Q4 2021 Spin Master Corp Earnings Call
And are taking a moderate approach to pricing and promotions investing where it makes sense to remain competitive while also preserving our profitability.
Now turning to entertainment, we continue to take a multi pronged approach to our entertainment content creation led by exceptional storytelling that will resonate with kids globally.
Our entertainment Creative Center achieved a historical milestone in August with our first ever feature film for our leading preschool franchise Paw patrol in partnership with Paramount Pictures and Nickelodeon the.
The phone success had a halo effect on the franchise overall significantly raising perpetual awareness around the world.
<unk> penetration increased 15 points among kit following the movie release deepening engagement with existing fans evidenced by increased viewing minutes and also attracting new fans, particularly on streaming platforms such as Paramount plus.
We currently have 10 regional shows and multiple short term short form series airing or streaming in more than a 190 countries 30 languages.
While perpetual the movie was our first feature film you will not be the last with other film concepts in development, including a second perpetual moving to debut in fall 2023.
<unk> will also get a spinoff series in 2023, which has been green lit by Nickelodeon.
Entertainment has reached development slate currently in production, including several new properties, which will launch in 2022 and 2023 with multiple broadcast broadcast networks and streaming services.
We're excited to build a diversified offering of 1 billion to different audiences and age groups.
We continue to experience record growth in 2021 in our digital games Creative Center, primarily driven by total life world with revenue growth of over 127% and culminating in <unk> world being recognized as the App stores 2021.
IPhone app of the year and Amazing achievement for it took us took a bogus studio as it celebrates its 10th anniversary.
Digital games continues to create expensive digital play experiences for our kits. If you have children, how integral digital games have become to their lives digital games have now become digital playgrounds, where kids explore and engage with their friends and favorite characters, new content releases and tools that allow them to create connect share and express themselves.
Our driving strong global engagement.
Monthly active users for Tokio life world more than doubled in 2021, increasing from $25 million in January to $56 million in December the entire toco Boca ecosystem now house over 74 million monthly active users compared to $45 million in Q4 2020, Inc.
In Q4, the team introduced our first in App licensing integration welcoming global lifestyle brands in Rio and he's Hello, Kitty and friends franchise into the digital playground with great results in.
In 2022, the team has more exciting branded partnerships in the works and new content releases, which will keep kids engaged and give them more options for customization and creativity.
Sago mini which focuses on the younger demographic. We're play to learn is a key driver for parents.
Helped fuel our digital games growth as well with an expanding subscription base. So at 29% increase in 2021 to 311000 subscribers compared to 2020 segment is working closely with originator, which we acquired in Q2 to expand our comprehensive play to learn subscription based digital games off.
<unk> building on existing platforms, and with new product launches in 2022 and 2023.
We are continuing to make progress building noyd, our new studio in Stockholm, Noyd is focused on developing digital games using spin master owned IP.
Our first game will launch in 2023, and we are very excited about the growth possibilities for digital games that are emerging from this initiative.
Now turning to our outlook for the year. There are several macroeconomic and geopolitical variables, we are monitoring closely and which we built into our outlook and mark will discuss shortly.
From a consumer perspective, the removal of stimulus payments combined with rising interest rates and inflation could put pressure on families disposable incomes.
As we know from history that toy category is somewhat insulated from periods of economic downturn, but it is something we need to consider especially for higher price point products. We.
We expect there will be continue to be challenges and disruptions in the global supply chain in 2022, ranging from transportation bottlenecks to cost inflation.
It remains an unknown variable in Asia, and we will continue to implement advanced planning techniques and seek to remain responsive.
<unk> and agile in both production and logistics now having said all of this with our clear vision for the future a strong global operating platform and firm Financial Foundation, we are optimistic about our growth opportunities in 2022.
We believe we are well positioned to capitalize on the momentum from 2021.
We will continue to seek opportunities to harness the potential of our three creative centers and as we continue to grow the business. We are seeing the power of our operating model, where each creative center acts independently, but also in concert with each other when it makes sense to exploit the full potential of creating talent innovation and intellectual property.
Let me conclude by thanking our global team members for their outstanding contributions in 2021.
The management team at spin Master remains inspired and encouraged by the passion knowledge competitive drive and commitment to innovation that each of our team members and bodies.
As we begin 2022, we see even greater potential to connect engage and reach even more kids and families with magical and memorable toy entertainment and digital games experiences.
I will now turn it over to Mark.
Thank you mix.
In the fourth quarter, we delivered very strong financial and operational results representing significant year over year improvements.
We entered the year acutely aware of our need to address the global supply chain challenges brought on by Covid.
We maintained strict cost management discipline leveraged out diversified third party manufacturing footprint to optimize production and worked with our logistics partners to gain access to additional ports and shipping lines.
We were able to methodically execute our plan as evidenced by our full year 2021, adjusted EBITDA of $414 million, an increase of $234 million or 130% over 2020.
Looking at Q4.
We're able to build on the momentum established through the first three quarters and deliver significantly stronger results compared to last year.
Q4 revenue climbed 26, 5% driven by double digit growth across all three of our creative centers and product categories.
The combination of higher gross product sales in all geographies improvements in sales allowances higher entertainment and licensing revenue and the strength and momentum of our digital games business combined with our operational execution produced record profitability levels.
Gross product sales rose approximately $116 million or 22, 6% to $627 million.
On a constant currency basis gross product sales were up 22, 9%.
Geographically, we delivered solid growth across all markets, especially in North America, which was up nearly 33%.
Europe saw growth in gross product sales of nearly 12%.
And the rest of the World was up just under 10%.
International gross product sales declined to 42, 4% of total gross product sales down from 46, 8% last year driven by strong growth in North America.
The growth in gross product sales for the fourth quarter was primarily driven by customer demand and our ability to successfully manage through the supply chain disruptions, which should steady inventory flow and availability both on shelf and online.
We did this by implementing safety stock and safety lead time programs using innovative transportation methods and close collaboration between customer focused teams and sales teams to prioritize orders and drive the best possible Q4 results.
Turning to category performance I want to call out that we renamed certain toy product categories. What we used to call pre school and girls has now been renamed preschool and Doles and interactive and what we used to call boys, we now call wheels and action.
Our preschool and tolls and interactive product category grew by $51 6 million or 25, 8% to $251 8 million in Q4.
Whole patrol continued to perform exceptionally contributing significantly to the growth of the product category together with the success of new product launches for Wizarding World Gabby storehouse and Perth.
Gross product sales in activities games, <unk> puzzles, and plush category rose by 18, 7% to $206 5 million.
Sales of kinetic sand as well as <unk> and <unk>, both of which were recent acquisitions positively contributed to growth.
In wheels, and action gross product sales were up nearly 20% to $146 1 million.
Driven by higher sales of DC licensed products in advance of the Batman movie in theatres on March the fourth and continued momentum for tech deck.
Q4 sales allowances with 13, 6% of gross product sales down from 15, 1% last year, driven primarily by lower noncompliance charges and reduced markdowns and promotions due to strong inventory sell through in.
In addition, we saw a higher proportion of sales in North America in Q4 compared to Europe .
North America has a lower overall sales allowance rate than the global average.
We've now seen eight consecutive quarters of strong revenue growth in digital games in Q4 digital games revenue increased 57, 2% to $50 million driven primarily by growth in total life world in App purchases.
Entertainment and licensing revenue grew 16% to $28 5 million, primarily from licensing and merchandising revenue from the pole patrol movie release.
Gross profit for the quarter was $323 3 million or <unk> 52, 1% of total revenue compared to $241 million or <unk> 49, 1%.
<unk> had the most significant positive improvement in gross margin due to lower closeout sales favorable changes in product mix and cost reductions, resulting from productivity initiatives.
These improvements were offset in part by inflationary pressures on product costs and ocean freight partially mitigated by price increases.
For the quarter, the net negative impact of inflation, partially offset by pricing was around 290 basis points.
In both digital games and entertainment, we achieved higher revenue, which was accretive to gross margin by approximately 70 basis points and 60 basis points respectively.
Selling general and admin expenses were $55 6 million higher due to increased marketing and administrative expenses.
Marketing increased due to higher media and commercial production spend.
Administrative expenses increased over last year by $27 1 million to $103 8 million. The increase was primarily from personnel and incentive compensation related accruals due to higher profitability in 2021.
However, SG&A as a percentage of total revenue remain consistent at 43, 1% compared to 43, 2% last year.
Adjusted SG&A declined to 41, 9% from 42, 2%.
In Q4, we recorded net income of $26 5 million or <unk> 25 per diluted share compared to net income of $300000 were essentially breakeven per diluted share last year.
Adjusted net income in the quarter was $38 7 million or <unk> 37 per diluted share an improvement of $24 1 million compared to $14 6 million or <unk> 14 per diluted share last year.
Adjusted EBITDA was $78 3 million compared to 51 5 million, an improvement of $26 8 million or 52%.
Adjusted EBITDA margin was 12, 6% up from 10, 5%.
The increase in adjusted EBITDA was driven by higher gross profit and lower distribution costs, partially offset by higher selling marketing and administrative expenses.
From a tax perspective, we had an income tax expense of $9 5 million in the quarter compared to an income tax recovery of $4 7 million last year.
Effective tax rate for Q4 was 24, 2%.
Turning now briefly to full year 2021, I'll call out a few items of note.
Sales allowances as a percentage of gross product sales were 11, 8% down 100 basis points from 12, 8%. This.
This highlights our strong sell through and improved operational performance, which drove lower markdowns on noncompliance charges as well as geographic mix, which favored North America.
Digital games revenue increased 127, 6% to $174 8 million from $76 8 million.
Entertainment and licensing revenue increased 73, 7% to $135 8 million from $78 2 million.
Okay.
Gross margin represented 51, 7% for 2021 compared to 46, 3%. The increase in gross margin was a function of cost reductions, resulting from operational improvements and productivity initiatives favorable product mix lower closeout sales and lower sales allowances. These improvements were offset in part.
By inflation on product costs, and ocean freight, which were partially mitigated by price increases implemented in Q3.
In addition, the higher revenue in both digital games and entertainment was accretive to gross margin in 2021 by approximately 90 basis points and 70 basis points respectively.
SG&A decreased by 390 basis points as a percentage of revenue as we continued to generate operating leverage through increased volume cost management and productivity higher selling marketing and administrative expenses largely driven by increased incentive compensation were more than offset by less.
<unk> from higher volume and lower distribution costs.
Adjusted net income for 2021 was $221 3 million compared with $53 4 million last year with adjusted diluted EPS of $2 10 compared to 51.
Adjusted EBITDA for 2021 was $414 1 million compared to $180 6 million, an increase of $233 5 million or 129, 3% over 2020 adjust.
Adjusted EBITDA margin was 23% compared to 11, 5%.
As a reminder included in adjusted EBITDA was $26 million of distribution revenue and the box office bonus from the pole patrol movie. If we were to deduct the $26 million adjusted EBITDA and adjusted EBITDA margin would be $388 million and 19, 2% respectively.
Inventory ended the year at $137 million compared to $102 million last year up $35 million.
At the end of Q4, because of the global supply chain disruption and in anticipation of growth in Q1, we had approximately $45 million of in transit inventory, representing 32% of total inventory compared to $19 million or 19% at the end of 2020.
Trade receivables ended 2021 at $327 9 million compared to $277 million at the end of 2020, an increase of 18% which is below revenue growth.
Net operating working capital as a percentage of LTM revenue was nine 3% compared to 13, 1% last year, we lead the industry in our working capital management by a significant margin.
Q4 free cash flow was $211 3 million $87 6 million up compared to 127, $123 7 million a year ago, driven by improved profitability and lower networking capital.
For the year free cash flow was $339 6 million up 46% compared to $232 1 million in 2020, driven by higher net income and lower working capital.
From a liquidity perspective, we continued to build on our strong position. We ended the year with $563 million in cash up $242 million from $321 million last year, despite investing over $70 million on acquisitions during the year.
Our cash position going into 2022 and the capacity on our credit facility. We are in by far the strongest liquidity position, we've ever been in with immediately available liquidity of over $1 billion.
Let's now turn to our outlook for 2022 as a reminder, our annual guidance statements of phased in line with our quarterly reporting cycle March May July and November .
At each stage, we revisit our annual guidance with increasingly solid data based on shipments and the flow of orders.
Our 2021 performance allowed us to achieve our best sell through and the cleanest retail inventory levels in many years in most key markets. This allowed us to exit the year with strong demand and brand momentum, which positions us well for 2022.
So far this year, we continued to see robust demand for our deep and innovative toy lineup, we have actually never carried so much strong momentum going into the first quarter.
However, we do need to be mindful of macro economic and other risk factors the removal of stimulus payments in the U S. Rising interest rates and inflation may put pressure on disposable incomes, we are carefully watching the situation between Ukraine and Russia for.
For context, please note that less than 2% of our gross product sales is derived from Russia, and we are credit insured.
Whilst demand in the toy industry is relatively inelastic, we need to be prudent. This early in the year, taking this all into account for 2022, we expect our growth rates for gross product sales to be in the mid to high single digits compared to 2021.
As a result of the increases in gross product sales and continued strength in digital games. We also expect growth in our total revenue to increase mid to high single digits over 2021, when one excludes the $26 million distribution revenue directly related to the pulp of Trump Paw patrol movie, which will not be ripped.
Pizza in 2022.
Yes.
Turning to profitability in 2021, we saw increases in input costs, particularly ocean freight accelerate significantly in the latter part of 2021 and remain elevated through Q4 and into 2022.
We implemented productivity initiatives and price increases to help us help us partially offset these inflationary pressures.
For 2022, we expect to see some costs remained at elevated levels and other costs rising although not at the same rate as 2021.
We will continue to take pricing selectively and implement other measures to allow us to remain neutral from a margin perspective in our toy business.
These actions include ongoing collaboration with our suppliers in Asia pre buying electronic components evaluating parts substitutions facilitating.
Facilitating inventory pre build strategically to reduce the impact of Covid lockdowns and finally, increasing multi carrier ocean freight sourcing for cost and predictability.
Through our commitment to operational excellence and focus on finding value within the supply chain, we expect to hold adjusted EBITDA margin consistent with 2021, excluding the 26 million benefit from the pole movie distribution revenue.
In addition, we expect depreciation and amortization to be down slightly compared to 2021 to approximately $100 million.
Of that $30 million results from deliveries of entertainment content.
We expect marketing cost to be between 9% to 10% of revenue and for SG&A as a percentage of revenue to be slightly higher than 2021, as we invest in growth for 'twenty three and beyond.
Finally, we expect our effective tax rate to be between 25, and 26% and capital expenditures are expected to be between five and 6% of total revenue.
To conclude as we look to the balance of 2022. Our team is fully aligned we remain deeply committed to growth with disciplined cost management operational efficiency and productivity. We will continue the momentum we developed in 2021, leveraging the significant improvements we achieved to prepare.
Tell us forward.
We continue to believe in our long term financial framework and that at its core a formula for innovation and growth across toys entertainment and digital games is stronger than ever.
That concludes our prepared remarks, we will now be pleased to take questions. Operator. Please open the line.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Okay.
We will take our first question.
So about car. Please go ahead your line is open.
Alright, great. Thanks, guys just on the outlook for 'twenty, two and some of the commentary around the movie release is expected for this year can you maybe share some color on maybe a quarterly seasonality that we can expect for this year.
So server.
We're going to tighten up al al outflow on seasonality in May when we release, our Q1 results, but what I can tell you.
Is that we expect to see strong momentum going into Q1 <unk>.
In Q2 so.
The strong H, one and it will actually give you formal guidance for the actual balance of the year. When we go out to May with our Q1 results sorry, with our Q1 results you assume nay.
Okay.
Okay, Great and then with the digital platform quite a bit of growth over the course of 'twenty one.
And how should we think about the growth in that platform relative to the overall guidance.
Total guidance looks like its for mid to high single digits year over year on revenue, but just wondering how that lineup line item is expected to do this year.
So sad, but digital games as part of our overall growth outlook is as we said, we do expect digital games to continue to grow.
And and it's actually going to be interesting in Q1, when we actually break that out further, but certainly digital games growth as important components of our total revenue growth of mid to high single digits.
Total revenue for this year.
Next is there anything you want to add on digital games well. It's just early days for <unk> and so digital games are becoming even now a more important social destination for gamers and for kids alike, and so I think youre going to expect that our our properties took a life world or even our subscription properties.
We'll continue to attract new users and we will be able to keep them engaged with new contents that were dropping and so were seeing momentum going into Q1.
Yeah.
Okay, Great and then just last one for me just looking at your cash balance here kind of in the $560 million range.
Any updated thoughts on capital allocation, whether it's M&A or a return of capital or anything you can share on that front.
Yes. So we do we do have strong liquidity, we have a very clean and strong balance sheets ever as you call out our primary focus is to use our cash for acquisitions and we're very active on that front. Both in terms of traditional acquisitions, but also in terms of venture activity our pipeline is strong and.
<unk>.
We don't have any plans at this point to return any capital we continue to believe in our growth story and our ability to use the cash.
If at some point that changes in the future, we'll certainly talk about either a dividend or a share buyback or something of that nature, but at this point nothing to report on that front.
Okay, great. Thank you.
We will now take our next question from Jamie Katz. Please go ahead. Your line is open.
Hi, good morning nice quarter.
Hope you can help us think about e-commerce going forward. It sounds like that channel has slowed but can you fill us in on.
Maybe what.
That was as a percentage of total sales for the year and then.
I know you guys mentioned, you had an 82% of sales into Russia, but I think you have maybe a distribution center there and so is there any impact to distribution and eastern Europe that might be ever greater magnitude. Thanks.
So Jamie e-commerce for the year was around 27% of our sales, but in the fourth quarter was as much as 40%.
Next I'm going to pass you to talk about E. Commerce, just in terms of what's going on with that and then ill take Russia sure. So.
Jamie our growth in E Commerce was pretty broad based we beat the market in Q4 as Mark suggested in 2021 as well and we beat every competitor we did so because we put a lot of effort in different tech stacks and wasting, which we're working and honestly with the biggest pure play player we were to runaway winters for the year. So we have a lot of <unk>.
That has gone into that space and for US. It has been a great source of growth and it has been a source of great more profitable growth and so we've made a lot of interventions to make sure that profitability is in line with our overall portfolio.
And in terms of your question around Russia.
<unk> pointed out and as I mentioned in my script less than 2% of our sales in Russia, just a couple of million dollars in Ukraine through a third party distributor.
In terms of that distribution mechanisms we.
We do have a small warehouse in Moscow that actually services, our Russian business.
But we our primary distribution centers are actually in in central Europe and in Northern Europe .
Not that connected to Russia directly.
Okay, and then if you have any color.
The profit.
The profit profile on that digital business at first J D.
<unk>.
Yes.
The line or above other revenue business.
The delta between that it would be really helpful to understand.
Yes.
Let me just make one macro comment and then I'll point you to our upcoming Q1 results, where we're excited to actually break out our creative centers in more detail. So youre going to have to wait to see P&L for toys Entertainment and digital games until Q1 results are out and we'll be doing that going forward.
But what I can tell you in macro terms is that digital games is accretive to both gross margins and EBITDA margins and so it's certainly an area of growth for us and we want to continue to drive that business because it is accretive to margins for us and stay tuned for more details.
Excellent looking forward to the data thanks.
We will now take our next question from Adam Shine. Please go ahead. Your line is open.
Thanks, a lot yeah, good strong results frankly.
Max maybe one for you on the marketing side.
It was telegraphed that this would track to about 10% I think of revenues.
And obviously you came in below that in the Q4 also marked in the outlook talk to you about sort of 9% to 10%. So just curious are the is the product just flying off the shelves on its own or.
Are there some lessons learned obviously.
You get a better feel for the landscape and some of the efforts you are putting into the marketing side of the equation and then I've got a couple more for Mark after.
So Adam.
Punch line number one is the strength of our brands improved materially. So we invested a great majority of our marketing in those core brands and franchises with truly want are driving to evergreens and push our revenue into more predictable.
Revenue going forward us number one number two.
It's really more about being digitally first and spend optimization thats punch lines number two and three on the digital first we basically were able to get a lot of money into rate base.
Basically the premium online television.
And also in CTV, and OTT, which are basically all basically streaming platforms and we were able to do that very efficiently. In fact, what I can tell you is that basically we were able to get about 33% higher reach with less than 12% less cost per reach point. So when you combine the higher reach and <unk>.
Obviously.
Cost per each point, you kind of get that really planning our favor and then third let's not obviously forget that with the supply chain constraints that we had when we had items that were not available and we would've had in marketing, we're actually flowed that money to other places where we're getting significantly more consumption. So that also helped but as we enter a quarter one.
One with the strength that we have in our brands, we're basically putting marketing investments against our core franchises and we're very excited to do so lots of learnings and efficiency.
Okay. That's great. Thanks, that's helpful.
Two other things, we obviously, none of us had the benefit of seeing.
Seeing some of the new products at toy fair that didn't happen and I guess.
We will hear more perhaps heading into the <unk>.
Q1, disclosures, but just out of curiosity and over and above from the licensed products that are obviously coming around the Batman movie et cetera.
Anything to highlight in terms of key new products that you'll lean on this year number one and number two.
Given some of the pandemic dynamics, where are we exactly in sort of the relaunch cycle of Baku Guide.
The context of what was expected to have been maybe a four to five year re launch thanks.
Yes. So so the good news is mark and I. Both are commented on is the growth in 'twenty. One was really more broad scale and so on which is I just would want to comment on that second the impact of our new innovation also played a key role. So as we enter spring 2022, and <unk> 22, what you can expect as a following and things that were.
Very excited about let's start with Paw patrol. So paw patrol was an incredibly important contributor in $2000 in 2021, and we have significant more support for our par petroleum in 2020 through we have new series, we have choice for New series, we have a number of things that we're very excited about both in the spring and in the fall and so thats basically the starting point in second and something that I'm very.
Excited about as well is the fact that <unk> dollhouse has now become an incredible contributor in this segment and we have significant follow up.
Innovation behind garbage Dalhouse, so basically that strengthen our position in preschool and we're super excited Briscoe anger and dose. So that to me is another place where I'm very excited theres not forget. The fact that we also have a lot of activity in Wilson actions, though is following 2021, so that is coming with a lot of.
<unk> both in the spring and also in the fall.
And then last but not least with all the licenses we have significant amount of toy collections for each of the movies that are coming out whether it's on the obviously on the DC or wizarding world. So those are some of the things that I wanted to comment.
On <unk>, we are basically going into a backing on content reboot and we're very excited about that and that will basically continue to propel the brand content for the people that we have attracted.
Coupled with a lot of the work we've done with roadblocks and Netflix to basically use a combination as we bring more fans into the franchise. So you can expect a lot more of that and stay tuned for future.
<unk> and <unk> that we are incredibly excited about.
Okay. That's great. Thank you very much.
We will now take our next question from George to May. Please go ahead. Your line is open.
Alright, guys good morning, and congrats on a good quarter.
Thanks for the information on the share gain I'm just following up on that.
Do you think thats going to continue maybe just maybe I guess your general outlook on where you see the industry growing or to what extent you see growing in 2022.
Yes.
As you know it was a combination of two things one is being in stock and second basically putting marketing activation. So we can actually lift.
The brands that we wanted to lift and so that continues into quarter, one and so far I can tell you without getting into too much details that that continues to be a proven model for us. So we're continuing to do very well I expect that as we go into the spring.
Sure.
Point of sale, we're going to continue to see the effect of the new innovation, helping lift our boats and as we go into the fall of 'twenty. Two we have a great slate of new innovation coming and as was commented earlier, while we have not been able to see that broadly with your inventory shows we're going to be able to see it in may when we have our conference with you guys. So I expect that we.
We will continue to basically grow in line with what Mark described as our guidance for GPS and we expect that we will be growing share within the context of that guidance.
That's helpful. Thanks, and then just a follow up on gaming.
If we keep our entertainment and allowances kind of constant.
You've got an implied kind of growth of about 20 or 25% or so for that category.
Is that the right way of looking at it and just a follow up to that can you talk a little bit about some of the drivers there.
Are we going to push price because of active users and anything you could talk to maybe the level of growth.
Yes, so so first and foremost the actual category for digital games is actually growing faster than our toys are growing so that's really one point, it's actually a larger category as well in which we play and therefore, you can basically do the math and understand quickly that is we are getting a lot more focus put in that segment.
Our growth rates will basically be commensurate with that that's number one number two on our on our properties that are basically driving our growth and let me start with.
Took a life world, we have great organic plans to continue to drive more users, but also to actually drive the engagement of the users in the ecosystem. So those are the two components that we're actually very focused on and in this obviously came into service environment, where you're actually creating providing greater tools for people to them.
Obviously purchase we find that to be very very attractive last but not least within tokio life World. We actually are looking to extend that line into took a days, which is basically our.
Introduction into multiplayer ecosystems, and we're very excited about that too. So you can expect that we have a tremendous slate of growth opportunities. We've took a life world and that is our focus on <unk>. We are incredibly excited about the subscriber base that we have actually been able to grow over the last year and we have great initiatives coming up starting.
Really soon.
With <unk> being one of them that we're very excited about and so we have a lot of other organic and extension.
<unk> for <unk> to expand our consumer subscriber base and we're working pretty closely between segment, meaning an originator, which we acquired in Q2 to have more options with originator basically leveraging what we know has really worked in this space and so we are very excited about the combination of that and then last but not least and this is <unk>.
More kind of headed into the future we have noise, which is our digital studio in Stockholm, and remember that is really all about taking our spin master IP and making digital gains without them and Theres a few things. We're working on that we're super excited stay tuned we will be able to tell you more in an upcoming call.
Okay. Thanks for that and then one last one maybe for Mark.
<unk>.
Working capital, it's obviously been pretty volatile.
If you look at free cash flow for 22 can you maybe help us kind of think about that working capital line and maybe as well Capex just to get a picture of I guess overall free cash flow for the year.
Yes, so free cash flow in 2021 was really very impressive $340 million at 82% free cash to EBITDA conversion ratio, which is really outstanding.
That's going to moderate in 2022.
We had some timing issues and in 2021 that boost the free cash flow that will unwind a little bit in the first quarter of 2022, we're also going to see larger capex spend overall in the entertainment business in 'twenty two.
In relation to 2021, and then finally in anticipation of further growth in 'twenty three in 'twenty, two and 'twenty three we'll be investing in working capital. So we will see free cash flow come down in 'twenty, two but still at very healthy levels.
Okay. Thanks, guys.
We will now take our next question from Brian Morrison CS go ahead. Your line is open.
Yes, thanks very much good morning.
First question is from Max I, just wanted to elaborate on the digital question, so far and I want to know what you think your total adjustable market is in the children's sub 10 age group and the digital category and then maybe just elaborate how.
How noisy is going to be integrated into your active user base will be through toco, Boca sago mini all of the above and do you have plans or any agreements in place that you can add 33rd party license agreements to the third party licensed characters to the digital world.
Okay.
Wonderful so what excites us a lot about this space is obviously addressable market as it is in excess of $90 billion. So it was incredibly large as you can I'm sure you've seen in other presentations.
Within that of course, you think about where we play today, which is just a fraction of that and the opportunities with noise really kind of go beyond that because basically it gets us into casual puzzle is it gets us into a lot of segments, we don't participate today.
You can do the math and think about our own toy IP and then basically do the permutations to where we can go with that and that is the way. We're approaching this so we see the world expanding for us in terms of audience most of our most of our <unk>.
Space today is for single meeting an originator in the 2% to five year old space and took our Boca ages up that audience and basically gets into the five to 10 years old if you will but imagine what we can do beyond that and that is the way we're approaching the addressable market.
Does that does that answer your question.
Well it does but I also want to know if you have the ability to add third party licensed characters true digital world.
Yes, we do right, we do and our first our first expression of that was <unk> with Hello, Kitty and given the success of what happened with Hello, Kitty Theres interest to continue to do that not just from us, but others as well and so you can expect that we will continue to do that.
Okay, and then I just have a follow up question for Mark Mark why does the digital revenue down sequentially in Q3, when there was a substantial increase in active users.
Yeah. So it actually was the timing of content and also Brian to do with the way that the holidays played out in 2021. So we had a very large Q3 July August with very big months, while kids were actually on vacation.
And then really we didn't have any major content drops going through all the way through until December and so.
Sequentially quarterly revenue came down a little bit, but we had an extremely large the same but we had a record month in December and digital games in relation to the content that Max was talking about with Sanrio and Hello, Kitty. So it really was a little bit of a function of kids going being on vacation going back to school moderating a little bit.
And then a large content drop in in December .
Okay.
I'm sorry.
Alright, guys, sorry, Brian I was just going to say in general.
You don't see the same seasonality in digital games that you do in toys is roughly a 50 50 seasonality.
In H, one and H too, but it can also depend on when you drop new content and wind.
New tools become available for example, so there is some variability associated with it.
Okay. Thank you for that and then final question I just want to confirm your message.
Can you talk about those quite routinely now, but it sounds like you feel you can deploy this half a billion dollars.
Cash on your balance sheet and I guess, just same style of spin Master Adventures.
Are there large opportunities like if there are opportunities to deploy a big chunk chunk of this cash at one time.
So Brian I mean, yes, we do believe we can.
We firmly believe that we have opportunities, but obviously, we approach things in a very disciplined way and so.
Just given that discipline, we have to look at larger acquisitions very carefully, but certainly as we've expanded al creative centers and grown our creative center businesses and we start looking now to entertainment and we start looking more to digital games in particular, the tremendous opportunities that open up there and we feel comfortable and confident that we can deploy.
Deploy that cash in a accretive way.
Thank you.
Okay.
We will now take our next question from Martin Landry. Please go ahead. Your line is open.
Hi, good morning.
Just you do a really good job rushing out some of the risks.
Our embedded in your in your guidance for 2022, I'd love to hear about some of the potential upsides that lie in your assumptions.
Sure.
New and margins for.
2022.
So Martin when you look at our guidance, we think at this point just given where we are in the year. We've taken a measured approach obviously, there are the macro and geopolitical issues that mix.
I also discussed in the script.
We're taking a view on cost inflation, we're taking a view on pricing. So there could be some changes on that front as well in particular digital games growth is an area, where we see which we've built into our revenue outlook, but there could be upside there as well as on the.
Licensing and merchandising front because keep in mind, we are carrying some momentum from the pole movie into each one as well so there could be some upside on licensing and merchandising and then that's all offset by slightly higher SG&A as we we.
We have a higher proportion of licensed properties and now 2022 mix so that.
Equates to higher selling costs as well as some investments in people in anticipation of growth in 'twenty three and beyond so there are lots of puts and takes there and to the extent that there is upside it's likely going to come from the digital games or gross product sales growth.
In excess of expectations.
Yeah.
Okay. That's helpful. And then maybe just touching on your inventory levels you did allude to the fact that your inventory levels are lean heading into 2022.
Anything you can quantify for us.
I'm more interested at your inventory levels at retail trying to see what we should.
In terms of closeout sales for Q1.
Just any any metrics you can share on.
Your inventory at retail would be helpful.
So we actually had a very strong sell through in Q4 as Max discussed earlier, we really actually were clean at retail.
And so we're seeing strong a refill of the inventory at retail currently as we speak which bodes well for a strong.
For a strong Q1 comp.
Compounded by the release of the DC movie as well Batman movie. So so actually Q1 is looking pretty good there is really no risk in our owned inventory. We ended very clean we had a fair amount in transit in anticipation of the growth in Q1, but overall channel retail inventories were actually in very good.
And in fact quite low which is why retailers are leaning in now.
Yeah.
Perfect. Okay. That's it for me thank you.
Okay. We've got a couple of minutes left.
Unfortunately, you have to make this long question.
We'll take our last question from Luke Hannan. Please go ahead. Your line is open.
Yes. Thanks, good morning, Thanks for squeezing me in here.
One on <unk> I think it was discussed last quarter about how property as it stood been skewed more towards North American audience. Although it was beginning to gain traction on a global basis. So I'm just curious how that's progressed.
Progress throughout Q4, and then into Q1 and maybe if we can compare that to some other similar global properties to get a sense of better context, where potentially.
The brand can go.
Yes, absolutely so the the composition of our our audience for it took I broke out use well beyond North America and while the U S is the number one country of users.
Actually increase but what is truly happening is as the saliency of the property has truly exploded in other markets, including emerging markets to be honest with you and as you can imagine kits with access to phones.
We actually have now access to the games and Ticktock has democratize, how basically people know about the brand not just stick to our other.
Other forms as well and so children are basically now with phones and the ability to actually connect to their brand able to do that no matter where they are.
The appeal of the content is universal and we've learned that as well and so we're basically seeing anywhere from India to Brazil to Mexico to places in eastern Europe and everywhere.
So we are very excited and therefore very optimistic as well and while this is a game as a service and is free to play. We also see the engagement and the monetization happening not just in the U S, but more broadly.
Okay. Thank you very much.
Okay.
Yes.
So John I think I think we're going to wrap it up at this point.
I just wanted to thank everybody for attending the call.
We are really looking forward to our release on May the fourth which is our Q1 release and particularly on May the fifth way, we will be providing updated outlook.
As well as our enhanced disclosure around toy entertainment and digital games as well as our Investor day, we will be actually showcasing some of our new products and technologies, you'll have an opportunity to hear from crisp, it'll and Jennifer Dodge and Frederick loving, who lead our creative centers as well and.
And so we're looking forward to may the first and we thank you for your participation today and we will talk to you again soon thank you.
Okay.
This concludes today's call. Thank you for your participation you may now disconnect.
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