Spin Master Corp.

Good morning, afternoon, evening. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spitmaster third quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Mr. Siegel, you may begin your conference.

Thank you, Cheryl. Good morning, everybody, and welcome to Spin Master's Financial Results Conference Call for the third quarter ended September 30th, 2020. I am joined this morning by Renan Harari, Spin Master's co-CEO, and Mark Siegel, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A, and unaudited interim consolidated financial statements for the third quarter 2020 are available on the investor relations section of our website and on CDAR. Before we begin, please note the 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, or any other future events or development. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes that are appropriate and are reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expressed 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 information on these assumptions and risks, please consult our cautionary statements regarding forward-looking information contained in the company's earnings release dated November 11, 2020. Please note that Spin Master reports in U.S. dollars and all dollar amounts to be expressed today are in U.S. currency. I would now like to turn the conference call over to Renan.

Thanks, Sophia. Good morning and thanks for joining us today. For Spin Master, 2020 has been about adapting to a shifting and evolving landscape. Over the past nine months, we have worked remarkably well to adapt to the various waves and stages of the pandemic in order to continue to provide the magical play to kids around the world at a time when connecting with family has never been more important. We've had to remain agile and flexible to best serve customers and consumers however they buy. We are monitoring the current COVID-19 situation closely as it continues to unfold. We are seeing some disruption in parts of Europe, such as France, UK and Italy, but e-commerce channels and many brick and mortar retailers remain open currently. In countries where offices are open, the work from home protocol remains in place and office reentry is voluntary. In countries where offices are closed and employees are working from home, We will only open offices if we are able to meet the reentry safety protocols mandated by local governments. Overall, I'm exceptionally proud of our team's focus, adaptability, agility to execute our normal business, and to simultaneously make significant progress against our goals for improving our operational performance. I believe we are in far better shape today than we were a year ago. Let me highlight a few key areas of importance to you. We grew our gross product sales and revenues in the third quarter, despite sales declines in two of our large business segments. Our POS performance and the momentum we are carrying in the critical fourth quarter continues to be strong for many of our key brands and holiday drivers. We launched several new product lines and line extensions that have met with positive response from customers and consumers. We reduced our SKU count by over 40% since the end of 2019, We cut the number of our DCs and warehouses from 18 to 5 ahead of our original schedule. We reduced our inventory 28% compared to last year while growing sales. We increased our sales through e-commerce channels by 65%. We continue to evolve our offering and strengthen our positioning as a diversified and fully integrated children's entertainment business. To that end, we just concluded our virtual October trade show for fall 2021, which went very well. We quadrupled our digital games revenue in Q3 through the growth of our Toka Life World platform. We've launched our new franchise, Mighty Express, in Q3 and announced the launch of Bakugan, Nintendo Switch video game. Finally, we announced the acquisition of Rubix, one of the industry's most iconic brands. I believe more than ever, our performance quarter demonstrates the power of a diversified portfolio of brands, entertainment franchises, and digital games, and the benefits of having a sound balance sheet. Our gross product sales were up about 1% in Q3, which exceeded our expectations. Parents are doing what they can to make sure their children are able to enjoy the holidays despite the pandemic, and we are experiencing that sentiment in our sales. The categories in the industry that are doing the best continues to be those that benefit from people spending time together or from kids spending more time at home. Over the summer, outdoor toys also did well due to many organized outdoor activities like sports teams and camps being canceled. According to NPD, the toy categories that performed best this year were building sets, outdoor sport toys, and games and puzzles. We saw strong demand for our home-based products from our activities, games, and puzzles and outdoor segments, both of which grew in the quarter. In addition to games and puzzles, the activity category has performed extremely well as we continue to see exceptional sales increases in KineticSand with existing and new customers discovering the endless creative possibilities and sensory play that KineticSand provides. With kids spending more time at home, even in the summer, and parents being more flexible with screen time, we continue to see strong demand for entertainment content and digital gaming in the quarter. Our digital games revenue increased fourfold in Q3. This is driven primarily by the growth of our Toka-like world platform. This needs to be viewed from an industry perspective. Mobile device gaming is the fastest growing segment of the video game industry. and 67% of all games are now played on mobile devices. Within this, 94% of kids aged 2 to 12 play games on mobile devices. They are playing games, videoing themselves, and stream those to TikTok, Twitch, and YouTube for others to watch. We believe this is a major factor behind TokaLife World's growth. For TokaLife World, we now have around 5 million daily active users, and over 17 million monthly active users with over 42 million downloads since its launch. In total, Tokaboka now has over 30 million monthly active users compared to 16 million last year. In addition, we also saw strong growth in our SagoMini subscription business where we now have nearly 220,000 subscribers across SagoMini World, SagoMini School, and SagoMini Box. compared to just over 100,000 in Q3 last year. We are now working very hard on our next digital game product launches, including a new Toca Boca box targeted at kids five to nine, and a multiplayer game launching in Q4 2021 called Toca Days, as well as continuing to grow our Sago Mini subscription business. In late June, the first episode of the new Paw Patrol-themed Dino Rescue premiered on Nickelodeon, Retailers have said that it is one of our strongest themes to date for the Paw Patrol franchise. Overall, Dino Rescue marked the number one show on television in Q3 amongst preschoolers. Excitement is building for our first feature film, and we ran on track to deliver the Paw Patrol movie in August 21 as planned. During the quarter, we announced world-class voice talent for the movie, including Jimmy Kimmel, Kim Kardashian, and Tyler Perry. Our new preschool franchise, Mighty Express, launched on Netflix September 22nd. This is our first series launching directly on a streaming platform. This launch is another example of our ability to push the boundaries of quality children's entertainment. The Mighty Express toy line will launch in fall 21, following the global entertainment rollout. We've seen strong early levels of awareness for Mighty Express, and we have a solid start in viewership with the show ranking in the top five US children's shows for kids two to five, in its first two weeks post-launch per Nielsen SVOD rankings. Secondary indicators are also moving in the right direction with organic viewership, watch time, and completion rate growing and outpacing all benchmarks at this stage. We announced earlier that we secured the Global Master Toy license for DreamWorks Animation for the new animated preschool series, Gabby's Dollhouse, which debuts globally on Netflix this month. Beginning fall 21, we will bring the characters from the show to life through a new toy line that will include play sets, figures, plush, games, and puzzles. And we also continue to build our presence as a toy partner for high profile brands. This quarter, we announced the multi-year agreement to become the global master toy license for Riot Games League of Legends franchise, which is the most played PC game globally. We will develop a toy line with action figures, play sets, role play, items which are anticipated to launch in fall 21, targeting an older collector fan demographic. The global nature of this property is also attractive, potentially allowing us to further penetrate markets where we had previously been underrepresented, such as China, where the franchise is very strong. We continue to grow our franchises with multiple partners. On November 3rd, we launched Bakugan Champions of Astoria, a new game developed for the Nintendo Switch platform in conjunction with Warner Brothers and WayForward. I want to briefly update you on the progress we have made on our operational challenges we encountered last year, and Mark will add more details later. We are already seeing the benefits of the remediation efforts we discussed in Q1 and Q2, and we are gaining strong momentum. We have focused on consolidation, realignment and simplification, while ensuring we remain sufficiently agile to respond to the evolving industry and retail environment. We have used the process of addressing our 2019 operational challenges to build a continuous improvement mindset, which has become embedded in our organization globally. We plan to continue to drive operational efficiencies in every area. We are doing deeper and more proactive planning for 2021, earlier and more detailed than ever before. We've also improved accountability over every line of the P&L and are building operating procedures to ensure that we manage more consistently globally. Let me briefly review with you some of the changes in consumer behavior we are currently seeing and how we are adapting our marketing. Consumers have been more mission-focused in their shopping, looking to reduce the amount of time they spend shopping in stores. We believe retailers had this in mind when they started offering their Black Friday discounts earlier and spread them out so the consumers would not need to go into crowded shopping environments. Consumer spending has shifted earlier. We estimate around 20% of December POS will be pulled forward due to retailer price promotions such as Amazon Prime Day in October and pull forward of Black Friday deals from Target, Walmart to reduce and to reduce and spread in-store foot traffic, as well as consumer concern around the supply of hot toys, given the potential COVID-related industry shipping delays may occur. We expect the shift to e-commerce to continue. Q4 to date is pacing above 30% of our POS. NPD is predicting online could represent as much as 45 to 50% of Q4 sales. Increasing in screen time continue and content consumption continues to shift away from linear TV towards SVOD gaming and YouTube. Recognizing that parents and grandparents are shopping with less kid influence near the purchase point, we've increased our investment against this audience with campaigns to help make purchase decisions compelling, simple, and easy. We've transformed our approach to marketing with digital at the core building extensive in-house capabilities that have helped us to optimize our plans in real time, guiding kids and shoppers through this year's new omni-channel journey. For our fall marketing plans, we've been spending less on linear TV and more on the mix of digital, including social, influencer, and e-commerce. Our fall mix will see us spending around 50% of our total budget on digital versus around 35% in 2019. From welcoming new preschool parents the Paw Patrol years with our viral video campaign and later encouraging them to convert to sale. And our new present pets lines to distributing hundreds of videos across YouTube and social, recreating the Monster Jam action with our innovative Megalodon RC. Our fall plans are driving consistently stronger lips in POS than last year, setting us up for strong sell through for the season. Just after the quarter, we announced that we have reached an agreement to acquire Rubik's Brands Limited, owner of the world's famous Rubik's Cube. The Rubik's Cube has sold more than 450 million units since its introduction in 1980. The Rubik's Cube is an iconic puzzle that has permeated pop culture, and we are excited for the opportunity to put our innovation on the entire Rubik's portfolio and expand distribution through our global footprint. We're always on the lookout for creative M&A opportunities that complement our organic, growth strategy, and we continue to apply a disciplined approach to assessing all opportunities. We're also increasingly focused on the entertainment and digital areas for M&A opportunities. To conclude, we remain very confident in our ability to create magic for children globally through the strength of our diversified portfolio brands, entertainment franchises, and digital game offerings. We are cautiously optimistic about Q4, given our strong toy lineup, momentum in digital games revenue, and consumption of our entertainment content. We are, however, mindful of the unknowns ahead of us, including the ever-evolving COVID situation. Overall, our strategic direction, our solid financial foundation, and diverse geographic platform, combined with the commitment of our global teams, positions us to take advantage of the evolving opportunities and drive long-term success. I'll now turn over the call to Mark.