Spin Master Corp.

Good day and welcome to the Spin Master third quarter 2021 earnings call. Today's call is being recorded. At this time, I would like to hand the call over to Sophia Basoukis. Please go ahead.

Thank you, Maureen. Good morning, everybody, and welcome to Spin Master's financial results conference call for the third quarter ended September 30th, 2021. I am joined this morning by Max Rangel, Spin Master's Global President and CEO, and Mark Siegel, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A, and condensed consolidated financial statements for the third quarter 2021 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 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, 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 statement regarding forward-looking information contained in the company's earnings release dated November 3rd, 2021. 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 Max Rangel.

Thanks, Sophia. Good morning, and thank you for joining us. Before we begin, I want to take a moment on behalf of Spin Master to express our sympathies to Brian Goldner's family and to all employees at Hasbro. Brian had an incredible impact within the children's entertainment space and his passion, leadership, and kindness will be missed. Now turning to our third quarter results, we are pleased with our strong performance, which puts us on very solid footing leading into the holiday season. This past quarter, total revenue climbed by 25% to over $714 million and gross product sales increased by 16% to 681 million. Thanks to the exceptional work of the Global Speedmaster team, we were able to deliver record profitability in a challenging and volatile supply chain environment. Adjusted EBITDA was just over 217 million, up 55% over 2020. It's rewarding to see that our strategic approach to toy innovation, multi-platform engaging storytelling, and open-ended digital play is driving strong diversified global revenue growth across all three creative centers. Our digital games and entertainment creative centers had a strong third quarter, growing over 120% on a combined basis compared to last year. Approximately 15% of our total revenue this quarter stems from digital games and entertainment. more than double what it was in 2020. To borrow a phrase from our preschool franchise Paw Patrol, Spin Master is on a roll. During the quarter, we debuted our first feature film, Paw Patrol the Movie, which was released in August in theaters globally and on Paramount Plus in the U.S. To date, it has grossed more than $135 million worldwide, and the film landed the number one spot on Paramount Plus at launch, with families watching it on average three times. The movie release had had a halo effect on our franchise. Our reach among children has increased from 41% to 60%, and awareness of the Paw Patrol has risen globally. There is strong momentum behind the Paw Patrol franchise, and yesterday we were pleased to announce that together with our partners at Paramount and Nickelodeon Movies, we have begun production on the theatrical sequel, Paw Patrol Movie 2, which will hit theaters in fall 2023. Additionally, we are broadening the Paw Patrol franchise further and have announced that a new Paw Patrol spin-off series will be coming to Nickelodeon in 2023. Our Entertainment Creative Center is committed to producing at least one new property each year. In addition to the new Paw Patrol movie and spin-off series for 2023, the team has a deep slate of new entertainment series and feature films in development, and we look forward to sharing further announcements in 2022. From the small screen to the big screen, we're creating endearing characters and engaging stories to capture the imagination of kids globally. Our growth in digital games, which nearly doubled in Q3, continues to be driven primarily by the Toka Live World platform. Toka Live World currently has over 47 million monthly active users, and the entire Toka Boka ecosystem has over 65 million monthly active users, up over 70% compared to $38 million last year. Strong user growth continues in core markets, including the U.S. and Western Europe, but also increasingly in countries such as Russia, Mexico, Brazil, and in Eastern Europe as well. During Q4, we will be dropping new content in advance of the holidays, as we always do, including our Sanrio furniture pack during the Sanrio event from December 20th to December 31st. our first major collaboration with Sanrio, owner of Hello Kitty. Toca Boca provides children with tools to create their own digital world and playgrounds where children's needs, creativity, and expression are at the center. During the pandemic, we saw this need grow, and when the world became smaller, the digital world expanded. An important part of Tokalive's success has come from the engagement of fans who create and share Tokalive-related content across social platforms such as YouTube and TikTok. On TikTok alone, fans of the game have generated content that has a total of over 16 billion views. By listening to their feedback and preferences, the studio continues to develop new creator tools and digital play sets, leading to incremental revenue inside of the game environment. Now turning to Seigo Mini, they increased our subscription base to 305,000 subscribers, up over 40% compared to the 215,000 last year. The subscriber base across our digital games and entertainment offerings continues to be an asset that we can leverage in building and deepening our relationships with our fans and their families, increasing stickiness within our brand portfolio. Our new digital game studio in Stockholm, NOID, has now established a core team and has begun to work on digital games leveraging the master's own IP, with two games in development currently. In Q2, we acquired Originator, a digital game studio based in San Francisco and a creator and publisher of entertainment-based education mobile apps for kids and families. This acquisition is complementary to SEGO Mini's edutainment offering as we can leverage our substantial subscription user base to expand the Originator apps to new audiences. With TOCA and NOID in Stockholm, SEGO Mini in Toronto, and Originator in San Francisco, we are continuing to build and strengthen a global studio model that gives us a strong platform for continued growth in digital games. Our growth in both entertainment and digital games is complemented by double-digit increases in toy gross product sales, which grew by 16% this quarter. This was a great performance on the very challenging conditions. Our supply chain and commercial organizations were very successful in working through global supply chain disruptions with our retail partners to ensure we deliver our goods to stores and digital shelves alike. We pulled forward finished goods production to increase capacity, and we invested in more tooling to dual-source manufacturing of certain product lines. We leveraged our diversified third-party manufacturing footprint across China, Vietnam, India, and Mexico to optimize availability, and we worked with our logistics providers to secure access to additional ports and shipping lanes. The work we've done since Q4 2019 to restructure our supply chain platform is really paying off. we are ready for a strong holiday season and we will do what we can to meet our strong demand by consumers for our products. Finally, as mentioned last quarter, we successfully implemented price increases in our fall line effective July, which helped to partially offset raw material and ocean freight cost increases. Now let me turn to POS performance. Strong demand for toys continued in Q3. According to MPD, the global toy industry is of single digits through the first three quarters of the year. In comparison, our global POS growth was in line with the industry growth and accelerated versus the industry in the month of September. Internationally for NPD, our Q3 POS is up 1% year over year, facing ahead of the industry, which was flat. On a year-to-date basis internationally, we are slightly ahead of industry growth at 7%. Now in the US, Our Q3 POS was in line with the industry growth of double digits. This is a significant improvement over the last two quarters. This trend accelerated in the month of September when our POS grew nearly three times the industry in both the U.S. and internationally. Our share of U.S. toy sales in September was above both 2020 and 2019 levels per NPD. We are very encouraged with our turnaround in our POS trend. and that we are taking back share, much of which is due to getting our inventory back to reasonable levels, delivering exciting innovation, and consumer loyalty to our core toy lines such as Bakugan, Paw Patrol, and Kinetic Sand. Supporting this growth was growing momentum in the e-commerce space. During the third quarter last year, much of the world was still in COVID lockdown. As a result, e-commerce sales increased dramatically. With much of the world now opening, MPD has indicated they are seeing a flattening in e-commerce sales growth for total consumer spend, although it still remains at 27% of our total sales, and we are growing in excess of 20% with an expanded market share across key retailers. As brick and mortar channels continue to rebound, we will benefit from the impactful retail store displays and increased impulse buying, complemented by strong omnichannel presence from brick to click. And with inventory levels in a better position through Q3, our innovative approach to marketing began to drive our POS turnaround. We continue to put the consumer at the center of our marketing strategy and are bolstering our capabilities to drive decisions based on insights. This season, we've built flexibility into our plans to be able to pull different marketing levers based on supply and demand. Many news reports have cautioned parents by early for the holiday season, and they are responding. We are seeing this in our early POS results and expect our consumer demand will continue to grow throughout the season. We believe we are well-positioned to capture an increasing share of the toy spending with integrated marketing campaigns that leverage digital, linear, and social paid media advertising supplemented with strong omnichannel activations and robust in-store and online presence. Our key brands and franchises demonstrated broad strength through the third quarter. Paw Patrol the movie had a positive impact on our shipments, where Paw Patrol toy line and we are seeing a positive response from consumers in both POS sales and overall brand health. Paw Patrol maintained momentum in Q3, outperforming the preschool category globally and in the U.S. with a successful movie launch and subsequent toy sales. Paw Patrol Q3 POS was up 22% globally and 27% in the U.S., and 19% globally and 20% in the U.S. year-to-date per MPD. Paw Patrol is currently the number one character in preschool and was the eighth largest toy property globally in Q3, according to MPD. Within boys, Bakugan continues to pose strong POS and is the number one item in paddling toys in France, Italy, the UK, and Belgium per MPD. POS for Bakugan in Q3 increased 18% globally and over 38% in the U.S., Bakugan's traction continues to be driven by an innovating digital-first marketing plan that immerses kids across Roblox, Netflix, and other touchpoints. Bakugan has seen great momentum on Roblox in particular, with over 75 million plays of our Bakugan Rage Runner game since April, and 2.7 million views of our first-of-its-kind Netflix full-episode premiere within Roblox in early September. Another highlight from our POS performance includes the activities, games, puzzles, and blush category. While we've seen POS declines in games following a robust period of sales in 2020 during the pandemic, we are experiencing strong POS growth in KineticSan, which together with our other items puts us in the second position in the activities category. Supporting this growth has been the strong performance of Orbeez, which we acquired in 2019 and which saw 70% growth in the U.S. in Q3 compared to the arts and crafts super category that was up 2%. This was driven in part by our viral Orbeez Challenge activation that has now received over 90 million views on TikTok. Gund also experienced EOS gains both in the infant plush category with Flappy the Elephant, which is the number one item in the plush preschool category for MPD, and with strong performance from our innovative new Pelageous line of fashion-forward collectible plush. Speaking of innovation, close to 20 Spin Master toys have been named to retailers' holiday top toy list in the U.S., with many more globally. Early POS shows strong performance for newly launched items. According to MPD, Purse Pets was the number one item in fashion role play and accessories in September. We expect to see strong continued momentum on this new brand with an exciting marketing plan in Q4, led by an innovative activation on Roblox with Adopt Me, the number one game on the platform, where we sold an incredible 2 million virtual purse pet accessories through viral and virtual in-game currency in just one week. We've also seen strength in our new Sonic Fin Football, endorsed by NFL quarterback Russell Wilson. which was the number two product in sports activities and games class in the U.S. in September. Our licensed toy lines have also seen strong momentum. One of the standouts is our new toy partnership with Universal Studios for Gabby's Dollhouse, which launched this summer on Netflix. According to MPD, the Gabby's Dollhouse toy line was the number one new property in the U.S. in Q3 and the number three overall property in the playset dolls category in the U.S. and growing. Both our Monster Jam and DC Universe lines were performing very well. In fact, Monster Jam is the number two brand in the vehicles category year to date and has gained significant shares since 2019. Spin Master is the number one toy licensee for DC Universe for NPD. In 2022, we will see four DC Universe franchise movies released, and our toys for the upcoming spring 22 Batman movie will be launching in January. The Wizarding World toy line in partnership with Warner Brothers is off to a strong start. Wizarding World has a loyal multi-generational fund base and is currently the 16th property in toys per MPD. The early performance of the line is gaining interest among a broad base of retailers, and we are developing broad global distribution with strong interest to expand listings and support, which should propel the brand forward in 2022. Spin Master has always been committed to innovating and pushing boundaries in the children's entertainment space. This drive pushes us beyond our initial toy offering into entertainment and eventually digital games. Last month, we announced the creation of Spin Master Ventures, an initiative that will focus on making strategic minority investments in early-stage companies to further accelerate our growth in our three creative centers. We've initially allocated $100 million in capital to invest in entrepreneurs with promising ideas, services, and products within the children's entertainment space, giving us access to potentially game-changing thinking and concepts. Our goal is to establish Speedmaster Ventures as the partner of choice for entrepreneurs looking for capital to grow. We have built a strong team to lead ventures with an experienced and knowledgeable leader for each creative center venture initiative. Speedmaster Ventures will be mutually beneficial for Speedmaster and the portfolio companies, providing them with capital and access to our knowledge and expertise to drive their ideas forward while also deepening our understanding of emerging technologies, trends, and ideas, as well as augmenting our current research and development activities. We launched Speedmaster Ventures with initial investments in two companies aligned with our Digital Games Creative Center. The first investment is in Nordlight, a mobile game development company based in Stockholm. Nordlight's team has delivered some of the largest grossing mobile digital games in history. Nordlight will support our global digital game studio network and will help accelerate our strategy of monetizing Spin Master's own IP in digital games. The second investment is in Hood Reading, an online tutoring service based in Canada that provides children with live one-on-one reading lessons with experienced teachers. The service connects kids with real teachers to advance reading skills through a video chat platform that allows for real-time on-screen collaboration between the child and teacher. We feel confident about our performance for the balance of 2021. We are generating positive momentum across all three creative centers, realizing our vision of being a fully integrated children's entertainment company. As a result, we are increasing our gross product sales and total revenue outlook for 2021. To conclude, as we look to the balance of 2021, we have continued confidence in our strategic initiatives and performance for the fourth quarter. We have built a strong diversified portfolio of products and brands, entertainment franchises, and digital games that are resonating well with consumers. Before I turn it over to Mark, I want to take this opportunity to thank our employees for their exceptional contributions. Our teams remain focused, and we are proud of the results our employees have delivered. Speedmaster's commitment to innovation, engaging storytelling, and playful digital experiences comes from all our people. I want to call out the work by our supply chain and commercial teams globally who have put in an extraordinary effort to ensure that our toys get to where they need to go to for kids to enjoy this coming holiday season. It's truly been a team effort, and it's evident in our results. Together, we are delivering profitable growth and creating long-term value for shareholders. With that, I will turn the call over to Mark.