentioned earlier industry install sales in the U S has not only recovered in 2021, but are ahead of 2019 levels by 30%.
Overall on a year to day basis, our E Commerce, Pos is up 5% compared to last year.
Looking over a longer period e-commerce sales in Q2, 2021, or 84% ahead of where they were in Q2.2019.
Sales allowances in the quarter with 9.1% of gross product sales down 140 basis points from 10, 5% last year.
Our improved inventory management led to reduced markdowns. In addition year over year operational improvements drove significant reductions in noncompliance charges over the last year.
These improvements were offset to some extent by continued growth in Europe, which has a higher overall sales allowance rate than the global average.
On a year to date basis sales allowances on 11% growth 12, 7% last year.
Historically, we have operated in the 10% to 12% range, we expect to be within that range, but towards the upper end of the range for the <unk> 'twenty 'twenty 1.
Gross profit for the quarter was $209.9 million for 53, 7% of total revenue compared to $118.2 million for 42%.
The significant improvement in gross margin is the result of the growth in digital games, and entertainment and licensing as well as the year over year cost reductions from our operational improvement initiatives.
These cost reductions include low scrap and obsolescence reduced closeout sales reduced reconfiguration costs and low sales allowances.
In Q2, 2020, we identified approximately $13 million in costs within gross profit, which related to inefficiencies from our operational issues, which have now been remediated.
Selling general and administrative expenses decreased as a percentage of total revenue to 38, 2% down from 48, 48%.
The 260 basis point improvement was driven by a significant reduction in distribution costs, which declined by $5.1 million to 3.5% of total revenue.
Compared to 6.7%.
Offsetting these improvements was higher marketing selling and administrative costs.
Marketing costs increased $15.8, million% to 7% of revenue, which represents a more normalized level of marketing spend for.
For Q2, when compared to 4.1% last year as a result COVID-19.
We now expect our full year 2021 marketing spend to be at approximately 10% of revenue in line with 2018 in 2019.
We will invest in marketing strategically to support sell through share growth brand momentum and channel country mix goals.
Selling costs as a percentage of total revenue declined from 7.3 percentage of revenue to 6.2% due to a low proportion of licensed product mix this quarter.
Administrative expenses increased over last year by $22.3 million or <unk>, 44% to $77.5 million.
The increase was primarily due to personnel related costs, including higher incentive compensation accruals driven by improved operating results as well as higher professional service expenses.
Administrative expenses as a percentage of total revenue increased slightly to 19, 8% from 19, 6% adjusted administrative expenses increased by $19.5 million to $72.9 million.
Adjusted administrative expenses as a percentage of total revenue decreased to $18.7 million from 8 sorry, 18, 7% from 18, 9%.
In Q2, we reported net income of $33.5 million or 32 cents per diluted share compared to a net loss of $14.9 million or a loss of <unk> 15 per diluted share.
Adjusted net income in the second quarter was $41.6 million or <unk> 40 per diluted share an improvement of $51.1 million when compared with an adjusted net loss of 9.5 million for 9 cents per share.
Adjusted EBITDA was $81.8 million in the quarter compared to $21.5 million an improvement of $60 million.
The significant increase in adjusted EBITDA was driven by higher gross profit and low distribution costs, partially offset by higher selling marketing and administrative expenses.
Adjusted EBITDA margin was 29%.
From 7.6%.
From a tax perspective, we had an income tax expense of 11 million in the quarter at a rate of 25%.
Free cash flow was $62.5 million compared to $40.2 million driven by higher cash flow from operations.
Inventory at the end of the quarter was $135.7 million down by $18.6 million compared to $154.3 million in Q2.2020.
Regarding acquisitions as Max mentioned, we acquired originated during the quarter for $15 million plus further performance based payouts, assuming certain financial and operating performance thresholds are met over the next 5 years.
Originator will continue to operate from San Francisco and will be reported within our digital games Creative Center.
Turning now to our view for 2021 well.
We are holding our gross product sales growth outlook for the full year at high single digits consistent with our guidance in may.
Whilst we have continued optimism for 2021 based on orders on hand, and retailer demand. We are seeing some headwinds which requires us to be cautious about our expectations for growth.
A significant headwind we are experiencing is from the global delay in shipping caused by a variety of factors, including logistics disruptions from Covid related shutdowns at key ports in China.
The ripple effect for the Suez Canal blockage and from Covid related labor shortages in certain areas.
In Vietnam and China.
All of which has resulted in a shortage of empty ocean containers in Asia, which is disrupting and delaying customer pickups.
We are working hard to mitigate those.
Our efforts include sourcing products earlier, increasing the number of ocean carriers, we work with and utilizing more corp to expedite the delivery of our product.
We continue to anticipate some port congestion and ocean container capacity constraints for the second half of 2021.
From a timing perspective, we are working extremely hard to ensure full product availability during the holiday season, and we're doing all we can to meet demand.
We anticipate experiencing some shifts in timing of revenue between Q3 and Q4.
Overall, given all the above we want to maintain a cautious bias when it comes to GPS growth expectations.
Turning to total revenue, we continue to see an acceleration of our momentum in entertainment and in particular digital guidance.
Based on this momentum we are pleased to raise our guidance for total revenue and now expected to increase mid teens compared to our prior outlook of low double digits that we shared in may.
Regarding the pull movie in May we advised you that in Q3, we expect to reflect in our results. The distribution revenue received from Paramount and a portion of the amortization of previously capitalized.
Previous guidance was based on release scheduled that provided for an exclusive theatrical period, followed by the subsequent release on other delivery platform.
Due to the uncertainties of Covid. The ship was made in Q2 in the movies U S distribution strategy with simultaneous release in theaters and on Paramount plus.
As a result, we now expect distribution revenue of approximately $23 million in Q3 compared to $13 million previously advised.
As well as approximately $22 million of amortization of the capitalized intangible assets compared to $12 million previously.
The net impact of this distribution strategy change on our gross profit will not be material.
But it will positively impact Q3, adjusted EBITDA by $10 million.
Consistent with what I described in May both licensing and merchandising revenue from the movie will continue to flow into Q3, and Q4 and into 2022.
And depending on the movies Ultimate box office performance, we could see additional revenue in late 2021 and possibly in 2022.
Turning now to profitability consistent with what is being experienced across the toy industry and many other industries. We continue to see increases in input costs, primarily from plastic resin paper and cardboard packaging and more recently from electronic chips, and particularly ocean freight which is.
Nearly double as a percentage of our Cogs compared to prior years.
These cost increases accelerated significantly in the latter part of Q2.
In early May we advised you that we had implemented cost containment and productivity programs to offset cost increases, but when necessary. We are implementing price increases to help us offset inflationary pressures.
These price increases became effective early in Q3 as planned.
Normally if we were raising our guidance for total revenue. We would also expect to raise out EBITDA margin guidance.
Gross profit and adjusted EBITDA are benefiting from the remediation of the operational issues and the positive mix effect of digital games and entertainment revenue growth.
However.
Given the incremental cost pressures the industry is experiencing and which are expected to continue we are maintaining our adjusted EBITDA margin guidance and we continue to expect our 2021 adjusted EBIT margin to be towards the high end of the mid to high teens range.
Capital expenditures and I'll state this tax rate are expected to be consistent with previous guidance.
To conclude we have advanced our strategic initiatives and made great progress across all 3 creative centers continuing to demonstrate our ability to produce compelling entertainment and digital content magical toy experiences.
And to be a great partner for the licensed toy lines we.
We have built a strong and focused global platform and I'm incredibly proud of the effort and results that employees have delivered.
We are committed to our long term financial framework for value creation and defense platform for innovation and global growth across toys Entertainment and digital games.
Our solid financial position together with the achievements of our operational improvement initiatives.
It's a very solid foundation for growth for 2021 and beyond.
That concludes the formal part of our Corp. We will now be pleased to take questions. Operator. Please open the line.
Okay. Thank you at this time because you have a question. Please press star 1 on your telephone keypad. If you wish to withdraw your question press the pound key we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Brian Morris from TD Securities.
Hey, Good morning first question for Mark you kind of answered it but just on guidance I understand gross product sales being flat and with the total revenue increase I would've expected a higher.
A commensurate increase in the EBITDA margin, but just walk me through the guide inputs. It seems like a conservative view taken into accounts for maybe logistics headwinds because you are putting into higher margin digital licensing revenues ex <unk>.
Yeah, So Brian as I just described.
We maintain a cautious by is just given what is actually happening out there.
The industry and in Asia.
We're experiencing.
Pressures on ocean container capacity.
And for that reason, we despite the fact that we have strong orders and a grateful lineup. We wanted to maintain a cautious bias on our top line on gross product sales, we all going up on total revenue due to digital games and entertainment strength, but we are maintaining our EBITDA margin guidance because of the inflationary cost.
Pressures that we're seeing.
Most recently ocean freight and and on electronic chips.
So given all those uncertainties, Brian we thought it would be prudent to maintain a cautious bias in terms of guidance on those 2 metrics.
Okay and then thank you for that the second question for Matt I think I understand it but I think it would be it would be helpful to us to make sure. It's clear you've got this negative 7% Pos declined in the quarter and it sounds like you've had bloated inventories down from last year versus a constraint. This year, maybe some timing of the paw patrol moving but can you just provide some color.
Relative to the industry your expectations for the second half and I realize it's early but can you provide some early paw patrol.
POS presale data anything on that from.
Absolutely good morning, Brian So I wanted to give you context for our Pos and I'll start with global and then come down to the U S, which is the numbers you are alluding to.
Globally, we are outpacing category internationally.
It actually grew share in 7 of 11 countries and as you actually have pointed out <unk>, our single largest opportunity from a category perspective total Pos 6 or 6 of our 9 total global franchises. Our brands are growing ahead of industry outside the U S.
You pointed out inventory challenges are the single biggest reason for the lack of progress in the U S. During quarter 2 at large and it's something we have share reviewing in may and so I think we're at that point, where inventory is beginning to look better and we're seeing tremendous growth on paw patrol, let me get into that in 1 second.
Now, it's not just within the U S debt you have profit driving there are other things happening that are noteworthy performances, we want to highlight and I want to just bring you up to speed on that so <unk> 1 right. We mentioned that in the in the prepared remarks.
The franchise is growing very aggressively tech deck is growing incredibly aggressively in the U S 49% growth in Q2, our DC universe.
Products are growing tremendously in the U S as well as 15% Batman being the star performer for <unk>.
<unk> continues to grow in the U S as well and the what you see there is just declining category performance, but we're growing share. We now have 2 items of the top 5 in the U S Arts and crafts category.
And so we're feeling very strongly about that and then finally PA is up 14% in the U S. Our year to date and what's really most exciting is that what's driving that is stronger awareness increases and penetration increases in households.
So which is great news ahead of them moving now as you asked about the movie effect, obviously early days, but early reads are very positive.
And so right now we have we have basically our train set at Walmart and the numbers at Walmart are very very encouraging and last week. We set we said or said in target and it's too early to tell we haven't even gotten the REIT yet so so far we're looking very very good from a profit drove.
So early days.
Anticipating the movie.
So overall.
It will be by the end of the year you should.
Pls in line with the industry average that for you.
And that is our expectation and and so that's what we're gearing up to and we have we have obviously marketing lined up to basically drive that demand.
We have more marketing in this back half than we did a year ago, we're actually going back to a more normal levels of investments and in some lines. We actually have focused so we are not spreading the peanut butter..2 thing we are going after our franchises in core brands more aggressively.
And so we expect performance to come back in the second half as we actually had basically guidance back in May.
We are continuing to see some really good good performance in some of our bigger e-commerce accounts as well. So we're growing share first half 2 for the first half last year.
The biggest pure play play.
Customer and also at 1 of our other.
Customers that he is omni channel. So we're seeing that continued and we made some interventions in Q2 and so our share has really grown so we're feeling very bullish about that.
Thank you very much.
Your next question comes from the line with Steph Wissink from Jefferies.
Okay.
Thank you good morning, everyone I wanted to follow up on Brian's question on EBITDA Mark maybe this is a good 1 for you just to help us bridge the.
For the EBITDA guide because you were guiding to margins, so you're raising sales holding the margin rate at that upper end, but what that does imply EBIT dollars are going to be going up versus the prior model I wanted to just make sure that that's exactly what you're saying and then secondly, just to help us think through the reference you made to the timing of the Paw patrol movie.
And it sounds like it's going to hit EBITDA by $10 million in the third quarter, but maybe just help us think for the balance of Q3 Q4.
Sure, Yes, so Steph, we do guide to margin as you say so to the extent that al total revenue goes up you would expect dollars to go up as well.
But obviously the situation is quite fluid because of the.
The digital games and entertainment growth and the margin positive margin impact of debt is being offset to some extent by the inflation that we're actually seeing on ocean freight and plastic resin and in packaging and in other areas. So the situation is quite fluid and nothing.
This is really stabilized completely yet which is why we're maintaining somewhat of a.
Cautious bias on on margin.
In connection with the pull movie.
Essentially what.
The change in distribution strategy, we're actually recognizing more distribution revenue and higher amortization in the third quarter. It's really just a timing issue. Although it does have a positive benefit in Q3 of $10 million.
On adjusted EBITDA.
Some of the some of that incremental EBITDA was actually going to flow through in Q4 than in prior quarters. So it's really just coming and sorry in later quarters. So now it's really coming forward into Q3 because of the simultaneous release of the movie in theaters and on the streaming with Paramount plus in the U S.
In connection with licensing and merchandising and.
There's no real change on the movie licensing and merchandising impact that will flow through and flow through in Q3, and Q4 and also 2022 and then again.
To the extent that the box office is really.
Higher than expectations overall, there might be some upside in terms of.
Income that we could see from debt, but stay if that debt is something that we haven't necessarily built into our models and I'm encouraging you not to do that yet because we just don't know how this is going to play out but it does represent upside ultimately too to all of our models.
If it wants to be really successful at the box office.
Okay. That's great and then my last question is just on advertising and marketing or your marketing budget for the year. It sounds like it's going to be closer to that 2018.2019 level from here.
This has actually gotten somewhat more profitable since 2018, 2019, especially with your operational improvements.
As you realize upside how do you balance passing that through to the bottom line versus reinvesting into areas of marketing and development to just continue to fortify the innovation pipeline.
So Stephanie we are as I suggested and I'll get into more color. So we are we are indeed investing in a few new lines that we're bringing to market.
Particularly in the adult segment right something that we don't have enough we have to invest and so we are reinvesting some of that margin as you suggest and things that we are bringing new to market. So we're excited about that.
Similarly, we have a few a few lines that we are bringing by Gabonese dollhouse that has basically incremental marketing that we need to now invest and we're excited about that and has begun to do really well in retail.
It's beating our expectations handily. So we have actually flown marketing dollars to do that and then importantly, some of these items are now making it to Europe as well. So we are strengthening our European marketing, we are doing very well in Europe. We are growing in most European markets and so marketing is to flow. So we can continue that data that momentum.
'twenty 2.
Beyond you are correct, we are strengthening our innovation ideas and bringing them to market next year not for not just for the spring book fall and even into 'twenty 3.
With incremental investments as well as we as we talked earlier and Marc reiterated our Noyd studio is coming up and we are excited about that there are some properties that actually will have multi creative center impact and so we are going to Europe and investing that as well. So I hope that gives you color beyond just.
The high level numbers that we have on your P&L.
That's very helpful. Thank you very much.
Your next question comes from from <unk> Khan from RBC capital markets.
Okay, great Thanks, and good morning.
I know you mentioned the DC comics.
Well in the U S earlier, particularly the Batman platform.
Do you have any insight I guess into the movie pipeline or the opportunities there into kind of the next couple of years for the remainder of that license.
Sure I'll take that 1.
Actually 2022 is going to be a big year on the on the DC front. They are actually full movies that are scheduled to come out for.
From a new content perspective.
You've got the Batman movie debt scheduled to come out in March 2022, you've got black Adam in the Middle of 2022, and then towards the backend of 2022, you've got the flash and Echo man.
That'll coming out so for movies associated with the DC slate in 2022, and and obviously, we're very excited about all of those in our toy lines are associated with those and we feel good about debt debt license overall mixes anything you want to add I think you said it well.
Gearing up for it we have great toy lines for that so we're excited.
And given I guess, those all sound like Theyre in the boys category I guess those would be sort of within the within the framework of the license that you have.
Yes, those are within the license and they would be in the boys category that we reported.
Okay, Great and then during the quarter I think it's what stood out was it purely related to Bakugan and I guess is there anything is it.
Their product line for that content behind that and maybe some color on what's driving some of that growth in that platform.
Yeah, so great great great in for instance.
Saba, So we actually had content drop in Q3.
That was really really successful and then as it dropped it was basically done concurrently with activation and roadblocks and activation and Youtube and so the combination of all these netflix roadblocks or marketing innovation truly propel a lot of users to engage with the brand the engagement went up significantly and we.
We're super excited to announce we actually just mentioned earlier, we are releasing our new series on roadblocks, which is a new for for us and for a lot of the market.
And we got a lot of play patterns that we're actually getting back into to supplement obviously with toys, all that great content and engagement by the new audiences that we brought to the franchise.
Just to add to that mix.
As you know bucket gun is a game.
And a toy that actually thrives on on kids, playing together and sell as as Covid restrictions have eased and kids all or socializing more that's also helped and the.
The new toy line has received a great reaction and kids getting together and word of mouth has definitely improved as well and just to reflect on Stephanie's question Saba just to build on your question..2 we actually have had great investments in marketing on Bakugan and we've had great listen Rois. So that gives you gives us confidence to continue.
Moving to invest on debt franchise, as we get into Q3 and beyond so we're excited.
Okay, Great and then just 1 last 1 for me.
For the concerns around trade and supply chain for the next 2 are you taking from litigation measures.
Volume deliveries earlier, bringing more product to your domestic warehouses, just any color on how you're looking for prepared for the holiday season.
That said, we are doing whatever we can to make sure that al al twice get to our customers and the kids can buy them when they want to buy them and parents. So.
We're definitely doing everything we can working with other carriers.
Moving things around using other ports.
Working with.
Working with logistics carriers wherever we can to move the goods.
Including.
Potentially bringing some good day on a domestic basis.
A little early yet, but but it's a very fluid situation right now and all I can say to you is that our supply chain team is extremely focused on doing what we can to make sure good zone.
On the retail shelf, when we actually want them to be.
You want to hit.
It's basically it's an all hands on deck.
Daily effort between our teams are retailers teams, our suppliers and basically weekly connections with the leadership of all of those stakeholders. So that we make sure we bring products to America and to Europe, particularly set for the 1 thing I would add just in addition to this is debt.
Because of the fluidity of the situation I do see a potential shifting revenue between Q3 and Q4.
Obviously from the perspective of the retailer retailers look at this.
In the context for full as opposed to Q3 and Q4, but obviously from our perspective, we report the quarters. So there might be a shift from September into October in terms of some revenue shifting.
Into Q4 as things move late September early October so just keep that in line.
And just on the shipment issue I think a few years ago, you guys had about 2 thirds of your product selling applebee, where retailers picked it up any where does that stand today I guess post pandemic.
Yes, So 2020 was not a good reference point because of the inventory issues that we had in 2019. So what you see in 2021 is a shift back towards if a b overall now keep in mind. The U S market is always more if I'll be in Europe is much more domestic but what we're seeing right now.
It's a shift.
Back towards <unk>, which is typically where we have been as a company not as much as the 60.40 that we used to see probably more in the low to mid fifties F O b.
What percentage in for the year I suspect that will be somewhere around 50.50 for the year, maybe a little bit more weighted towards <unk>, but in that order of magnitude.
Thank you.
Your next question comes from the line of Martin Landry from Stifel GMP.
Hi, good morning.
You've talked about.
Supply issues and challenges.
Wondering for your perpetual movie team toys.
I know you expect it to be.
At retail are in on August 1st and then.
Visited the retailer and a large retailer in Canada and I couldn't find your toys.
Can't find them on the web site as well just wondering do you have some delays in Canada for your perpetual movie team toys.
So I think all of those stories good Martin Martin are underway in some other retailers as we described earlier they already are set on train displays or on basically end caps and if it goes to other pure play you're going to find that toys, as well and youre going to find a.
A couple of handfuls of key items that we're launching already feature and selling so and you can order them, obviously online so I am very well aware that those actually are in.
In their warehouses and making their way to a retailer shelves.
Apologies that you can find it everyone's really working hard to get them to you.
And so and if we need them before you actually get back to the store I think we can help on that front.
Thank you.
And my.
My other question was on the on your point of sale metrics.
You know when you do a really good job flushing out what's been to drive you know or working really well and growing well, but what's the what's the what's dragging a little bit to your global point of sales they were down 7% year over year does it have to do with.
Activities and puzzles being due to a hard comp or anything else.
So.
What we need to really level set here is and I think it took me. It's taken me here a couple of months.
We play in part of the market and categories that are smaller than obviously some of the larger super categories from the in the space that are growing. So if you look at the where we play and where our shares more developed we're now benefiting when you look at total spin master share from just basically.
Our if you will where we play perspective once and we remain very focused on every brand and making sure every brand is growing share and that's why I talk about 6 out of 9 brands growing share, but when you aggregate it and you look at the whole toy World and how it reports then you can see the weighted average of our play and our performance we basically.
Not necessarily recognize from a total spin master share performance I hope that makes sense, but that's really 1 of the things that are that is that is hurting us and as you well point out we have an overdevelopment in games and puzzles and games and puzzles is 1 of the largest declining segments in Q2, given the year ago base and for us in that.
Category is even more pronounced because in the year ago base period, we had basically some promotional items that we were selling at that time, which we don't have this year because they were basically being liquidated. So I hope that explains a bit of the context, we've talked about in basically kinetic sand on how well we do from a share perspective, but that category is.
Well from a year ago pandemic base is also not 1 of the fastest growing categories. So I hope you get the debt, where we play and where we put effort and investments may not be the larger categories in the ones that are growing fastest.
And so I think if you look at it in that context, hopefully the math scores for you.
Yes, that's perfect. Thank you.
Your next question comes from Jamie Katz from Morningstar.
Hi, Good morning, I'm, hoping you guys could share your updated expectations for gross margin, obviously, you've made a lot of progress.
Year to date.
Gross margin as the FRP segment mix shift per head and then digital.
Or digital and entertainment versus the traditional.
Channel shift as well should we be thinking that the opportunity for that gross margin is a little bit better than maybe it had been in the past.
So Jamie good morning.
Historically, if you look at if you look at the company we've been in the high Forties overall 49, 48% and net range and we've always targeted to be north of 50% at a minimum and continue to grow from day, we had an exceptional quarter in terms of our gross margin.
Of the 33% on a year to date basis we're.
Just over 51%.
Gross margin is improving and has improved because of all the operational initiatives that we have.
Implemented as well as digital gains.
Growth in entertainment growth, which will which are gross margin accretive as well as product mix product mix has been a big factor as we've as we ship more product, where we own the IP that has a positive impact on gross margin.
And so.
I would say to you we are going to continue to focus on net I don't believe we will be able to to keep the right at the same level that we were at in Q2 for the balance of the year, but certainly our goal is to be well north of 50% and to continue to grow from there and we focus on all of the levers that will drive.
<unk> gross margin, whether it's value based pricing lowest sales allowances increased digital games and entertainment content.
Productivity programs.
In Asia volume rebates cost engineering, and all of those factors that drive higher gross margins, but the cautionary reality that we're dealing with right. Now is that there is inflation on all of the inputs on and into Cogs, whether it's plastic resin whether it's Peter.
Paper cardboard packaging of chips and ocean freight and so we just have to maintain reasonably cautious expectations around where our gross margins are going to be at this point until things settle down.
Of course, and I think in the prepared remarks that there was there were some comments about potential early price promotions or last minute shoppers is there anything in the purchasing pattern from consumers now that would indicate.
Debt things are moving that way or is that more just surrounding uncertainty in the environment right now and what issues may surface.
So I think Q3.
Good morning, Jeremy So I think if you look at Q2, and we talked about the overall market being 15% versus being 30% in Q1 and as we go into Q3, what would be the impact of that.
We're seeing because of the programs, we have and how we actually share with you. The fact that we're trying to leaning too for example, some things with back to school and source Sonic Finn football program is off the gates and basically trying to reach that audience and get behind that.
Period before the holidays. So we expect that he will not just pick up on Q3, but it also will have residual purchases back in Q4. That's just 1 example, the same is true protect deck and then the same is true for perpetual right. So I spoke control has now hit the retail stores.
And then we will be we'll start to play and streaming will continue to get keeps engagement gets actually keep rewatching that that video we expect that debt repurchase once it can happen. So we are seeing right. Now really these are early days tremendous momentum in our Pos in perpetual on particularly the low end.
Price points, and so as the more expensive price price points come closer to the holiday you can imagine that that will continue to fuel our Pos momentum into late Q3 early Q4 and.
And prior to the holiday.
Okay. Thank you.
Your last question comes from the line of Garrick Johnson from B and low capital markets.
Hi, Good morning can you talk about what drove entertainment licensing growth I'm not sure you wanted to day tone. There was there were some early CPE revenue from perpetual movie and then my next question is on your own inventory on your balance sheet down, 12% I would assume with price increases your cost increases the units.
Down probably a little bit more than that is there.
Is that sufficient to help hit your back.
Back half groups product target, which seems to be about flat year over year.
Yes, I'll start with the second part of your question first.
Gary Yes, so inventory was down around 12%, even though our sales were up 27%. So good inventory management and good results from a working capital perspective.
We did see some inflation starting to creep into Q2.
Which will obviously affect cost ultimately and we will see more in the second half of the year, so that that will actually.
Drive up inventory carrying value is even if units are flat and salt.
We do expect our inventory levels to to increase year over year at the end of at.
At the end of 2021, I think we actually ended 2020, a little bit to clean in many areas and that's part of why we've struggled with in the first 6 months of the year, because particularly in the U S. We actually really.
Were very low at retail Andy now on warehouses on the inventory levels.
In connection with the entertainment and licensing.
We're seeing.
Both our TV distribution revenue as we delivering our new shows we have.
New shows on pulp patrol Mighty express, but you've done and others, all deliveries, which is driving TV distribution revenue up and then also because of the strength of pulp patrol in general it's much as toys that are strong, but also for licensing and merchandising program globally.
Is driving increased licensing and merchandising revenue in pulp patrol and that's driving up entertainment and licensing within the other revenue just keep in mind we have.
Over 200 partners around the world that are selling pole patrol licensed product and end with the movie coming along and in Q3, we're obviously excited about licensing and merchandising for Q3 and Q4 as well, but we did see strength in Q1 and Q2.
Okay. Thank you Mark.
Thanks, Gary I think I think that's our last question operator, So let me just say thank you to all of you for participating this morning, and <unk> and Sofia look forward to chatting with you again in November for Q3, thanks, everyone.
This concludes today's conference you may now disconnect.
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