Spin Master Corp.

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.

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.

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.