Q3 2022 Spin Master Corp Earnings Call
Please standby.
Good day and welcome to the Spin Master Corp, third quarter 2022 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Sofia Bazookas. Please go ahead.
Thank you Justin good morning, and welcome to spin Master's financial results Conference call for the third quarter ended September 32022, I am joined this morning by Max Wrangle spin master's global President and CEO and Mark Segal spin master's Chief Financial Officer.
For your convenience the press release, MD&A and unaudited consolidated interim financial statements are available on the Investor Relations section of our website at spin Master Dot com and on SEDAR before we begin please note the remarks.
This conference call may contain forward looking statements about spin master's current and future plans expectations intentions results level of activity performance goals or achievements or any other future events or developments 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 and reasonable any circumstances. However, there can be no assurance that the estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expected 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 dish for additional information on these assumptions and risks please contact <unk>.
Our cautionary statements regarding forward looking information in the company's earnings release dated November <unk> 2022. Please.
Please note that spin Master reports in U S dollars and all dollar amounts to be expressed today are in U S currency unless otherwise noted I would now like to turn the conference call over to Max. Thank you Sophie and good morning. Thank you for joining us today to review our third quarter results.
To begin let me remind you that we are committed to building on our legacy as a growth company by re imagining everyday play and leveraging common IP across our three creative centers, including innovative toys engaging multi platform entertainment content and open ended digital game experiences we believe this.
Powerful combination provides spin master with a distinct competitive advantage, while also creating a robust platform to deeply engage with entertain and inspire children under families globally.
We are investing in our capabilities to sustain our presence and influence in children's lives now and for generations to come.
Following strong performance over the first half of the year. Our total revenue for the third quarter was 624 million a decline of 12, 7% compared to last year.
Primarily due to the pull forward of joist shipments into Q2, this year, coupled with inventory correction by retailers in Q3, giving lower category consumption as inflation pressure consumer spending.
The difficult although expected comparison against the perpetual movie launch last year decelerating digital games revenue and foreign exchange were also factors excluding the distribution revenue from the public drove movie last year revenue increased in Q3 in constant currency declined by six five.
<unk> percent compared to 2021.
For the third quarter adjusted EBITA margin declined to 26, 9% from 34% and Mark will provide further color on this later in the call.
As you are aware, we are operating in a very uncertain macroeconomic environment, we spoke last quarter about the possibility of declining consumer confidence and the pressures of inflation impacting discretionary spending.
The toy category has historically been more resilient than others during recessionary environments since.
Since 2005 for example industry growth has consistently exceeded GDP growth. However, we have seen an impact on point of sale trends in the category as the year has progressed and the average consumer becomes increasingly price sensitive according to NPD, while toy demand remained stronger than 2019 levels.
It has been slowing on a year to date basis. Our Pos is up 3% and has continued to grow ahead of the toy industry globally, which grew at 1% per NPD we.
We also remain the number four manufacturer globally, making this the fourth consecutive quarter, we have held this position.
We are starting to see the effects of the current economic climate and shifting customer dynamics.
Retailers have begun to reduce orders due to higher inventory levels industry wide and.
And have put a greater focus on profitability over growth.
Consumers are more price sensitive given inflationary pressures.
Are more susceptible to promotions as a result.
This activity has had an adverse impact on the launch of new items at retail.
While our year to date growth is ahead of category performance, our third quarter Pos declined compared to the total industry, which grew 2%.
A material part of our year over year decline is from lower Paw patrol Pos lobbying movie pass last year.
We anticipated a decline in preschool dolson interactive category in Q3 this year given the exceptional growth we experienced last year coming off the heels of the strength of the perpetual movie toy line.
While global Pos for Paw patrol decrease in Q3, the franchise remains the number one preschool toy property globally, both on a quarterly and year to date basis per NPD.
If we exclude paw patrol Pos.
Our point of sale grew by four 5% in Q3, and seven 8% year to date for the GE 11 countries per NPD.
We firmly believe in Paw patrol has tremendous brand equity with preschoolers and are looking forward to celebrating paw patrol's 10th anniversary in 2023 with the launch of our second bought movie in the fall.
The robo spinoff and new content.
Our retail customers toward our L. A trade show in September and we're very excited about the innovation, we are bringing to both the core and the movie toy line.
You will have the opportunity to see our fall 'twenty three showroom in L. A this coming January so stay tuned for your invite coming soon.
With fresh content, a blockbuster movie and a milestone anniversary. We believe we can continue to attract new Paul fans and further solidify our position with our current preschool fan base.
I wanted to speak to Gabby as dollhouse, which has been a tremendous partnership with Universal Studios Gabby.
<unk> has been a runaway success since the launch of the animated property last year and speaks to the power of strong entertainment driving consumer demand.
The Gabonese Dalhouse perfect place it was a number one item in the infant toddler and preschool Super category in Q3, and even year to date in the U S per NPD Gabby.
<unk> is a great example of how we apply innovation to licensed brands.
Our licensed portfolio continues to resonate with consumers. According to NPD, our licensed portfolio Pos was up 32% in Q3 on a year to day basis.
Up 39% and this is mostly driven by Gabby as Dalhouse Wizarding World and Monster Jam.
Within Wilson action are licensed toy properties continued to perform well.
According to MPD DC universe has decreased in Q3 as gains in the first half connected to the Batman movie tapered off.
Our new Black Adam Toy line inspired by the feature film that debuted at October 21st is now set at retail and we have an early indication of solid performance in.
In 2023, we have a series of DC universe movies slated for theaters as well as an epic New places for the line.
Monster Jam remained the number two property in vehicles for the third quarter per NPD and Pos increased three 7%.
Fandom for Monster Jam is being driven by a combination of spectacular live events complemented by new spin Master innovation.
In 2023, we will have a new all terrain vehicle, a new play patterns within the traditional 164 vehicle lineup.
We are excited to launch two new licensing partnerships in 2023. The first is for Disney's New preschool animated series fire buts.
With toy launches beginning in spring 'twenty, three and a full rollout in the summer.
The second is with Sony Interactive Entertainment, which will see us become the global Master toy licensee for Playstation games, including titles, such as God of War.
<unk> zero down the last of us and others.
In activities kinetic sand yours was down by four 4% in Q3 in a category, which also saw overall declines kinetic sand has made such amazing strides over the past few years and remains the number two brand within the arts and crafts category.
Strong brand affinity and continued innovation in the line gives us confidence for the remaining holiday season and for 2023.
I wanted to touch on sales within our games and puzzles category.
During the pandemic, we saw a tremendous resurgence of classic games today most of the growth in this category is being fueled by trading cards, a new board game titles.
Our sales are mirroring the trends within the category at large with continued softness in classic titles, such as chess and checkers offset by the introduction of new titles and next editions of our own IP like headbands.
Rubik's Cube was a number a brand within the category for <unk> for the quarter with Pos up 13% compared to $4 seven for the category.
<unk> four it rubik's runs deep and when we introduce our own spin on the classic puzzle. This fall the Rubik's Phantom featuring thermal chronic technology quickly sold out we are chasing opportunities to ship new inventory into retailers over the next few months.
We know that innovative marketing is critical for the big holiday season, we are leveraging our in house agile team to adjust our marketing with precision.
Most of our marketing investments against our priority brands designed to sustain and build momentum in support of selling through our key toy drivers.
E Commerce sales continue to outpace our outpaced brick and mortar, although we are expecting brick and mortar to accelerate later in the season we.
We are making the necessary investments in marketing from an omnichannel perspective to ensure an exceptional experience and a clear path to purchase for the consumer.
As mentioned last quarter, we are taking a balanced approach to pricing and promotions investing where it makes sense to remain competitive while also preserving our profitability.
Turning to entertainment our team are experts at creating engaging stories and that transcend boundaries and platforms in turn discount and will serve as a catalyst for growth and innovation in toys and digital games and licensed consumer products. This quarter. The team launch sago mini friends on Apple TV or first.
Major collaborations between the digital games and entertainment creative centers, which saw us bring the popular characters from the award winning sago mini app to episodic content.
The launch of Apple TV in September was our first distribution deal with the streamer and we have been thrilled to see the enthusiastic reception to the series across the world.
Looking ahead to 2020 three our entertainment Creative Center will have one of the biggest years ever 'twenty.
<unk> 2021 was a landmark year for us as a result of the release of our first movie box office results for Paw patrol the movie demonstrated our ability to tell our story for park on a much bigger canvas.
Fans globally are eagerly awaiting our second feature film for the franchise Paw patrol, the Mighty movie, which will be hitting theaters in October 2023.
Further building on the Paw patrol world rubble in crew, our first spinoff will debut in Q1 'twenty two 'twenty three.
We will also introduce a series of specials throughout the 2023 year to commemorate pause 10th anniversary.
A new animated series Vida, the vet will debut on Premier Childrens and broadcasters BB season in the U K and Corus Entertainment's Treehouse in Canada in the fall of 'twenty, three with more international broadcasters to follow.
A new toy line in full consumer products program will follow in 2024.
While we have seen exceptional growth within our digital games Creative center over the past two years, driven by new content and features as well as Covid related Lockdowns. We are starting to see the market normalize. We are seeing this play out more broadly across the video game and mobile gaming industry landscape last quarter, we commented on the <unk>.
World slowdown of revenue growth across the digital games industry. That's gets US kids return to in person schooling play dates and extracurricular sports driving lower in App purchases.
As a result, we saw declining revenue in quarter three despite M. A U remaining at comparable levels to 2020 one we.
We have ambition ambitious growth plans for our digital games Creative center in the long term the mobile game markets growth potential is very attractive with mobile gaming being the largest and most popular form of gaming for kids.
We are not discouraged by the revenue decline, we experienced in the quarter compared to 2021.
As I mentioned, we continue to see strong engagement with our properties. Despite a decline in in App purchases monthly active users for took a bogo were flat in the third quarter with some decline coming in September as children returned to school following the summer break.
It took a life world we were at 49 million monthly active users for the quarter.
Second many of downloads increase in the quarter, but the active subscriber base was flat at 340000 subscribers.
With the help of the Sago mini French series, we hope to continue to attract new users and drive further downloads of the award winning App.
We are evaluating a single bundle approach for 'twenty twenty-three, which will combine several apps into one cost effective subscription.
We think this will drive growth and will be a simpler more cost effective way for parents to manage a subscription for their kids.
Originators teams continue to work on two major initiatives, including a paw patrol digital game pardon friends, which will launch together with the second ball movie in 2023, and an exciting new educational learning game.
We expanded our digital game ecosystem with the acquisition of nor lighting August following an initial investment in the gaming studio through spin Master ventures.
The gaming studio has been working on the development of the Rubik's digital game in the casual gaming space set to launch in 2023.
In addition to collaborating with nor light on the Rubik's game, our Noyd studio is working on several other digital gaming initiatives, leveraging our toy and entertainment IP.
We continue to drive towards our long term goal, which is for digital games revenue to represent 20% of our total revenue.
We will achieve these through a combination of growth in existing games, the development of new games and accretive M&A.
With our 2500 employees around the world. We are excited to bring our magical content and experiences to children and their families. This holiday season.
While it is too early to discuss specific guidance for 2023.
We want to provide some context on how we are approaching next year.
We expect the external environment to be dynamic and challenging in 2020 three and we are taking actions to ensure we navigate these backdrop and positions spin master to thrive.
We continue to look for accretive acquisition opportunities and balancing investments designed to deliver on our long term business strategy, while also effectively managing our costs and navigating a retailer and consumer dynamics to deliver profitable growth.
We remain very excited about our prospects both for 2020, three and beyond and continue to focus on driving growth throughout all of our creative centers driven by innovation and collaboration we firmly believe the power of our innovative toy portfolio diversified entertainment pipeline and our suite of digital games will drive shareholder.
<unk> now and into the future I am going to now pass it over to Chief Financial Officer, Mark who will share more details on our financial performance and outlook.
Thank you Max and good morning, everyone.
Before we get into the quarter briefly.
Briefly want to step back.
Since our IPO, we have more than doubled revenue from under $1 billion in 2015 to over $2 billion in 2021, delivering a compound annual growth rate of over 12%.
Our gross product sales CAGR over the last five years of over 9% is approximately twice the toy industry growth rate.
We have diversified the business globally, we have broadened our lines and develop stronger brands and we have grown our entertainment and digital games creative St as meaningfully as a proportion of total revenue.
Our strategy is designed to achieve long term diversified growth and we are delivering on that strategy.
Year to date Q3, we have generated just over $1 5 billion in revenue a nine 3% increase over last year on.
On a constant currency basis, our year to date Q3 revenue is up 11, 7%.
Year to date gross product sales growth of 12, 3% and 14.9% in constant currency has outpaced the toy industry globally.
Currency continues to be a meaningful headwind as you can see and I wanted to remind you of our transactional currency exposures.
While most of our buying and selling transactions are in U S dollars and we are therefore naturally hedged.
Our European region, so euro pound and krone weakness impact our top line.
This was partially offset on the bottom line by the reduction in costs, we benefit from as a result of a strengthening U S dollar relative to the euro pound krone, and especially the Canadian dollar where we have a large naturally short position arising from our Canadian cost base.
As expected revenue growth in Q3 was a difficult comparison.
Revenue was $624 million in constant currency down from $714 5 million last year, a decrease of $12, 7%, reflecting customer order timing shifts in our toy Creative center, along with the decline in digital games and entertainment revenue, we recognized $26 million in pulp.
Troll movie distribution revenue last year.
Retailers brought in goods earlier this year to avoid anticipated supply chain disruptions in the fall.
As a result, and as we discussed in previous earning calls first half 2022 gross product sales represented a larger proportion of full year gross product sales than in prior years.
In constant currency terms Q3 revenue declined nine 9% and excluding the revenue from the pulp patrol movie last year revenue in constant currency declined by only six 5%.
Let me now briefly review a few details on Q3 Creative Center performance.
Toy gross product sales were $617 7 million a decline of $63 5 million or nine 3% on a constant currency basis gross product sales declined 6%.
Preschool and doles and interactive declined by $26 3 million.
8.5% driven by lower sales of pulp patrol, which as Max noted was strong last year in the wake of the film's release as.
As well as declines in present pets, and <unk> offset by higher sales of Cabbies Dalhouse.
Activities games, <unk> puzzles, and plush was down 10, 3%, mainly due to the games and puzzles portfolio cool maker and gunned offset by higher sales of Rubik's.
Wilson action decreased $8 5 million led by Monster Jam RC.
D C comics licensed products and <unk> offset by higher sales of the Monster Jam core line and tactic.
Outdoor declined by $8 5 million, mostly for brands that were divested in Q1 this year.
Okay.
Geographically North America saw the biggest drop in Q3 due to retailers shifting more buying into Q2 international.
International sales, comprising Europe , and the rest of the World Rose three 8% to 43, 3% of gross product sales.
Q3 sales allowances with 10, 6% of gross product sales down from 10, 8% driven by a favorable change in customer and geographic mix offset behind Lockdowns.
On a year to date basis sales allowances with 10, 6% compared to 10, 9%.
Historically, we have operated in the 10% to 12% range, we expect sales allowances to be right at the upper end of the range for 2022 as we manage retail inventory levels and promotional activity in Q4.
Soy revenue or gross product sales net of sales allowances declined nine 1% to $552 4 million from $607 8 million.
Adjusted EBITDA for toys was slightly down at $126 9 million at a 23% EBITDA margin compared to $146 5 million or 24, 1% due to higher administrative and marketing expenses as a percentage of revenue partially offset by improved gross margin.
From product mix and price increases we implemented earlier in 2022 to offset inflation.
Entertainment revenue declined $15 9 million to $37 5 million from $52 9 million.
Note that in Q3, 'twenty, one we recognized $26 million of distribution revenue from the pole patrol movie.
Adjusted operating margin in Q3 was up significantly to 78, 9% compared to 34, 6% the.
The increase was driven by the dilutive effect of the lower margin movie distribute goofy distribution revenue last year and fewer margin dilutive content deliveries this year.
As a reminder, our content distribution revenue is lower margin and is a catalyst for higher margin toy sales and licensing and merchandising revenue.
Also remember that when we discuss entertainment profitability performance on a standalone basis, we focused on adjusted operating margin as this is after content amortization.
Digital games revenue declined 35, 7% to $34 6 million driven by lower in App purchases and Tokio life World in Q3 last year, we saw heightened levels of activity due to COVID-19 related lockdowns.
Adjusted operating margin was 28, 9% down from 48, 3% from lower revenue and higher product development and personnel costs for future game development.
From a consolidated P&L perspective, Q3 gross margin was 56, 2% compared to 51, 2%.
The 500 basis point improvement was largely driven by strong toy and entertainment gross margins.
Keep in mind gross margin was reduced last year above the dilutive effect of the pulp patrol movie.
Excluding the movie last year gross margin was 52, 7%, which equates to a very strong 350 basis point year over year gross margin expansion, driven by product mix higher pricing and licensing and merchandising revenue.
Yeah.
SG&A was $195 3 million compared to $187 1 million, representing 31, 3% of consolidated revenue up from 26, 2% because of the decline in revenue.
Adjusted SG&A was $191 million compared to $183 million, representing 36% of consolidated revenue up from 25, 5%.
Marketing expenses increased by $5 6 million to 39.8 million, we continue to expect marketing to be between nine and 10% of revenue in 'twenty two as we invest in marketing strategically in Q4 to support sell through share growth brand momentum and channel and mixed goals.
Administrative expenses grew by four 9% due to higher personnel related costs and professional services expenses offset by lower incentive compensation.
As a percentage of revenue administrative expenses increased to 13, 4% from 11, 2%.
Selling expenses increased to eight 2% of toy revenue from seven 8% due to higher royalties on sales of partner licensed products.
In Q3, we recorded net income of 141 4 million $1 33 per diluted share compared to net income of $135 4 million or $1 29 per diluted share.
Adjusted net income in Q3, which excludes FX was $114 4 million or $1.08 per diluted share.
100, $132 6 million or $1 26 per diluted share.
Adjusted EBITDA declined to $167 6 million compared to $217 3 million.
Adjusted EBITDA margin was 26, 9% down 350 basis points from 34%. However, excluding the poll patrol movie revenue in Q3, 2021 adjusted EBITDA was $191 million or 27, 8%, which equates to a comparable 90 basis.
<unk> year over year margin decline there.
The decline was due to higher selling general and admin expenses, partially offset by higher toy and entertainment gross margins.
Turning to the balance sheet inventory at the end of Q3 was $178 million down $5 million compared to $183 million last year.
Inventory continues to be of high quality, and we continue to adjust our demand and supply forecast to reflect current realities.
We expect to be in line with our inventory goals by year end.
Core net working capital as a percentage of LTM revenue was 11, 3% down 450 basis points compared to last year, driven by lower trade receivables lower inventory and accounts payable.
Free cash flow in Q3 was $175 3 million compared to $65 8 million driven primarily by higher cash from operations.
Year to date free cash flow was $180 million compared to $128 3 million from higher cash flows provided by operating activities.
Our free cash flow to adjusted EBITDA conversion ratio was 105% for Q3, and just under 50% year to date.
We ended the quarter with $675 million in cash we continue to be an extremely strong liquidity position with available liquidity of well over $1 billion.
We continue to remain focused on increasing opportunities to leverage our diverse and global platform by making accretive acquisitions across all three of our quite creative centers.
This quarter, we closed the acquisition of solid roots and Oklahoma based board game manufacturer best known for the trivia game mind the gap.
And the North light digital game studio, which Max described earlier.
Turning now to our 22 outlook, we are lowering our full year gross product sales and revenue growth guidance to low single digits in constant currency and excluding the poll patrolled movie amidst a challenging second half macroeconomic backdrop that has deteriorated rapidly.
We are now expecting a more difficult fourth quarter comparison than initially forecast it driven by lower retail orders from weakening consumer demand in the U S and Europe and elevated inventory levels at retail industry wide.
As a reminder, in Q4 last year there were three specific factors that generated very strong sales and toys. In addition to strong consumer demand of a role fueled by supply chain concerns. Firstly, we made initial shipments for the Batman movie, we generated strong sales of pole movie toys following the movie launch and finally.
We saw very robust initial cabbies dalhouse sells on its on its launch in the U S.
We are also seeing pressure on digital games revenue in Q4 compared to Q4, 2021 due to the current macroeconomic environment impact on consumer spending and lower activity levels compared to the heightened activity levels due to COVID-19 related lockdowns last year.
We do however, anticipate sequential growth based on a number of new telco life world content launches in Q4.
We are reducing our 2022 adjusted EBIT margin outlook to slightly below 2021, adjusted EBITDA margins, excluding the Paw patrol movie distribution revenue of $26 million due to the expected reduction in high margin revenue in Q4 relative to our prior outlook and some.
King.
We expect gross product sales seasonality in 2023 to return to historical trends of 30% to 35% H one often unusual you're in 2022 with significant volume was pulled forward from Q3 into Q2, resulting in a very strong H, one with gross product sales representing <unk>.
Over 40% of expected gross product sales.
This will make our H, one 'twenty twenty-three challenging relative to H, one 2022 with a correspondingly stronger H two comparison in 2023 relative to H two in 2022.
Regarding inflation cost overall continued to remain at elevated levels relative to prior years. However, we.
We have seen supply chain pressures begin to ease as there is greater availability of ocean containers in raw materials and the cost inflation environment for both commodity and transportation process. In 2023 is trending favorably as they move off the peaks.
We are remaining vigilant and are continuing to remain close to suppliers and focus on accelerating productivity and efficiency.
In 2023, we expect consumers disposable spending power to remain under pressure due to inflation in food housing and energy as such we intend to plan the topline prudently and to manage our cost structure appropriately.
We do however remain very excited about our prospects for 'twenty three and beyond.
We are not providing further specific 20 twenty-three details now as usual and we will do so when we released Q4 and 2022 full year results in March.
To conclude we continue to demonstrate our ability to produce compelling entertainment and digital games content magical toy expenses and be a great licensing partner.
We remain committed to growth with sound investments disciplined cost management operational efficiency and productivity.
We continue to believe in our long term financial framework and remain focused on maintaining operational agility and strategic execution to position to position spin master for sustainable and profitable growth over the long term.
That concludes our remarks, we will now open the line and take questions. Operator. Please go ahead.
Thank you.
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<unk> one.
Our first question will come from Martin Landry with Stifel.
Hi, good morning, everyone.
I was wondering if you could touch a little bit more on your.
Your revised guidance.
I was wondering if you can walk us through a little bit what's changed since August .
To prompt you to bring down your your back half our.
Revenue guidance floor.
Is it a function of too much inventory in the channel is it a function of customers trading down is is the competitive environment, becoming more challenging a bit more color would be super helpful.
Good morning, Martin I'm going to start and then pass it onto Mark.
From August the toy market.
Deteriorated.
And sequentially.
Pos got materially worse.
With now the benefit of the last two to three weeks' worth of P. O S Mark and I have to look at the facts.
And all the August September .
Promotional.
Investments to reduce inventory did not bring the inventory down as expected that's number one number two.
As a P O S declined more significantly than anyone expected retailers specifically.
Obviously actions by them, resulting in delayed orders canceled orders or sometimes even shutting down replenishment were things that we knew just recently.
As we head into Q4, despite the fact that we have a great plan. We also now have to take into account that he is going to be about consumers returning to more traditional patterns of consumption late in the game.
And we wanted to be prudent and basically plan accordingly.
That is really what drove the change for us.
So just to add to what Mike said in connection with P. O S weakening in consumer discretionary spend and inventory reduction plans not working obviously that has actually taken out top line down and.
A lot of that revenue is high margin revenue. So we anticipate losing some of that revenue and then as volume comes down obviously, we see some deleveraging.
We actually have pulled down our guidance on both the topline and slightly on the bottom line as well Martin I do want to say to you and everyone else though.
That in the context of the reduced guidance you know.
We still have very high EBITDA margins are they still within all our long term target range and they still very good relative to our peers in the industry at both a gross margin and adjusted EBIT margin level. So while I'm sure people are disappointed.
To make sure that everyone at least understands that we're still doing extremely well as a company.
Okay. That's helpful and I was wondering if.
You can talk a little bit about the evolution of your your point of sales you know maybe in October and maybe also.
Yeah, Postpose quarter, what's what's happened and as as is the slowdown in recently as this.
You know.
There is a slowdown increased any any of that on your on the evolution of your point of sale post quarter end would be great.
Yeah. So I think talking about the third quarter P. O S is used to basically about three different things specifically one is.
In the context of our year ago base, we had plan of course to have paw patrol in the year ago base, which is obviously something we had planned down. This year. So this was already a planned decline and by the way in line with what we expected.
Outside of Paw patrol Martin our point of sale is growing four 5%, Okay and is growing seven 8% year to date. When we just basically quoted to you industry numbers, which were lower than that.
So when I think about quarters, three and a P. O S outside of Paw patrol, we were seeing that.
One thing that happened I am now moving to the second part of my answer is as pricing in the category was exacerbated to decrease inventory levels.
The effect of items that were new to the category was lesson.
And as you know we have obviously an important part of our revenue that is innovation and that was so far less effective given all the promotional investments in the marketplace.
So I think those are the two more important factors.
The third factor is really asp's and so as we had basically gotten into quarter three with a healthier inventory.
Investments were basically utilized on other portfolios.
We had some ASB gaps in some areas, but I think that is a mine that is a minor component to to.
Two our gap in P O S remind remind yourself or.
Quarter, three P O S I'll sort of bumper Joel.
Significantly significantly better the last piece is important because the last two to three weeks that we have which may be which is indeed, new information for all of you from what you may have seen from other.
Competitive.
You know players has really worsen and he's really come down quite materially and mark and I have to look at that and make a call and he is not just about spin master like I said, we're still better but it's about the total industry. So we wanted to be prudent when we actually took the guidance approach.
Okay.
And then maybe just switching gear. My last question is on the on digital games.
I was wondering if you could maybe just refresh US you talked about.
A rubik's cube being launched in Q in 2023, maybe just a bit more details on timing would be great. And then are there under other digital games being launched next year.
So so Martin we have a we have a slate of new games being launched next year. Some will soft launch timings are basically you know still being finalized definitely rubik's more on the first half and then PON friends more on the back half and so that is basically our current our.
Our current plan.
The plan for Tokio life World, which is really our biggest revenue driver and 49 million people in the ecosystem is quite a strong plan with content drops every month of the year. So I want to also emphasize side because that's really important.
Okay.
Okay perfect. Thank you.
Thank you and our next question will come from Luke Hannan with Canaccord Genuity.
Thanks, Good morning.
You've talked on past calls about what the demand trends have been across price points. In your portfolio can you give us an update on how that trended in Q3, and how thats playing out thus far in Q4. Please.
Sure.
Luke good morning, the higher end of the price points have obviously declined a bit more than the total market and they're very very thorough to $10 range has also declined more than the market has declined and so in that respect things basically are behaving very similarly to what.
You know it would have happened when we spoke last.
The whole market has declining Pos consumption. It has not been driven by one necessarily segment more than others.
Price reductions however have been more pronounced in certain price points and those would fall in the middle of the pack. So just wanted to add that color. So even though you know.
We would see similar behavior the price.
The price promotion depth of discount has been bigger in the middle of the pack.
Got it Okay, and then Matt sticking with you for a second you had mentioned before that I just want to make sure I understand this dynamic that the consumer spending environment had negatively impacted your ability to bring out new launches is that just to clarify that means that you are selling your.
New launch products lower prices than you ordinarily would have because of that that consumer spending environment.
No absolutely.
Absolutely not.
What he basically it's meant to seek to give it to you guys very transparently is in an environment, where innovation is competing with items that are basically half off or 75% off.
And when actions by retailers are basically trying to clear that inventory, so putting that on end caps or or or just displays. Then obviously that was a number one priority before they would give focus to new items, that's really more what I mean.
Okay understood and last one from me and then I'll pass the line just what are your expectations either on a dollar basis or a unit basis for where you expect your own inventory balances to trend for the balance of the year that heading into the new year.
Good morning, Luke.
So obviously just given the environment that we're in we're managing our inventory flows very very tightly.
Last year actually at the end of Q3, we were at over $180 million with below a 180 million. This year. So we're actually down year over year on inventory as you as you can see our inventory is pretty clean and high quality. This is owned inventory obviously our days inventory on hand is up slightly but we're down in dollars and we expect to end the year.
Down below where we are now as Q Q4 plays out, but we will be slightly higher than where we finished at the end of last year last year inventory levels were very low because demand was so high in Q4 of last year. So we'll be we'll be above that but will still be well within our targets and I just want to mention to you and everyone.
If you actually look at probably the most important metric that we track from a working capital perspective is networking capital.
As a percentage of LTM sales and you know all our results are really quite extraordinary relative to our peers and.
We are below last year as well we are at around 11% of LTM sales down nearly 450 basis points. So we really on managing our working capital very well and I'm quite proud of how we're the teams are doing that so I just wanted to call that out it's not just inventory.
Got it okay. Thank you very much.
And our next question comes from David Mcfadden with core Mark Securities.
Yeah, a couple of questions on the digital games business.
So just looking at toga, we saw at the Emmys decline year over years wondering if you could give us an idea on what you think.
For the fourth quarter, and maybe going into 'twenty three.
And then just thinking at the Arps, who obviously, that's down quite a bit due to lower in app purchases.
Business, particularly on the RP, who really benefited from Covid and the Lockdowns and so now it's coming up.
Beth I was just wondering do you.
Do you think that that could actually go back to pre COVID-19 levels I'm, just kind of wondering what your views are on the business right now.
David So there are two or three parts of your question, let me take them one by one so on the level of monthly active users.
The monthly active users are holding close to 50 million M of you. So you call that a slight decline in you're correct, but we're actually very encouraged that when you consider that versus what's happening in the marketplace across other competitive games.
Referring quite better so that's number one it doesn't make makos stay dormant in right. In fact, we're actually working really hard on the quality of our content to actually drive that further engagement and for kids to monetize the love they have for the game and that's what our teams are focused on doing which goes into your second part of the question.
Which is <unk> and so I think we've seen precisely as you described that ARPA declined, but I want to just make sure you understand as well that what we want is more.
More kids to come to the game and experience something they love and then by in App purchase content.
And while we're seeing that the fact that gets our spending a little bit less time on screen is what's actually driving that behavior too and so youre right as we get into the post COVID-19 are normal that number of minutes will make potentially is returning to the pre COVID-19 levels, but we're working on trying to get the content basically more now.
Supposed to all the users in the ecosystem so that basically they can enjoy it and then purchase it and so that's our action item.
And we have some tests that we've actually executing in a startup Q3.
And as we actually get to the most important month of the year, which is December .
And as you remind ourselves that that is the most critical month for the four for OCD took a life world, we have great content and the benefit of some of these tests, we should actually boost our ARPA as we actually close to a year.
Okay.
Yes.
Okay, I mean, I I guess.
It's just constant really.
Tough to really say, how it's going to unfold right. I mean, you guys are doing everything we can so okay alright. Thanks.
Thanks, Dan.
And moving on to Brian Morrison with TD Securities.
Maybe Max we can just stick with digital for one minute you reiterated that the.
Amp to 20% of total revenue in time, maybe just help me get some comfort on the cadence and the time to ramp include annoyed how that should flow through and then mark maybe discuss or acquisition multiples have come down how active do you think you can be in the near term on that front.
So we will continue to be focused on driving organic growth behind the Taco life World. You know, obviously, a incredible property, we own and are proud of so that's actually action number one action number two.
Our north light studio is getting is getting us into casual games market, which is really expensive accretive to us and a new audience.
And that should bring significant new players and revenue to us and that's a big part of actually capturing that we have yet another property that we're working on that gets it was yet into another segment of the market, which which is one we're not playing in today and he's an audience, we're not serving today.
And then importantly in the second half of the of the year, we're actually doing a multi creative center Big Bang behind the movie launch of Paw patrol and Paul and friends. The digital game will actually come to market. So that's yet another important contributor to our growth towards that dot on that ambition.
Last but not least we have two or three other games.
That we're actually working on in soft launching in their games that are now developed and we feel really strongly about it and so we are basically trying to get the IP over company digitize to actually try and get new players to experience parts of the digital gaming market segments, we're not playing in today.
So let me turn it over to Mark So that he can then complement with the M&A angle.
So Brian let me just make a point overall in terms of M&A for you and everyone else.
<unk> invested a lot in the last 12 months in building up our M&A team. We've now got specialized roles in each of our creative centers.
Who are focused on building up our pipeline and our pipeline in M&A in general is much larger than it has been in the history. So we're really encouraged by that in terms of multiples I think just given the environment, we are seeing multiples come down.
I would say to you in terms of the deals that we've actually done we've we've structured our deals in a way that we would make a smaller cash payment upfront and then there's future payouts based on both performance and retention in terms of the teams that we acquire and that's the most recent acquisitions and some that we've done in the past.
Just as well so in a way that de risks the action the acquisition itself. So overall multiples are coming down we expect that to play out in 'twenty, three and 'twenty four.
And I think we're in a good cash position just given our liquidity to take advantage of some of the acquisition opportunities that we see flowing in our pipeline.
And Mark timing to 20% do you have any.
Color on that.
The 20% target that our Max referred to on digital games is more of a medium to long term target. So I don't want to call a specific euro net Brian because that's going to get to be driven by both the acquisition as well as our new products and organic growth in existing so it's gonna be a mid to long term target, but we still firmly.
Our focus on their cargo.
Okay and then second question just on inventory I just wanted to go back obviously, it's elevated at retail and in your somewhat your warehouse right now, but I think you said the actions have been taken they hadn't received desired results maybe just elaborate on what the actions are that you are taking as we get into Q4 here I assume its price and heightened marketing, but what does the rest of that.
And the year with elevated inventories with Pos declining substantially the last couple of weeks.
Great question. So I think we started taking we started taking actions on our on our owned inventory. Okay. A few months ago as we actually were beginning in August to see the the deterioration.
And the exiting of retail inventory at a high level as of when we spoke last we immediately action our domestic inventory ownership and then obviously, we would began to push contracts and production into 2023.
We only focus on things that are basically items, we can actually bring forward to 'twenty three on a recurring and so we took good actions.
With enough time and have been able to mitigate quite a bit of that.
Recall that the all the retail inventory that you're alluding to most of it was really brought forward into H one F O b by retailers. So a doc that is something that was basically done that way and in Europe , where we actually do manage the inventory by and large we've been doing this now for about three or four months. So I think all the actions we took.
A few a few months back or you know have pay dividends and position us well as we actually approached the end of the year and just to add very briefly to what makes it Brian .
Obviously, we're sensitive to our retail inventory levels and to the extent that we need to actually take action at retail with Mark Downs, we've built that into our projections.
And and we've got it towards the higher end of that 10% to 12% range, which takes into account I think we think a reasonable level of mark downs to manage any retail inventory problems.
Thank you very much.
Okay.
And our next question comes from Adam Shine with National Bank financial.
Thanks, a lot cavorting Max just in terms of how.
<unk> sales have come off in the last let's call it Bob.
Post post August effectively.
Were there any opportunities for you to delay any particular launches scheduled towards the end of the year I suspect not perhaps based on prior plans, but.
Who knows maybe there was such an opportunity in terms of pushing some launches.
We need to do here, maybe start there and a couple more.
Yeah, Good morning, Adam.
There were some items that actually we are getting behind in the spring and as you can imagine with the situation that we were facing.
Exactly what's going to happen and Theyre getting massive supporting this spring and so we've taken opportunistically, one or two of those items and are going to get behind that in very important way.
Starting next spring and into the summer. So that's that is a very acute observation on your part and we've done it.
But other things.
We're basically in flight and so now we're just re promoting those as we get into what's going to be.
Christmas falling on a Sunday of the 50 <unk> week and so we just have tweaked our marketing approach to kind of give those innovations the right chance with consumers. So that's the other thing we've done we haven't just basically seen this situation pass and not acted on it we've actually re.
<unk> directed our investments in marketing and our plan accordingly to make sure we give that innovation.
Do they in court.
Okay and just.
The other elements in regards to Covid.
We've got the situation of obviously couple of years of Covid that elevated that number of product items, you've highlighted that a few times in terms of games and puzzles, but those.
Those categories seem to.
<unk> remained robust at least for a good chunk of it.
This year and so maybe with the context of some of the weakening in P. O S. Generally in the marketplace are you getting a better feel for.
Let's call it out of post Covid bubble bursting in regards to some of these categories that certainly did elevate strongly through the course of the prior let's call. It two two and a half years.
We have so we commented on the script and have seen for example, when you think about art.
The arts and crafts.
Portions in subcategories.
And we've actually kept.
A little bit better than the decline. So those are about low single digit declines and so we're actually covering that in that space and that's been happening now for a few quarters. So we've seen that in these moderated and stabilized.
We don't have a big business in outdoor that has been a very volatile category and has seen some massive declines. So we have taken all these different categories and if perhaps perhaps plan our 'twenty three with those facts in mind.
But when you think about infant preschool when you think about Wilson actions with oldest slate of new content.
I think those have been actually quite quite more positive and as we look forward because a we have great new content on our own IP or licensed IP, then we feel more confident.
Okay, and just lastly in regards to digital games, you've answered a few questions already there, but you know coming out of Q2, what are the items highlighted in the Q2.
Was that.
Sac spending with sort of elevated in terms of subscriber acquisition efforts is that something that is.
He is continuing to be pushed to help support some of the Mou and any other traction and the digital <unk> business or.
Is there, perhaps some pruning of that activity at least through year end.
So we we definitely have you know a dynamic mark martech.
Rhythm for user acquisition, and we are very obviously disciplined about deploying those dollars and seen the effect.
And we continue to do that so nothing is changing our approach to try and get new users into both our game for in App purchases, but also into our subscriptions and while I have the opportunity on subscriptions in particular, your your comment about bringing new users.
You know I I did comment on my script that we had a new way to actually manage our subscription business, which actually we are very encouraged by it. So think about everything you read in the marketplace on subscriptions declining for a lot of different services for us we've maintained our subscription level closer to 340000 users.
And we're now going to bundle, our services and our and our games actually to come to the to the parent with a better option and better value and we're very excited about that so this is something we're going to do going forward and there will be at user acquisition on that but it's something that we have martech to manage.
Okay. Thank you.
And our next question will come from Gerrick Johnson with BMO capital markets.
Good morning, Thanks for squeezing me in here.
I'm going to dig a little bit deeper into the toy market is a little bit more specific questions.
The retailers seem to ramped up the private label effort this year I guess.
They did have some lower cost options for their for their customers.
How has that worked for them has that stolen share in space from you guys.
So I would so I would argue that in the lower price points.
We actually participate less.
That has basically been the case, but as you probably know from your own tracking which is robust.
Segment has been really weak and so whether it's taken from us or stick them from someone else. It does not necessarily materialize the way that he would have been expected.
We don't as you know have a huge prevalence of revenue in that space. So for us has been less of a less of an impact.
Okay, and then moving on to collectibles market, which has been red Hot in your space.
Youre Playstation license.
Caters to that market.
<unk> how are you thinking about that market. It has defied gravity and maintains super robust how do you see that playing out over the next you know.
Quarter, two year to couple of years.
So.
One of the things. We're excited about is precisely what you just mentioned blackout them. So you know it's doing really well we have a bakugan reboot coming up in 2020 three one thing we have discovered.
As Gary that the Bakugan user from years ago, Who's now basically in the age group, you're describing when we do something or roadblocks and something beyond that came back to the franchise and so we're actually taking actions from that learning. We have obviously the properties. We've described on Sony and so we're excited about the skilled sentiment segment has been driving.
The category and we have been under developed.
To your point now we're actually looking at a lot of macro factor.
Factors for these audience as basically a lot of these people had a lot of you know benefits from all the checks and whatnot and as the micro tightens up and inflation has now taken hold we are now basically tracking that group very closely because obviously quite a drop market is going to change in 'twenty three and so we're actually we're getting we're.
Very excited we're tracking very closely the audience dynamics and we're going after it.
Okay, Great and lastly will veto the vet are in U S.
Yes, it will.
Okay, I didn't hear I heard youre part of Canada, but not for the Idose, where those deals are being finalized you're correct, you're acutely right about the fact that I didn't mention it because those deals are being finalized.
Okay, Okay, great. Thanks Max.
Thank you.
Thank you and we will take one more question.
Question is from John <unk> with CIBC.
Thanks for squeezing me in good morning Al.
Just wanted to touch on inventory you mentioned youre relatively pleased with the health of it but I wonder how you are positioned for a trade down environment and in particular the comment you just made Max about not not participating as much in the low price category, but is there anything you can say about what percent of your sales would be considered a lower priced items I'm not sure. If you measure it in absolute.
Or versus peers, but any color you can share on your ability to take share in a trade down space.
So we obviously have mark Mark described the fact that we have some promotional mechanisms to participate more aggressively.
However.
We have we don't we don't have the great majority of our volume in that zero to $10, we do have items or to be perfectly clear.
But we do have quite a bit of plans against these more in the price point brackets that follow that which is where the majority of the market is anyway. So even if you trade down from the 50 to $79, we're going to be incredibly well represented.
So even if you go down from from 'twenty to 'twenty nine we will still be very well represented so we're very confident that we're going to be represented where to market basically is coming down one price point below so that is that he has been our planning approach and our support model.
Okay. That's helpful. Thanks, and then the last one for me is on regional differences that Youre seeing at point of sale and apologies if I missed it but you referenced that your sales are done more in North America and Europe .
Shifts in timing, but I'm wondering what youre seeing at point of sale and what you can say about consumer behavior in North America, and Europe , I think it's no surprise for us to see a more reluctant European customer, but it seems like there's been a material deceleration in North America as well so any other color you can add there would be helpful.
Yeah absolutely.
So we have basically just to wrap up North America, we have a super strong consumption business in Canada, We've had a really strong business in Mexico and feel very bullish about it now as we go to Europe , we have our toughest marketing Europe and does the UK. The UK has been by and large the toughest market for a lot of people. Most included more from a promotional price.
Asian, and Joe's overall, Pos decline and so that is the situation and he is not new it's been basically there for quite a few months.
The rest of Continental Europe has deteriorated some and.
And we've had really strong positions there. So I think we're still doing very well and we expect our business to end up very positively in Europe , Continentally and in Australia, which we may have in the past hinted at you that we were actually turning around that turnaround is really hoffman from a consumption level and so they're now going into the season in summer months, we're excited about our business.
Australia more so than we would've been six months ago.
Okay. Okay, I think operator, we're going to have to wrap it up at this point. So let me just say thank you to everyone for participating.
And we look forward to talking to you all again in March when we release, our Q4 and full year 2022 results. So thank you everyone have a good day.
Thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.
Okay.
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Yeah.
Okay.
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