Spin Master Corp.

Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spin Master fourth 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'd like to ask a question during this 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. Sophia Lasukas, you may begin your conference.

Thank you, Lindsay. Good morning, everybody, and welcome to Spin Master's financial results conference call for the full year and fourth quarter ended December 31st, 2020. I am joined this morning by Renan Hiroti, Spin Master's CEO, co-CEO, and Mark Siegel, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A and audited consolidated financial statements for the full year and fourth quarter of 2020 are available on the investor relations section of our website at spinmaster.com and on CDAR. 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, or any other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there could be no assurances 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, SpinMaster 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, SpinMaster 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 the cautionary statements regarding forward-looking information contained in the company's earnings release dated March 1, 2020. Please note that Spin Master reports in U.S. dollars and all dollar amounts are expressed today in U.S. currency unless otherwise noted. I would like to turn the conference call now over to Ronen Harari.

Thank you, Sophia. And good morning, everyone. And thanks for joining us today. What a difference a year makes. At this time last year, we were coming off a year in which we faced significant operational challenges and we had already started to see the early effects of COVID. Overall, I'm exceptionally proud of our team's focus, adaptability, and agility to execute our day-to-day business as well as to simultaneously make significant progress in improving our operational performance. Through 2020, we adapted to a shifting and evolving landscape, and we are very happy today to have demonstrated concrete signs of our progress. Let me highlight a few key areas of importance. In the fourth quarter, our revenue grew nearly 4%. driven by dramatically higher digital games revenue. As we have indicated would be the case, we were able to show significantly lower distribution costs and sales allowances. We improved our gross margins and EBITDA margin in Q4 compared to last year and ended 2020 with the lowest year-end inventory and accounts receivable levels since 2016. We established three creative centers, Toys, Entertainment, and Digital Games, We have strengthened these creative centers by putting leadership in place with broad and deep skill sets that will allow us to drive innovation and growth. These centers are operationally independent, but linked through cross collaboration to maximize growth and optimize our return on investment. As a result of the evolution of these three creative centers and the rise in e-commerce, we are evolving rapidly into a fully fledged children's entertainment company. and are interacting with our customers more broadly and more deeply than ever before. Our customers can access our products and content through a wide range of channels, including brick-and-mortar retailers, subscriptions, our games-as-a-service model, streaming services and broadcasters, in theaters, and directly through our direct-to-consumer websites. I want to update you on the progress we have made on the operational challenges we encountered in 2019. In Q4, we saw the benefits of the remediation efforts we spent much of 2020 implementing. From an operational perspective, we focused on two key areas in 2020, which will benefit 2021 and beyond. First, our supply chain optimization. After reducing our North American DC structure footprint from 18 to 4, One less than our target of five, we are now well positioned to manage inventory and to address changing demands in our industry. This streamlined structure, along with our one SKU, one location inventory management approach, allowed us to improve customer service, reduce inventory, eliminate waste, speed up the flow of products, and reduce customer chargebacks. Our customer focus team strategy with consumer first internal hubs focused on a single large customer group is working well. We're now performing at or better than the benchmark historical cost levels when you also consider the growth in European domestic sales since 2018. We are typically higher than North America. We intend to continue to improve further in 2021 and beyond. Secondly, we focused on process simplification and automation and will continue to do this year and beyond, despite the significant progress made in 2020. The simplification and further automation of our business processes will increase efficiencies and drive cost improvements. We'll be focused more on data-driven insights, and we will aim to refine our systems to increase productivity. Overall, we believe that we have not only remediated the issues we have, but we are now in a stronger position operationally than we have ever been before. Looking at some of the factors that drove our revenue growth in the fourth quarter, one of the standard items was the performance of Toca Boca, our digital games business. Toca Life World is a game that regularly evolves with new content and play sets, as well as creator tools that allow kids to express themselves and personalize their experience. Playing digital games has become an integral part of children's lives, and this trend has intensified during the pandemic as kids turn to gaming and to connect and communicate with their friends. With kids spending more time at home and with parents being more flexible with screen time, we quadrupled our digital games revenue in Q4, primarily due to the growth of Toka Life World platform. Kids are playing games, videoing themselves, and streaming the videos onto platforms such as TikTok, Twitch, and YouTube for others to watch. Toca Boca has seen explosive growth in consumer engagement over the past year, and we believe that this major factor behind Toca Life World growth. We generated over 4 billion views to the Toca Boca hashtag on TikTok in 2020 and are at nearly 5 billion currently. We now have over 30 million monthly active users for Toka Life Worlds. In total, the Toka Boca ecosystem currently has over 40 million monthly active users compared to approximately 19 million last year. In addition, we saw strong growth in our Sago Mini subscription business. where we had over 240,000 subscribers across Sagomini World, Sagomini School, and Sagomini Box at the end of 2020, compared to just over 119,000 at the end of 2019. This large monthly active user and subscriber base is a tremendous asset for us to develop and direct to develop a direct relationship with consumers and to which can market and sell new digital games as we expand our product offerings. Socializing the digital universe is one of the major trends that has emerged from the pandemic. In this emerging digital universe, kids can hang out in multiple locations and geographies and interact together. We are now working hard on our next digital game product launches, including Toka Days, a multiplayer game going live in Q4 2021, and we just launched a new Toka Boka subscription box program targeted at kids five to nine. Saga will focus on edutainment, a way for young kids to play and learn simultaneously, another area which grew extensively during the pandemic as parents sought to ensure their kids do not lag academically. I want to briefly discuss two brands in the Toy Creative Center, Kinetic Fan and Bakugan. One of the standout performances for the year was the Kinetic Fan brand. Kinetic Fan continues to solidify its status globally, but also increasingly in other markets. Its surging popularity and strong growth, positive online reviews, and extremely popular social media presence has helped solidify the Kinetic Sand brand as a childhood activity compound in households around the world. For context, we have around 20 million social media views per day and have had over 14 billion total views. We are pleased with the response to the Bakugan franchise since its relaunch. Together with Innovative Toys, we have built a multi-channel content approach encompassing television, SVOD, video games, and YouTube. Bakugan toy sales were strong at the beginning of 2020, but slowed as the pandemic restricted social play for kids. Despite these restrictions, Bakugan still performed well in many countries, especially in Europe, including recently reaching number one in its category in Germany. In 2020, we launched the second season of the TV show on Cartoon Network and Netflix, introducing a new theme and corresponding toy innovation. The second half of Season 2 launched on Netflix in early February. This spring, we have had two additional drops on Netflix with an hour-long special coming on March 15th and the launch of season three on April 15th. We're excited about growing and expanding the franchise in 2021, especially as we anticipate social play for kids significantly expanding. We are working on creating an all-new Bakugan experience in the world of Roblox to help further engage with fans by bringing Bakugan to life in the game. For the past few years, we observed the changing consumer content consumption patterns and have mobilized and established a multi-platform approach to content production within our entertainment creative centers to stay ahead of the curve. Telling stories and creating engaging and enduring characters that resonate with kids around the world is important to us regardless of what screen they are watching. Our commitment to storytelling is working. Paw Patrol, currently in its eighth season, continues to be the number one preschool show. Fans around the globe responded with excitement as we announced Spin Master's feature film debut with Paw Patrol the movie. The animated feature film produced by Spin Master includes a cast of world-famous voice and music characters and is scheduled to debut in the theaters in late August 2021. in association with Nickelodeon and distributed by Paramount. Late last year, we launched our first-ever straight-to-streaming series with the Netflix original Mighty Express. We've taken a multifaceted approach to content creation for Mighty Express that includes a YouTube destination with short-form content, music videos, and character bios, as well as a mobile app to further engage kids. Spin Master has retained the rights to the distribution of the series outside of SVOD including licensing of consumer products and the toy line. While we currently have 10 series and multiple short form series airing or streaming in 190 countries in 30 languages, the development team within the Entertainment Creative Center is constantly searching for fresh stories and ideas that will captivate children and families alike. We are very proud that Spin Master is producing its first feature film, Paw Patrol the Movie. The Entertainment Creative Center is building on the feature film strategy and will be bringing out other movies in the upcoming years. We also continue to partner with the best licensors to build their presence as a toy partner for high-profile brands. In addition to core franchises such as the Monster Jam with Feld Entertainment and DC Batman with Warner Brothers, we announced several new strategic toy license agreements in 2020. including Warner Brothers' Harry Potter and the Wizarding World, Feld's Supercross, and Riot's League of Legends, all of which have scheduled toy launches in fall 2021. We are proud of the trust that these IP partners have shown us and look forward to creating and unveiling innovative toys for kids and fans around the world. Within the past year, the impact of the pandemic and its profound economic and social effects has significantly changed the mindset of the consumer. Consumers are increasingly comfortable in accepting online and e-commerce. E-commerce penetration and usage grew exponentially, with strong nuances by region, and we believe that as more consumers have experienced the convenience associated with these platforms through the pandemic, e-commerce usage will continue to grow. Consumers are concerned about and focused on their family's mental health and well-being. The pandemic has had an undeniable effect on the state of mind of parents and kids alike. While in the beginning of the lockdown, parents were mostly focused on toys that would keep their kids busy, now they're increasingly interested in ways to bring their kids joy, relieve boredom, and bring specialness to an otherwise monotonous time. Toys, digital games, and entertainment are the perfect antidote to that monotony and continue to play an important role moving forward. Parents have a renewed focus on togetherness. Families are finding new ways to bond and stay busy. Co-viewing content between kids and parents has increased over COVID and is expected to carry on after lockdown. When social distancing restrictions subside, Undoubtedly, traffic will return in-store, but in-store behaviors and interactions will likely be different. Customers are hungry for new and different. Classics were a safe choice in 2020, but we expect consumers may shift to newness. This will allow SpinMaster Elite to lean in to its strengths in innovative product development. We continue to tool our marketing strategies to align with these consumer trends and to make marketing as innovative as our products. We're uniquely positioned to do that as a diversified children's entertainment company across three creative centers. Our goal is to use the strength of all three to build a fluid ecosystem that allows us to own and grow more of our own audience, in turn generating organic growth for our brands. Digital now represents 50% of our marketing mix in the US, and we'll continue this mix into 2021. We will continue to operate digital first, and we continue to increase spend supporting e-commerce, driving to our retailers.com presence, and maximizing sales online. In early January, we completed the acquisition of Rubik's Brands Limited, owner of the Rubik's Cube, and one of the industry's most iconic brands. We're excited for the opportunity to put our innovation on the entire Rubik's portfolio and expand distribution through our global footprint. The acquisition of the Rubik's Cube further strengthens our presence in the games and puzzle category and gives us a platform for further innovation and global leverage. We're always on the lookout for accretive M&A opportunities that complements our organic growth strategy, and we continue to apply a disciplined approach to assessing all opportunities. We're increasingly focused on the entertainment and digital games era for M&A opportunities. Given our growth in digital games, our potential M&A universe has expanded dramatically. Let me conclude by addressing our recent executive leadership changes. The dual CEO structure we have had for decades has served us well, but we believe... Now, my apologies. but we believe we now have a great opportunity to transition to a single CEO model and for Anton and I to transition to different roles. To that end, we appointed Max Rangel as SpinMaster's new CEO, effective April 2021. Max is a seasoned executive who has successfully led global businesses, generating growth across multiple consumer package categories. He's an effective leader with a well-established established ability to unlock the potential of teams to boost organizational capability. Beginning in April, Anton and I will move into higher-level strategic growth-oriented board roles, continuing to drive the long-term vision and strategy for Spin Master. I will maintain involvement in the creative process for entertainment and oversight of the Digital Games Creative Center. Anton will provide guidance on Spin Master's talents and culture globally. We will continue to be actively involved in areas of the business we are passionate about, including external partnerships and a strong focus on acquisitions. Together, we are energized to be taking the next step in our journey. I believe more than ever, our performance in 2020 demonstrates the power of a diversified portfolio of brands, entertainment franchises, and digital games, and the benefits of having a sound balance sheet. With a clear vision for the future and an exceptional leadership team, a solid operating platform, and financial foundation, and three thriving creative centers, we are optimistic for 2021. We are, however, mindful of the unknowns ahead of us, including the ever-evolving COVID situation. In the long term, our strategic direction and diverse geographic platform, combined with the commitment of our global teams, positions us to take advantage of the evolving opportunities to grow and build long-term value. I'll now turn over the call to Mark.