Q3 2023 Spin Master Corp Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the Spin Master Corp, third quarter 2023 results conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require me to just this does please press star zero for the operator.
This call is being recorded on Thursday November 2nd 2023 I would now like to turn the conference over to Sofia <unk>. Please go ahead.
Thank you and good morning, welcome to spin Master's financial results Conference call for the third quarter ended September 30th 2023, I'm joined this morning by Max Wrangle spin master's global President and CEO and Mark Segal spin master's Chief Financial Officer for your convenience the press release, MD&A and interim Consol.
Dated financial statements are available on the Investor Relations section of our website at spin Master Dot com and on SEDAR plus.
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 Est.
<unk> 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 and assumptions will provide will prove to be correct. Many factors could cause the actual results to differ materially from those expected or implied by the forward looking statements.
As a result spin master cannot guarantee that any forward looking statements will materialize and you are cautioned not to place undue reliance on these forward looking statements.
Except as may be required by law spin Master has no obligation to update or revise any forward looking statements, whether because of new information future events or otherwise for additional info on these assumptions and risks. Please consult our cautionary statements regarding forward looking information in our earnings release dated November one 2023.
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 call over to Max.
Good morning, everyone. Thanks for joining us we deliver a third quarter characterized by strong performance across all three of our creative centers digital games and entertainment grew revenue double digits for the quarter and highlights the strength of our diversified platform.
Digital games revenue has now returned to year over year growth on a year to date basis.
This past quarter, we celebrated several milestones and achievements in support of our strategy to re imagine everyday play within entertainment.
Either with Paramount on Nickelodeon movies, we released our second feature film for preschool powerhouse Paw patrol, which opened as a number one film worldwide and has recorded more than $170 million at the box office already exceeding the total from the first Paw patrol movie in.
In digital games, we launched our first in house developed App for the PA franchise.
Patrol Academy to coincide with the movie launch we also introduced our new value add a subscription bundle picnic providing unlimited access to circle Muni toco, Boca Juniors and originator apps for one monthly fee.
In toy we were awarded a significant preschool toy license for parent amongst new animated preschool series Dora from the old weren't waiting Dora the explorer franchise just after the quarter. We were excited to announce our agreement to acquire Melissa Doug a trusted leading brand in early childhood play with deep knowledge in the creation of open ended play too.
Joyce and reach relationships with parents. This is a strategically compelling acquisition the largest in our history and has the potential to accelerate our long term growth and strengthen our relationship with parents in the earliest years both their child's life let.
Let me now review each creative center.
Total revenue increased eight 9% from stronger gross product sales, which were nine 9%.
Order volumes were higher as retailers increased inventory levels in anticipation of the holiday season.
As we have discussed the 20th twenty-three toy season has returned to historical seasonality relative to 2022.
Turning to P. O S. Sir kind of data shows that the G 10 toy industry was down mid single digits in Q3.
This was the fourth consecutive quarter of industry decline and we believe this is due to consumers delaying holiday purchasing which is slowing Pos in the category.
It's worth, noting though that the toy industry remains above 2019.
Despite the industry's decline we outperformed the industry globally declining seven 5% as a result, we grew our market share 20 basis points and improved our position in the quarter to number four toy manufacturer globally pressure kind of.
From a geographic perspective, we saw strong performance internationally, which helped to offset the decline in the U S, which has been a far more volatile environment internationally, we've had a strong year and in Q3, we increased B O S outside the U S by <unk>, 7% compared to the industry, which was down mid single digits.
<unk>.
In the G 10, we grew our Pos in six countries. The U S market has been challenged this year and that trend continued in Q3.
U S toy industry sales declined high single digits in Q3, and we were down 11, 5% Mercer economy. We are encouraged that for the first three weeks of October. So we're kind of out of shows at spin Master. It was ahead of the U S market.
<unk> 350 basis points, which we attribute to the support of the Paw patrol and movie and new toy innovation overall, we believe that the challenge industry performance has caused retailers to pause or reduce planned orders, particularly from mid October onwards in order to avoid potential post season inventory.
Issues continue.
Continuing the trend we saw in H, one a retailer inventory levels were down 8% year over year globally and at the end of Q3, we were down 22% year over year in the U S.
We remain highly focused on ensuring that we manage both our on hand inventory and our inventory at retail.
We continue to demonstrate our strength in preschool in Q3 spin Master has the top two of the two of the top 10 U S infant preschool category items as defined by circa including Gabby as Dalhouse perfect place it and Paw patrol that Mighty movie vehicles assortment.
Despite our strong performance with new items and for Paw patrol, So Canada indicates that global sales were down 19, 2% in Q3 overall the health of the franchise is strong with Paw patrol remaining the number one preschool property globally in Q3 for the first three weeks of October the U S infant toddler preschool category performance was.
Negative down double digit year over year, while the puppet drove property grew 13% during this time fershur economy.
Cabbies Dalhouse continues to take share in the infant preschool toddler category internationally, but has seen signs of slowing in the U S. S share was down in the quarter. Despite the declining Pos in the U S. <unk> Dollhouse was the number seven infant toddler preschool property globally in Q3 23, and the show on Netflix is the fifth.
Most watched show in the U S. Among kids ages two to five.
Within those and interactive bitsy spin master's innovative breakout toy for 2023 digital pet that you can actually touch Bitsy has received numerous awards for most innovative toy of the year. In Q3, we gained 670 basis points of market share in youth electronics, as we launched BT and has books berserk.
Kona.
Betsy was a number one item in the youth electronics Super category in two of the 10 top countries across G 10, and top three in seven in robotic interactive Playmates Bitsy was number one across five countries and top two in eight.
This performance continue for the third weeks for the first three weeks of October were bitsy was the top selling robotic interactive item in the U S in both daughter and units versus or kind of.
Within Wilson actions, we experienced mixed performance in Q3, Bakugan and tactic declining Pos in Q3, but monster Jam outperformed the category as a number two property in vehicles with B O S up 13, 6% globally Monster Jam has been the number one global license within vehicle Super category for them.
10th straight quarter pressure kana and we're excited about our innovative items in the lineup for this holiday as well as continued strength from our small vehicles, which are great for stocking stuffers in.
In activities in games in Q3 kinetic sand remains the number two global property in the reusable compound fast and core items are performing well, our new cool maker item pop style bracelet maker was number four item in the craft kids class in the U S.
Rubik's Cube was a number nine brand globally in the activities and games Super category and continues to trend well with Pos up eight 9%. These.
This fall we launched the coach Q designed to help make solving the cube easier and launch a special edition Disney 100th anniversary Q.
We are now planning to celebrate rubik's, 15th anniversary in 2024, which will be a momentous year for the brand globally.
Turning to entertainment with a strong quarter with revenue increasing over 70% driven by higher distribution revenue from content deliveries, including the public from movie rebel and crew Unicorn Academy in beta the vet I.
I previously mentioned the Paw patrol the Mighty movie debuted at number one worldwide in the box office you will recall that the first movie was released in August of 2021 during the pandemic in September.
Paramount was able to release the film to over 800 theaters, we've always been very proud that the paw patrol is Canadian make content and that team was super excited to learn that paw patrol. The Mighty movie earned the largest north American opening for any Canadian film in the past decade.
The response to the film has been incredible and the global box office is now as I said over $170 million.
We will continue to reach new audiences. When the film goes to Paramount plus mid November and on DVD Blu Ray December 12.
Earlier this year, we expanded the PA universe and introduced rebel and crew are first paw patrol's spinoff since launch Roblin crew has been in the top five series on Nick Junior with Kids Ages two to five.
Perpetual also continues to capture the highest share of preschoolers watch time on Nick junior maintaining its number one leadership position today, our new fantasy Adventure series Unicorn Academy will premier globally on Netflix over the past several months, we have begun building a fan base for the new franchise with curated content for Tictoc.
Youtube as well as integrations with the leading roadblocks games are early preview in roadblocks generated almost two and a half million views and has provided us with powerful insights as to the characters that are resonating.
Netflix I urge you to watch the Premier. So you can see for yourself how magical this series is.
Building on the amazing storytelling named captivating animation.
Choice will be available for fall 2024 and to round out the franchise digital games team is working on developing the companion action adventure mobile game for Unicorn Academy.
Following the Premier of Unicorn Academy, our next major of content launch is for Vida the vet at to the animated series retailer reception to the counting has been overwhelmingly positive and we will launch toys for the series in 2024 after the episodic debut.
Finally within digital games total revenue grew by 39% to $45 $3 million, primarily from the higher E not purchases in polka life World.
Average toga life World monthly active users increase again in Q3 up 11% year over year to just over 60 million a new high the soft launch of our new took a day's multiplayer game continues to rollout with continued constructive feedback and performance enhancements. We can wait to share. It took a days with our highly engaged took a life world.
Fan base in 2020 for sago mini soft launch picnic our app subscription bundle, which includes thousands of top rated activities created by parents child development experts and kits. The picnic bundle celebrities full launch in October 5th with apps, including Sago Mini World Sago Mini school Sago mini first.
Words, toco, Boca Juniors and took a book a hair Salon Ford.
The bundle it provides significant savings while offering families are convenient.
Simplified approach to digital playtime.
The offer is proving popular with 26000, beginning subscriptions by the end of Q3 or.
Our perpetual Academy App is off to an excellent start with over 17000 subscribers currently.
Ranking us one of the top apps for kids on the Apple App store in the U K the U S and Canada.
Patrol Academy seamlessly integrates phone learning them for preschoolers, while leveraging episodic perpetual content ratings of the App have been positive and we look forward to continued momentum in Q4 and beyond.
Subscribers across our portfolio at the end of Q3 was 347000 and he's already currently trending over 375000, and all time high driven again by picnic and Boy Academy.
In August some of you joined us install come to better understand our digital game strategy and test games in development.
One of those products was Rubik's match. This is a new mobile casual game, which allow us to get into a different large and larger new player segment. The game is currently in late testing and on track for worldwide release in 2024 to coincide with the cubes 50th anniversary overall too.
24 will be a big year for a digital games Creative center, and we are ready to level up.
Before I turn it over to Mark I want to summarize a few key points we.
We are expecting the toy industry in Q4 to be challenging because of economic headwinds, including continuing to inflationary pressure and rising interest rates, which has reduced consumer spending.
And orders for choice, we expect consumers to purchase very late in the season, which will reduce our replenishment potential and for retailers to remain risk averse to avoid inventory risk.
Our team is highly focused on delivering operational excellence to ensure sustained profitability and we are managing all areas of spend to ensure we get the right ROI.
In addition to managing our bottom line, we continue to make internal investments across each of our three creative centers from physical toys to content and digital playgrounds to strengthen our long term position. We are also investing in the future highlighted by our plans to acquire Melissa Doug We are looking forward to closing the acquisition early in Q1 2024.
We are confident that our investment in Melissa and Doug will build upon our legacy as leaders in the childrens entertainment industry now and into the future and position us to create long term value for shareholders. We're highly focused on executing our long term growth strategy and we continue to make significant progress by leveraging our deep expertise in play.
Well established global network and innovation capabilities to unlock growth and inspire future generations I will now turn the call over to Mark to provide further commentary on our performance.
Thank you Max and good morning.
Our team delivered a solid quarter with strong revenue and profitability growth highlighting our commitment to building three integrated creative centers and investing in long term growth.
Consolidated Q3 total revenue grew to $710 million up 13, 8% and adjusted EBITDA grew by 40% to nearly $235 million.
Q3, consolidated gross margin was 54, 5% compared to 56, 2%.
Margin was lower from the dilutive effect of more entertainment content deliveries in Q3, including the poll patrol movie.
Despite being dilutive initially these.
These content deliveries will produce long term favorability as high end launch and revenue streams evolve.
The declining gross margin in the quarter was partially offset by the benefit of favorable product mix and ocean freight rates compared to 22.
SG&A of $202 1 million was up year over year in dollars, but at 28, 4% of consolidated revenue was down compared to $195 3 million or 31, 3%.
Marketing costs were down $4 2 million at 5% of revenue compared to six 4%.
Administrative expenses increased by $6 2 million, primarily due to professional fees for the Melissa <unk> acquisition.
Adjusted SG&A was $191 million or 26, 9% of consolidated revenue compared to $190 7 million or 36% a significant improvement.
In Q3, net income was $155 4 million or $1 45 per diluted share compared to net income of $141 4 million or $1 33 per diluted share.
Adjusted net income in the quarter was $143 6 million $1 34 per diluted share compared to $114 4 million $1.08 per diluted share.
Adjusted EBITDA was $234 9 million compared to $167 6 million.
Adjusted EBITDA margin was 33, 1% up from 26, 9%.
Adjusted EBITDA, excluding the poll patrol movie distribution revenue was $219 3 million with an adjusted EBITDA margin of 31, 6%.
Looking at Q3 performance by Creative center, despite industry declines.
Gross product sales increased by nearly 10% to $678 6 million.
Foreign exchange benefited gross product sales by $13 5 million and on a constant currency basis gross product sales increased by seven 7%.
Toy gross product sales grew as we sold more traditional order volume and seasonality in Q3 compared to last year. As a reminder, shipments in Q3 2022 with lower as customers ordered earlier in the year in advance of anticipated supply chain disruptions.
The largest year over year increase in gross product sales was in the preschool and doles and interactive product category, which grew 22%.
Q3 toy adjusted EBITDA was up $40 million at $166 8 million compared to $126 9 million at a margin of 27, 7% compared to 23%.
Higher adjusted EBITDA was driven by increased gross profit and lower SG&A.
In Q3 entertainment revenue increased by $26 4 million or <unk> 71, 4% to $63 4 million from higher distribution revenue from new content deliveries, including the poll patrol movie, which contributed $15 6 million Unicorn Academy rebel and crew and visa.
This event.
Adjusted operating income was $24 million down 17, 8% and adjusted operating margin was 37, 9% compared to 78, 9%.
The decrease in entertainment profitability was driven by higher amortization of production costs from the additional content deliveries this year.
I want to take a moment to review the second theatrical movie release support control and how it will be reflected.
We have previously advised you that in Q3, we estimated we would earn approximately $17 million of distribution revenue from Paramount with the equivalent amount in amortization in fact in Q3, we recognized distribution revenue of $15 6 million from Paramount and amortization of 11.
Providing a gross profit of $4 6 million.
The lower revenue and amortization are reflective of lower final net production costs from higher tax credits and foreign exchange as the Canadian dollar was weaker against the U S dollar compared to our estimates.
Also if you recall in 2021, the pool movie released in theaters and streaming on P plus day and date in August.
We earned $26 million of distribution revenue from Paramount in Q3 2021.
Our second movie had a theatrical only release at the end of September which will be followed by a streaming release on P plus mid November.
We now have two distinct promotional windows.
Although we appear to be earning lower revenue upfront compared to the first Paul maybe.
We will now be participating in the subsequent subsequent revenue share much earlier.
This has proven to be a good approach as given the movies box office success, we now expect to see additional revenue from our share of proceeds as early as Q4 2023 and into 2024 and subsequent years.
The additional amortization related to the remaining capitalized intangible asset will also partially flow through Q4 and into 2024 and beyond as income is earned.
Licensing and merchandising revenue from the movie will flow into Q4, but mainly into 2024 and subsequent years.
Q3 revenue in digital games grew 39% or $10 7 million to $45 3 million, mostly from Tokio life World strength.
Adjusted operating margin in Q3 was 34, 2% up from 28, 9% due to lower marketing and administrative spend.
On a year to date basis digital games revenue is now at just under 6% of the 2022 and 8% in constant currency.
Turning to our balance sheet, our on hand inventory at the end of Q3 continues to be in good shape at just over $153 million compared.
Compared to $179 million last year.
We generated $145 3 million in operating cash flow and used $25 1 million in investing activities $8 2 million of which was for PP&E and $17 2 million for intangible assets.
Free cash flow in Q3 was $118 9 million compared to $175 3 million.
Primarily from lower operating cash flow.
We ended Q3 with just under $651 million in cash up marginally from the 2022 year end position of $644 million.
We continue to be an extremely strong liquidity position with unutilized liquidity of over $1 billion.
As we discussed in Q2, our top priorities from a capital allocation perspective continues to be investments in innovation content development and M&A.
After the quarter, we announced the acquisition of Melissa Doug for $950 million, plus a potential additional contingent earn out consideration of up to $150 million.
We plan to fund the 950 million purchased with approximately $450 million of cash and debt financing of $500 million.
The acquisition represents a strategic deployment of our capital resources.
Form of the transaction, we expect to have leverage ratio of under one times EBITDA.
This allows us to preserve our financial flexibility.
We will continue to generate strong cash flow and we intend to maintain our dividend as well as preserve capacity for opportunistic share buybacks.
Turning now to our outlook, we now expect 2023 gross product sales to decline high single digits.
This reflects the challenging macroeconomic environment, particularly in the U S that Max described earlier.
Consumers are under pressure and was consumer spend remains high overall consumers are allocating this spin to travel and experiences.
Toy industry POF for October was.
Disappointing and will and well below retailers plans.
Retailers have adopted a more conservative order position and particularly from mid October started reducing their orders for November and December delivery to prevent potential overstocking.
We are still outperforming the global marketing.
But with retailers slowing their orders into Q4, we believe it is prudent to lower our gross product sales expectations for 2023.
It's worth noting that since our IPO in 2015, we've grown gross product sales at an 8% CAGR compared to one 7% for the global toy industry.
Evidence that we have successfully met our growth strategy objectives set in 2015.
We remain committed to continuing our long term growth strategy.
As a result of loan expectations for toy gross product sales in 2023, we are also lowering our expectations for 2023 revenue from flat compared to 22 to down mid single digits compared to 22, excluding the pole movie distribution revenue.
Our teams are working incredibly hard to manage all cost areas tightly in Q4.
In toy, we expect to see sales allowances in the 13% to 14% range for 2023 and for marketing to be in the 10% <unk> range for the full year.
We continue to see strong performance in our entertainment and digital games creative centers from both a revenue and margin perspective.
On a net basis, we are raising our 2023 adjusted EBITDA margin expectations. We now expect adjusted EBITDA to be up over 2022, excluding the pole movie distribution revenue compared to flat to slightly higher as previously guided.
To conclude.
Let me say that amidst the challenging macroeconomic environment, we are well positioned strategically financially and operationally.
And we remain committed to continuing to execute our strategy for long term growth.
And shareholder value creation.
That concludes our prepared remarks, we will now be pleased to take questions. Operator, Please open the lines.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone, you'll hear three Toms prop acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the two if you are using a speaker phone.
Please lift the handset before pressing any keys. Your first question comes from Adam Shine with National Bank Financial. Please go ahead.
Thanks, a lot the boarding.
Maybe we could go.
Backwards, just starting with the outlook Mark.
Pretty clear in terms of what Youre seeing in regards to the topline pressures.
Clearly some offsets around entertainment and <unk>.
Digital games, which maybe I'll follow up with after but just specifically around adjusts.
Adjusted EBITDA margin is there any additional color you can add just in terms of what up necessarily represents and in particular, the context of where street estimates might've been in terms of EBITDA and how that specifically might be affected.
Thanks.
Yes, I think I think in my comments I think I explained it.
In terms of the major areas that are moving Adam, but let me just say again.
Obviously with the drop in gross product sales and and the impact that has that that is a negative impact on EBITDA.
We are seeing sales allowances going up.
We expect to be quite aggressive on promotions and pricing in Q4.
But we are actually seeing some tailwind from lower freight and supply chain. So that's a nice offset and then in particular, we're actually seeing some upside from our digital games business, particularly with <unk> strength, which is high margin revenue and then also from entertainment.
And it's really important to understand that our strategy and entertainment is working nicely because we took more risk upfront on the movie and because of the movie success. We're actually now seeing some box office sharing coming in early in Q4, which we did not expect in our previous outlook and so that is margin accretive to us.
And which is when you put that altogether. The reason why we've been adopting a slightly more positive tone.
Adjusted EBITDA margin and moved it up from flat to slightly up to up.
Okay, maybe I'll follow up with you after all of that.
Just in the context of the Paw patrol booby it the additional distribution for Q4 is it just a matter that you are not entirely clear as to what that might be.
Or frankly, you just don't want to share at this time in the context of what appears to be some pretty clear visibility around the fact that it hits the street began.
Couple of weeks right.
Well just keep in mind that the movie economics have gotten multiple dimensions to it right. The movie economics revolve around our share in the box office also the licensing fees, we get from from Pete plus as well as licensing and merchandising income and gross product sales. So if you look at gross product sales will pick up some gross product sales for the <unk>.
<unk> in Q3, and mostly in Q4, most of our licensing and merchandising income will come in 2024 and subsequent years, we've indicated because of the movies box office success that we're now going to actually be sharing in the box office earlier than we otherwise anticipated, which is which is a big components of our adjusted EBIT.
Margin raise and so we're not going to quote specific numbers for that Adam we never have but but we are positive and the movie will actually have a significant impact from a margin perspective in Q4 ended 2024 and in subsequent years, It's high margin income for us in terms of that revenue.
Sure from the box office.
Okay. Thanks for that Mark just lastly, just around digital games.
Obviously as Mark alluded to sorry, Max alluded to very strong result in the quarter.
Is there a way to just maybe dissect a little bit more in terms of the core business, excluding some of the new apps being launched.
It was the core business the main driver of some of the recovery.
In terms of year over year growth and if so what might have changed in terms of consumer behavior. What is it more content launches and door either marketing that you might have done to sort of stimulate greater activity in the core business or.
There was a lot of the upside surprise in Q3 helped by at least some of the.
Additional traction on.
The new App launches.
So I'll go first and then I'll pass it over to Max to give you. Some context. So the revenue in Q3 was primarily from Tokio life World to the telco franchise, but we did see strength in our picnic app as well, which contributors although that came in very late in the quarter.
But we have not launched the new games and new games did not generate any meaningful revenue in Q3, nor will they do so in Q4 to be clear most of what we're talking about in terms of our digital games business is in relation to Tokio life World and Al Sago mini and picnic franchise mix would you like to give some color on what's that.
Absolutely good morning, Adam.
So I think it boils down to two things and they're beautifully in our court, let's start with talk of life World and why.
First and foremost downloads were up okay, and that's really important. So we already told you on the script that engagement was up because we had a new high watermark for basically monthly active users.
So if you have monthly active users go up and downloads go up they went up about 8% quarter on quarter and about 5% versus year ago. That's one positive building block on top of that the spend went up as well. So it went up about 15% quarter on quarter and about 40% versus year ago. So those are very important increases.
And we're super excited that the consumer once again came back from a behavior.
It was mostly weekends, but I have to give our team a lot of credit the content resonated and we had content basically in Q3 that was really robust and it extends into Q4.
The first building block the second building block is our picnic and Paw patrol apps truly added quite late but still at it and that's really positive and so remember those launch later in the quarter, but they were very positive too and so we have a lot of expectations for those businesses as we now get into queue for adding to the new year 2024, So I.
That clarifies it for you.
Great. Thanks for that and I'll queue up again I appreciate it.
Your next question comes from Martin Landry with Stifel. Please go ahead.
Hi, good morning, guys.
I wanted to touch on the perpetual toy line.
Max I believe you said that the toys I think point of sales were up 13% in the first three weeks of October.
Which looks like a nice performance in light of the.
The industry so.
Wondering if you can just discuss a bit more the impact of the movie on the on the perpetual toy line and your expectations for the remainder of the year.
Good morning.
In fact, it did and the numbers that we quoted.
We're keenly paying attention where basically October numbers remember movie goes up.
And then we basically gave you the October numbers and the October numbers are fast vastly outperforming the market, but the market for preschools down double digits right. So even though were up 13% in a down market. We have more families who are going to come to the category is just a matter of time and so we have expectations for Q4.
The puppet drove movie range to do significantly better and so we have November one today, we're basically one big retailer in America is beginning to activate very aggressively so we're going to get some wins from that and expect that then we have mid November another retailer doing yet another big event and then we have what you have.
<unk> come to realize is Turkey, five day period between Thanksgiving Thursday, and cyber Monday, where we have a lot of activity on perpetual. So we do have expectations and on top of that we have the extension into <unk>, plus which will basically add eyeballs and repeat it watch of the movies. So I think that is really <unk>.
And so when you get more eyeballs once Paramount plus basically gets the movie and other streamers and he is going to be incredibly important to basically watch how those kids would basically be getting moms and parents to want to basically buy the toys.
So the other piece that I would tell you for the remaining of the year is that we are adjusting dynamically pricing on a range to make sure we actually meet consumers' financial needs on our more expensive items. So they could be affordable. So we're doing that too I just think that that's the context for paw patrol and I hope that clarifies the situation.
Yes, that's great color. Thank you.
Maybe just switching gears.
In the last earnings call you.
You had mentioned you were talking about your average prices this year, which I think were down.
As a strategy to make our products more affordable given inflation and interest rate pressures.
And I think you alluded as well to 2024 prices.
The average price of your of your tour line could be down 10%. So.
When I think about that at first glance, it seems like a big headwind to overcome with volumes.
In order to keep your dollars stable on a year over year basis for 24 so.
So help me understand a little bit is that strategy still the same you expect to bring your average price down and.
How is that going to impact your volumes for next year.
So I think this is an and not an or just to be clear right. So we basically will have.
If you think about bid season at $30, a great toy, earning all sorts of accolades doing incredibly well at retail and at right around $30 that is one expression of a 30 dollar toy against nothing in that area in the previous year base. So that's 30 Bucks times of units that we didn't have.
Before I don't think that's depressing the the ability for us to earn revenue on something that is white space and you can expect that we will do the same going forward. It's not just <unk>. If you think about how to you most of life. Another great place it with multitude of opportunities for four play pattern at around 30 Bucks. So we do have.
So we're going to continue to innovate and bring Wow products at the right price point.
May not be 129, that's really what mark may have alluded to and I did allude to as well you may be 99.
But the percentage of those sales martone is not the most prevalent percent of our total volume sales to be very clear the opportunity for us beyond that used to make sure we come up with toys that offer a value and theres going to be about 40, or 50, skus that we're going to basically be coming up with which are indeed more lower price point any scenario that one.
Once again from a volumetric perspective, it's a white space for US we don't have that volume base in this year's volume. So then it becomes incremental revenue for us as you do the multiplication of those units, we would get from penetrating that consumers home times that number of daughters will get for that purchase so happy to work with you on your model, but that's.
The way we're approaching it.
Would not want to dilute ultimately going forward, both our margin or our sales.
Okay.
Okay. That's it for me thank you for that color.
Yes.
Your next question comes from <unk> Khan with RBC capital markets. Please go ahead.
Great. Thanks.
I guess, it's probably a little bit of color on the outlook commentary I was just hoping you could maybe talk about maybe puts and takes that could lead to Q4, Pos maybe being better or worse than you expect obviously the industry has talked down the Pos numbers for the full year, but I'm just thinking what are kind of the big needle movers for you that could go well or go against you as it.
Relates to the top line over the next couple of months here any brands or platforms or launches maybe.
Good morning Saba.
Yes, So I would tell you that paw patrol is one of the key drivers as I explained earlier in the call in terms of the expectation for dose toys to sell through.
Parents basically geared to buy for the holiday and I think one thing is really important to understanding that.
Parents are basically going from season or from from tradition to tradition, and if you've followed their traditions and you basically went and basically your back to school and you understand how much you spent and you got through that and you put some of that in credit card debt and then you know went through basically Halloween and you know that Halloween.
Had a good season and a lot of it came at the very end of the season and he was October 31, and he was really I don't know how much you spent on.
Candy for the girls Saba, but the average consumer spend about 100 Bucks and Thats not what they spent last year. It was about 12, 8% more than they did last year. So people were basically waiting for that last day in and day and the season did come for for Halloween and so as we gear for the next month and a half is the same pattern Fort toy.
And so I basically just told you some retailers have begun to get that going so we expect between paw patrol how chipmos alive.
Obviously, the <unk> dollhouse are we have a lot of great innovative items in our line and we are very excited about it we actually have begun to get some already <unk> are reported in this in this quarter, three which mark alluded to in our Pos and I do to Europe is doing well there. The numbers are coming up I think we've got some some markets at all.
Really posting really nice numbers for us I would tell you. It's not just the U S is really global for US a wonderful counterbalance to the U S.
I guess picture, we're navigating through so those are some of the biggest things we have and Betsy.
<unk> continues to do incredibly well so a beachy has multiplied what we would sell into next.
Six to eight weeks versus what we would've expected only 10 weeks ago in the U S. In the in the international markets <unk> really what he's doing incredibly well, but in the U S. Particularly in October he has truly shut up.
Nice way to number one so those are some of the highlights.
Okay, and just maybe a quick follow up on that I guess it sounds like the momentum is strong but is it I guess the caution more related to the comments Marc had earlier around maybe increased promotional activity and maybe some pricing just to drive that because of the macro is that the right way to think about it.
I think what we are what we saw in basically what what you think what you should think about this.
Imagine you're a retailer and a year ago, you were sitting on the inventory numbers you would've been sitting at that point and you were still pushing with hope that to see some would basically get through.
Well fast for a year, which is today and inventory at retail is down okay.
Inventory for us is down at retail. So so the question is if you would've looked at the last few weeks of Pos in the industry, particularly in the U S that Pos has not picked up as retailers and also expected against a year ago base that was low.
And that is what basically causes people to.
Be cautious and to not get ahead of themselves because they don't want to wake up Gen. One with another inventory issue that is what's happening.
Okay, great. Thanks, and just one on kind of the cost side. It looks like freight was a benefit here on the margin this quarter. It looks like freight costs are down significantly, but we're hearing that they have sort of bottomed here, maybe you can just walk us through how long.
Vas you lock in trade and how long that could be a benefit before the.
The cost sort of normalized any color on that would be great.
Yes.
Yes, so <unk> we have seen.
<unk> come down quite significantly since Q3, 'twenty, two and in Q4 as well.
So we don't anticipate any material increases at this point or any major changes at all if anything our supply chain at this point overall is stable state.
Stable to declining actually from a cost perspective, we don't we don't lock in freight long term.
In total we do lock in some so we have some contractual rates, which we're taking advantage of now that our supply chain team is also quite situational and opportunistic and they go into the spot market.
And by depending on what is actually happening in the market as well, it's similar to our currency hedging, where we don't hedge 100%. So theres an element of contractual and an element of spot acquisitions overall.
Overall I think we're in a good place for 2023 and.
For 24 as well.
Alright, thanks very much.
Your next question comes from John <unk> with CIBC. Please go ahead.
Thank you good morning, I wanted to ask about the Dora deal and the licensing deal I don't imagine you're going to quantify your expectations for that arrangement, but can you give some context into the relevance and size of that brand.
The duration of that deal any exclusivity.
And in the context of past licensing deals even announced how would you say how important is this one and do you believe this opens up more opportunities for you.
Sure.
As you can expect a multiyear deal.
Paramount is <unk>.
Absolutely doing an incredible job with the content we're super excited.
They are bringing this property I mean, it's a property my kids grew up with and so I know it well and what what at what I've seen so far is absolutely mind blowing. So we're excited about that that's just to level set. The fact that we have a great franchise with great 2024 25.
Modern content, it's beautiful and we basically have three plus years in this on this deal with a global Master license for spin Master. So we have the whole thing.
We're trying to get to fall 2024, with toys and that is basically what we have in store for Dora we're very excited.
Alright, that's helpful. Thanks, and then on both Unicorn Academy and visa does that.
Assuming these do.
What you think they're capable of can you walk through the timing of the expected impact what quarters would we see meaningful revenue increases from each of your three creative centers related to these two forms of IP.
Sure I'm going to start and then I'll pass it onto Mark So the great news is that we've or you've already seen.
Revenue for four Unicorn Academy is we actually deliver content right.
And Netflix will start airing today today's the debut for Ford.
For the 72 minute movie so that was really great. So you would have seen already revenue in our current year and what happens is now we have the series that follows that.
Episode, and basically you're going to have kids that would be engaging with the franchise for the next six to nine months and you can expect that in 2024 in the second half youre going to get two things you're going to get toys, primarily and some licensing and merchandising revenue as well, which will then carry on into 2025.
Beyond but that is a sequencing of what we see and how you would want to model it.
So just just to complement that John just to make sure you get this Rockville model Entertainment revenue is already occurring now and we recognize revenue in Q3 and will continue through 2024 as we deliver the shell the.
Toys will launch in late 'twenty four not exactly sure. The date right now it's late Q3 or early Q4, but we'll be recognizing toy revenue in 'twenty four and then in 'twenty five and beyond we'll start generating licensing and merchandising revenue for Unicorn Academy.
V to the vet, we again, we've launched the show now we recognizing entertainment revenue now will be launching the toy in 2024. So we will get toy revenue in fall of 2024, as well and similar to Unicorn Academy will be generating licensing and merchandising income in 'twenty five and beyond on the digital game.
I'm a.
A little bit different the digital game will launch late in 'twenty four or early 'twenty five so really most of the Unicorn Academy digital games revenue will be in 2025, and <unk> to the <unk>, we don't have a digital game as of yet, but that's the timing of everything and just a reminder, because it highlights a key principle.
For us in that we view our entertainment creative Santos of catalyst. So when you think about content deliveries.
As I said in my script earlier, the content deliveries precede the other.
Revenue streams, like toy or licensing and merchandising and those content revenue streams are often margin dilutive earlier, but then become margin accretive as the toy and the licensing and merchandising kicks in which is much higher margin.
That helps.
Yes, that's very helpful. Thank you very much.
Your next question comes from Luke Hannan with Canaccord Genuity. Please go ahead.
Thanks, Good morning, everyone and Mark. Thank you for the earlier commentary on the call about the expectations for Q4, when it comes to margin I don't one of the drivers for that was higher O&M revenue that's going to begin to be recognized in Q4, but it does sound like 'twenty four as a whole is going to have <unk> be a much bigger driver overall.
I'm curious, particularly as it relates to the Paw patrol movie.
If you can help us.
Give us more context for dimensionalize, the LNR opportunities or partnerships what have you.
How thats going to manifest itself in 2024, and contrast, and compare that to what happened as far as all of them goes for the first pocketful movie as well, whether it's the number of partnerships the depth or magnitude of those partnerships et cetera.
Yeah sure. So look let me just clarify something.
The actual nature of the revenue that we're talking about for Q4 and 424 as it relates to the box office share is not classified as <unk>, It's actually distribution revenue right. So it's it's it's the share of the box office proceeds that we get.
Is actually classified as distribution revenue. So we're not talk about it you'll hear me, saying distribution revenue just to be clear okay. Okay. So.
Again, just to repeat this because this can be confusing.
We get the initial distribution revenue from the actual distribution of the movie the first window. The Greenlight revenue, which is what we recognized in Q3, that's a $15 6 million.
When the box office.
It comes alive, and we start generating our share of the proceeds because of the success that's going to be flowing into Q4 of 2023 earlier than we expected and it's going to be flowing into 'twenty, four and 'twenty five given the.
Success of the movie.
We then have the toy, which is in Q3, and Q4 and with will actually likely be some in Q1 as well and then we have licensing and merchandising. So when we talk about licensing and merchandising revenue, we're talking about shoes apparel.
Bidding pajamas, so that kind of stuff that revenue is going to be very limited in 2023 will mostly flow into 'twenty, four and 'twenty five as it relates to the movie.
Does that clarify for you.
My question is on that that last piece there I.
I guess, what im asking is as compared to the movie in 2021 do you have more partnerships or is there more plans from an O&M perspective.
We actually sorry, I forgot about that question, we actually have 25 blue chip CPG.
Licensees and just remember when we talk about <unk>, we actually have.
Paramount to Nickelodeon managing this part of the relationship. So we actually shared this with them that they manage the front end and we have 25.
Blue Chip CPG licensees lined up for the movie and those are actually in over 50 countries, which is which is definitely a bigger program than we had four.
For the first movie so.
We're excited about the potential for <unk> and 'twenty four and beyond.
And by the way once we're on the topic. We also have a very strong licensing and merchandising program for Unicorn Academy.
Which which we are managing ourselves. So that is something that we are doing exclusively on our own without any partnerships, which is again margin accretive for us and we have a very strong program for <unk> for Unicorn Academy.
Okay, that's going to show up in 2025, yes, that's going to be at 25% toy is going to be in 'twenty four and the <unk> will be in 25, mostly okay got it understood.
Look just to add and.
And good morning.
Just this last quarter, we actually were still getting.
Paw patrol moving number one Elena and revenue flowing into the P&L. Just so that you can think about from a perspective of time.
Two years later, we still get that benefit.
Okay. Thanks for that.
My follow up here and then I'll pass the line. It's just on the managing the rollout of <unk> days and I guess, what you guys are baking into expectations as far as one may be potentially a migration of the player base from took a life world too.
In 2024, but also what your expectations are for maybe capturing a demographic that may not already be included and took a life world just given that I think <unk> caters to a little bit older.
Player base, then took a life world.
Youre correct and so I think.
The intention on took a day's who's as it enters its next phase of soft launching fiscal 'twenty four.
Teams are focusing precisely in driving that retention and monetization as we actually get to that new segment, we're trying to get to.
To engage with the property so I think it's really important.
So that is what's basically going to happen in 2024, and so we will basically continue to tweak and in soft launch and then.
Basically you can expect that come the second half we are basically we will scale that up that's the current plan.
Great. Thank you very much.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one your next question comes from Andrew Lopez with TD. Please go ahead.
Hey, good morning.
One of my questions have been answered here, but just want to go back not to beat dead horse here, but on the Paw patrol O&M revenue and the box office receipts sharing with Paramount.
I was wondering if you could just provide a little color on the revenue contribution size for both of those in aggregate.
I want to provide individual detail for those.
Yes, so Andrew we're not breaking out individual numbers for any of these streams. So so unfortunate the icon icon quantified for you, but what I would say to you is that relative to our investments, it's very attractive and high margin and and so we're excited about it.
<unk>.
We're not going to quantify the individual.
<unk> okay.
Yes.
And then just on the just wanted to follow up here.
Switching gears, if you could just provide a little bit more.
Kind of color and update on the launch of <unk> to Brixton Rubik's match I know you just spoke a little bit until the days, but.
Some of those other.
Sure.
Easter coming out there can you break some good expansion as well.
Sure.
Andrew Good morning, So Rubik's and took a day, so basically going into soft launch in and basically they are in soft launch and extending soft launch into 2020 for first half and then expect it to scale up in the second half that's basically that those two games.
And then obviously you know Paul Academy is off to a great start and doing really well Unicorn Academy would be 2020.
Five.
I think Q break is still in soft launch and we have not determined yet what window, we will launch it more more beyond the soft launch phase at Eaton.
Okay.
That's very helpful I'll jump back into the queue. Thank you. Thank you.
Thanks, Andrew Your next question comes from David Mcfadden with Carmax Securities. Please go ahead.
Great. Thank you.
So just a question on Panama.
Origin pop on the island so.
Are you expensing all of the content cost.
At the top of the term movie against the distribution revenues so that when the Allen Madden kicks in is probably very high margin because you're probably just getting a royalty rate I think 5% of retail is that.
The way is that the way things are going to work.
Yes, David.
Great question.
We actually amortized as you saw this quarter $11 million, we have about 14 or $15 million.
Remaining on the balance sheet to amortize over the course of the revenue that we generate most of that capitalization and sorry, most of the amortization will go against the distribution revenue. We earned from the box office and from the <unk> plus licensing fees and then you're correct in assuming that the lie.
Sensing and merchandising.
Income will be very high margin because it will mostly be amortized at this point to be very little to amortize by the time, they even named kicks in so that's highly margin accretive revenue for us.
Okay, and so when do you expect that revenue kicking the O&M, whether it be in the latter half of 'twenty, Florida is at more than 25, sorry.
Yes, it's going to kick in in 'twenty, four I would say.
I don't want to pinpoint a specific quarter I think it will start.
In 2024, and then moving to 25.
As Max just said the.
The tail on on net <unk> revenue can be quite long and so when you think about it it's going to be at 24, and 'twenty five and potentially even 26 income stream for us.
Okay and then just lastly on your updated guidance for 2003.
Does that that does include.
I guess it doesn't include the additional distribution revenue you are expecting in the fourth quarter from the box office and then the other streaming services and the adjusted margin excluding Papa trial.
Based on the same correct.
Yes, that's all correct it does.
Okay. Okay. Thank you.
Hey, Thanks, operator, we're actually at time, so I don't think Theres any more questions. We are at time, let me thank everybody.
For attending this morning's call and we look forward to talking to you again at the end of February when we release, our full year and Q4 results. So thank you very much everyone take care.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Cool.
Yeah.
Okay.
Yes.
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