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spk09: We're feeling and feeding our current audience with new ventures, new adventures, looks, and experiences, but we're also building a diversified offering appealing to different audiences, age groups, and platforms. Over the next few months, stay tuned as we share new and more exciting new entertainment content currently in development. Our Digital Games Creative Center had another very strong quarter with revenue up 50% led by Talk Alive World. Monthly active users for Toka Live World grew to 61 million at the end of Q1, nearly double the 33 million last year at this time. The entire Toka Boca ecosystem now has over 78 million monthly active users, up 50% compared to the 52 million in 2021 at this time. Active Sego subscribers were 309,000 this year compared to 286,000 in 2021. In March, Toca Boca launched their third online-only clothing collaboration with H&M, this time focused on gender-neutral sustainable fashion. The collection launched worldwide online and allowed kids to wear clothing inspired by their Toca characters and designs both physically and within the digital ecosystems in the app. Engagement with kids is critical to Toca's continued success. This quarter, we launched the Toca Time initiative on TikTok, which challenge kids to exercise at home and then create and share their stories using Toka characters on TikTok, generating over 22 million hashtag views. The Sego Mini Friends initiative with Apple will also be beneficial to the Digital Games Creative Center. The launch of the show on Apple TV increases brand awareness for Sego Mini World and drives engagement, familiarity, and attachment to the characters. SEGO's association with a powerful brand such as Apple increases credibility for all of SEGO Mini's digital games. SEGO also partnered with Otsimo, a developer of game-based learning apps for children with special needs, to launch SEGO Mini First Words in April, a new app focused on early speech development. First Words is a powerful digital education solution to support kids and parents with speech training that is accessible in a listen-repeat format that children recognize and engage with. The app won the Apple Editor's Choice Award immediately after its release. We will share a very powerful video of this app later in the afternoon when we meet during our investor day. We continue to make progress with Noid, our newest digital game studio in Stockholm. Noid is well down the path of developing its first digital game using Spin Master's own IP. Frederick Loving will have an exciting announcement of our first NOI developed digital game launch later this afternoon. Now, with the power of the three creative centers, I believe we have an incredible opportunity to grow our reach and connection with kids and families on a global scale. With each of our creative centers, while each of our creative centers have success stories to share, we are also starting to see the results of deep collaboration between toys, entertainment, and digital games. We are pleased to be able to raise our revenue and toy gross product sales outlook for 2022. While there are macroeconomic factors of concern, such as raising inflation and interest rates, ongoing supply chain volatility, another factor such as a war in the Ukraine, we also see some tailwinds that are positive. The trend towards nesting, which started in the pandemic, remains strong and families are spending more time together. In general, disposable incomes are higher, grandparents are spending more on their grandchildren, and as COVID dissipates, birthday parties and social gatherings are coming back. More content, movies, licensing, and social media events are increasing consumer demand. With that in mind, and with a rich slate of entertainment content for 2022 and beyond, a robust toy line for innovation and a growing digital games business, I am very excited for the potential we possess to harness and leverage the power of our three creative centers to create magical and memorable experiences for kids everywhere, and in turn, drive growth and value for our shareholders. With that, I will now turn it over to Mark.
spk05: Thank you, Max, and good morning, everyone. We carried the strong momentum from 2021 into the first quarter of 2022 with excellent financial and operational results. we generated just over $424 million in revenue for Q1, a 34% increase over last year, driving exceptional profitability growth with adjusted EBITDA of $95.7 million, up 161% over Q1 2021. This performance was in part due to proactive management of our supply chain to hit on-shelf dates for spring innovation, cost management, and continued growth in digital games. This quarter, we introduced a significant change in our segment reporting, providing more transparency into our growth and profitability drivers and aligning our external reporting with our management structure. We now have three new reportable operating segments, toys, entertainment, and digital games. Our three creative centers have different but complementary financial models and operating profiles, each one contributing to our overall strategy. We have provided historical quarterly results for 2021 for our three creative centers for comparative purposes. The metrics we are now providing will give you an insight into the key operating areas that management is focused on and which over time will allow us to further grow shareholder value. We will continue to focus on gross product sales, revenue, and adjusted EBITDA margin for our consolidated business, but we'll now discuss adjusted EBITDA for toys, as well as adjusted operating margin, or EBIT, for entertainment and digital games, in addition to revenue. We will also share CapEx by segment. Let me briefly review Creative Center economics and performance for Q1. Firstly, Toys has a proven model for revenue and profit generation. Our diverse portfolio of toy brands generates significant cash flow that enables us to reinvest in the enterprise portfolio. Our entertainment strategy involves developing traditional content in close alignment with toys to build our future portfolio of long-term franchises. Entertainment acts as a catalyst for our other creative centers, increasing popularity, driving sales, and turning toys into franchises. Our digital game strategy is built on a mix of organic growth and M&A. Organic investments will leverage established brands, such as Toka Life World, a new IP created in collaboration across creative centers. Digital games revenue is a combination of both in-app purchases and subscriptions and has a more balanced seasonal sales profile. Digital games have EBIT margins that are highly accretive to Spin Master overall. Taken together, our three creative centers will continue to broaden our portfolio, diversify revenue, create a more consistent sales cycle, and lower volatility and operational risk. Turning to the quarter, total revenue was $424.2 million compared to $316.6 million. Coming off a strong 2021, we delivered a great start to the year with revenue growth driven by toys and digital games. Toy gross product sales were $397.5 million, an increase of $102.8 million or 34.9%. On a constant currency basis, gross product sales were up 36.6%. we are pleased with how broad-based our growth was across our diversified product portfolio during the quarter. Preschool and dolls and interactive grew 56.2%, driven by Gabby's Dollhouse, Wizarding World, Paw Patrol, and Purse Pets. Activities, games, and puzzles and plush grew 16.5%, led by Rubik's, Gund, and Orbeez. Reels and action grew 46.6%, led by DC Comics licensed products, mostly Batman and Monster Jam. Outdoor also grew 5%. As we discussed in March, we exited Q4 with a very clean inventory position at retail, leading retailers to restock their shelves earlier and in larger amounts than in prior years. Geographically, we delivered solid gross product sales growth across all markets led by North America, which was up nearly 40%. Europe saw growth of just under 28%, and the rest of the world was up nearly 30%. International gross product sales represented 40% of total gross product sales, down from 42.1%, driven by strong growth in North America. Q1 sales allowances declined to 11.7% from 13.3% as a percentage of gross product sales, primarily driven by geographic mix, lower promotions and markdowns, and lower noncompliance charges. We've made significant operational improvements that have led to reduced noncompliance charges, and we have improved our inventory management, leading to reduced promotions and markdowns. This continues to be an area of ongoing focus, and I'm proud of our commercial team's ability to deliver incremental improvements quarter after quarter. Toy revenue, or gross product sales net of sales allowances, increased by 95.3 million or 37.3% to 350.9 million from 255.6 million. Adjusted EBITDA for toys grew to 56.9 million at a 16.8% adjusted EBITDA margin compared to 5.1 million or just under 2%. Adjusted EBITDA margin improved due to higher gross margins from favorable changes in product mix, price increases, and improved operating leverage, offset in part by some product cost and ocean freight inflation. Entertainment revenue was $22.2 million compared to $26.9 million due to lower content deliveries this quarter. Adjusted operating margin was 51.4% compared to 43.1%. To emphasize this further, when we discuss entertainment profitability performance, we will focus on adjusted operating margin. as this considers content amortization. The increase in operating margin this quarter was a result of the improved mix of lower gross margin content deliveries and higher gross margin licensing and merchandising revenue, as well as lower selling general and administrative expenses as a percent of revenue. Digital games revenue increased by 17 million or 49.9% to 51.1 million. The increase was driven by higher in-app purchases in token life world. Adjusted operating margin was 42.3% up from 39.6%, driven by a favorable mix of in-app purchases, partially offset for higher product development and personnel costs. From a consolidated P&L perspective, gross margins were 55.9% compared to 49.7%. The 620 basis point improvement was largely driven by favorable changes in toy product mix and price increases, offset in part by inflation in product costs and ocean freight, as well as a higher proportion of digital games revenue. In addition, fewer content deliveries resulted in a lower proportion of program amortization, which positively impacted gross margin. SG&A was 158.6 million, representing 37.4% of consolidated revenue compared to 43.9%. Marketing expenses were consistent with the prior year but declined as a percentage of consolidated revenue. Administrative expenses grew 15.5% due to higher personnel-related costs but declined as a percentage of revenue. Selling expenses grew to 29.6 million or 8.4% of toy revenue from 8.1% due to a higher licensing product mix. In Q1, we recorded net income of $45.6 million or $0.43 per diluted share compared to net income of $3.2 million or $0.03 per diluted share last year. Adjusted net income in the quarter was $57.5 million or $0.55 per diluted share compared to $8.4 million or $0.08 per diluted share. Adjusted EBITDA was $95.7 million compared to $36.7 million, up 161%. Adjusted EBITDA margin was 22.6%, up from 11.6%. The increase in adjusted EBITDA was driven by increased gross profit and operating leverage. Turning now to the balance sheet, inventory at the end of Q1 was up $44 million to $148 million from $104 million at Q1 2021. The increase is driven by anticipated sales growth in Q2. At the end of Q1, we had approximately $29 million of in-transit inventory, representing 20% of total inventory compared to $14 million or 14%. In general, we continue to use safety stock, pre-buyers, and pre-builds to help mitigate any supply chain disruptions and maintain customer service levels. Free cash flow in Q1 was negative $79.4 million, compared to negative 6.5 million, driven primarily by changes in net working capital, largely from payments in Q1 of year-end trade payables and accrued liabilities. This was partially offset by higher operating income and lower cash used in investing activities. We ended the quarter with 493 million in cash, a decrease of 70 million from the year-end balance of 563 million, but in line with seasonal cash usage patterns. We continue to be in an extremely strong liquidity position with available liquidity of over $1 billion. This was a great start to 2022 and we are raising our outlook. We now expect toy gross product sales to increase low double digits compared to 2021 with the seasonality of gross product sales expected to be approximately 40% H1 compared to 30 to 35% in prior years. We continue to expect the third quarter to remain our largest quarter from a top-line perspective, but we now expect Q2 to be significantly larger than prior years as retailers bring in goods earlier to avoid potential supply chain disruptions to their full planogram set. We are also increasing total revenue growth expectations to low double digits compared to 2021, excluding the Port Patrol movie distribution revenue of $26 million. Total revenue growth is driven by growth in toy gross product sales. We are maintaining 2022 adjusted EBITDA margin expectations, which are in line with 2021 adjusted EBITDA margins, excluding the Paw Patrol movie distribution revenue of $26 million. While we've increased our top line outlook and our adjusted EBITDA margin in Q1 was well in excess of the comparable period in 2021, we are mindful of the fluid and rapidly changing macro environment that may affect profitability in 2022. We still have a long way to go. We are seeing increased input costs, although at a lower rate than what we saw in the second half of 2021. Rising interest rates and inflation may put pressure on disposable incomes and the potential for further supply chain disruptions are high due to ongoing COVID-related lockdowns in China. We have implemented stringent cost containment and productivity programs to offset increases as much as possible, and where necessary, we have raised prices for our fall 2022 line, which will start flowing through in Q2. We expect to remain margin neutral in our toy business, but it is something we are watching very closely. For all these reasons, we are maintaining a cautious tone in relation to adjusted EBITDA margin guidance for 2022. To conclude, We have advanced our strategic initiatives and made great progress across all three creative centers, continuing to demonstrate our ability to produce compelling entertainment and digital content, magical toy experiences, and to be a great licensing partner. We have built a strong and focused global platform and are incredibly proud of the effort and results that our employees have delivered. We remain deeply committed to growth with disciplined cost management, operational efficiency, and productivity. We continue to believe in our long-term financial framework and that, at its core, our formula for innovation and growth across toys, entertainment, and digital games is stronger than ever. That concludes our prepared remarks. We will now take questions. Operator, please open the line.
spk12: Certainly, sir. Ladies and gentlemen, as a reminder, to ask a question, please signal by pressing star 1. Please make sure the immune function on your phone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. First, we want to take our first question from Adam Schein from National Bank Financial. Please go ahead.
spk06: Thanks a lot. Good morning. Obviously, very strong results and good execution. And as was noted, you know, pretty good follow through from how you ended last year very strongly. Mark, you touched on some improvements on sales allowances. Is this something that we can watch to see improvements within that sort of 10%, 12% type range? I think you'd be guiding to the upper end of that range because of maybe different dynamics in Europe and other considerations. But given the improvements you touched on, do you think you can sort of move things down closer to the midpoint of the range or even improve further? And then I'll follow up.
spk05: Thanks. So, Adam, good morning. I think a reasonable target for us on the sales allowance side would be in the 11.5% to 12% range. The reason it's come down is twofold. One is we are seeing tremendous operational improvements in our supply chain, and that helps us. But we also had strong North American sales growth this quarter. And North America is a lower sales allowance environment, so there was some geographic mixed benefits. When Europe grows and picks up again, there are higher sales allowance environments, so that's going to pick up again. I would think for modeling purposes, Adam, 12% is a good number.
spk06: Okay. Max, it's an interesting year in terms of how much restocking is going on, and obviously there's some interesting licensing opportunities that you're successfully exploiting. Can you characterize that within the context of perhaps some of the marketing spend or stepped up marketing activity that you talked about last year and how that might evolve this year, sort of the plus and minus. The plus being obviously the strengths you're seeing where maybe the product is ultimately destined to fly off the shelves, but the minus may be in terms of an inflationary backdrop and how you might need to push product a little bit further in terms of awareness into the back half of the year.
spk09: Absolutely. And good morning, Adam. So we actually entered the year, as you might remember, with low inventory. So Q1 was a restocking time for many of the retailers. And again, some of our brands, you have to remember that we rely heavily on innovation and our innovation in Q1 has truly helped us. So a lot of that inventory has not only actually flowed through, but it's actually being consumed. So our POS growth on new items for our core franchise or items that were not present before is truly what is driving our growth vis-a-vis key competitors. And we actually put a lot of marketing activation dollars behind it. As we look to the second half, and as you well know, Q4 containing about 45% of the POS consumption for the year, we have really great plans and increased marketing spend when you think about the margin of marketing we're investing on our brands in the second half. And I hope you join us this afternoon. You're going to see the slate of new activations we have, along with innovation. So we're super excited. And there's more marketing for it.
spk06: I guess just to touch a little further, last year I think the comment was maybe around 10% of revenue, given some of the strengths we're seeing. at the revenue line, can we think about that maybe more towards the 9% level or still in that 9% to 10% zone is the appropriate level?
spk09: I will kick it off and then pass it on to Mark to give you more depth on the numbers. On marketing, one of the things we're doing, and I give our team a lot of credit, is we're actually getting to ecosystems where kids are present, and the cost per eyeball acquisition is significantly lower. So we're actually getting more efficient with our marketing spend. So if we would have been spending on the same places we would have been spending a year ago, the marketing spend requirement would have been significantly larger or a lot more effective. And I'm talking about, you know, magnitudes of orders of increased CPM. So I think this is one thing I wanted to make sure you have in context. And let me pass it on to Mark.
spk05: Thanks, Max. Adam, historically, as you know, we've always guided you to around 10% of sales for marketing. I think this year, as Max said, we're all getting some efficiencies in the way we're operating. So a range of around 9.5% to 10% would be the right range.
spk06: Okay, great. I appreciate that from both of you. Thanks a lot.
spk12: Of course. Thanks, Ben. Brian Morrison, TD Securities. Please go ahead.
spk13: Yes, good morning. Well done on the cross-selling side of digital entertainment. Can we expect much more cross-selling of these two segments as you expand both properties, introduce NOID? And then the second part of that question is, when I look at entertainment and digital, it's 45% of total EBITDA last year. It's certainly poised to grow as I look out to 2023. Can you maybe just talk about the cadence of growth here? And by my numbers, it looks like it's going to approach 60%. Just thoughts on where you expect this to progress to.
spk05: Brian, I just want to clarify the first part of your question was in relation to the cost structure of the different entertainment and digital games creative centers. Is that what you're asking?
spk13: No, I just want to understand the growth of it because you have this cross-selling of Sago Mini from entertainment to digital, which, pardon me, digital to entertainment, which we haven't seen before. And I wonder if there's going to be much more cross-selling opportunities as both segments grow and you introduce Noid. And then how far, like what sort of total contribution in EBITDA can these two segments comprise? It's at 45% now. It certainly looks like it could be 60% plus as we get out to 2023 and beyond.
spk09: So, Brian, we'll answer in two parts. I'll kick it off and then pass it on to Mark. You will see more IP leverage across our creative centers. That's the answer. And we've already begun, and typically we come from being more entertainment and toy, and now you're basically seeing digital to entertainment, and you're going to be seeing now toy to digital. And I will basically urge you to attend this afternoon. You're going to see our first announcement of what that first IP that will be digitized will look like. And it's actually quite cool, and we're excited. It goes into a massive segment of digital game players. So we're going to basically be able to leverage that and benefit from that. So there's going to be significantly more cross-creative center revenue gaining opportunities. And so that starts this year and extends into the future. with a really nice portfolio of cross-creative center collaborations in 2023 as well.
spk05: So just in terms of how we look at this from a financial perspective, Brian, firstly, when it comes to the creative centers, the digital games and entertainment creative centers, our focus internally is on operating income or EBIT. particularly in the entertainment area that's important because DNA in entertainment is pretty much like cogs in toys, so it's important to look at that. We are actually targeting to grow digital and entertainment share of total revenue quite significantly, in the case of digital games, to at least over 20% of total revenue over the next few years. Entertainment is a little bit of an unusual creative center in the sense that it's a catalyst for developing IP and growing that into toys, licensing and merchandising, and digital games. And so from a margin perspective, as we actually build out digital games and entertainment, we're going to be putting some costs onto the balance sheet, then amortizing that. So there will be some margin dilution over the next few years until these properties build up a critical mass. And then as they start to develop the franchises, the margins will start expanding and getting to a steady state mode.
spk03: Okay, and did you want to take a stab at where you think this could settle as you go forward or no? A stab in terms of what? Overall margins?
spk13: Total contribution to EBITDA into two segments.
spk05: No, I don't think we want to be that specific at this point. I think that each of the individual creative centers have got margin goals. I would say to you on the toy side, we are looking to stay in the adjusted EBITDA range of around 15% to 16% in digital games. We want to stay at around 35% to 40%. And in entertainment, the operating income, around 40% is where we want to be as well in the long term. You are going to see some dilution in the next few years as we build out our content platform. But as I said to you, that is a catalyst for growth in toys and digital games. And so you have to look at entertainment in more holistic terms, and you also have to look at entertainment over a multi-year life cycle as we build the content.
spk03: Very helpful. Thank you, Mark. Stephanie, we've seen Jefferies. Please go ahead.
spk01: Thank you. Good morning, everyone. Mark, I wanted to follow up on your comments about retailers taking more inventory in earlier. Can you just share with us a little bit about how that might affect the second half order book? And then when you look at the order composition or the buying composition, is there any sort of distortion into entertainment-backed properties versus maybe some of the more classic play patterns we've seen over the last couple of years? Or any other figures that you can share with us with respect to kind of the composition in addition to the volume? Thank you.
spk05: Good morning, Steph. Thanks. Yeah, so we are actually seeing a shift in seasonality this year that we haven't seen before, and it's driven off of what happened in 2021, given the logistics challenges that I think the industry and many other industries faced as well. And so what we're seeing is a shift from Q3 into Q2, and we expect to have a much larger Q2 this year than we've had before, which is driving our H1 seasonality to around 40% compared to an average of around 32%, 33% for the last few years. So really it's a shift in terms of protecting the full planogram set in August and September, and so we expect H1 to be significantly up relative to prior years. Most of that volume is going to come out of H3, so we expect H2 to actually show flatter growth compared to what we would have seen typically before, Steph. In terms of the mix of entertainment and whether there's any unusual patterns there. I'm not aware of anything, but Max, is there anything you would like to add on that?
spk09: So with regards to our portfolio, Stephanie, and good morning, I think you're going to see in infant preschool continuous strength because of the themes on Paw Patrol, but you also will see continuous strength in Gabby's Dollhouse. And then outside of that, we've talked about our licensed portfolio and particularly in Wilson Action with some continuous strength in that area. Last but not least, we talked about girls and dolls and interactives, and we're going to see new innovation that will continue to basically make our portfolio in the second half quite accretive to us and incremental versus what we would have had a year ago.
spk01: That's very helpful. Just really one quick cleanup question is on pricing. Have you taken the pricing that you need to take for 2022, or do you anticipate you could take an additional round of pricing as we get into the fall?
spk09: So, Stephanie, we process all of our 22 price increases with retailers in the early part of 22. That's point number one. Obviously, as you would expect, we balance our need for margin with obviously price point management. We have been really successful so far this year with our POS because we have, in certain price points, outperformed the market materially, and we have been basically very thoughtful about that, and that will continue into the second half. And then third, because our mix of new innovation, which has no previous context for what that would have cost a year ago, has truly helped us tremendously. We are overdeveloped in bringing new items for our core and franchises or just brand new properties, and that is helping us quite a bit. That will continue into the second half.
spk01: All right, very helpful as always. Thank you.
spk03: Thanks, Steph. Martin Landry, please go ahead.
spk08: Hi, good morning and congratulations on your strong results. My first question is on the supply chain. You alluded to the COVID lockdowns in Shanghai and China overall. I'm wondering, do you anticipate having difficulties sourcing products this summer as a result of these lockdowns?
spk05: So, Watson, good morning. You know, I would say to you the situation in China and Vietnam and Asia is somewhat fluid, but I think our team over there has done an extraordinary job in terms of managing what we're actually doing. And so, in connection with Shanghai, we did not see a major impact. The Shanghai factories in the outlying areas have continued to run at reasonable staffing levels. The shutdown that happened in Shenzhen and Dongguan only lasted a few weeks. And Vietnam and India is operating at relatively full staffing levels at their factories. There are some raw material delays from China, but nothing material. Overall, what we're doing is we're working very closely with our suppliers in Asia. We're designing and pre-buying electronic components. We're evaluating part substitutions and productivity with automation. We're doing inventory pre-builds strategically to reduce the impact of any COVID lockdowns. And so I would say to you overall, we're managing very well. Our commercial and supply chain teams have done a great job. While we can't say for sure there won't be any impact, I would say the way we're managing it so far has been very proactive and very good. Max, is there anything you want to add to that?
spk09: No, I just want to compliment, besides what you've said. So we've done three more things that I think are worth mentioning. One is we're planning lead times, taking into account the new weeks that it takes us to get from point A to point B. And so that is affecting how we plan our business going forward. That's one. Two, we're using multiple ocean carriers. We would have been a year ago. And then we basically have, in certain places, items that are now dual-sourced so that we can actually weigh in where we have some backlogs and use a second mold in a different place and continue to bring that demand. And you can expect that we're doing that for some of the very hot items that we have, launch and will continue into the second half. So this is a key priority for us.
spk08: Okay, that's helpful. And can you remind us what's the proportion of your total products that you source in China?
spk05: It's about 60%. Martin comes out of China, about 25% comes out of Vietnam, and the balance comes out of Mexico and India.
spk08: Okay, that's helpful. And then just lastly, wondering if you can talk about your inventory level at retail. How does that look currently versus historically for this time of the year?
spk09: I'm going to kick it off and then maybe Mark gets into more details if you'd like. But I think we're basically in a good position vis-a-vis our consumption and our order books as we look at end of Q2 and into Q3. We're watching that very closely as we progress through the year. But operationally, we are where we need to be with inventory and managing it accordingly.
spk05: Yeah, so I think Max has covered the retail side of it. I think we're in good shape, Martin. In terms of our own inventory in our warehouse, as you saw, it's up about $40 million, $44 million to be precise, quarter over quarter. Most of that is in anticipation of the growth in Q2. We do have a little bit of cost inflation flowing through to inventory, not a huge amount, but some. But overall, I think our inventory is in good shape. You saw that our networking capital overall was around 10.8% of LPM sales, and I think we're still far, far ahead of the industry in terms of our working capital management. And that's something that we in the toy business are laser-focused on as a management team because if we manage our working capital right in the toy business, we can generate significant free cash flow, and that helps us with the rest of our enterprise portfolio. So that's something that we're really focused on.
spk03: Okay. Thank you very much. Congrats. Thank you. John Zamparo, CIBC. Please go ahead.
spk10: Thanks. Good morning, Max and Mark. I wanted to start on the inflation side. Can you quantify the cost inflation you've seen on your primary cost inputs in Q1, and how does that compare to Q4 last year?
spk05: Yeah, so we're not going to specify a particular number, but what I can tell you is that we are seeing some Modest inflation in a few areas, you know, resin in particular, a little bit of ocean freight flowing through, but at significantly lower levels than what we saw in late Q3 and Q4 last year, John. So, you know, it's something to watch and to keep a close eye on, but nothing like it was in the second half of last year. And by the way, welcome to Covering Spin Master. Good to have you.
spk10: Thanks very much. And my follow-up is on consumer behavior. I'm just wondering if you're seeing any impact or any change in behavior from them as they face higher costs. And it seems like the growth or much of the growth in toys over the past couple of years has been from medium to higher price items, maybe suggesting those consumers aren't as impacted by inflation. But I'm curious if you're seeing any trade down among customers.
spk09: Yeah, so I'll address that. So the answer is yes. Okay, so that's the bottom line, and we see it more in pricing, and we see it more in promotion. And so at the outset, let me tell you that price points that are below $10 are contracted, and there are specific price points where our toy line has fared better, as I mentioned to Stephanie earlier. And so you basically see where you may have bought an item that was between $15 and $19.99, You know now you see between 10 and 1499 as a price point increasing its consumption as a whole You know close to 10% which is really positive and if you're in that space you will be succeeding Similarly where we had remember last year quite a few items that were priced over $70 and that was really growing pretty materially you've seen now basically items in that category of price contract a bit and Instead, items that are priced, and I'm going to give you a pretty broad range, from $30 to $70 increase quite materially. So that is something that we're seeing and basically understanding. But outside of that, in terms of channel shifting or channeling where you're basically at from a consumer behavior, no changes there. E-commerce continues to be very strong, obviously. Specialty has reopened. That has been good for some categories. But it's really come down to price.
spk03: Okay, that's helpful. Thank you very much.
spk07: Thanks. Good morning. I want to circle back to the digital game segments. There's commentary in the MD&A stating that for M&A here, you guys are probably more focused on the smaller types of acquisitions because they're a little bit easier to integrate, but also open to transformational opportunities should they present themselves. I'm curious to know if the criteria for acquisitions in the digital game segment, is that any different from than sort of what the criteria is for toys, where it has to be a creative, be relevant on a global basis, that sort of thing? Or is there any other different criteria we should be thinking about there?
spk05: I'll take that, and then Max will add to that. Look, the reality in digital games is that, you know, that is an area of strong focus for us from an M&A perspective, and we're going to talk about it more this afternoon at the Investor Day as well. I think the reality also is that you know, multiples in that space are definitely higher than they are in the toy industry. I mean, we've typically paid, if you look at the originated deal, was around 12 to 13 times trailing EBITDA. In toys, we've historically been at four to eight times. And you would say, well, are you concerned about that? I mean, the answer actually is no, because I think the reality is that margins are much higher in that space and the opportunity to generate the appropriate returns is there. And so we're going to focus on smaller companies transactions where we can acquire IP or talent and we would also consider a transformational deal in digital games or in toys for that matter if it made sense but that's how we typically looking at it. Max?
spk09: No, I think well said. I think our founders are incredibly involved in our acquisition strategy and in sourcing acquisition and so you can expect that a fit with what we're looking for is incredibly important so that's really paramount to us As you think about the current properties within our digital games portfolio and the age groups that it basically caters to, you can expect that, you know, we're going to hear this afternoon, you know, as we're now basically trying to go after kids of all ages, that we will get into segments, and we're open to that. And so definitely looking at the right fit, we're open to a transformational target, and we're working really hard to find that right fit.
spk07: Excellent. That's very helpful. Thank you. And just as a follow-up on the digital game segment as well, right now you guys have a very strong presence in mobile apps. That's the main platform for you guys right now. But do you see yourself maybe three, five years down the road as something that you could have using either PCs or consoles as other platforms to reach out to these kids of different ages as well? Should we think of you guys expanding into different platforms down the road?
spk09: Yeah, we... As you can imagine, we're watching consumer behavior very closely and at the same time trends. And, you know, basically mobile penetration, mobile phone penetration continues to shoot through the roof and utilization of that medium to consume not just games but just about anything is truly what's growing. And so you can expect that we will be more focused in basically playing in that space.
spk03: Okay. That's all for me. Thank you very much. Thank you. David McFadgen, or Mark, please go ahead.
spk04: Oh, hi. Yeah, a couple of questions. I'll just start on the digital games. So when you look at this business, I thought that the growth might slow post-COVID as we get into a more normalized environment. I thought that you thought that as well, but obviously that doesn't seem to be the case. So I'm just wondering if you can give us an update on your thoughts on the growth of that, and will there be an impact here later as the world goes back totally to normal. And then secondly, when I look at your balance sheet, you have about $500 million in cash, no debt. You commented a little bit about acquisitions on this call. Do you think that you could deploy a fair amount of those proceeds within the next 12 months on acquisitions? And what are your thoughts about an NTID?
spk05: I'll go and then I'll pass it to Max. On the growth rates, as you said, David, are your over-year growth rates are extremely high in the digital games revenue side, nearly 50%. Sequentially, obviously not as high, but our engagement levels are still extremely strong. I think Max described the number of monthly active users we have in Toka, which is in the 60 million range for Toka Life World and over 70 million for the whole Toka ecosystem. So you can see there are a tremendous number of people involved in digital games in our world. You would expect, over time, growth rates to moderate because the prior years have obviously come off a much lower base. But we are actually working on a lot of new products, and so digital games is an increasing area of focus for the company, and we are targeting to get revenue for digital games as a percentage of our total over 20% in the next few years. That's number one. Number two, in terms of... the cash available on our balance sheet. We still believe we're a growth company. We believe we can deploy that cash creatively. We talk about it all the time at the board level. We have no current plans for a share buyback or a dividend at this point, but it is something that we evaluate constantly. At this point, though, we still believe we were able to deploy that cash. Max, please comment.
spk09: So basically, we watch very closely and track aggressively metrics within this space, whether it's basically the average retail price we get per player or the churn rate. And obviously, converting the engagement of those 60 million active users in TokaLife World, for example, is something we work really hard to do. Similarly, on subscription rate, same thing with Segoe and Originator. And there is no denying that obviously fatigue may have set in for some people, but we're working on mitigation plans as we see those things and basically pivot quite quickly. But that's basically our game every day.
spk03: Okay. All right. Thank you. Garrick Johnson, BMO Capital Markets. Please go ahead.
spk02: Good morning. Thank you. You know, in discussion with perhaps some of your private competitors, I think the main concern out there in the industry is with all the pre-build that's going on, early shipping, combined with inflation-compressing budgets and lapsing stimulus, that we could see a glut of toys and some significant markdowns. Is that off-base, or is that an appropriate fear?
spk09: Hi, Gerd. It's not an inappropriate fear, because I think consumer behavior might actually suggest that you would look for the deal, correct? And if you have a glut, as you described, and you have to get rid of it, you may resort to actually markdown. So it is absolutely logical that that may be something that happens more and more. So we're basically ready for it. The one thing that I wouldn't tell you that insulates us, because that would be arrogant, but rather protects us a bit and helps us is the amount of new items we have that have no comparison and that are basically very incremental from a play pattern to what we have on the shelf. And we are excited about that. So that's what we can control and that's what we focus on.
spk02: Okay, great. And Mark, related to what Max just said, you do have a lot of new items in Batman and DC. Well, Batman in particular being incremental, I mean the movie portion of it being incremental. What would your POS have been if you exclude that BAPM program?
spk05: Well, look, our POS on our total license portfolio in Q1 was around 40%. So it was a meaningful part of our business, Gary. As you know, we don't disclose individual product line sales or POS. But what I will tell you is that we had pretty broad-based growth in Q1. wasn't just Batman. Certainly Batman was a meaningful component, but Gabby's Dollhouse, Paw Patrol, Purse Pets, there were a large number of other lines that performed extremely well. So while it is significant, it wasn't overly concentrated on Batman.
spk02: Okay, great. And really appreciate the new segment reporting, particularly seeing what's underneath digital gaming. Can you perhaps just for edification for the people on the call, just go over the digital gaming accounting real quick, particularly where does the platform fee hit? Is it a reduction of gross to net or is it a cost of goods sold? Thank you.
spk05: Yeah, so when you look at revenue, that's gross revenue. We then have part of what we call COGS would be the hosting fees like the Apple and Google fees would be essentially part of COGS. And the way accounting works in the digital games world, Garrick, is that when we develop a new game, we go through typically a three-stage process. In the first stage, most of the costs are OPEX. So those are the development costs, the conceptualization costs. That hits our P&L as product development. Once a game hits a certain level, of stability and we've proved its commercial viability, we then start capitalizing those costs until the game is actually launched, at which point those costs are then amortized. And that's why I've been saying to you and others, over time, as we grow our digital games business, it's important to focus to get a true picture of performance on EBIT and not EBITDA. At this point in time, it doesn't really matter that much, but going forward, it will. Does that make sense? Did I explain that okay? Anything you want to follow up on that?
spk02: Oh, perfect. Very clear. Thank you, Mark.
spk03: Thanks. George Dumas of Deutsche Bank. Please go ahead.
spk11: Good morning. This is the hot calling on George's app. It's the Scotia Bank, by the way. Congrats on the results. Can you talk a little bit about the free cash flow profile on the operating segments? Of course, some could be more lumpy than others, but how should we think of maintenance and growth, capex, cash flow margins, conversion, things like that?
spk05: Okay. Sorry, George. I didn't hear you very clearly. I think what you were asking was about the free cash flow profile for each creative center. So let me just walk you through that. I think in terms of capex, toys has got pretty low capex. All that capex comprises in the toy area is tooling. which is relatively low. And as I said to you, the primary focus on free cash flow management there is on our working capital. Entertainment has got very high capex. It's actually quite capital intensive. However, on a net basis, once you take into account entertainment tax credit from the government, as well as advances from our distribution partners, the net capital outlay is actually much less. You have to look at entertainment over a multi-year cycle because Most of our productions take a couple of years to actually develop, and then they get sold. And then once they actually generate some traction in the market, you can get some toy revenue, you get licensing and merchandising revenue, and you get second window distribution revenue. And that can make an entertainment franchise very profitable. On the digital game side, as I just described to Geric, most of the development of a digital game is around 18 months maybe 24 months at most some are even less and what we do is once it's being proven as a commercially viable game all the capex gets capitalized overall our capex from a spin master consolidated perspective is in the five to six percent of revenue range so if you're thinking about a blended average for the whole of spin master it would be around five to six percent very helpful
spk11: Can you speak a little bit about the pricing in digital games as well? How sensitive is pricing there? Has there been any action as well?
spk09: So, yeah, absolutely we can. So remember, so in-app purchases for us on the TokaLife world, which is the majority of our revenue and an important part of the question, basically range anywhere from $0.99 for a creator tool to sometimes $2.99 for a creator tool. So you can imagine three times the cost. And what I would tell you is that the engagement that that creator tool and the attachment it generates for the player is what is being driven most aggressively, the consumption. And so we have creator tools that we have dropped at $2.99 that are far better than $0.99 creator tools. And that goes to show you that is truly that connection and the excitement and quality of that creator tool that is most important. Obviously, something that costs three times as much is something we pay close attention to, but there isn't something that would suggest to you that there's a linear relationship between the price and the actual creator tool and one that is half or a third of the cost will have one-third the units. No such thing. Not that we've seen so far. And we did take pricing, one, on some of our digital game creator app tools. So that has contributed to our growth as well. And it's not slowed the engagement nor the acquisition of our MAUs.
spk05: Just to add to that, just one thing to add to that on the subscription side. Remember, the revenue on the subscription side is based on a monthly or annual subscription. So that actually varies between $5.99, $6.99 a month, depending on the product. up to $49 for a year. So the digital games business model is actually driven off of two separate structures. One is an in-app purchase model, which Max just described, and which is most of our revenue, as well as the subscription business as well.
spk11: Thank you, guys.
spk12: And we will now take our last question today from Sabah Khan from RBC Capture Markets. Please go ahead.
spk11: Great, thanks. Just some of the comments earlier around the amount of pricing you're taking and some of the price sensitivity that might be out there. Is that affecting in any way your product rollout for the back end of the year? Have you rethought the mix or even just rethought pricing on some of the stuff? I'm just thinking about how does that market then reflect into the guidance that you've updated this morning?
spk09: Yeah, so when you think about our... Hi, Saba. So basically our... Our average selling price, right, our ASP, which has increased in Q1, as you will state, will be influenced by the definitely price increase, but also trading up, fewer promotions or more promotions, you know, shift to online stores or physical. They actually behave differently. And then the product mix itself. So when you add it all together and you think about our own portfolio, we have fared pretty well in Q1 and into now Q2 with the available public data that you can actually read. We continue to actually show strength. And as we go into Q2, I mean, sorry, into the second half, we are equally positioned to do well in that space. So for us, you know, we watch it very closely. We go down to the price point level and we are watching the dynamics and we're acting accordingly. to an earlier comment and question raised by Geric with regards to GLUT and obviously promotion and consumer sensitivity, we're watching that as well to be able to activate against that. But yeah, this is a very dynamic and fluid environment and basically we have a really well-positioned team with a lot of great information at their fingertips to act on behalf of our brands with retailers.
spk11: Okay, thanks. And then there's more of a broader question, but as you look back over the last couple of years, you know, in the industry with the exit of Toys R Us, and then you had COVID, you know, a lot of transition in your customer base. Does it feel like now the dust has settled a bit outside of maybe just e-commerce penetration changing in terms of your customer mix, or are you still seeing a bit of an evolution around your top three or four customers?
spk09: Well, you know, listen, I'm going to comment from my last year and a half with the company, which has been terrific, and I've studied the past, but I'm going to ask Mark to comment as well, given the fact that he has the tenure to answer more with more history. So the answer to your question is that our top three customers are shifting quarter in quarter. The prevalence of e-commerce is here to stay. For us, 32% of our POS in Q1 was through e-commerce, and it's not just pure play. It's Ultimately, folks like, if I may say, Amazon or Walmart that do have a dot-com as well. And when you turn to Europe, it's basically customers in Europe that are similarly positioned to what Walmart and Target will be doing here. But at the same time, you have to think that Amazon has also expanded into Europe. And I was just recently in Mexico with a team, and I was with three retailers, top retailers in Mexico, and no difference in what's happening in Mexico. So this is a global phenomenon. And we're actually positioned to go capture growth where consumers are shopping. And so that is basically what we'll see going forward.
spk05: And just to add to that, Saba, with a little bit of history, I think there are two things that have happened in the industry that I think are important contextually. One is, if you go back to when we were in public, 27% of our business came from outside of North America. Right now, that number is over 40%. So our customer base has broadened dramatically as a result of geographic diversification. Then in the case of Toys R Us, when Toys R Us went down, obviously it sent shockwaves through the industry, but I think that's history. I think the industry has pivoted, has absorbed that volume, and has moved long past that now. Target, Walmart, Amazon, and all the other customers have really absorbed and changed in the way that Max has described. And so I think the industry is stronger than it ever has been from that perspective.
spk03: Great. Thanks so much for the call.
spk05: Okay. I think that actually was our last question. I want to thank you all for your participation and your interest. And we look forward to talking to you at 1.30. We're going to have a presentation by Max and our Creative Center presidents. I think you will find it very, very interesting and informative. So for those of you that will be joining, We look forward to talking to you at 1.30. Thanks again.
spk12: Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.
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