Q4 2022 Spin Master Corp Earnings Call
Good day and welcome to the spin Master fourth quarter and full year 2022 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Sofia. So guess please go ahead.
Thank you and good morning, and welcome to spin Master's financial results conference call for the fourth quarter and year ended December 31st 2022, 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.
M DNA and audited consolidated financial statements are available on the Investor Relations section of our website and spin master Dot com and on SEDAR.
Before we begin please note that remarks on this conference call may contain forward looking statements about spin master's current and future plans expectations intentions results levels of activity performance goals or achievements and any other future events or developments.
Forward looking statements are based on information currently available to management and on estimates and assumptions made.
Just on factors that management believes are appropriate and are reasonable in the circumstances.
There can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those 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 Excel.
That as may be required by law spin Master has no obligation to update or revise any forward looking statements, whether because of new information future events or otherwise.
For additional info on these assumptions and risks please consult our cautionary statements regarding regarding forward looking information in our earnings release dated March eight 2023. 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.
Good morning, and thank you for joining US today 2022 was another year, where we made meaningful progress on key priorities our commitment to re imagine an everyday player across our three creative centers continues to give us a strong platform for growth, enabling us to achieve an increase in constant currency revenue for 2022.
Against the backdrop of a challenging economic environment.
22 was really a tale of two house in toy, we had an exceptionally strong start to the year.
And on the momentum from 2021, coupled with retailers, bringing in goods earlier to minimize anticipated supply chain disruptions going into the fall.
This resulted in us having the biggest first having our history with gross product sales up almost 35% compared to 2021.
However, in the second half of the year with higher interest rates and inflation hurting consumers discretionary spending retailers haven't had much higher than expected inventories going into the big holiday season.
<unk> became more price sensitive and focused on finding discounts, we saw reduced consumer spending impact Torrey point of sale trends and in turn reduce retail orders. This created a difficult environment for us to launch new and innovative products, which is the core of our toy strategy.
As a result, our fourth quarter results were below last year. Despite this we ended the year as the fourth largest toy manufacturing globally for sure kind of who you may remember S. M. P D up from number five in 2021.
The toy industry continued to show its resilience. Despite microeconomic challenges overall sales for the U S toy industry were flat for the year and up 22% globally compared to the pre pandemic years of 2019, we continue to believe the toy industry is a growth industry and we expect to continue to growing over time.
One of the consequences of the weak fourth quarter to the industry and for us.
Is that retail inventories at the end of 2022 were up in both dollars and weeks of supply compared to a very low level a year ago.
And they remain elevated during Q1 2023.
Retailers are focused on inventory and profitability management and have limited their replenishment orders to bring levels down we are working closely with them and we expect to be back in balance by end of Q2.
Our fourth quarter Global Pos declined 6% over a year, which was in line with the industry. According to sort of counter for 2022 our global POS was down one 2% also in line with the industry a significant portion of the year over year decline can be attributed to the lower Paw patrol Pos.
As we were lapping the pole movie in 2020, one declining global Pos for Paw in the fourth quarter were consistent with what we experienced in quarter three with a decline of 23% for sure kind of on an annual basis Paw patrol Pos declined 16%.
Despite these P O S. A clients the pole franchise remained the number one preschool toy property globally, both on a quarterly and yearly basis Mercer kind of pop.
<unk> has accomplished with only a few preschool franchises have ever achieved to remain in the hearts and minds of kids and their families for more than a decade today. We believe the paw patrol franchise is stronger than ever and we have a series of exciting activities planned in 2020 three as we celebrated its 10th anniversary.
Excluding paw patrol Pos grew by one 1% in Q4 and four 8% on an annual basis for the G. Live in countries for sure kind of we are particularly pleased with the performance of our international markets, where we outperformed the industry.
We were in the top 10 in 10 out of 11 markets.
Over the past few years, we have significantly expanded our licensed store portfolio, bringing popular entertainment franchises with built in fan basis, resulting in continued growth in P. O S where this element of our business.
According to sort of kind of our licensed portfolio P. O S increased 32% in Q4, driven by <unk> DC Comics Monster Jam and Wizarding World.
Sure contact calculates our licensed business has grown 61% since 2019 and now comprises 30% of our P. O S compared to just 19% in 2019.
We are known in the industry for our deep understanding of the preschool category that is why we were chosen by Universal Dreamworks animation to be the global toy partners for Dobbies Dalhouse, what a fantastic collaborations. These has been for US Gabby as Dalhouse continues to outperform in 2022 with adult house place that in a SEC.
Your item digging the spot as the number one overall item in the infant toddler and preschool Super category in the U S for sure kind of God.
<unk> has quickly risen to be one of the top preschool properties globally, and we believe the franchise has great potential for the future.
Monster Jam was a third property in vehicles in quarter four up one position from 2021 and the brand remains the number two property for 2022 in P. O S increasing 4% according to sort of kind of.
The strong performance of Monster Jam added our vehicle I aided our vehicle performance in the vehicles category <unk> gained share and increased.
By 5% in 2022.
We are excited for a blockbuster year for the D. C franchise in 2023 with three theatrical movies plan, which will see us launch toy lines to complement the movies and characters Adil.
Additionally, we have new innovations in our core Batman offering, including an epic large scaled place it which is sure to be a toy of the year contender.
In 2023, we are continuing to grow our licensed portfolio with the launch of our first product for Disney's New preschool animated series fire boats, which was just launched in North America with a rollout plan for the summer.
One of our primary growth strategies is to pursue strategic M&A.
Across our creative centers, we've made 28 acquisitions since the company was founded in 1994 and <unk> since our initial public offering in 2015.
We completed the acquisition of Rubik's cube in 2020 one.
This past year, Mark the first opportunity to inject our own innovation into Rubik's portfolio with the launch of the Rubik's plant Phantom featuring third Mccormick technology. He was also the first year in which we were able to apply our integrated marketing support to the brand.
The result of each has been a notable increase and now Rubik's cube, becoming the 10th largest brand in the games and puzzles Super category in the quarter up from the <unk> decision in 2021 and P. O S grew four 5% compared to a decline of four 3% in the category for the quarter. According to <unk>.
Donna.
Building on our rich history of acquisitions, we recently announced three toy and game acquisitions in August we further diversified our games and puzzles offering by acquiring games entitles from solid roots, a creator of family Board games, including the popular game mind the gap a.
A few weeks ago, we closed the acquisition of 40 brands portfolio of <unk> puzzles kits opening up new opportunities to inject innovation into our puzzles portfolio with new form factors and popular third party licenses.
We also announced the purchase of Xbox brand, which will be strengthening our robotic toy range capabilities. We continue to look for accretive acquisition opportunities to further diversify our overall portfolio stay on the leading edge of children's play and pursue new areas of growth.
Our entertainment Creative Center had a really strong year growing licensing and merchandising revenue while also continuing to develop our content pipeline for screens of all sizes.
In addition to continuing to create fresh perpetual content, we introduced two new properties in 2022, including Sago mini friends on Apple TV, making the first cross Creative center collaboration with our digital games Creative Center, and we started delivery of rebel and crew are first paw patrol spinoff series airing on Nick Junior.
Sure.
2023 will be our biggest year ever in terms of entertainment content releases showcasing the investments we have made to create a diversified content pipeline.
We have several new series launching in 2023, including two entirely new properties. The first is a preschool series b to the vet, which will air on BBC in the U K and of course Treehouse in Canada with more broadcasting partners to be announced soon.
The second is a new fantasy adventure series franchise, and we just announced last week called Unicorn Academy.
These exciting launch exemplifies our approach to franchise building.
With fully branded experiences planned across all three creative centers there.
The journey begins with a Netflix original series this fall, which will be followed by a toy line in 2024, and a digital game, which is in development as well as an expensive licensed consumer products initiative.
I've seen the initial episodes and it is truly magical with some of the most visually stunning animation we have ever created.
I mentioned earlier that we will launch our second feature film for deposit growth franchise on September 29th in conjunction with Paramount.
Two weeks earlier than originally anticipated and planned and in advance of the first long weekend in October .
Our first perpetual spinoff series rebel and crew debuted on Nick Junior in February 3rd and early reads for the show are very positive.
Many of you saw the toy lining our L. A showroom in January which centers around a construction play pattern. In addition to the spin off we have a series of specials throughout 2023 to commemorate pause 10th anniversary.
Our digital games Creative center faced tough comparisons in 2022, given the unprecedented growth in digital games, we experienced during the pandemic when screen time was unlimited.
While we have had incredible growth within digital games over the past two years, we have started to see the pattern normalized <unk>.
Engagement in our apps and games remained high at 58 million monthly active users.
Alka life world, but in App purchases declining in 2022, which reduced revenue we remain very ambitious about the long term growth opportunities within our digital games Creative center in part due to the development, we have underway and given the trend of children spending more of their leisure time in the digital world.
In 2023, we will release several new digital games.
Nor light the digital game studio we acquired in August last year is developing a new mobile game, leveraging our iconic Rubik's cube, IP, which will take us into the casual gaming space.
The originator team he has deep in development of our first in house developed digital game for Paw patrol called Paw Patrol Academy.
The game will invite preschoolers to join missions games and content designed to blend story and interactivity.
With a dedicated educational and emotional learning and is set to launch in conjunction with the movie.
In Q3, sago mini will introduce a digital games bundle, which will give subscribers access to a host of our educational digital games from a single Meanie toco Boca and originated portfolios all for one monthly subscription fee.
We believe this will be driving growth and be a simpler and cost effective way for parents to manage a subscription for their kids.
In summary, we are squarely focused on continuing to execute on our strategy of leveraging our global IP across our creative centers.
As we look ahead, we expect to face continued microeconomic headwinds this year and continue to foresee a period of volatility impacting consumer demand.
One of the most significant factors that will impact our 'twenty three performance is elevated retail inventory levels in the first half of the year and we're managing this closely.
We are also focused on managing our operational costs, ensuring we position spin master to thrive we are being prudent in our approach to cost management, while balancing the need to invest in key organizational capabilities to scale our business.
Given our healthy financial position. We are also focused on pursuing acquisition opportunities to attract new fans reach new audiences and engage new players in order to further solidify our leadership in children's entertainment and deliver profitable growth now and into the future.
I am now going to pass it over to our CFO Mark Siegel to cover our financial performance in more detail as well as our 2023 outlook.
Thank you Max and good morning, everyone.
The fourth quarter was a challenging quarter relative to last year.
Revenue came in at $465 8 million down, 25% or $484 2 million down 22% in constant currency.
This compares to $625 million last year, reflecting the decline in the toy Creative center due to the customer order timing shifts described earlier in the year, along with a decline in digital games revenue.
Entertainment revenue for the quarter was up nine 5%.
Looking at Q4 Creative center performance in more detail toy gross product sales were $479 2 million a decline of $148 3 million or 23, 6%.
On a constant currency basis gross product sales declined 26%.
2022 was a year, where we saw unusual phasing of revenue towards the first half primarily due to the low level of retail inventory entering the year after exceptional growth in 2021.
First half gross product sales outpaced Pos as retailers were replenishing low inventory exiting 2021.
Retail has also brought in goods earlier than normal in 2022 to avoid anticipated supply chain disruptions in the fall and began building inventory levels well ahead of our holiday season.
We expect this to reverse in the third quarter and accelerate in the fourth quarter.
Although it did improve consumer demand was aloha as inflation and interest rates took their toll and demand came much later than expected.
This caused retailers to reduce replenishment orders throughout Q4, which impacted our performance across categories and regions.
Q4 results overall, we're heavily skewed by the volatility and timing of this retail inventory movement throughout 2022.
Preschool indulgent interactive declined by $50 1 million or 19, 9%.
And by lower sales of pulp control.
Which as Max noted with strong last year in the wake of the movie release offset by higher sales of Gaby Stonehouse.
Activities games, <unk> puzzles, and plush declined by $45 9 million or 22, 2%, mainly due to the games and puzzles portfolio and kinetic sand offset by higher sales of <unk>.
Wilson action decreased $56 1 million or 38, 4% due to decreases in DC comics licensed products, mainly due to difficult comps against shipments for the Batman movie in Q4 of 2021.
Yeah.
Geographically North America saw the biggest drop in Q4, both in dollars and percentage terms.
Revenues in North America declined $101 1 million or 28% to $2 $67 million.
North America accounted for 54, 4% of total GPS in Q4 down from 57, 6%.
International sales, comprising Europe , and the rest of the world declined $47 2 million or 17, 7% and comprised 45, 6% of total sales up from 42, 4%.
Our full year results paint a more complete performance picture.
For 2022, we generated over $2 billion in revenue down 1% on a reported basis and up 1% in constant currency.
Despite the backdrop of a difficult macroeconomic environment. We were pleased that 2022 revenue was in line with 2021 and 28% above 2019.
Gross product sales for the year grew three 5% in constant currency.
One 2022 gross product sales represented 45% of full year gross product sales compared to an average of around 33%.
As I noted last quarter since our IPO in 2015, we have more than doubled revenue from under $1 billion in 2015 to over $2 billion currently <unk>.
Delivering a compound annual growth rate of nearly 13% considerably outpacing the industry.
Turning back to the Q4 P&L.
Q4 sales allowances was 17, 2% of gross product sales up from 13, 6% as we manage our inventory levels and executed high markdowns and promotions as consumers, who are more price sensitive and responsive to promotional activity.
For 2022 sales allowances with 12, 2% compared to 11, 8% last year.
Slightly above the high end of our historical range.
[noise] toy revenue or gross product sales net of sales allowances declined 26, 8% to $396 7 million from $542 million, reflecting the gross product sales trends and increased sales allowances.
Q4, adjusted EBITDA for toys was a loss of $24 4 million compared to adjusted EBITDA of $40 8 million a margin of negative six 2% compared to positive seven 5% due to higher administrative and marketing expenses as a percentage of revenue partially offset by improved gross margin.
For product mix and price increases we implemented earlier in 2022.
The shifting seasonality year over year was a significant driver in the comparison of EBITDA margin.
Turning to our other creative centers Q.
Q4 Entertainment revenue increased $2 7 million or nine 5% to $31 2 million from $28 5 million.
Adjusted operating income was $20 5 million up 53% from $13 4 million in Q4 2021 and.
And adjusted operating margin was 65, 7% compared to 47%.
The significant increase in entertainment profitability was driven by higher licensing and merchandising revenue as well as lower amortization due to fewer content deliveries.
As a reminder, when we discuss entertainment profitability performance on a standalone basis, we focus on adjusted operating margin is this is after content amortization. This is true of digital games as well.
Digital games revenue decreased 24, 2% to $37 9 million driven by lower in App purchases in telco life World.
In constant currency digital games revenue declined $19 8 million.
19, 8% to $40 1 million.
Adjusted operating margin was 32, 5% down from 38% from lower revenue and higher product development and personal costs related to future game development.
Yes.
From a consolidated P&L perspective, Q4 gross margin was 49, 9% compared to 52, 1%.
The 220 basis point decline was largely driven by higher sales allowances and increasing closeout sales and unfavorable foreign exchange, partially offset by price increases lower ocean freight higher entertainment <unk> revenue and lower content amortization.
SG&A in Q4 was $237 8 million compared to $267 4 million, representing 51% of consolidated revenue up from 43, 1% as a result of the decline in revenue.
Adjusted SG&A was $233 million compared to $260 million, representing 50% of consolidated revenue up from 41, 9%.
The full year SG&A rate is more reflective as the shifting seasonality year over year created less comparable figures.
For 2022, adjusted SG&A was 37, 5% compared to 35, 3% in 2021.
Looking within SG&A marketing expenses in Q4 decreased by $8 7 million to $83 3 million due to lower media spending in response to lower Q4 volume.
Marketing expenses as a percentage of consolidated net revenue in Q4 increased to 17, 9% from 14, 8% for the full year marketing increased $5 4 million to $185 1 million from higher media spend and trade show expenses.
As a percentage of revenue marketing for the full year increased to nine 2% from eight 8%.
For Q4 administrative expenses declined by $12 6 million to $91 2 million, primarily due to lower incentive compensation and favorable foreign exchange.
For the full year administrative expenses grew by seven 1% to $353 8 million due to higher personnel related costs travel and professional services expenses, partially offset by favorable foreign exchange and lower incentive compensation.
As a percentage of revenue administrative expenses increased to 17, 5% from 16, 2%.
In Q4, we recorded a net loss of $13 8 million or <unk> 13 cents per diluted share compared to net income of $26 5 million or <unk> 25 cents per diluted share on an adjusted basis net income in Q4 was breakeven compared to adjusted net income of $38 7 million.
Adjusted EBITDA declined to $12 4 million compared to $78 3 million.
Adjusted EBITDA margin was two 7% down from 12, 6%.
Adjusted EBITDA for the full year of 2022 was $389 million at a margin of 19, 3% compared to 23% in 2021.
After adjusting 2021 for the pulp patrol movie distribution revenue and amortization adjusted EBITDA margin in 2022 of 19, 3% was up 10 basis points over 2021.
Turning to the balance sheet, we ended the year on a very strong financial footing.
Our balance sheet is in the best position it has been in which we'll provide more flexibility to execute our growth strategy.
We managed inventory levels aggressively in Q4, and our commercial teams did a great job in this area.
Our on hand inventory at the end of 2022 was $105 million down $32 million compared to $137 million at the end of 2021.
Our remaining inventory continues to be of high quality.
Retail inventory for spin Master products is also predominantly current and of good quality.
Our core net working capital as a percentage of full year revenue was 13% up two 5% compared to last year, driven by lower payables due to the timing of purchases, partially offset by the reduction in inventory and trade receivables.
Free cash flow in Q4 was negative $30 million compared to positive $211 million driven primarily by the loss in the quarter higher net working capital and more cash used in investing activities.
Full year free cash flow was $115 million compared to $340 million.
The decline was due to lower cash from operations driven by changes in net working capital, partially offset by lower cash used in investing activities.
We ended the year with $644 million in cash up from $563 million.
We are in an extremely strong liquidity position with available liquidity of over $1 billion.
Looking ahead to 2023, we expect to continue to face volatility in a tough macroeconomic environment with high interest rates and inflation, putting pressure on families disposable incomes.
As Matt said earlier, we continue to believe that the toy industry is a growth industry, but continuing macroeconomic headwinds and market volatility may impact 2023 consumer demand.
Our outlook for gross product sales reflects our view that consumer behavior. In 2023 is likely to continue to be adversely affected by inflation and recession concerns, which in turn could impact retailer buying plants as they look to manage their inventories and profitability.
Retail inventory carryover and the anticipated order reductions as retailers draw down the elevated inventory levels, particularly in the first half of 'twenty three will reduce our 23 gross product sales and was a factor in our outlook.
We expect the seasonality of gross product sales to return to historical averages of 30% to 35% in the first half compared to 45% in 2022.
This will make H $1 23 comparisons to <unk>, 'twenty, two particularly challenging, especially in Q1, and we expect our toy revenue and profitability to be down in the first half.
While we don't usually comment on quarterly expectations. We will note that we expect Q1 to account for approximately 10% of full year gross product sales compared to approximately 15% typically.
We expect retail inventory carryover headwinds to clear by the end of the second quarter.
Followed by a corresponding growth in the second half of 2023.
We expect full year 23, gross product sales to be flat to slightly down overall.
We expect our total revenue growth to be in line with 2022 in.
In addition to choice from an entertainment revenue perspective, we have a strong slate of entertainment content for 2023, where we are delivering six shows and the second pole movie.
In Q3, we expect to reflect approximately $17 million of distribution revenue for the pole movie from Paramount in entertainment revenue and approximately the same amount in amortization of the capitalized intangible asset.
To be clear 2023, gross product sales and revenue guidance does include movie specific toy sales and licensing and merchandising revenue.
Regarding digital games, we expect stabilization in digital games revenue levels for 2023.
Foreign currency translation is expected to have a neutral to marginally positive impact on revenue based on current rates.
With respect to profitability, we will continue to look at pricing selectively in relation to market needs and cost input levels. We expect sales allowances to be approximately 12% of gross product sales, we see some tailwind in 2023 for toy Cogs.
Ocean freight is expected to be down from 2022.
Resin costs have stabilized will come down on electronic components, we have seen improvements in both costs and lead times and expect us to provide favorable cogs improvements for paper and packaging materials. We have seen some improvement however to a lesser extent as high E com use of shipping boxes and cardboard.
As a more sustainable materials and plastic is keeping prices from dropping as much as we are seeing on other commodities.
In entertainment, we see headwinds in 2023 on gross margin driven by the large amount of new content deliveries.
This will impact consolidated gross margins as well.
The distribution revenue arriving from arising from the delivery of New entertainment content is gross margin dilutive until we can generate toy sales and licensing and merchandise merchandising revenue once the shows have become established.
We are focused very closely on cost control for all areas of SG&A and have looked at our fixed cost carefully to ensure we can drive operating leverage.
We expect marketing cost to be between 9% and 10% of revenue.
We are managing our people costs and administrative costs very carefully.
All of this into account, we expect 2023 adjusted EBITDA margin, excluding the pole movie distribution revenue to be flat to slightly up compared to 2022.
Tax is expected to be approximately 25% cap.
Capital expenditures are forecast to be approximately 7% of revenue from 5% in 2022, as we continue to invest in entertainment and digital games content.
Total depreciation and amortization is expected to increase from $68 million in 2022 to approximately $150 million in 2023, primarily as a result of more deliveries of entertainment content.
Free cash flow in 2023 is expected to be slightly up compared to 2022.
To conclude we have built a platform that we feel confident we will continue to generate above industry growth. We will continue to seek opportunities to harness the potential of our three creative centers acting independently, but also collaborating across platforms to exploit the full potential of our talent innovation capability and Italy.
Actual property.
Our business model Leverages, our global capabilities and allows us to scale our business to capture the full value of our IP.
Our teams remain committed to a disciplined operating and cost control model and as an organization. We are measuring ourselves in a way that maximizes long term shareholder value.
That concludes our remarks, we will now open the line and take questions. Operator. Please go ahead.
Thank you.
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Press Star one to ask a question.
We'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we will take our first question from John <unk> with CIBC. Please go ahead.
Thank you good morning, I wanted to start on industry conditions and I appreciate the color from or about your key retail partners and their inventory positions and I Wonder if you can share anything about your ability to gain more visibility into their inventory position and their order patterns throughout the year.
Good morning, John .
We exited Q4 with known retail inventories, which we've built into our 'twenty three guidance.
Through the first obviously as we exited and we now enter 'twenty three our POS consumption has basically remained ex exactly in line with the category. So we're actually exactly asset categories.
<unk> is performing.
And inventories are beginning to come down, but we don't see that completely getting to clean until the end of Q2.
What we know today with about eight weeks of data.
Okay understood and then my follow up is on <unk>.
You mentioned, it's been a positive reception so far but is there anything quantitative you can share on that that would give some insight.
On the show so far maybe it's relative to Opex roller or just anything to add some color. There I guess that I know, it's early but just like to get a sense of the sustainability of that property.
Sure.
So remember we basically started airing this early February and so far our audience has responded incredibly well.
Our premier has posted double digit gains in playback on our most recent premier deliver really high you know engagement.
And so the viewership is comparing very positively with other pas episodes, we've launched in the past so we feel very encouraged by that.
And then we just set toys on March one and our first week or so has been very positive, but it's just a week and that was basically done at Walmart.
So so far we feel very strongly.
Okay. That's helpful I'll pass it on thank you.
And if you find your question has been answered you may remove yourself from the queue by pressing star two and we will take our next question from Martin Landry with Stifel. GMP. Please go ahead.
Hi, good morning.
My first question is on your guidance it looks like consensus is for the industry to them to be flat this year.
And looking at your guidance in terms of slot revenues.
So I would expect or I would think that paw patrol toys are going to get a bit of a boost from the movie.
It looks like you have some new stuff with firebirds coming on.
Your your your digital games are going to be flat, so I'm trying to understand what's going to be.
You know down this year, what's what's what's dragging a little bit the rest of the portfolio to bring your revenue was flat this year versus last year.
Good morning, Martin. Thank you look there are obviously some positives in 2023 for sure and we've been through those holding in detail today.
The reason, we're guiding the way we are on gross product sales really relates to the industry carry all that heading into 'twenty.
2023 there was significant industry.
Retail inventory carryover and that is going to affect the first half and that was affecting our guidance now we as a company spin master a retail inventory was actually in pretty good shape. Although we did have some carryover as well not not nearly as extensive as the rest of the industry, but that certainly was a factor in our guidance.
Next you want to add anything Martin.
Good morning, and I just wanted to add one thing on what Mark just said.
Because the industry was bloated, we actually almost participating that is basically buyers have to distribute our daughters and first would like to basically get rid of the inventories.
When others are higher were in that same boat and so unfortunately for US short term, we are basically getting through that cycle. So just to be clear we are.
We're keeping a close eye on our on our Pos and so the spring items were set so we're actually plowing forward with optimism, but we actually live in these situations. So I just wanted to make sure I put that in context.
And all that is important because as we said for the second half of the year of the year than we have to get to clean and you know retailers have been conservative and so that's likely what youre seeing as well as we actually deal with them and they deal not just with us.
Hurt from the script, not just inventory, but their profitability. We wanted to take that into account. So we're being prudent but we're being aggressive with the innovation, we have because we feel very strongly about it.
Okay. That's.
That's helpful.
Wanted to touch a little bit on your new franchise that you've announced the last week Unicorn Academy, just trying to understand a little bit your expectations for that franchise in terms of revenue potential.
Could this be bigger than your other franchise, you've developing giannini like vida, the vet or Mighty Express.
We're super excited he takes us into a space that is white space for US right. We've never we don't have a franchise in that for that audience necessarily so that's the first thing the second thing is.
<unk> really studied how audiences are being built and our franchise are being developed and are succeeding and we have you know basically first viewed to a very successful franchise in <unk> housing and strong collaboration with them have learned a lot. So we've built that into our into our franchise development plan and that basically debuts in.
In the in the coming fall on Netflix. So we study how to build that and so we feel very strongly that as we get to 'twenty four and we begin to monetize that franchise through toys and consumer products licensing and merchandising we are well set to basically get each new new new new audience sales.
In our <unk> centers I failed to mention digital games, we have a game in development. So we're also very excited and we've seen how complimentary to the audience built.
You know that ecosystem is so from a size perspective, you know, where we're just not going to be more shy to tell you something today, but we can talk to you offline, but we're very excited.
Okay.
Okay and just last question just just to make sure I understand how amortization costs flow through your your bottom line for the movies so for Paw patrol.
Can you remind us what was the net income impact on or off the first movie.
Yeah. So so just remember there's various aspects that impacts our P&L for a movie.
We did in 2021 was it called out specifically the distribution revenue that we received from Paramount, which was really as a share of our cost reimbursement.
That actually is.
So we get the revenue in March and that actually gets reflected in distribution revenue and then amortization is the amortization of the intangible asset that's been built up on our balance sheet.
That gets added back from an EBITDA perspective, which is why that we always talk about EBIT.
EBIT when we when we discuss our entertainment business now the issue that we have we said we don't do a movie every single year.
Everything that I've just described to you for the movie is equally true of our TV shows and it's exactly the same principle. However, we don't do a movie every year and so in 'twenty, one we actually broke it out to make it comparable to 2020 in 2022 and then the same with our guidance for 'twenty three we breaking that out so it becomes comparable to <unk>.
'twenty two if we were actually making movies every single year, then we wouldn't need to break it out the way that we do.
Hope that helps does that clarify.
Yeah, Okay, maybe we can take it offline. So okay. That's it for me. Thank you.
Well take our next question from Gerrick Johnson with BMO. Please go ahead.
Great. Thanks, Good morning, Hey.
<unk> I wanted to hear a little bit more about your marketing tactics in the quarter. I think you said if I heard you correctly, you pulled back but.
Could you ramp up pull back what did you do with your marketing when you saw retail slowing down.
Gary in the quarter and the fourth quarter, our marketing dollars were down but they were up as a percentage of revenue and for the year marketing was actually up year over year relative to 2021.
So we were at around nine 2% for the year relative to eight 8% in 2021.
Between 9% to 10% as is our historical range of marketing spend 2021 was an unusual year because of the massive growth in the demand that happened in 2021, we didn't need to spend as many marketing dollars in 2021 as we normally would so we got a little bit of a pickup in 2021 from that.
As it relates to tactics I'll, let <unk> comment on that.
Morning Garik.
We actually continue to invest in Q4, I think it's a burst mentioned and I think you know that a lot of the purchase in Q4.
Went to online online did really well not just in Q4, but throughout the year.
And a lot of the searches are basically where dawn on Amazon and so we we continue to spend.
Aggressively on Amazon on our marketing and on par as well so just to make sure that that was part of the Doctor says you are you're asking the question, but a lot of content that we have to flow to online.
Demand creation, which we did and so that was basically one big component of our marketing shift in Q4, just to basically go where golar eyeballs were going and where search works, we're being we're being searched. So that's the biggest component of our marketing shift that we did and we continue to execute as we actually get into 2023.
And we're not we're not planning just to be clear to draw down inventory, sorry, our marketing dollars.
A few innovations where we're excited about we have a couple of new franchises. We're excited about so we're pretty intent on spending marketing dollars.
Yeah.
Okay, great Thanks for that Matt.
Mark.
Sort of related promotions at retail.
We were looking at.
It just seemed like target Walmart U S based retailers are somehow.
Hesitant to promo choose promotes sorry to use promotions.
But there were plenty of spin master promotions, especially early so how are those discussions was there a pushback from retailers. When you said, hey, if things are slowing down we need to promote and run some some discounts because it didn't seem like the retailers are very aggressive in promoting for some reason, especially early.
I think your intuition is correct you know remember, we where we were headed into second half of the year and we're talking 2022, which is your question. So I'll just answer to that very directly.
And when you got to the third quarter right and we've talked to us in the last call, but I'll just remind ourselves there was basically a period, where people were beginning to draw down, but the consumer didnt respond and when we got to Q4 and that hadn't worked we had to basically go a little bit harder and your question about whether retailers, we're leaning in with us to do that or not.
While the conversation was what percent do we do what percent do they do et cetera, and so that was basically on the table, but we saw no choice, but to make sure that we were responsibly trying to get our items.
Cleaned to get into the year.
So our own inventory, we did really well with and our retail inventory did better than our competition, because we were aggressively pushing that agenda.
Yes, great that was very clear.
One more and then I'll drop out the Paw patrol.
Distribution revenue.
Theatrical related or movie theater related right when does the streaming hit when would that start to be booked.
Okay. So so garrick you correct the $17 million approximately that we've called out relate specifically to the distribution with the movie. This year is going to be different to 2021 in the sense that there's a theatrical release.
At the end of September followed by a Paramount plus 45 days later, if you recall in 2021, it was day and date in the theatrical and P. Plus release will actually on the same day and so now we have two promotional windows.
To actually get the impact of the promotion of the movie. So so we feel very encouraged by this strategy and things are more normal now in terms of.
The COVID-19 environment, whereas in 2021 things were just coming out of Covid. When we when we launched that movie in August. So so overall, we feel good about the second pull movie.
And I think because it's a little bit later as well in the year.
It's going to actually drive.
Gross product sales and licensing and merchandising a little bit later than it did in 2021, but and more into 2024 as well, particularly.
Particularly on the <unk> side, but overall, we're very encouraged by the movie.
Yes, I'm, sorry to monopolize so much time here, but I'm just again the distribution revenue for streaming that should hit in November so that will be a benefit to the fourth quarter, So you're calling out $17 million in the third quarter, what should we call after the fourth quarter.
Right. So the way that the economics work on this movie if you recall in 2021, the amount was actually $23 million or $26 million actually that was reflected for distribution revenue. This year, we reflecting less and we're taking more of the revenue share and more of a kind of a risk based approach with <unk>.
And that will recoup earlier, and we'll actually get more revenue as a result of that but that revenue garik is actually going to flow a little bit later later into 'twenty, three and into 2024 as it relates to streaming.
Okay, Great got it thank you.
We'll take our next question from Luke Hannan with Canaccord Genuity. Please go ahead.
Thanks, Good morning, Mark in your prepared remarks, you touched on a number of tailwind as it relates to Cogs in 2023, and freight being one of them I realize theres only so much that you guys can disclose here, but presumably if if we were to assume that the freight environment, maybe get a little bit better throughout 2023.
How much of a benefit or would that be a benefit at all to you guys. I guess, what I'm trying to ask is how much as we sit here today, how much of your freight costs are locked in for the year versus how much can you flex should there be some alleviation in rates.
Thanks, Luke So the question is an interesting one ocean freight rates have come down quite significantly and we've built we've actually built a fair amount of that into our outlook.
We're actually looking at freight rates on a quarterly basis, now and and so to the extent that freight rates come down even further there is some potential upside.
As it relates to the later quarters, but we are seeing we are seeing some pressure and some indications from the ocean freight carriers that there could be a slight uptick in the second half of the year and so we are being a little bit cautious on that but there could be some upside there.
Okay understood and then also if we just think about the PAH movie for a second here. If we think back to 2021, obviously was a very different environment, the retailers more or less and you can correct me, if I'm wrong, but the retailers more or less we're trying to get as much of an inventory.
They could get their hands on it was clearly very challenged supply chain environment. It's much different this time around but I think the commentary in 2021 was that the retailers had left some sales on the table. If you will has there been any indicators.
Conversations are preliminary expectations on their front that they could maybe be we'll say a little bit more aggressive when it comes to timing of sales or timing the inventory rather for the movie this time around.
Yes.
I think.
Good morning look I I believe that the movie for retailers is an important building block for PAH, along with Bravo and we're trying to get to the movie window with like a super great clean shelves. So that the movie items and are all the innovation that you would've seen can shine and Thats basically the number one objective and.
So right now they're working closely with us to make sure we get to that specific condition and we feel strongly that we are set up as of now to accomplish that that's the objective. So just just to add to what Mike said, if you go back to 2021, because the movie was released in August there was actually a fair bit of gross product sales that landed up in Q2.
Two in advance of the movie.
Because the movie is now at the end of September the majority of the shipments for the movie will actually be in Q3, some will be in Q2, but mostly in Q3, and then they'll obviously be gross product sales at landing in Q4, most of the licensing and merchandising revenue for the movie.
You know the backpack shoes that kind of stuff is really going to come very late in Q4, but mostly in 2024.
Okay understood I'll pass the line. Thank you.
Yeah.
Yeah.
The next question from Brian Morrison with TD Securities. Please go ahead.
Good morning.
Mark Mark I understand the composition of the Parliament, the economics, but if you're participating more on the risk share I presume youre going to share more on the upside of the box office. We're seeing this correct and then can you just remind me the box office benefits from 2021.
Yes, I mean, the first part of your question is correct. Bryan we will we will actually get less upfront from Paramount as it relates to the movie, but then we'll share more and we'll share quicker as it relates to the ongoing receipts and the upside in the revenue once Paramount has recouped the.
And marketing.
Budget.
Then we will share in the revenue.
So in 2021 we didn't necessarily break that out and we're not going to break out specifically the movie related revenue.
<unk> from from the movie, but what I will tell you is that what we saw with the first movie is that we actually got some of that upside in 2021, we actually got it in 2022 and a little bit in 'twenty three as well. So I think the benefit of our Rev share and the movie economics will actually be mostly in 'twenty four.
But also into 'twenty, five as well and it really depends on how successful the box office is and how quickly paramount to recoup the costs on the movie.
Okay.
Question I want to just go back to inventory I understand the retail channel inventory being heavy on the corporate level, though you brought that down very nicely I Wonder how you feel these stack up relative to your peers on a corporate level.
So I'll go first and then mix will add some commentary they just numerically if you look at our networking capital and if you look at our working capital management in general over the last few years I would say we are well ahead of the industry and I think we lead the industry by a wide margin in terms of our working capital management, so against our two biggest.
<unk> U S based competitors and the data is public we basically we would be better with decline in our own inventory.
One of them actually went up 23%. The other went up 15% so a material difference.
Okay.
Alright.
Last question I want to understand the interaction like what's the strategy of bringing this to market in 2023, how meaningful should we expect this to contribute to the top line and market and you still have the target of doubling digital revenue over time.
Brian just to clarify did you say no we didn't see it on the same.
Yes pardon me.
So our target of 20% for digital revenue in the next few years still stands.
I'll go first mix and then you can add just noisy is currently working on a bunch of projects relating to spin Master IP. The acquisition that we did of Nord light.
In 2022, because north like was actually helping noise in the development of the Rubik's game, if you recall, Brian and so what we did was we actually acquired North light and they are the ones that are fully focused right now on bringing the rubik's digital game to the market.
In 2023 in the middle of the year and so noyd. The noise studio is working on either spin master IP, whereas node life is directly focused on bringing the rubik's game to the market this year.
In aggregate, though shows how meaningful should we expect these to be.
Yeah. So.
First and foremost thanks, great question, and we're Super thrilled about our digital games future. So.
But I was just going to give you some more context I think noyd basically is getting us into casual game and Rubik's is our first execution of that and that is a really large addressable market for us. We don't play in today right. So we are getting into a soft launch this year and you can expect that that growth in that.
<unk> will express itself late into the year and into 2024 that addressable market is very very large so that's first and foremost. We also have other studios that we're excited are bringing new games to our digital games portfolio as well we've talked about the Paw patrol Academy that to US is very exciting is.
Basically going to be launched into Q4 and to coincide with the movie and so all the all the advertising and all the promotion for the movie will help us drift and basically get that property into market.
Prototypes, you're excited that's basically slated to launch as well.
And then on top of that we're working on two other games that will go into soft launched later in the year and so we're super determined to continue to expand the addressable market and digital game stores or 20%. So a combination of organic and inorganic but where we're thrilled teams are doing a great job in full.
Full force ahead.
Okay. Thanks for the clarification on the color.
We will take our next question from Jamie Katz with Morningstar. Please go ahead.
Hi, Good morning, Thanks for taking my questions I think in your prepared remarks, you had said that.
Pls, our sales were trending exactly in line with the category maybe that was during the Q&A, but I don't think you articulated what the category was doing this year. So could you just clarify that will start.
Yes, it's been flattish just to be clear and he basically depends.
We typically look at the whole globe in <unk> 11, and so it depends by country, but if I were to aggregate. It for you is about flattish and we'd been about flattish.
Excellent and then you guys have a thought process on how inventories will rightsize themselves at retail I guess through the second quarter can you give us sort of an idea of what the sensitivity to EBITDA EBITDA margins are.
That process takes longer than anticipated, perhaps if it takes like the whole year, because I suspect some of the.
Some of that benefit would be assumed in the second half of the year.
So Jamie.
Just as a general macro comment obviously, the seasonality shift we're going to see in 'twenty three versus 22 is going to be quite dramatic H $1 22 was 45%, we expect it to be somewhere between 30% to 35%.
This year in H, one and so obviously that volume shift is going to shift income in EBITDA from.
From H, one to H two in the current year.
And so really it just becomes a question of how long it takes for the retailers to to actually manage their inventory levels down. We expect our current expectation is that that is going to happen.
Mostly in Q1 and Thats why we actually gave specific guidance on Q1, because it's an unusual year that we are dealing with in terms of Q1. So there will be a relatively material EBITDA impact in Q1 as a result of the fact that replenishment orders in retail is managing the inventory in Q1 is going to impact.
Q1 shipments quite dramatically.
We think Q2 is going to start moving towards normality and therefore by the end of Q2 will be in a situation where hitting into the second half of the year, we'll be in good shape and the comps will be much better.
Obviously to the extent that that's something changes on the retail front, which we can't predict and this timing of shipments that may move from Q1 to Q2 Q2 to Q3 that will shift some EBITDA margins, but we can't guide to that level of precision right now at this point.
Excellent and then lastly can you just talk a little bit about the spin Master ventures business I know it was.
Noted that there were new.
Partnerships and I guess it would be helpful to know, maybe what sort of product offerings at <unk>.
Represent and maybe where you guys are seeing the opportunity to.
Try to take share and new white space categories. Thanks.
So we did do a few small investments in the in the fourth.
Fourth quarter of 2021.
In total for ventures since inception to current we've invested about $10 million in the ventures area.
Combination of toys Entertainment and digital games, we did do we did a small investment of follow on investments actually in the toy space in Q4 than we did two in the.
Entertainment space in Q4 of 2021.
So these are.
Areas in entertainment, where we saw nice content, we liked what they were doing and.
Sure.
In one case, there was a technology capability and entertainment that we wanted to explore further so no.
Nothing has changed in terms of our strategy and we're quite excited about some of the things that we're seeing coming out of the eventual space the biggest and most significant.
Venture activity that occurred in New York was when we actually acquired Nord light, which was a follow on investment from an early venture investment and that was exciting for us in terms of the rubik's developments that mix described earlier.
Alright, thank you.
Okay. Operator, we have time for two more questions and then we're going to have to call. It.
Okay. Thank you we'll take the next question comes Alot Com with RBC capital markets. Please go ahead.
Okay, great. Thanks, and good morning, just I guess, it's been a bit of discussion on the inventory here could you provide maybe a little bit more color on.
Is there a specific categories. You know you talked about maybe preschool being a bit more backend weighted partly driven by the movie but is there any categories you a bit more focused on where you want to get the retail side of the inventory a bit more cleared up.
Good morning Sal.
Yes, I will get into it and I think it's important that we realized that when we think about it and reporting inventory, we're thinking global right and so the first call of orders to make sure we understand that within outside of the North America, particularly the U S market in the U S. There's quite a big difference so in Europe .
Be pockets and I'm talking about really small pockets in certain countries, but is not the same as we have in the U S. So that's the first thing to note and so we're giving a dose you know very specific items in Europe , and we feel good about where we need to get through so that's point number one point number two when you think about the U S. Within North America that is where we have the majority of.
The issue and where we have the majority of our focus within the US You also have to look at channels and within channels you have to think about mass and within mass are to customers and that is where the majority of the issues are that we're working through E. Commerce is in a very different place and in fact club is in a different place there might be some daughter channels customers that may have.
Sporadic things that we're working through but that's the context at our geographical and then channel level and then we do have color in specificity within categories as well and within the <unk>.
From preschool you know Paul exited the year and Mark in his prepared remarks that 16% decline in Pos. So we're working through some things and when you think about it as basically some of the themes in Q4 that because of all the congestion of inventory into Q4, we're not able to sell through and those sort of new themes. So when you get that new seeming to 'twenty three.
It's not like it's a theme that would've been there for a year. So dean that has been there for about three months at best So that's the condition. There are maybe other couple of categories, but by and large I think thats the color I wanted to provide.
Alright, Great and then just a quick one on you mentioned e-commerce there.
I guess on that front that you are investing in are changing as we kind of look forward post pandemic or is it just more now growing in line with the major customers, whether it's e-commerce only or the bigger box ones. Just curious how maybe you're thinking about that channel as we kind of operate in a post pandemic world.
Very differently.
<unk> of our revenue.
I don't know.
Put that in the prepared remarks, but I'm happy to share it's public so not seeing anything that is not public.
The number one customer in the U S is no longer who we would have been a year ago, its actually Amazon and so we prepare for data over a year and a half ago and changed our technology stack to make sure that we were doing better in that space not just for Amazon to be clear, but as other.
Other digital commerce was happening where they're at target or at.
You know Walmart or beyond.
We adjusted that's point number one point number two our share has done better in e-commerce that need house in brick and mortar which is good because we prepared for it and as we go forward. We have a team solely focused on driving our sales and our content in E Commerce and it is not just sales and revenue.
It's about also marketing our products through that medium. So we have a whole new way to do it. We're excited about it and is going beyond the U S into other parts of the world.
Great. Thanks very much.
This will be the last question operator.
Thank you we'll take the last question from Gerrick Johnson with BMO. Please go ahead.
Alright, thanks, Yeah the.
The last question here is I want to go back to something that I think Max you Might've said earlier in the year that you thought paw patrol revenue this year would be equal or better to perpetual revenue in 2020, the year before the first movie did that did that play out.
It did it did thank you Eric.
I know, we Couldnt tell you are in a quiet period, but you know and and by and by the way that happen on revenue on POS you know again, we've looked back to 2019 and and we have countries that are in 2022 growing double digit both revenue N. P. O S. So it's a difference of development of the property depending on the country.
But you know, we're vigilant and we look forward to a stronger 'twenty, three and making sure to Brian says healthy healthier as we exited a movie year.
Great. Thank you very much Max.
Thank you.
Okay, well that concludes our call. Thank you very much everyone and we will be talking to you again in may with the release of our Q1 results. Thank you and talk to them take care Bye bye.
This concludes today's call. Thank you for your participation you may now disconnect.
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