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spk02: 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.
spk12: 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.
spk04: 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.
spk05: Thank you, Max. We delivered very strong financial and operational results in the third quarter. The momentum we saw in the first half of 2021 continued through the third quarter with excellent year-over-year performance. Revenue increased 25% driven by double-digit growth and more in the case of entertainment across all three of our creative centers. The combination of higher gross product sales in all of our geographies, higher entertainment and licensing revenue, and the upward trajectory of our digital games business, combined with a successful execution of operational improvements we have been working on for the past two years, led to record profitability levels. In addition, we continued to strengthen our balance sheet, ending Q3 with net cash of just over $360 million. despite investing over $70 million in acquisitions so far this year. We are pleased to be entering the holiday season with so much operational and financial momentum. Gross product sales rose approximately $94 million or 16% to $681 million, with a favorable foreign exchange impact of $3.5 million. On a constant currency basis, gross product sales were up 15.4%. We generated strong sales growth in preschool and girls as well as outdoor and saw a solid increase in activities, games and puzzles and flash. Growth occurred across all geographic markets. Europe was the strongest region growing 20.5%. The rest of the world was up 16.7% and in North America, gross product sales rose 13.8%. International gross product sales represented approximately 40% of total gross product sales up from 38%. Including entertainment and licensing revenue and digital games revenue, total revenue was $714.5 million, up 25% from $571.6 million last year. Our preschool and girls segment grew by $68.3 million, or 28.1%, to $311 million in Q3, driven primarily by strong sales of Paw Patrol, Wizarding World, and Purse Pets. which more than offset declines in present pets and hatchimals. Paw Patrol continues to perform exceptionally well, accounting for a significant portion of the growth. The successful launch of the movie has boosted sales not only of products directly related to the films, but the core line as well. Gross product sales in the outdoor segment were up 67.5% to 20.6 million. Gross product sales in activities, games, and puzzles and plush category rose by 8.2% to $195.8 million. The increase was driven primarily by sales of Kinetic Sand, Gund, and Rubix, offset in part by declines in games and puzzles, which continued to face difficult comparisons against 2020, when sales rose sharply during the pandemic. Games and puzzles continued to show strong growth relative to 2019-20. pre-pandemic levels. In boys, gross product sales were up 1.6% to $153.8 million, with higher sales of Monster Jam RC, DC licensed products, and Tech Deck, offset by declines in Ninja Bots and DreamWorks Dragons. Sales allowances in the quarter were 10.8% of gross product sales, down slightly from 10.9% last year, despite continued growth in Europe, which has a higher overall sales allowance rate than the global average. On a year-to-date basis, sales allowances are 10.9% compared to last year's 11.7%. Historically, we have operated in the 10 to 12% range. We continue to expect that for 2021, we'll be towards the upper end of that range. A significant contributor to our strong Q3 performance was other revenue, which grew 58.4 million or 121%, to $106.7 million. Both primary components of other revenue, entertainment and licensing, and digital games, increased significantly. Entertainment and licensing grew 158% to $53 million, primarily from distribution revenue related to the Paw Patrol movie. In Q3, digital games revenue increased 94%, to $53.8 million, led by growth in Toka Life World. We've now seen six consecutive quarters of record revenue growth in our digital games business. Regarding Nepal Movie, as we described in August, we recognized $23 million of distribution revenue from Paramount in Q3, along with $23 million of amortization related to movie production costs, which were previously capitalized. We are pleased to report that because of the strong box office performance of the movie, we also recognized a box office bonus of $3 million this quarter. As mentioned in August, we may see additional revenue relating to our share of movie distribution revenues in early 2022. Licensing and merchandising revenue from the movie will continue to flow into Q4 and into 2022. Outside of licensing and merchandising revenue, there will be no further movie income in 2021. Gross profit for the quarter was $366 million or 51.2% of total revenue compared to $277.9 million or 48.6%. To help understand the improvement in our margins, it is important that we consider all three of our creative centers. Our toy creative center had the most significant positive improvement in gross margin due to continued cost reductions resulting from our operational improvement and productivity initiatives, offset in part by inflationary pressures on product costs and ocean freight. For the quarter, the net negative impact of inflation, partially offset by price increases implemented in Q3 and productivity benefits, was around 80 basis points. In addition, we saw lower closeout sales and improvements in our product mix. As a reminder, in Q3 2020, we identified approximately $7 million in costs within gross profit, which related to inefficiencies from our previous operational issues, which have now been remediated. In entertainment, we recognized distribution revenue from the poor movie and the box office bonus, which was offset by the amortization of production costs. The net effect of the movie was dilutive to consolidate a gross margin by 150 basis points this quarter. Continued growth in digital games was accretive to gross margin by approximately 60 basis points. Selling general and admin expenses decreased to 26.2% of total revenue down from 27.9%. The 170 basis point improvement was driven by revenue growth year over year and the reduction in distribution costs which were down 13.5% this quarter. As a percentage of revenue, distribution costs improved by 110 basis points. In 2020, we estimated that we incurred $2.7 million in additional warehousing costs in Q3 relating to the Q4 2019 operational issues. We have now anniversaried those issues and our remediation efforts are driving further efficiencies. Offsetting the improvements in SG&A or higher marketing, admin, and selling expenses. Marketing costs increased 9.2 million to 4.8% of revenue, compared with 4.4%. We continue to expect our full year marketing spend to be approximately 10% of revenue. We will manage marketing strategically to support sell-through, share growth, brand momentum, and channel country mix goals. Selling costs increased due to the higher proportion of licensed product in our mix. Administrative expenses increased over last year by $13 million or 19.4% to $80 million. The increase was primarily from personnel related costs and incentive compensation related accruals due to higher profitability. However, administrative expenses as a percentage of total revenue dropped to 11.2% from 11.7%. Adjusted administrative expenses as percentage of total revenue declined to 10.6% from 11%. In Q3, we recorded net income of $135.4 million or $1.29 per diluted share compared to net income of $86.8 million or $0.83 per diluted share last year. Adjusted net income in the quarter was $132.6 million or $1.26 per diluted share, an improvement of $37.5 million when compared with adjusted net income of $95.1 million or $0.91 per share last year. Adjusted EBITDA was $217.3 million compared to $139.9 million, an improvement of $77.4 million. Adjusted EBITDA margin was 30.4% up from 24.5%. The significant increase in adjusted EBITDA was driven by the contribution of higher gross profit and lower distribution costs, partially offset for higher selling, marketing, and administrative expenses. As a reminder, included in adjusted EBITDA was 23 million of distribution revenue from the Paw Patrol movie and 3 million from the box office bonus. The offsetting 23 million related to the amortization of production costs for the movie is not included in adjusted EBITDA. If we were to deduct the movie amortization, adjusted EBITDA and EBITDA margin for the quarter would be 194.3 million and 27.2% respectively. From a tax perspective, we had an income tax expense of 41.8 million in the quarter compared to an income tax expense of 14.7 million last year. Our effective tax rate for the quarter was 23.6% compared to 14.5% last year, which is in line with our historical annual effective tax rate of 25 to 26 percent. From a liquidity perspective, we continue to be in a very strong position. We ended the quarter with $360.5 million in cash, up $153.2 million from $207.3 million last year. Given the cash on hand at the end of the quarter, cash flow we expect to generate in Q4, and the undrawn capacity on our credit facility, we are very solidly positioned regarding available liquidity. Our third quarter free cash flow was $65.8 million compared to $96 million, $13.2 million lower as a result of an increase in non-cash working capital partially offset by higher cash flow from operating activities. The change in non-cash working capital was primarily driven by increases in inventory and trade receivables. Inventory ended the quarter at $183.1 million compared to $155.9 million last year. up 27.2 million, or 17%. As a result of the global supply chain issues, at the end of Q3, we had approximately 59 million of in-transit inventory, representing 32% of our total inventory, most of which shipped in October, in comparison to 32 million representing 19% at the same time last year. Trade receivables ended the quarter at 417.3 million, compared to 350.1 million at the end of Q3 last year, up 67.2 million or 19.2% and slightly above our sales growth. Net operating working capital as a percentage of LTM sales was 15.8% compared to 17.8% last year. Late in the quarter, we entered into an agreement to amend and restate our existing 510 million five-year revolving credit facility which is now unsecured, matures in Q3 2026, and contains greater flexibility to make acquisitions and investments, as well as improve pricing and financial covenants. The facility also has an accordion feature, which permits us to increase the total amount available by an additional 200 million if we meet certain criteria. As Max mentioned earlier, the creation of SpinMaster Ventures will allow us to accelerate growth through strategic minority investments. These investments will have strong correlation with our strategic growth plan across our three creative centers. We have allocated $100 million to the venture initiative, which will be funded from existing internal resources. The investment range will be between $500,000 and $10 million at the upper end, but our sweet spot will be around $1.5 million to $3 million per investment. The strategy calls for both early stage or seed investments, as well as expansion investments for more mature companies. We are taking a long-term view of this initiative with no need to focus on returning capital within the traditional VC fund timeframe of 5 to 10 euros. Some of these minority investments may become acquisitions over time and some may be sold. Turning now to our outlook for the balance of 2021, we are seeing robust demand for our deep and innovative toy lineup and are increasing our gross product sales growth outlook. We now expect our growth rate for gross product sales for 2021 to be in the mid-teens, compared to the outlook we issued in August for growth of high single digits. From a timing perspective, we are working extremely hard to ensure full product availability during the holiday season, and we're doing all we can to meet strong demand. We saw approximately 50 million of orders shift between Q3 and Q4. Most of these orders shipped in October, and the balance are expected to ship early November. The elevated inventory levels we had on hand at the end of Q3 gives us comfort that we have enough domestic inventory to fulfill customer demand for Q4. This revised outlook considers the strength in our business we have seen so far, but also recognizes that there continues to be potential supply chain risk and cost pressures for the remainder of the year from port disruptions and container availability. As a result of the increase to gross product sales and continued strength in entertainment and digital games, we now expect growth in our total revenue to be slightly above 20% compared with our prior outlook of mid-teens. Turning to profitability, we have seen increases in input costs, particularly ocean freight, accelerate significantly in the latter part of Q2, increase further in Q3, and remain elevated into Q4. we implemented productivity initiatives and price increases to help us offset these inflationary pressures. Our price increases became effective early in Q3, but given the rapid and unexpected rising costs, these increases will not be sufficient to allow us to remain neutral from a margin perspective in our toy business. Fortunately, as a result of our diversified business model, The positive mix effect of digital games and entertainment and licensing has helped offset toy margin pressure. For that reason, despite the increased guidance for gross product sales and total revenue, we are maintaining our previous EBITDA margin guidance and continue to expect 2021 adjusted EBITDA margin to be towards the higher end of the mid to high teens range. As a reminder for Q4, when we talk about the timing of spending and profitability, a significant portion of our annual marketing expenses are incurred in Q4 to maximize the impact on consumer purchases and our ROI. This typically causes a misalignment of sales and marketing spending between Q4 and Q3, resulting in adjusted EBITDA margins in Q4 significantly below those in Q3. Looking ahead to 2022, we will provide gross product sales and total revenue growth, expected seasonality, and adjusted EBITDA margin guidance for 2022 when we report our fourth quarter and full year 2021 results in early March. This will allow us to incorporate customer feedback into our outlook from the critical customer previews that started this past September and continue during January and February of 2022. To conclude, we are committed to our long-term financial framework for value creation, underpinned by our formula for innovation and global growth across toys, entertainment, and digital games. Our strong financial position sets a solid foundation for successful growth for 2021 and beyond. That concludes our call. We will now be pleased to take questions. Operator, please open the line.
spk02: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach your equipment. And if you find that your question has already been answered, you can remove yourself from the queue by pressing star two. We will now take our first question from Adam Shine, National Bank Financial. Please go ahead.
spk00: Thanks a lot. Good morning. Congratulations. Obviously, a very strong quarter across the board. And I'm glad, Mark, that you acknowledge that your revised guidance appears conservative because I think, again, my math clearly looks like GPS growth to mid-teens plus, you know, run rate on Entertainment X Movie and the new digital games levels looks like total revenue growth maybe closer to 24%, 26% growth than the slight above 20%. I'll leave it to you maybe to address it maybe later on, but I think acknowledging conservative guidance is appropriate. The context of marketing spend, which was alluded to, and I know, Max, you've talked quite a bit about, you know, change the foot that you're going to be doing in regards to advertising initiatives. you know, at a 10%-ish of revenue metric, it certainly reflects, you know, somewhere around 40% growth year over year in the Q4. So maybe we can start there, talk about, you know, what is going on particularly in this Q4 where, you know, there seems to be just massive demand out there inherently in the marketplace and the products are certainly resonating. Obviously, a marketing push would be incrementally helpful in that regard. And then number two, maybe more for Mark, it looks as though you guys – and the rest of the industry are doing a great job controlling or at least managing these supply chain issues. Is there anything in the Q4 beyond the ongoing trend that causes any incremental concern worth highlighting? I'll leave it there. Thank you.
spk04: Thank you for the question. And let me start with marketing, and then I'll turn it over to Mark. So what we've done, as I was referring on my remarks, is basically – secure the marketing investment in Q4 and to basically drive a lot of the marketing innovation that is really beginning to pay great dividends for us. We mentioned a few times as kids are now basically playing both physically and digitally and entertaining themselves with social context that actually allow them to share with friends, a marketing plan that is really integrating these two spaces very seamlessly. That is coupled with the fact that we have great innovation across a number of our segments. And so what we're doing is basically segmenting our portfolio to drive the greatest amount of marketing investment on our franchises and core brands first and foremost. And that is really fueling great growth and will continue through quarter four because we have great news across our franchises and our core toy brands. But separate from that, we have a lot of innovation as well in our licensed products. And then to top it off, we have a lot of new items that we brought to market, like PursePets, and that's just to name one. And so we have secure marketing for each and every one of those initiatives so we can actually secure a clean sell-through through the actually holiday period. We feel very confident that our sell-through is right now tracking ahead of what it was last year through the actually week ago. So we will continue to invest. We are working very closely with our supply chain teammates because we have to make sure that the products are on shelf. And that has been a very important new activity system that we've instituted this year. So we can actually maximize our investments and not let parents down when they actually go to look for toys on the shelves. I want to do one more thing, which is to penetrate a bit more. new and more efficient and effective ways to invest marketing in our e-commerce space. And so we actually have built tech stacks that basically combine with our search, new efforts, and the content agility of actually pivoting to where consumers are actually inquiring about our toys. We've seen significant growth on e-commerce, despite the fact that, as I share in my remarks, that that space, as new doors open, was forecasted to be flat. For us, it's been a source of growth. And parents actually continue to go to the e-commerce sites to actually search first for items and then may still go to purchase in physical stores. And we have benefited significantly from that incremental marketing investment in that space. Mark?
spk05: Thanks, Max. Adam, to answer the second part of your question in relation to supply chain and new factors, I would say to you, if you think about what's been driving the supply chain, the macro supply chain issues this year, You've had COVID in China and Vietnam. You've had container availability. You've had the West Coast port delays. You've had trucking issues and trucking capacity in the US as well. There's a lot of macro factors that are all actually playing into the supply chain issues. I would say to you that we have not seen any new factors emerge. We haven't yet seen a significant improvement in those factors. We've been managing around them and our supply chain team and commercial teams have done an absolutely outstanding job in navigating those choppy waters, and that's been one of the reasons why we've had such strong results in Q3. But to come back to your previous point, it's one of the reasons why we are remaining cautious. We're optimistic but cautious, and that's why we've adopted the tone that we have for our outlook.
spk00: Great. Much appreciated. Max, can I just do a follow-up on just on the marketing spend? Is there anything meaningful to highlight just in terms of advertising directed to the digital games?
spk04: Absolutely. Obviously, we have a growing and very engaged monthly active user base, which we actually also track at the weekly and even daily user base levels. And with the content drops that we have upcoming, which we feel really strongly about. We have a lot of paid user acquisition activity to actually continue to expand that user base. And then importantly, there's also marketing activity to drive engagement within those people in the actual ecosystem, which can go to our stores and actually interact with other items as well, so we can increase their engagement and share of heart for our basically Tokolite world, in the case of Tokolite world. In the case of Sego Mini, we also have a lot of great marketing ahead of us, as we actually emphasize more the digital gaming aspect of that platform. So we have a lot of digital user acquisition marketing spending as well on Sego Mini. And that leads me to Originator, which basically we're now trying to transfer our learnings on marketing to that edutainment portfolio, which is really rich and that we have actually a lot of upside with. So we are incredibly encouraged by the marketing activity on our digital gaming platforms. and it's going to continue to be a source of growth for us. Great. Appreciate it. Thank you very much.
spk02: We will now move on to our next question from Martin Landry, Stiefel GMP. Please go ahead.
spk09: Hi. Good morning, everyone. I would like to get more details on your total revenue guidance for 2021. You're calling for an increase of slightly more than 20%. If I'm trying to deduct what that means for Q4, it could suggest that your Q4 revenues could be down on a year-over-year basis. I'm just wondering if you could give us some color as to the driver of these expectations.
spk05: Martin, our total revenue guidance, as you said, was slightly over 20%. Again, similar to what I responded with Adam, we're actually taking a cautious tone overall with not only our toy guidance, but also in connection with digital games and entertainment. Digital games is in a back-to-school world now, whereas in Q3 it wasn't. And so we're actually just taking a cautious, moderate approach to everything in the fourth quarter, and that's the tone that we've adopted. So there's no issues or concerns there. It's just simply a cautious tone in terms of how we see the year playing out. Just remember that last year as well, Q4 2020, was a strong quarter as well. So we are comping a much stronger quarter than we have previously up to this point.
spk09: Okay, that's helpful. And then wondering if you could give us some visibility on your inventory situation at retail and Is there any way for you to quantify how many inventory days you have right now at retail in North America?
spk05: We don't actually quantify days inventory on hand in terms of retail inventory, but But certainly, and Max, you can add as well after this, I think our retail inventory levels have improved significantly. And that's one of the reasons why we've actually seen a strong Q3 performance. If you remember, through the first two quarters of this year, we were significantly behind where we wanted to be at retail relative to demand. And we've actually now started to catch up. In terms of our owned inventory, we've seen our own inventory at around 183 million compared to 156 million. We're in good shape on days inventory on hand, they're actually down. The reason dollars are up is simply because we've had higher in transit inventory. We've also seen some inflationary costs as a result of inflation driving inventory up even though units have not increased at that same rate. And then simply the business has grown. If you look at our net overall investment in working capital though, we're actually in the best position we've been at many years at around 15.8% compared to 17.8% last year. So overall, I'm very pleased with our working capital management position. Max, is there anything you want to add on retail inventory?
spk04: Martin, good morning. As we entered U3 Recall, we had been explicit about we were refilling low inventory levels at retail, and so that's helped with actually our BOS and share performance. And the really great news is that as we actually replenish and began to activate marketing, we have seen the sell-through to be very positive. So I would tell you that you've got to go brand by brand or franchise by franchise. In some franchises, our sell-through and velocities have been so encouraging that we continue to be in low retail inventory levels, which is positive. Obviously, we can always – and we're bringing more. So we have basically leaned into a few of these items and brought safety stocks, so we're replenishing as fast as we can. But by and large, we feel very strongly about our positions.
spk09: Okay, perfect. Thank you.
spk02: We will now move on to our next question from Sabahat Khan from RBC Capital Markets.
spk10: Okay, thanks and good morning. Just a quick follow-up, I guess, on the inventory side. I think Mark mentioned earlier that you have inventory in warehouses to kind of meet demand through Q4s. I just want to understand, again, with regards to supply chain, is it just some risk on maybe late quarter replenishment or You know, how are you thinking about, you know, major products that you need to sell through Q4? Are those here versus maybe less important ones that are on the way? So I want to get some context on what you foresee as the risk related to inventory or supply chains.
spk04: Good morning. So we like to think of our inventory in three buckets. Bucket number one is basically toys that have been coming and basically are basically set for the holiday season. Bucket number two are basically items that actually are replenishable items, so basically things that will sell tomorrow as they would basically six months from now. And bucket number three will be items that are basically about to ship for the spring season. So we talked about Batman the movie, and so those items are going to begin to ship between now and the end of the year. So as you can imagine, we feel very strongly about, you know, buckets number, you know, two and three being, you know, things that we have no risk. In fact, we're actually trying to ensure we have enough inventory to get the year 2022 off to a phenomenal start. So we have inventory that we've brought and lean into so that we can get the year going in the right direction. Similarly with our spring 22 innovation projects. And then bucket number one, we've been working very closely with our retail partners to make sure that we brought those earlier. So as they said, their planograms or, you know, obviously digital shelves, we were able to basically capitalize on the activation for those more seasonally supported items that were basically meant for these holidays. So that's the way we're looking at it. We feel very strongly about our positions as to where we are. And we believe that any risk on bucket number one, which is basically our inventory for the toys this holiday season, is very manageable and within the guidance that Mark has provided.
spk10: Okay, great. And then following up on the recent announcement on Spin Master Ventures and the commentary that some of those opportunities or investments over time could become acquisitions, I guess, how are you thinking about your just broader M&A strategy going forward Does this become a bigger part of it? Is the M&A strategy still in line with what you thought previously? I just want to understand how the two kind of go hand in hand.
spk05: So, Saba, this is an additional strategy that we're going to be working in parallel with our acquisition strategy. Our previously enunciated acquisition strategy continues to operate We have a full pipeline. We're looking at a lot of opportunities. We just recognize that with the Ventures Initiative, there's a ton of activity going on out there where companies may not be willing to sell at this point in time or not looking to actually sell their entire businesses and where we actually may be able to take positions that are complementary both from the portfolio company's perspective and from ours in terms of technology, in terms of understanding cutting-edge developments that are happening. And so we really see those strategies working in parallel with each other and being complementary. At some point, some of the investments in our venture strategy may turn out to be acquisitions, some may actually be sold and become dispositions, and some we may hold and continue to work with over a longer period of time. But we really see it as complementary to our acquisition strategy.
spk10: Okay, and just one quick last one. I think the DC Comics license or the partnership there is through 2023. You know, I guess when should we expect to maybe hear on whether that's renewed and does the pandemic, was there some sort of an automatic renewal because it's sort of a lost year in between? Just kind of want to get an understanding of the timelines for that license.
spk04: Yeah, so I would expect that by the time that we come back to you guys in March, we would have basically updated news across a number of our licensed partners. So we're working really hard with them. They're incredibly pleased with our performance. And so you can see in some cases we have truly eclipsed where these franchises were just a couple of years ago since we stepped in. And so I would just have to tell you things are incredibly positive and we feel very strongly. But we also are looking forward to our innovation with them in the next year and a half. And so as we actually have presented that, there's a lot of excitement mutually. So hopefully we can get back to you by the March meeting and then confirm a few things.
spk10: Great. Thanks very much.
spk02: We will now move on to our next question from Garrick Johnson, BMO Capital Markets.
spk06: Hey, good morning. Thank you very much. Mark, first for you, can you just go over a little bit more on the movie economics, like what other amortization might be coming through, if any?
spk05: Hi, good morning, Garrick. Sure. So the movie is fully amortized. There's no more amortization on the actual production cost coming through. That was all taken when we actually delivered the movie. So really what happened in Q3 was that we had the distribution revenue, which was now recognized. We had the amortization, which flowed through, and that impacted gross margin. We also had a box office bonus of $3 million, which flowed through into income. And then what you're going to see going forward is essentially licensing and merchandising income flowing through into Q4 and into Q1 of 2022 and beyond, and potentially If the movie continues to do really well, there might be some other distribution related residual income from the movie at some point in 2022. But I wouldn't build that into your model because it's just an unknown at this point. And, you know, we're hopeful that it happens, but it's hard to predict at this point.
spk06: Okay. Any idea how big that could be?
spk05: No, it really depends on the performance of the movie itself and the way that Paramount recoups all their full expenses against that. So it's going to depend on box office. It's going to depend on download to own and home video and all the other revenue sources. But as I said to you, it hopefully is meaningful, but we just do not know at this point, Garrick, and I would be cautious on that for 2022.
spk06: Okay, great. And I just want to ask Max one question, please. Max, you discussed at retail how we've been seeing early shopping with fears of shortages, et cetera, and I completely agree. What I was wondering is you were very positive and you expected that spending to continue. Why are you as optimistic as you are on retail continuing through the rest of the season? Thank you.
spk04: Yeah, so the reason that I actually expressed my optimism on retail specifically is driven by a number of things. One is, so as we replenish some of the new innovation behind the early sell-through, which we track weekly, as you know, we see that continued sell-through success week on week. So if we brought something back in August and we started to support it in September because we had inventory I can tell you that, you know, now in end of October, that sell-through continues to be very, very positive. And that's basically new shoppers that are engaging with the franchise or brand who weren't before. So we have continued to see continued sell-through success across a number of our innovations and for toy brands. So that's basically what's giving me a lot of, you know, optimism. Second, I mentioned and I referred to our e-commerce platforms. And in one particular case, we have very strong predictive analytics because we're actually getting real-time data daily, hourly. And as we look at that, we also see the rate of sales and the velocities continue to be very positive. And so as we get more people to basically, as the months and days go by, continue to shop, we're just optimistic with that. And we have money in our pockets to continue to support those brands. And that is the other piece. which gives me confidence we can actually trigger that demand, Gerrit, and so it's beginning to, and it's proving to work beyond our initial days.
spk02: We will now move on to our next question. Please go ahead, Brian Morrison, TD Securities.
spk01: Yeah. Good morning. I just want to follow up on the comment about money in your pockets. Clearly a high class problem to have. I understand your spin master ventures and your acquisition strategy, but at some point in time, Mark, how do you think about your balance sheet and maybe paying out a special or, or maybe the introduction of a dividend?
spk05: So Brian, yeah, um, we, we have a great balance sheet. We generate strong cash as you know. Um, We believe that we have a strategy that will, over time, allow us to deploy that cash in a creative way for shareholders and to create some value. The Ventures Initiative, I think, is one more way to allow us to do that in addition to our acquisition strategy. The amount that we've allocated is an initial amount. If we need more, certainly we can think about allocating more dollars to that as well over time. But I would say to you, we're a company that's a growth company. We're in growth mode and we want to deploy our capital. If at some point in the future, and we can't do that, we'd have to think about a way of returning capital to shareholders. But that's really... not something that's on the radar right now. It's not something that we or the board are thinking about, but it's possible at some point in the future.
spk01: I want to follow up on that quickly then. It looks like you're going to have north of $400 million and $600 million maybe by the end of next year. Are there opportunities out there to deploy that much capital?
spk05: I think on the acquisition side, And on the venture side, there's a tremendous amount of opportunities. Just remember on ventures, we're actually now looking across all three of our creative centers from a venture perspective. And also on the acquisition front, historically, all the acquisitions that we've done, apart from the one acquisition that allowed us to get into digital games, have been in the toy space. We've never done any acquisitions in the entertainment area, and we've done very limited acquisitions in digital games. Now with originator, the only one that we've added to that portfolio. There's a huge market out there and a huge number of opportunities for us to tap into. We've put a strong leadership team in place of senior, experienced people in each one of our creative centers to lead these initiatives on the acquisition and venture front. And we think there are opportunities out there to do that. And we're going to try our hardest. And if we can't do it, then we'll have to talk about a dividend at some point in time. But that's not where our mind is at now, Brian.
spk01: Okay, thank you. And then last question, Mark, in terms of digital. Maybe you can just comment on the outlook for digital. Clearly great subscriber traction continues here, but I just wonder how you balance that with the economy reopening and perhaps children being allocated less screen time.
spk05: Well, I think COVID definitely had a positive boost in our digital games business. That was part of it. And we've certainly seen a slight shift in in kids' behavior now that they're back at school. And so there will be a moderation of that behavior for sure. But if you think about what we're doing in our digital games business, we have so many exciting initiatives that we believe will continue to drive that business. You have Toka Days coming at some point in the future, which is our first multiplayer game. We've got a tremendous amount of potential with Originator to expand that business. It only has around 35,000 subscribers now, and with the whole a user base that we have across Toka and Sago, there's tremendous potential. And in addition to that, we've got the initiative with Noid that Max has described before, where we're actually going to be monetizing our owned IP. And so the investments that we're making across the broader studio network globally really positions us for continued growth in digital games, and we're very excited about that. Max, is there anything you want to add?
spk04: No, I wanted to amplify on NOID and our own IP. And obviously, we're incredibly excited about what they've already begun to show us that we'll be able to tell you more in 2022. And I want to just double-click on your edutainment space where we have significant upside potential, particularly with our originator franchises in that group. And we're beginning to see some green shoots. So I think we have a very balanced approach to continue to drive beyond the TokaLife World platform. And then I just want to say that we have now proven that revenue tracks are user-based, but I think the team is very, very engaged on basically moving forward with moving up the engagement levels as well, which is another basically area to drive our revenue in that space. And we have some opportunities, and the team is doing a lot of experimentation to continue to basically enhance our model. So we're very excited with the prospect.
spk01: All right. Thank you, and congratulations. Thanks, Brian.
spk02: We will now move on to our next question from Jamie Katz, Morningstar. Please go ahead.
spk03: Hi. Good morning. Thank you. Nice quarter. I hope you can fill us in on what your internal expectations are for inflation and how that plays out over the next few quarters, given that you've recently taken price increases.
spk05: Jamie, good morning. Certainly, as part of our planning for 2022, we're taking a very hard look at all the input factors now that impact our cost base. We've seen resin and electronic chips rise. They did moderate in Q4. We've seen a continued increase in ocean freight costs from Q2 into Q3, and again, remained at elevated levels into Q4. We're actually studying what we think is going to happen in 2022. I would say to you it's one of the top few things that we're looking at when we formulate our budget. I don't want to give you a numbers or prediction at this point in time. I think it would be better if we actually go through the process we're going through now and provide guidance when we have our customer previews back as well through January and February and we'll come back to you in in March with a more articulated view of how we see things playing out. But certainly it is a very strategic issue for us now, which is top of our agenda.
spk03: Okay. And then I think there were some comments on working capital efficiency gains during the prepared remarks. Would you be able to give us any insight into continued opportunity, as you see in this space, to gain traction on that? Thanks.
spk05: I think managing our working capital is something that we've, for the last few years, been very heavily focused on. If you look at where we were a year ago, we were at 17.8% networking capital as a percentage of LTM sales. That's down now to 15.8%, so we're continuing to drive that. I think if you look at that metric relative to the rest of the industry that we operate in, we are significantly ahead of our competitors when it comes to managing networking capital investments. So it's something that we will continue to focus on. We're looking at technology. We're looking at automation. We're looking at better integration across all of our platforms to drive better information, which will allow us to continue to do that. And so that's something that I think we're proud of and we'll continue to focus on.
spk03: Thank you.
spk02: Thank you. We will now take our next question from Pukit Savarwal from Canaccord Genuity. Please go ahead.
spk11: Hi, good morning, and thanks for taking my question. I was just wondering, could you expand on Tokalive and the digital platform and the growth you're seeing there? What is your customer acquisition strategy like there, and then what is the mix between new users versus users that are coming from previous games on your platform?
spk04: So good morning, Pakit. Over the last year, as we expressed in our remarks, we've actually increased our user base materially. Quite a bit of that user acquisition increases come just from basically organic kids sharing on platforms that basically invite other players to come. So we have a really wonderful model by where kids are sharing socially. on platforms like TikTok, and that basically gets people into the space. On top of that, we have a user acquisition strategy as well to go and basically source more kids to come into the ecosystem. And then to top it off, we have basically other TOCA ecosystem properties that actually we source into to kind of bring to our TOCA Live World platform, just to use an example. Now, To be clear, you know, that will continue to go forward into the next few quarters. And one thing you actually have to think about is that we are a global platform. And one of the things that is really encouraging for us is that a lot of our growth at the beginning was really North America-centric. And what we've seen with this game is that it has a global appeal. So now we have many other countries who were not basically providing user-based services. people into our platform as recent as three months ago. We've seen significant growth in places that perhaps we have been surprised, and that speaks to the wonderful appeal of this franchise. So we're super encouraged. We're going to other places to get more users into our ecosystem. And the thing now that we're turning our attention to is precisely what you're hinting, which is how do we then engage these kids to basically interact with the platform beyond the what they see as they actually play and basically hang out as they, you know, say themselves they are doing. So lots of opportunities. We see continued growth. Some geographies are exploding. I mean, they're bringing users, you know, at very astronomical rates, and so we're excited about that. And we're just managing this, you know, this funnel in a very productive way. The team's done a terrific job, has a good model, which we keep perfecting. And with, you know, think about 16 billion views in just one platform, there's a lot of learning that we're basically now feeding into how we develop new creator tools, which will appeal to geographies and kits, which we may have not appealed to yet. You know, think about the Sanrio, you know, tie-up coming up now in December. When you look at the user acquisition in Asia, you would argue we have a huge opportunity. Hello Kitty in Asia. I've lived there for 10 plus years. It's a massive property. So we're super excited to basically lean into properties like such to be able to get more people into our ecosystem.
spk11: So I hope that answers your question. Yes, that was very helpful. Thank you so much. That's it for me. I'll jump back into Q. Thanks.
spk05: I think we have time for one more question. Operator, make this the final question, please.
spk02: Yes, no problem. Our last question comes from David McFadgen from Cormac Securities. Please go ahead.
spk07: Hi, thanks for squeezing me in. A couple of questions, if I may. You know, there have been some questions about digital games, because obviously the growth has been spectacular. And I'm just wondering, how easy is it for you to forecast that business? And I'm just wondering how long can you sustain these kind of growth rates? I mean, they're obviously pretty high. And then secondly, just when you look to 2022, you know, it looks like 2021 is shaping up to be a phenomenal year. And I'm just wondering, is it reasonable to expect growth in 2022, just given how strong 2021 has been or is expected to be? Thanks.
spk04: So there were two questions there, and so I'll start to address the questions and then pass it over to Mark. I think part of your question is digital games, growth, sustainability. And then your second question is really more on 2022 overall growth, if I understood your question. So I'll start with the first question. Our digital games portfolio continues to expand. So a lion's share of the growth right now has been Tokalive World, and that has driven a significant portion of our total digital games growth. and we're super excited about that, and we have great plans to organically continue to basically drive that growth. That growth, as I mentioned, has been really following our user acquisition and our user growth, and as that user growth continues to grow, which we track daily, we expect revenue to follow that and revenue to strengthen as we actually get more engagement, which will reflect basically people coming to our stores in more quantities than they currently do and spending more on our stores than they currently do. So that's basically a revenue growth algorithm that we're perfecting. Beyond that, we talked about expanding our user base from where we are today, and we still have plenty of geographies to actually be able to help us with that. And then on top of that, we have land extensions on that property, which is our biggest. that we believe will get us into the multiplayer ecosystem, which is very exciting for us, and the team's doing a terrific job to get that into 2022. That's Tokalive World. On top of that, we have Seigo Mini, which basically increased their user base to over 300,000 subscribers, which was a massive increase over a year ago, and that number continues to grow up. As we actually look at that subscriber base and we apply that subscriber base to actually get you know, our properties within our originator portfolio and to basically cross-sell that platform, we see a huge opportunity for growth as well. And then we have now also entered into an agreement with a partner in Turkey who's helping us with even further, you know, sources of wonderful, you know, ways to engage children and help children in areas that are white space for us. So, Last but not least, we have significant development within our noise studio to actually get some of our own IP and digitize that into basically digital games. So all this to tell you we are taking a portfolio approach. We're not letting the gas of the accelerator on TokaLife World, which has been our driver, but rather complementing that with other sources of digital games growth opportunities. And then on top of that, our Spin Master Ventures digital games groups is very active, you know, sourcing candidates to continue to help us with that. You know, one example of that is the investment in Nordlight, which we have already, you know, benefited from as they actually have jumped in and helped us in accelerating the development of one of our IP properties in-house. We're super excited and we'll be able to tell you more when we actually have our next call in March. Let me turn into Mark for 2022. which has a great slate of toy innovation, and I'll let him get more into it. Thanks, Max.
spk05: Just to add, David, to what Max said on the digital games front, just some macro points. Just keep in mind that kids aged 2 to 12, 94% of kids in that age category are playing digital games right now. It's a huge market. It's actually bigger than the toy market, and we're very small relative to the overall market, and we think there's a tremendous amount of white space for us to grow into with Toka, with Originator, with Sago, with Noid, and so we feel very excited about the future growth potential in that digital game space. Digital games now are actually becoming a social destination rather than just a game themselves, and it's where kids actually play. So we are leaning into it. We feel very comfortable with it, and we're going to continue to believe that we'll see some strong growth in that space. As it relates to 2022 overall, Our innovation pipeline continues. We have five movies coming on board for 2022, four in the DC Universe franchise, and then there's the Wizarding World movie that's coming in 2022. There's a lot of exciting things happening in 2022. It's completely reasonable to believe that we will continue to grow in 2022, David. But at this point, I would say to you that We'll come back to you in March with a more formulaic view of how we see that growth manifesting when we've actually been through our customer previews in January and February globally. But we feel good in general about our performance and very good in general about our prospects for 2022 and beyond.
spk07: Okay. If I could just maybe push you a little bit. I mean, in the past, you've given long-term growth targets, right? I was just wondering, would 2022 be in line with those long-term growth targets, or is it just the related thing right now?
spk05: Well, our long-term growth target is mid- to high-single-digits top-line growth. We haven't changed that, and we'll come back to you on 2022, as I said, in March.
spk07: Okay. All right. Thank you.
spk05: Thank you very much. I think we're going to have to end the call at this point. So let me thank everybody for their participation. And Max and I look forward to talking to you again in March with our fourth quarter and full year 2021 results.
spk08: Thank you. Thank you, ladies and gentlemen.
spk02: That concludes today's call. Thank you for your participation. You may now disconnect.
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