Spin Master Corp.

Good day and welcome to the Spin Master Corp 4th Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sophia Bazoukas. Please go ahead.

Thank you, John. Good morning and welcome to Spin Master's Financial Results Conference Call for the 4th Quarter and full year ended December 31st, 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 audited consolidated financial statements are available on the investor relations section of our website. 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, Spin Master has no obligation to update or revise any forward-looking statements, whether because of new information, future events, or otherwise. For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the company's earning release dated February 28, 2022. 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.

Good morning and thanks for joining us today. In 2021, we delivered very strong performance for the fourth quarter and full year, showcasing the power of our three creative centers comprising toys, entertainment, and digital games. We've continued to build on both the legacy that our founders created and our demonstrated leadership within children's entertainment. Our creative center structure allowed us to remain focused on being where children are, ensuring our presence in their lives is in an ever-connected world with ever-expanding options. The most significant element of our excellent performance in 2021 was the broad, diversified way we achieved it across all our creative centers and all our geographies. The efforts we've made to grow our global footprint, develop our entertainment capability, as well as the early investment we made in digital games through the acquisition of Toca Boca and Sego Mini are paying off. Gross product sales grew over 20%, highlighting this trend of our brands on a global scale. Total revenue grew 30%, exceeding $2 billion for the first time. Approximately 15% of our total revenue in 2021 resulted from digital games and entertainment. EBITDA exceeded historical levels in both dollars and margin. Against the backdrop of our strong financial and operational performance, we've demonstrated our commitment to creating engaging play experiences. We provided magical experiences for kids and their families at home, in playrooms, on small and big screens, and in digital playgrounds around the world. We are very proud of SpinMaster's performance and I want to commend our global team for delivering these exceptional results. I now want to touch on each of our creative centers, beginning with toys. Toy gross product sales growth was driven by the global success of new and innovative items and enthusiastic fandom for our newest licensed toy properties. Our commercial teams navigated a complex supply chain environment to deliver on time throughout the year to meet customer demand providing the foundation to grow share in key markets. These teams worked diligently to bring forward production earlier in the season to ensure inventory was available for the key shopping period. We saw the effects of this in improved POS in the back half of the year. As we discussed in November, we observed a meaningful turnaround in POS trends, where we regained share through the combination of improved inventory equals The introduction of new innovative items and strength in our core brands compared to the POS deficit we saw in the early part of 2021, when our inventory levels hamper our POS results. We were pleased to see this momentum continue to the whole fourth quarter, resulting in meaningful share gains for SpinMaster. According to MPD in Q4, our global POS growth grew 9% compared to 5% for the industry. In North America, we outperformed the industry in Q4, growing by 12%, compared to the industry at 8%. Internationally, in Q4, we grew POS 6% while the industry was flat. In Q4, according to MPD, SpinMaster was the fastest growing toy manufacturer globally among the top five. We were particularly pleased with the diversified nature of our POS growth in Q4, with share growth in five out of the 11 categories measured by MPD compared to two out of 11 in Q2. The success of Paw Patrol the movie continued to have a positive impact in the performance of our Paw Patrol toy line, which outperformed the preschool category, finishing as a number one preschool property globally in 2021. POS in Q4 was up 28% over the prior year per MPD. Paw Patrol ended the year ranked as the eighth largest toy property globally, according to MPD. We have continued to keep the franchise fresh with new themes and worlds for preschoolers to explore. In activities, KineticSan, which experienced tremendous growth during the pandemic, continued its upward trajectory in 2021 with 44% POS growth in Q4, gaining greater international brand awareness and increasing share in the activities category. Per MPD, KineticSan is now the number two reusable compound property and has become a staple creative toy for kids, and kids are hard. With new innovative product introductions and always-on marketing for KineticSan, we expect to continue to grow the brand, and we feel there is more growth potential within the category internationally. Our games and puzzles product category saw mixed results in Q4. Our core game brands outperformed, while Cardinal was down compared to 2020, driven by strong pandemic-led demand last year. Within Wheels in Action, we saw strong performance from many of our core brands, including Bakugan, which beat the industry in the battling toy class for 2021. Giving up for 2022, we're continuing to lean in the marketing platforms that deliver the strongest conversion for Bakugan, which includes stacking new entertainment content on Netflix with engaging integrations and experiences within Roblox to reach fans of the franchise within the platforms they interact with every day. In Q4, our toy license for Monster Jam ended the year as a number four property in vehicles and number one license in vehicles per MPD. With more international experiential events and live Monster Jam shows ramping up in 2022, we expect more kids will be inspired to recreate real Monster Jam action in their homes and backyards. In addition to our evergreen brands, our design teams are also constantly reimagining, inventing, and bringing new toys to market. For MPD in 2021, we had two of the top five new toy properties in North America. The first is Purse Pets, a line of interactive fashion purses. This item was introduced in August 2021 and quickly rose to the top of toy lists. According to MPD, Purse Pets was the number one selling toy in the fashion role play and dress-up class in the U.S., We're continuing to evolve this brand in 2022 with new characters, retailer exclusive, and micro versions for fans to wear and collect. The second was Gabby's Dollhouse, building off the success of DreamWorks' popular Netflix series. We debuted the Gabby's Dollhouse toy line in Q3, and it quickly became one of the most sought-after toys this past holiday season. In 2022, we will launch a toy line in Europe and elsewhere internationally, and we'll introduce new themes that complement the ongoing storyline and Adventures of Gabby. In 2021, we saw great results from new and existing license partnerships, including Gabby. POS and our total license portfolio grew over 20% in Q4, according to MPD. We revealed an epic second year of Batman and DC toys, making Spin Master the number one toy licensee for the DC Universe, per MPD. In 2021, just yesterday, we were thrilled to announce that we have renewed our initial contract with Warner Brothers that will see Spin Master retain the DC franchise globally for toy rides of the boys category, as well as games, outdoor and seasonal, and vehicles, including films, for a further four-year term beginning 2023 through 2026. 2022 is a blockbuster year for the DC franchise, with four feature films hitting the big screen. We will have innovative custom toy collections launching in conjunction with the Batman movie coming to theaters on March 4th. followed by Black Adam, The Flash, and Aquaman later in the year. Also with Warner Brothers, we launched the first of our innovative toys inspired by the Wizarding World stories and characters from the Harry Potter and Fantastic Beasts films. The performance of these products from an innovative playset to an interactive Hedwig exceeded our expectations and demonstrated that a strong following of these stories and characters have. Spin Master is now the number two licensee for Wizarding World globally per MPD. Between our strong showings for Perspex, Wizarding World, and Gabby's, Spin Master outperformed the U.S. dolls category for 2021 with POS growth of 21% compared to 4% for the industry per MPD. This is an area that Spin Master has been underrepresented in for the last few years. It's encouraging to see results like this in one of the most competitive categories of the toy business. Industry e-commerce growth is moderating as COVID eases, but has become a significant larger portion of the overall industry POS when compared to just a few years ago. We are continuing to invest in our e-commerce business to ensure we grow our share in this important retail channel. With some sales shifting back to bricks and mortar, we believe we are having definitely opportunities to elevate our in-store displays in partnership with our retail customers and are taking a moderate approach to pricing and promotions, investing where it makes sense to remain competitive while also preserving our profitability. Now turning to entertainment, we continue to take a multi-pronged approach to our entertainment content creation, led by exceptional storytelling that will resonate with kids globally. Our entertainment creative center achieved a historical milestone in August, with our first ever feature film for our leading preschool franchise, Paw Patrol, in partnership with Paramount Pictures and Nickelodeon. The film's success had a halo effect on the franchise overall, significantly raising Paw Patrol awareness around the world. Franchise penetration increased 15 points among kids following the movie release, deepening engagement with existing fans, evidenced by increased viewing minutes, and also attracting new fans, particularly on streaming platforms such as Paramount+. We currently have 10 regional shows and multiple short-form series airing or streaming in more than 190 countries in 30 languages. While Paw Patrol the movie was our first feature film, it will not be the last. with other film concepts in development, including a second Paw Patrol movie to debut in fall 2023. Paw Patrol will also get a spin-off series in 2023, which has been greenlit by Nickelodeon. Entertainment has a rich development slate currently in production, including several new properties, which will launch in 2022 and 2023, with multiple broadcast networks and streaming services. We're excited to build a diversified offering appealing to different audiences and age groups. We continue to experience record growth in 2021 in our Digital Games Creative Center, primarily driven by Toka Live World, with revenue growth of over 127% and culminating in Toka Live World being recognized as the App Store's 2021 iPhone App of the Year. an amazing achievement for Toca Boca Studio as it celebrates its 10th anniversary. Digital games continues to create expansive digital play experiences for our kids. If you have children, you know how integral digital games have become to their lives. Digital games have now become digital playgrounds where kids explore and engage with their friends and favorite characters. New content releases and tools that allow them to create, connect, share, and express themselves are driving strong global engagement. Monthly active users for Toka Live World more than doubled in 2021, increasing from 25 million in January to 56 million in December. The entire Toka Boca ecosystem now has over 74 million monthly active users compared to 45 million in Q4 2020. In Q4, the team introduced their first in-app licensing integration, welcoming global lifestyle brands in Rio and his Hello Kitty and Friends franchise into the digital playground with great results. In 2022, the team has more exciting branded partnerships in the works and new content releases, which will keep kids engaged and give them more options for customization and creativity. Sega Mini, which focuses on the younger demographic where play to learn is a key driver for parents, has helped fuel our digital games growth as well. with an expanding subscription base that saw a 29% increase in 2021 to 311,000 subscribers compared to 2020. SEGO is working closely with Originator, which we acquired in Q2, to expand our comprehensive play-to-learn subscription-based digital games offering, building on existing platforms and with new product launches in 2022 and 2023. We are continuing to make progress building Noid, our new studio in Stockholm, Noid is focused on developing digital games using SpinMaster on IP. Our first game will launch in 2023, and we are very excited about the growth possibilities for digital games that are emerging from this initiative. Now, turning to our outlook for the year, there are several macroeconomic and geopolitical variables we are monitoring closely and which we built into our outlook, and Mark will discuss shortly. From a consumer perspective, the removal of stimulus payments combined with rising interest rates and inflation could put pressure on families' disposable incomes. As we know from history, the toy category is somewhat insulated from periods of economic downturn, but it is something we need to consider, especially for higher price point products. We expect there will continue to be challenges and disruptions in the global supply chain in 2022, ranging from transportation bottlenecks to cost inflation. COVID remains an unknown variable in Asia, and we will continue to implement advanced planning techniques and seek to remain responsive, collaborative, and agile in both production and logistics. Now, having settled this with our clear vision for the future, a strong global operating platform, and firm financial foundation, we are optimistic about our growth opportunities in 2022. We believe we are well positioned to capitalize on the momentum from 2021. We will continue to seek opportunities to harness the potential of our three creative centers. And as we continue to grow the business, we are seeing the power of our operating model where each creative center acts independently, but also in concert with each other when it makes sense to exploit the full potential of our creating talent, innovation, and intellectual property. Let me conclude by thanking our global team members for their outstanding contributions in 2021. The management team at Speedmaster remains inspired and encouraged by the passion, knowledge, competitive drive, and commitment to innovation that each of our team members embodies. As we begin 2022, we see even greater potential to connect, engage, and reach even more kids and families with magical and memorable toy, entertainment, and digital games experiences. I will now turn it over to Mark.