Q2 2023 Spin Master Corp Earnings Call
Okay.
Good day and welcome to the Spin Master Corporation second quarter 2023 results call Today's conference is being recorded.
Thank you, Chris and good morning, welcome to spin Master's financial results Conference call for the second quarter ended June 30th 2023, I'm joined this morning by Mark Segal Spin master's Chief Financial Officer, and Renan, Harare Chair and cofounder Max Rankle, our global President and CEO will unfortunately not.
Be able to join our call today we.
We are saddened to sure he has experienced a loss in its family. That's just fine father who's passed away.
Our thoughts and prayers are with Max and his family during this time.
For your convenience the press release, MD&A and interim consolidated 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 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.
Based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that certain estimates or assumptions will prove to be correct. Many factors could cause actual results to differ materially from these 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 maybe required by law spin Master has no obligation to update or revise any forward looking statements, whether because of new information future events or otherwise.
For additional information on these assumptions and risks please see our cautionary statements regard with regarding forward looking information in our earnings release dated August 2nd 2023, and please note that spin Master reports in U S dollars and all dollar amounts will be expressed today in U S currency unless otherwise noted I would now like to turn the call over to Mark.
So if you mentioned with sorry to mismatch today with the costing of his dad yesterday, but we are happy to have renamed join us today.
We are pleased to have delivered a solid second quarter, which was inline with expectations. Despite last year's unusually front end loaded shipping patterns.
Our results reflect our commitment to building three thriving creative centers and investing in long term growth.
Together with a winning combination of choice entertainments and digital games, we are expanding our reach and providing kids and families around the world with magical experiences by re imagining everyday play.
These high inventory levels caused retailers to slow orders in the first half of this year, resulting in Q2 revenue declining 29% in comparison to Q2 'twenty two.
Retailer inventory clearance activities have now been concluded.
The clearing of retail channels creates a pathway for new items to be launched for the holiday season.
From a spin master perspective, our U S retail inventory at the end of Q2 was down 17% over last year as of the end of Q2.
Last quarter, we spoke about the expected softening of the toy industry in 23, specifically in the U S. A region that has traditionally held up well during tougher economic periods.
Global toy Pos in Q2 declined 10% and we trailed the market with a decline of 17% versus the Cana.
As in Q1, most of that decline in Q2 occurred in the U S. With P. O S declined 22% compared to the industry, which was down 12, 4%.
We are however, encouraged that pls declines have begun to slow and in late June and in July we have started to see growth reemerge.
For example, we had very strong results in the U S for Amazon Prime day with P. O S. Well ahead of our expectations and ahead of market growth.
Our Prime day performance increased 130% year over year.
And set an all time high.
Internationally.
POS declined four 6% in Q2 outperforming the total industry, which was down six 4% corsicana.
This result was in part due to less inventory clearance within Europe .
On a year to date basis, we have gained share in all of our hearts are the countries and the G 10, According to <unk>.
The preschool category continues to be a key area of strength for spin Master led by Paul control, a leading preschool franchise, which is celebrating its 10th anniversary this year.
In Q2 pulp control was the number one preschool toy property globally and has held that position since Q1 of 2020 Corsicana.
In Q2, we had three of the top 10 items within the infant toddler preschool category in the U S versus Canada.
These dalhouse perfect place that was number four pulp patrol echoed pumps was number five and the poll patrol Big truck pumps was number nine.
In Q2, our global Pos for Paw patrol declined approximately 10% plus of Canada.
In Q2, our U S. Pos for Paw patrol was down slightly pushed mccanna.
However, in the U S on a year to date basis pulp patrol grew low single digits in the infant toddler and preschool category.
We are optimistic for the toy line in the second half coating coinciding with the release of our second feature film for the franchise on September 29.
We expect the second pole movie to have a similar halo effect on the brand's performance as it did in 2021.
<unk> Dollhouse continues to produce incredible results.
Having built a strong consumer fan base around the world through the Netflix show and its robust digital ecosystem.
Within Doles and interactive we are very excited about the launch of hatching was alive. Beginning this August which will give kids a whole new way to hedge using water to bring these characters to life the.
The price points of this line lends itself well to parents seeking value during the holiday season.
As many of you have seen we have another exciting launch within the dolls and interact with category. This fall.
Lindsay the digital pet you can touch embodies the best of our innovation and Leverages, our brilliance in creating engaging interactive toys.
While the product only just set in the U S. On August 1st we are seeing early signs of very strong performance initial launches in China, Japan, Spain, and Portugal have shown strong reaction and very positive sell through results and Betsy is already nominated for a number of industry Awards.
We have several strong properties within our Wilson action category, including Monster Jam Bakugan DC of TEQ TEQ, notably.
Bakugan became the number one property in the battling toy category globally on a year to date basis compared to number two last year. According to <unk>, Canada.
We are excited to reinvigorate the brand this fall with a new season of our MMA adventure series hitting Netflix beginning September 1st.
Featuring a revamped anime style and a fresh storyline and new characters.
The new season will first be revealed in roadblocks, given our past success with Leverages <unk> to reach kids and.
And we will be complemented by a new toy line with an enhanced way for players to battle.
Putting master became the number one manufacturer for the DC universe globally up from number two in Q2 of 'twenty two according to <unk>, Canada.
As we have mentioned previously the DC universe continues to bring new firms to fans throughout 'twenty, three and through to 2006, which will have a halo impact on our toy lines.
Within games Rubik's Cube continues to grow.
<unk> was 16, 9% year over year and was the number seven brand according to <unk>, Canada.
The franchise items, an evergreen staples solid price points. We believe we are in a good position to succeed.
We expect that consume consumers will be looking to purchase at more modest price points and will be shopping even later in the season, given that Christmas falls on a Monday this year.
We have created robust marketing plans that cater to the current consumer and marketplace realities.
Our paid media activities are aligned to key tentpoles retail activations and promotional activity and we have ensured maximum flexibility to remain agile in our targeted marketing campaigns to meet the consumer where and when they shop.
Turning to entertainment, we had another strong quarter with revenue increasing by over 19% driven by higher distribution revenue.
Previously we shared that we have launched or are launching three brand new entertainment properties in 2023, rather than crew leaders events and Unicorn Academy.
Vita, which is a new animated preschool series is set to debut on Bvc's cbeebies in the UK and on choruses Treehouse in Canada. This fall.
Since we last spoke we have signed close to 10, new international distribution deals for beta, including the U S.
We are also approaching the launch of Unicorn Academy, a new fantasy adventure series that will start streaming on Netflix globally in November .
The full franchise marketing plan will beginning September as we preview the content viral blocks stock paid media and execute our influencer and Youtube content strategy.
We have already made tremendous progress on building our licensed consumer product program, signing several license source within fashion publishing bedding, sleepwear health and beauty and accessories.
We are aligning our franchise marketing efforts to regions, where Netflix is the deepest reach.
Additionally, our digital games team is currently developing the Unicorn Academy mobile action adventure digital game that encapsulates the magic of the series and expands overall engagement in the franchise.
Earlier this year, we introduced our first spinoff for pulp control rather than crude I am pleased to share that ravelin crew continues to be a top performing series on Nickelodeon.
Given us impressive showing in its inaugural season, Nickelodeon has Greenland, a second season for Robyn and crew.
Our original pulp patrol series also continues to perform well ranking in the number one spot on Nick Junior in May and has been greenlight Greenland for its 11th season of.
Of course, we are approaching the release of our highly anticipated second feature phone pulp patrol the Mighty movie Salesforce theatrical debut on September 29 in association with Nickelodeon movies and Paramount Pictures.
The trailer was released on Youtube in June and has accumulated more than 17 million global views already.
This is the first year over year quarterly increase we've seen in digital games since Q2 of last year.
This was driven by new content releases, including the launch of a second licensee impact with Spongebob and higher engagement with monthly active users up 3% year over year to $58 million we.
We now have 76 million monthly active users across the toco Boca ecosystem.
We think the fan community within Tucker will be Super excited with Tokyo days.
Polka days will allow the opportunity for open ended play and creativity, coupled with the ability for social interactions between players.
Player sentiment so far has been high based upon the initial feedback and learnings the team is making continuous improvements to ready for a full go live in 2024.
We are launching a poll control App pull patrol Academy this fall to coincide with the movie.
This will be our first in house developed pulp pulp control App focused on integrating show content was fun learning experiences and emissions for preschoolers.
Our new Rubik's cube casual game officially known as Rubik's match will have its worldwide release in early 'twenty fall in line with the cubes 50th anniversary.
With the continued popularity of <unk> as a physical toy. We believe this mobile digital game will resonate with fans young and old and will attract new diners to the brand.
This comprehensive bundle of apps will include thousands of top graded activities created by parents child development experts exits.
The best touch screen content with one single membership at significant savings.
Leveraging our IP across our creative centers is core to our strategy and we are excited about the opportunities for growth stemming from the initiatives underway in and across each of our creative centers.
Turning now to our financial performance in more detail as I mentioned total revenue in Q2 was 427.
The challenging year over year comparisons this reflects a 17% decline in revenue compared to Q2 'twenty two.
This decline can be primarily attributed to the return of traditional seasonal order timing.
Toys create a center.
As a reminder, in May we discussed how the toy industry in the first half of 'twenty three felt the impact of retailer clearance activity after ending 'twenty two with significant inventory carryover.
Comparisons from the first half of 'twenty three to the first half of 'twenty to look, especially unfavorable since we had unusually high sales in Q2 last year as retailers brought inventory in much earlier than normal to avoid anticipated supply chain disruptions.
On top of this.
<unk> thousand 822 were inflated by the DC Comics Batman movie launch and we were still shipping in Russia.
Outside of the top line performance, we continued to develop consistent operational and financial results, achieving a strong earnings and margin profile with EBIT with EBITDA at over $88 million for the quarter at a 21% margin.
Looking at Q2 performance by Creative Center toy gross product sales were $319 million down 19, 5%.
Foreign exchange did not have a material impact and on a constant currency basis GPS declined 20%.
Geographically in Q2, North America was responsible for the decline both in dollars and percentage terms as the trends discussed earlier were more pronounced in the U S.
Preschool indulgent interactive declined 28% primarily from a drop in sales of pulp control had symbols wizarding world in postpaid <unk>.
Partially offset by an increase in Betsey, Robert <unk> crew and Gabonese dollhouse.
Activities games, <unk> puzzles, and plush was down 24, 4%, mainly due to a decrease in the games and puzzles portfolio and kinetic sand.
Wilson action dropped 12, 8% driven by decline in DC and Bakugan outdoor.
Outdoor was down 11, 7%.
Q2 sales allowances were 11, 2% as a percent of gross product sales compared to nine 7%.
Solid result, considering the broader retail environment, we were operating in.
Q2, adjusted EBITDA for toys was $47 7 million compared to $83 2 million at 13, 8% margin compared to 19% the.
The primary factor behind the lower EBITDA margin was the deleveraging effect of the reduction in soy revenue relative to administrative marketing and distribution expenses.
In Q2 entertainment revenue increased $5 5 million or 19, 4% to $33 9 million from from primarily higher distribution revenue from the first pulp patrol movie as well as new content deliveries will be to the vet, Robert <unk> crew and Unicorn Academy.
These increases were offset by lower licensing and merchandising revenue.
Adjusted operating income was $16 3 million down nine 4% and adjusted operating margin was 48, 1% compared to 63, 4%.
The decrease in entertainment profitability was driven by higher amortization of content production costs, and lower licensing and merchandising revenue as a percentage of total entertainment revenue.
Q2 revenue digital games with slightly higher at $40 5 million compared to last year.
This was a strong results with digital games as mobile gaming in Q1, and Q2 'twenty to continue to benefit from Covid factors.
<unk> World was particularly strong in Q2 this year.
Digital games adjusted operating margin in Q2 was 31, 6% up from 24, 8% because of lower marketing spending.
Overall Q2 consolidated gross margin was 54, 9% down from 56% because of lower entertainment licensing and merchandising revenue.
Higher amortization of entertainment content and higher sales allowances as a percentage of toy GPS partially offset by favorable toy product mix.
Assistant with the deleveraging we saw in Q1 SG&A in dollars was down year over year, but higher as a percentage of revenue.
G&A was $179 5 million representing 42.
7% of consolidated revenue compared to $119 4 million or <unk> 37, 6%.
Marketing costs were down $4 million at seven 3% of revenue compared to six 9%.
Administrative expenses were flat with lower incentive compensation personnel and consulting costs offset by higher restructuring costs.
We continued executing on our plan to close our last remaining manufacturing facility in Calais, France, which we inherited in 2013 with the acquisition of <unk>, Canada.
In Q2, net income was 28 million or <unk> 26 per diluted share compared to net income of $88 1 million or <unk> 83 per diluted share adjusted.
Adjusted net income in the quarter was $48 8 million or <unk> 45 per diluted share compared to $72 4 billion or <unk> 68 cents per diluted share.
Adjusted EBITDA was $88 4 million compared to $113 7 million.
Adjusted EBITDA margin was 21% down slightly from 22, 5%.
From lower operating leverage.
Turning to the balance sheet, our on hand inventory at the end of Q2 was in very good shape at just over $115 million down $34 million compared to $184 million last year.
We ended Q2 with $554 9 million cash down $89 million from $644 million at the year end.
We continue to be in an extremely strong liquidity position with available liquidity of over $1 billion.
From a capital allocation perspective investments in innovation content and M&A remain our top priorities.
In addition, we continue to look at all avenues to maximize total shareholder value in Q2, we repurchased 156200 shares for $4 2 million, bringing the total to 397700 shares year to date.
We will continue to use the NCI be opportunistically and believe that together with the dividend. This represents a prudent use of capital and an important part of our efforts to create value for shareholders.
Turning to our outlook 22023 has played out as we expected so far and we are pleased to confirm our guidance for the full year.
We should recognize that this is a unique macro environment and that makes forecasting a challenge, but despite this macro backdrop. We are confident in our innovation the strength of our entertainment and digital games content and new toy launches plant.
We continue to expect the 2023 toy gross product sales to be flat to slightly down compared to 22.
In 2000% to 45% of our gross product sales occurred in H, one compared historic compared to historical seasonality of 30% to.
To 35%, which created a difficult H one comparator for us.
This headwind will act as a tailwind in <unk>, especially in Q4 as the reversion to traditional seasonality.
Combined with a jam packed toy entertainment and games release schedule works in our favor.
We expect sales allowances of approximately 13% for 2023 higher than our normal range of 10% to 12%. This will allow us to ensure we meet our sell through in your inventory targets, but will not negatively impact gross margins due to strong cost control measures and productivity within our supply chain.
We are maintaining our expectations for 'twenty three revenue to be in line with 2022, excluding the $17 million pulp control the Mighty movie distribution revenue expected in Q3.
For the year foreign currency translation is expected to provide a slight tailwind on revenue based on current market rates.
We are maintaining 2023, adjusted EBITDA margin guidance, which should be flat to slightly above 2022, excluding 17 million poor patrol Mighty movie distribution revenue.
And $55 million in Q4.
Our capital expenditures are now expected to be 6% of revenue down from 7% we communicated earlier this year.
We continue to invest in entertainment and digital games content and this change is simply a timing shift between 23 and 'twenty four for certain entertainment and digital games content.
Later this month some of you will be joining us in Stockholm, Sweden for a deeper dive into the incredible work taking place within our digital games Creative Center the.
The purpose of our trip is to highlight in more detail. The incredible development that the teams have done in the lead up to the launch of several new digital games.
We know, it's a big investment, but for those of you not yet signed up who may be interested please contact myself with Sofia.
To conclude we will continue to leverage our integrated creative center platforms to generate above industry growth in the medium to long term and to leverage our IP scale and talent across our creative centers.
Combined with a strong balance sheet, we intend to capitalize on both organic and acquisition opportunities and in doing so build long term shareholder value.
That concludes our prepared remarks, we will now be pleased to take questions. Operator. Please open the line.
Thank you ladies and gentlemen, we will now begin the question and answer session.
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Your first question comes from Brian Morrison TD Securities Brian . Please go ahead.
Thank you very much first off my condolences to Maximus family.
Mark when I look at guidance, Steve had revenue sort of in line with guidance. The first half of the year, but pretty strong margins more than we would have been anticipated I think implies maybe a bit of a tailwind or Christian in terms of your full year margin guidance. So are you at this time more comfortable with your full year margin outlook for in the first half performance and the potential to meet or exceed that.
Or is there some sort of offset that we should be thinking of in the back half of the year.
Hi, Brian Good morning. Thanks.
I would say to you. We are obviously pleased without EBITDA performance I think we've done well we've managed our margins we've managed our costs very well and there's been a lot of focus from Max myself and the rest of the executive team on this and I think it's a good measure of our ability to keep our gross margins up and stable.
And manage our costs for the balance of the year.
However, Brian as you know we're sitting in late July early August we have a long way to go we are 70% approximate approximately about GPS still to come in the second half.
I think we collectively feel that prudence is still required which is why that even we even though we beat.
In Q2 on margins, we're still holding our guidance for the year.
Okay I appreciate that and then I want to talk about digital gains for a minute.
So you're talking about obviously the exciting launch of your digital product and growth in digital games and I assume we'll get more color in Stockholm, but.
<unk> got this 20% forecast and I'm wondering if you can provide some data points like should we think of this growth I think it's 8% today should we think that it's more organic is it more M&A.
The M&A physical properties that you develop in house or more digital platforms and our the acquisition multiples more reasonable now now that you might get something done on this front.
I'm going to answer the first part of that and then I'll, let <unk> comment on that as well.
I think if you.
You look at if you look at digital games.
We're actually at around 12.7% about total revenue on a year to date basis coming out of digital games.
And so that business has grown and it continues to grow and we're excited about it we're seeing some good activity happening in the in the digital game space right now Tokio life World in particular is resonating very well both in Q2, but also in July and so we're actually very comfortable with that I think al.
At least for the initial part of all our growth. We're looking at organic growth. We've got a number of big games that are launching in the next 12 months I'll, let Renee and discuss those but we're also continuing to look at M&A as a complement to that organic strategy renamed do you want to add some for sure Hey, Brian how are you.
Hey, Brian Nice to hear your voice.
I think that will continue with our strategy, which is first and foremost.
Being located in two incredible places in the world for digital games, one being Toronto and the other one being Stockholm, Sweden.
And that gives us the ability to.
Higher incredible local talent, so the ability to create our own in house Studer.
Our studio, which is noise, which is producing the Unicorn Academy game.
So being able to hire local talent and then two smaller acquisitions like we did with Nord life.
In Stockholm, which will meet which is building the rubik's match game.
And then the acquisition with the originator.
Which has been an incredible acquisition for the company.
Which is now actually.
Responsible for putting out the PA Academy cameras coming out.
Paul I wouldn't actually call it a game I call it a platform.
And then I can talk to it more if you're interested.
But.
It's interesting so now we've.
Made two small acquisitions and those small acquisitions or.
Kind of put out some incredible games and then we have our own studios that are continuing to do magical things. So I think youll see a combination of both those things are moving into the future and also growing the existing studios that we have so now we now have a total of five studios globally around the world.
And you will see growth within those studios moving forward.
Okay. So it sounds like a combination in terms of M&A. It sounds like it's going to be more tuck ins and anything of significant material size left there.
Listen you never know I think that.
We are.
Tuck ins are working well for us the organics working well, but if there is an acquisition of size.
To help grow this part of the business, we're not going to shy away from it.
And with the multiples being more reasonable today than they were say 12 months ago.
Yes, Brian we've definitely seen multiples come down in this space.
Particularly in the emerging of newer companies.
Those multiples with very frothy about 12 to 24 months ago, and with rates going up and venture capital kind of throwing up in that area. We've definitely seen multiples come down in the digital world, but that's true of I think that's true of all areas. In fact that we're seeing in the acquisition area I think multiples have.
Come down.
Thank you both very much thanks.
Thanks, Brian .
Thank you. Your next question comes from <unk> Khan RBC capital markets. Please.
Please go ahead.
Okay, great. Thanks, and good morning, Mark you gave some color earlier on just some of the prior year comps and how they played out can you maybe.
I'll give a little bit of color on looking ahead.
The prior year comps bolt on the shipping side and on the Pos side to help us think through the back half of the year and maybe if you can also just tie in.
Just given all the moving pieces youre confidence on the.
Our full year guidance, both on the top line out on the margin front and just how confident you are at this point in the year.
Okay.
Hi, <unk>. Good morning, that's a big question. So let me let me deal with it in two separate sections. If you don't mind first I'm going to respond on the question around growth in the second half of the year and how we feel about that and then I'll give you a little bit of a some color on our views on the comps in Pos and everything thats going on because.
Obviously, theres a lot of noise in the market around Pos.
So I would say to you when you look at the second half of the year and you look at the toy area in particular, the five sectors that are driving growth and give us comfort for the year.
Firstly, we have high quality innovation, that's coming out we've got <unk>, We've got Bakugan, we got <unk> alive and they're at the right price points and we think that innovation is going to be critical to win in the second half this year.
Secondly, we have incremental business, that's coming we have rubble, which is new we have Hicks bugs, which we acquired we have 40, we have <unk>, which is growing internationally very nicely and we've got more.
More points of distribution.
Thirdly, we have.
Really good marketing strategy I think our new CMO CMO, Jeremy has done a great job in terms of <unk>.
Building out a strategy with.
Agility, which is invested in key priorities, especially in the digital area with strong content backing it up.
Our price point for the for the second half of this year for the full season is less than $35 on average so we're helping consumers and and I think that's going to be an important factor in the fall.
Finally, I would say to you that that we have strong potential in digital games, I think that telco life world and other digital games aerosol coming alive again, and so we're seeing some reemergence of of growth there and thats encouraging for us in the second half.
If you actually look at it from a comp perspective.
Obviously, if you look at the server you know it was not great in Q2 or in the first half in general no one likes to see that but but I don't think anyone should really over read on that is too much because there was tremendously heavy clearance activity in the first half of the year now we had less inventory it re.
Tail to clear.
And on hand for that matter and so.
We want the beneficiaries of a lot of that clearance related Pos because a big percentage of the POS was clearance driven and very heavily promoted now if you look at our gross margins in toy relative to our competitors, you'll see that our gross margins were stable, even though our sales allowances was slightly higher we did.
I have some more enhanced promotional activity, but our gross margins were still stable and strong which is an important point.
In Europe , there was less inventory to clear and we outperformed and even though in the U S was really bad in the first part of the second quarter in late June and July we've seen really good signs of consumption and grocery emerging Prime day is a good example of that as I say to you digital games is growing nicely as well.
And so.
Overall, we feel confident that we're going to get the tailwind we expected in the second half, particularly when you look at the comps in the second half of 'twenty three against 22, sorry, Thats, a long answer, but I want to make a comprehensive for everyone.
No. Thanks for that and I guess, you alluded to this a little bit just a question on the Paw patrol movie.
Can you maybe talk about to the extent you can just your expectations for this movie maybe in context of how the last one data and just kind of how you are planning for it.
And through Q3, and Q4 with the products product Rollouts.
Sure.
2021 was was it in August day, and date release, and we were still in Covid. So day in date means that had went to theaters and screaming at the same time this.
This year 23 with launching on the 29 to September and it's actually got two Windows is a 45 day theatrical exclusivity period before it goes to asphalt and streaming now that gives us two promotional windows and more marketing opportunity. So we feel good about that it's also going to be more theaters. This year, it's in over 4000.
Theatres compared to 3000 last year. It is also more retail points of distribution this year and more licensees, we're actually licensing the poor product generally toy as toy and non toy over <unk>.
The countries and we've got 25 Blue chip CPG licenses lined up.
And obviously, that's great work by Paramount.
Now the other thing to keep in mind is that the later release at the end of September It does have an impact.
Good news for 'twenty, three because we still get a big chunk of sales in 'twenty three but because its later will also have a flow of and more impact in the first half of 'twenty four from the movie.
Also and as you would expect.
We always see a lift from a movie and Youll see a decline that's normal but the reality is we think that the decline will be less this time because of the flow over into 'twenty. Four. We've also got the fact that rubble is going to be in its first full year in 2024 and that will help.
So that's some color around the movie, but Renee do you want to just give everyone a little bit of a sense of how you're thinking about movies in general.
Yeah, Hey, Sarah I think that.
The second film is.
The quality of the film the production I think that.
It's.
It's better than the first film.
And it's just such a different type of narrative to see the pumps as superheroes come to the big screen.
And I'm, just so proud of our team for being able to produce this film.
And just to remind everybody that we produce the films in house.
We obviously finance the films partially ourselves, but the production is done in house with spin master with their own people, we don't outsource us and the ability to do that.
Is an incredible asset for the company, an incredible asset for us going forward.
I'm really excited about the fact that we have this 45 day window.
We're in more theaters.
Is going to go on to Paramount plus afterwards, and so the great thing about these films they have long lives and the kids, just watch them over and over and over and over again.
And just reinforce and expand the whole Paul universe. So overall I'm really excited and then in terms of films.
I think that we've seen.
And.
I would actually say going back.
Is this basically in the last year, we've seen a lot of examples between Sonic and Mario and Barbie, just the strength of toy IP or or kids based IP being turned into films.
And people wanting to see those IP is brought to life in those characters on the big screen and so we're very excited about this movie and we're excited about turning bakugan into film.
And looking into our.
Treasure chest and taken things like tech that can potentially turning that into film and things like Unicorn Academy, we're already working on scripts to turn that into a live action film so lots of stuff to come.
From spin Master in terms of film area.
Great. Thanks for that and just one quick one.
No there was no mention of the perpetual App coming out later on in conjunction with the movie.
Just trying to think through the revenue side of that is that more of a brand building platform I think indicated some games and things like that on there were just thinking how you plan to maybe monetize that or is that just largely a marketing and brand building exercise that option.
Yes.
I was a developer that was if I was originator working on us and hearing this call I'd be a little upset because I wouldn't call. It an app is it's actually.
Say, it's a misnomer to call it an app maybe get it on the App store, but it's I would actually call. It a platform and it's 100% revenue generator for the company and the reason why I use the word platform is because it's actually a combination of learning.
Music and video all combined together.
And.
I have to just take my hat off to the whole digital team into originator for bringing this to.
Berthing it because we've been talking about doing something like this for 10 years.
And.
Yes, it will.
Enhance the overall franchise, but I think this is going to be a catalyst to ignite our subscriber growth and our whole.
Digital games area. So we're currently sitting with about 330000 subscribers and this platform is going to kick in and drive a lot of subscriber growth will be talking about it in the future in terms of what our outlook would look like in numbers and stuff like that it's going to it's going to retail for 799, 799, a month or 70 919 <unk> yet.
But this is SAB, 100% this as a revenue driver for the company.
Okay, Great that was helpful color. Thank you.
Okay.
Thank you. Your next question comes from Adam Shine National Bank Financial Adam. Please go ahead.
Thanks, a lot obviously, my condolences to Max's family and welcome <unk> back to the call.
A couple of housekeeping items for you bark and then maybe two.
Two more first off just in terms of the cost savings.
We've seen the restructuring charges move up into the $10 million to $11 million zone is that the level of related cost savings or potentially incrementally more than that.
No the cost savings on a run rate basis will be more than that going forward. Adam I think on the on the <unk> side, we're looking at around $3 million a year.
On a run rate basis cost savings and then the earlier workforce reduction we did earlier in the year is going to be around $10 million annualized so total around $13 million of run rate savings going forward.
Okay. Thank you that's helpful.
Are we back to your comment on sales allowance and the fact that it's a bit more more towards 13%.
I could see obviously or we can all see the.
The increase in H widen for obvious reasons, some of which you've already touched on on this call when I look to what.
Could you speak a little bit more to that because that seems to be tracking a bit higher particularly in the context of what transpired last year, especially in Q4, and then ill follow up with two more please.
Yes, sure so so.
Yes, listen I debated that 13%.
I will tell you there's two there's two reasons for it one is.
One is the fact that.
We've seen growth in Europe , Europe has a higher sales allowance environment as I've explained to you before so this is just the geographic mix element to this.
Regardless the second element is I think goes back to the overall tone that answer I think Brian question on guidance in general and our EBITDA margin.
I think that the second half of the year, they will be more promotions more discounting and so we have factored that in to our guidance and into our outlook and I wanted to call that out for you.
I think if you speak to crispy at all in our sales team I don't think theyre actually going to want to spend that money to be honest with you, but and we're going to try not to but we thought it would be prudent to call. It out just because of the macro uncertainties. The one thing I will say too Brian .
Adam is that we don't think its going to reduce our gross margins because we're actually seeing some tailwind coming from ocean freight we are managing our supply chain costs very tightly and so from a gross margin perspective.
That's neutral if you look at our guidance right now and if we don't need to spend it for whatever reason then it will represent upside to margin perfect.
Perfect. Okay. So I expect those to be the two the two explanations I just what I.
I want you to hear you say that.
You've talked about how you are positioning for the consumer you talked about the context of.
How how things evolve in the second half can you just maybe talk a little bit about how retailers beyond.
Inventory Destocking dynamic that has largely run its course, how they're thinking.
About the overall market does it remain.
Very cautious very last minute a greater burden on you to take on more inventory.
Just characterize the general retail, particularly the big box retailers as we move through the early part of Q3.
Yes. So if you look at if you look at the retail environment now I think you have to look at it in the overall context of the cycle that we've been through with if you go back to the first half of last year. It was real concerned about supply chains, and so retailers were building up the week supply on hand quite significantly then we had the whole issue.
You have rising in Q in the <unk>.
Second half of 2022, all the macro factors that led to the.
Massive overstocking and all the retail a clearance activities that have happened in the first half so retailers have been particularly cautious very profit focused and very focused on reducing inventory and getting weeks supply way down.
What we're seeing now is that things are starting to normalize we've actually we've really gone through that retail clearance activity.
Weeks supply on hand are starting to normalize and and overall the retail cone is such that we have seen a turnaround.
Towards the latter part of June and into July where retailers are starting to actually position themselves now for the second half of the year with many of the problems actually behind them and behind all of us.
The Rubik's cube as complicated as it is at least has a solution.
What have you sort of look look at your cash hoard.
And.
The absence of perhaps patients added eventual materially sized acquisition.
It's a dilemma.
Terms of how to cope with a float.
Certainly suboptimal at.
The fact that M&A has not been big and you've alluded to a comfort doing some of the tuck ins. So maybe more from your perspective, the board's perspective.
How do you look at the cash hoard it at sort of the suboptimal leverage that clearly has not helped the stock.
Well first I would like to admit that I've can only do one side of the Rubik's Cube I can't do all six.
But.
I would say listen it's a good problem to have these are good problems to have I'd, rather have that problem than then.
Being been drowning in debt.
So I think that's.
People should look at spin master over the course of our 30 year track record and history.
And.
We're a prudent company and when the opportunities arise, we'll be there and we'll take advantage of them.
And it's been really.
Choppy waters in the last years and sometimes.
You make the wrong acquisition and you pay the price for it and start writing it down. So I think that we are a growth company and we will allocate and deploy the cash to get the highest type of growth for the company and the best strategic growth for the company and that if that takes some more time.
Then pi.
Hi.
Our request the patients on behalf of the shareholders and so.
Funny I was reading a Warren Buffett book last night, and they were talking about how he held onto.
The Washington post for so many years and when he bought it and and how it was such an under leveraged.
Stock and company and people just didn't understand the value.
I feel the same way, but its been now so I don't think people fully appreciate.
That's going on here in this company and all the levers that we have to drive growth in the depth of the portfolio.
And I am Super proud of our management for the way they've managed especially these choppy waters and to deliver the profitability and keep the margins high.
In this environment is incredible.
And I think that the strategy of our three creative centers.
Are just starting to bear fruit and you will see that coming out in.
In this third and fourth quarter the ability to produce the Paw patrol Academy platform in conjunction launching with the film launching on package with QR <unk> codes.
That that platform with the PA Academy.
Could not be outsourced.
You cannot get the outcome of that the quality of that platform and the innovation that you guys will see when it comes to market.
If it was done or outsource to another gaming company and licensed with some sort of licensing model. The same thing with Unicorn Academy So excited for that.
Uh huh.
Franchise to hit Netflix starting with a special one hour movie it's incredible.
And the world I wouldn't even call it a game, but the immersive fantastical world for kids, it's going to launch in the first quarter of next year.
Again.
Could not have been done by outsourcing it to another to another party. So I think that's not I think but that combination of the three creative centers in the amount of money that we're putting in and I think the shareholders should look at the amount of capital allocation that we're starting to put into all of our games and put into our entertainment franchise. So we are deploying monies.
We're just being very strategic about it so I think that the story is continuing to be written.
And I encourage people to.
Dig deeper into the assets of the company in.
See our return to good quality growth coming into 'twenty, four and 'twenty five and 'twenty six.
Thanks for that for that I appreciate it.
Thank you. Your next question comes from Martin Landry Stifle Martin. Please go ahead.
Hi, good morning, everyone.
I would like to touch on.
New product introductions and your product portfolio for this fall.
You touched a little bit about it.
<unk> interest rates are stretching the consumer so.
Just want to hear you talk a little bit about your pricing strategy I think you mentioned.
In a previous question that your average price.
Is around $35.
Just trying to understand how that compares to last year.
Would be helpful.
Good morning Martin.
For the question, Yes, I did mentioned earlier.
Our average price point for fall 'twenty, three is actually less than $35. So let me just give you a little bit more context on pricing for choice.
In the environment that we're in with.
Interest rates the way they are.
Consumers are stretched and are actually buying down so to speak from a price point perspective, this definitely pressure on products above $70 retail.
For us this fall, we only have two items.
There are greater than 69 99 to $4 23.
One of them is the is the big coal movie.
The item with the aircraft carrier.
But we only have two.
Our average price is less than $35 and that's down just around 10% from 2020 two's average price.
If you look at the key drivers that we have for this fall.
I mentioned some of them earlier Betsy great.
Great Innovation 29, 99 Bakugan.
<unk> is alive visa or five to $10 price points.
And so we think we are pricing the line very effectively to help the consumer obviously, the consumer is going to buy twice birthdays come in Christmas comes and everything will drive regular purchases in toys, but we're helping them at the lower price points. The other point I just want to call out while we're talking about <unk>.
Missing is that we're actually thinking hard about 2024, as well and we expect the average prices to come down around another 9% to 10, 9% to 10% again from full 23 so.
<unk> appropriately in our pricing strategy is a very big part of what.
<unk> and the commercial teams and toy, Chris Biddle and marketing teams are looking at very closely.
Okay.
Okay. That's helpful.
And then.
You launched your new Paw Patrol tour line, that's related to the movie and then in your press release. This week I think there was five new toys that were featured.
I'm just wondering do you have more skus coming than there was five toys in relation to that but the movie and the 10 year anniversary.
Okay.
I don't actually know the exact number of skus that are related to the movie.
But certainly those are the five primary skus that we promoting running do you do now.
I don't have the exact number but I know it's more than five yes, I think we just highlighted those for the consumer.
Okay, and then I think you mentioned.
In that press release that.
Those products are starting to be available on August 1st that retailers.
Wondering how how does your shelf space look like for <unk>.
The toy line are you satisfied with where Youre located do you have any and caps.
<unk>, just love to hear a little bit where you are positioned in the stores.
Yes, I think I think our shelf spaces is either consistent with 2021 or even better.
We have a lot of promotional activity.
Caps out of aisle tremendous amount of promotional activity that's going on around that.
The movie in store.
I think the other point to call out is that we actually have more points of distribution I think that's something that we're excited about not only is the movie and more theaters, but we actually have more retail points of distribution I think we have close to 300 points of retail distribution for the movie and I think.
It's certainly something we feel very comfortable and excited about it.
Okay, and just to wrap this up.
From a calendar perspective.
The up and the down will be less pronounced and then also the fact that we actually have rubble.
In the line for a full year in 2024 as opposed to a partial year in 'twenty three will help soften some of that as well.
Great. Thank you.
Thanks Martin.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone.
Your next question comes from John's MRO CIBC John Please go ahead.
Thank you good morning, I wanted to ask about the international business, both both Europe and rest of world. These geographies seem to be continually materially better than North America, obviously theres the inventory issue.
With retailers in North America, but I'm wondering if there's anything else, we should be focusing on there, particularly in Europe as it is not considered a high growth market.
Yes, good morning, John and just operate in others.
This will be our second last question just from a timing perspective, but.
John Thanks, Thanks for that question on international.
Europe Pos was.
Was actually not great in the second quarter, but we are actually seeing.
We're seeing strong activity in Europe , and it actually had far less inventory clearance activity and far less inventory issues and we had to deal with I think if you. If you look at our international business. We're in the early innings of outgrowth, there because we've really been building out our international strategy now for around 10 years, but many of the markets.
We've only been in for a few years.
We literally just opened Spain la.
Last year, Spain is going incredibly well for us.
We're about to open Portugal on on.
The first of January 24, we move into Portugal.
Even though we've lost Russia is a market, which was around $20 million to $30 million of sales our international business is growing.
Our headquarters are based in London, but we have offices around Europe central and Eastern Europe is expanding.
Germany is a growing market for us it's one of the biggest toy markets in the world and we have low penetration rates stay. So if you look at our market share in North America relative to our market share in Europe .
Are we going to see growth in Europe in Europe , just just to get back to what al North American talk market share it looks like.
And then if you actually think about the.
The growth in that market.
A tremendous amount of potential still to come as we mature as a company.
Okay. That's helpful. Thanks, and then one quick follow up my guess is that the answer to this is still no but is there any change in your view on whether you are impacted by the ongoing writers' strike.
Now the writers strike does not impact what we're doing on the movie.
We're about to we're completing them moving down we're going to deliver attendants animated and it's done in Canada. So really doesn't have much of an impact at all I think the only impact on the movie.
For us might be some of the promotional activity regarding some of the actors and actresses that that would normally be doing so promotional activity around the time of the launch so there might be a little bit of an impact on that from the strike.
They might also be an impact depending on when this gets resolved on some of the movies in 'twenty four 'twenty five that are coming out the big movies that are coming out in 'twenty five in early 'twenty five or the DC movies put back man and Superman, which are currently scheduled to be in the first quarter of 'twenty five.
So.
I don't know what impact the strike has on some of the schedules, but it's likely to cause some delays remain do you have any any other thoughts on that.
Okay, that's such a.
Okay. That's all for me. Thank you very much. Thank you. Thank you.
Mike just a final question.
Your last question comes from Luke Hannan Canaccord Genuity Luke. Please go ahead.
Thanks. Good morning, just one from my end here at the Paw Patrol Academy.
Our platform rather than a game does imply that there is sort of a multi layered multi year approach to how does that you're going to be managing.
Content on that platform I'm, just curious to know how the efforts of the team I guess youre going to be balanced between developing the content that's going to be on that platform versus maybe some of the other newer launches that you guys are going to be having over the course of the next couple of years here.
Sorry, when you mean, the newer launches you're talking about the other games flex it is correct.
Oh.
No.
The most amazing thing is that.
We've been building up the capabilities to have five studios and the last number of years. So the PA Academy platform is going to be done is being done by originator, which is based in San Francisco.
And they are dedicated on this end.
This other game that we're bringing out in 'twenty four called Kubrick's, so their dedicated as a standalone and all the other games have their own studios that are dedicated to it. So we've actually taken this interesting approach, which is kind of.
The model the largest video game companies take which is each studio has their own dedicated one or two titles and thats, what they specialize in and they go deeper and to continue building that out over long periods of time and they just become experts.
In that domain.
Got it.
Yes.
Thank you there are no further questions I will now turn it back for closing remarks.
Well. Thank you everyone. It was good to talk to you today and we look forward to seeing some of you hopefully.
In Stockholm in a few weeks for our digital games Investor and Analyst day.
<unk>.
We look forward to talking to you all again in November with our Q3 results and conference call. Thank you very much.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.