Spin Master Corp.

Good day and welcome to the Spin Master Corp second quarter 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sophia Bazokas.

Thank you. Good morning and welcome to Spin Master's financial results conference call for the second quarter ended June 30th, 2022. 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 unaudited consolidated interim financial statements are available on the investor relations section of our website and 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 are 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 expected 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 our cautionary statements regarding forward-looking information in the company's earnings release dated July 27, 2002. Please note that Spin Master reports in U.S. dollars and all dollar amounts to be expressed today are in U.S. currency unless otherwise noted. I would now like to turn the conference call over to Max Rangel.

Good morning, everyone, and thank you for joining us. As we announced yesterday, Spin Master had a very strong second quarter with revenue growth across all three creative centers amidst a rapidly shifting microeconomic environment. Our second quarter revenue increased by just under 30%, with toy revenue growing more than 34%, proving once again the power of our diversified toy portfolio, including breakthrough innovation, evergreen franchise brands, and fan-fueled licensing properties. Digital games saw revenue gains of over 9%, and entertainment grew 3.3%. Combined, this performance showcases the power that can be harnessed by leveraging our three creative centers, to reimagine everyday play for children around the world. In addition to growing our top line, we also maintained our focus on operational discipline, resulting in a year-over-year 39% increase in adjusted EBITDA in the second quarter. We're able to navigate through external pressures with supply chain system, raw material cost increases, and inflation, while maintaining strong margins and profitability. We are very pleased with our sustained growth across all creative centers, And I want to thank our more than 2,000 team members globally for their commitment to innovation, collaboration, and operational excellence. Our vision in toys is to be a global leader by creating play experiences that spark creativity and imagination in kids and families around the world. It's clear that our portfolio is resonating with children globally, as evidenced by our POS performance in the second quarter and year to date. I want to share some highlights with you. all of which is sourced from MPD. Our excellent performance in both North America and international helped us maintain our toy market share position as the fourth largest manufacturer in the quarter in the G9 countries for the third consecutive quarter for MPD. Spin Master continued to grow our POS ahead of the toy industry with a 10% increase in the second quarter compared to the industry at 7%. In Q2, SpinMaster had the second fastest growth rate of the top five global manufacturers and was number four globally year-to-date through June, up from five last year. SpinMaster grew 7% year-on-year in the first half compared to the industry, which was up 1% for the first half of 2022, and now SpinMaster had the fastest growth rate of the top five global manufacturers in the first half. In North America, POS grew 12% in Q2 compared to the industry at 8%. Internationally, our POS in the second quarter was up 6% compared to the industry at 3%. On a year-to-day basis, we outperformed in North America, a market that grew 7% compared to the industry, which was up 2%. We grew 4% internationally year-to-date, while the market was down 2%. From a brand perspective, we are very encouraged by our momentum at the retail level and are also pleased to see our POS sales grow in six of the 11 super categories that are measured by MPD. Paw Patrol remains the number one preschool property globally. Global POS for Paw Patrol increased 3% in Q2, demonstrating Paw Patrol's global popularity and reach. We recently launched an exclusive feature length special, Cat Pack, on Paramount Plus together with a themed toy line. Following on the heels of Cat Pack is a new Paw Patrol theme this fall, Big Truck Pups, which will air on Nickelodeon with an all-new toy lineup. Gabby's Dollhouse continues to be a standout license for Spin Master. Last quarter, we shared that the Gabby's Dollhouse Perfect Playset was the number one item in the Playset Figures and Accessories class in the U.S., and I'm happy to share that the Playset maintained its leadership position in the second quarter. Season 5 of Gabby's Dollhouse featuring eight new episodes dropped on Netflix just three days ago, and we expect continued demand for new toy launches for the line hitting shelves in August. The final item I want to highlight within Preschool Dolls and Interactive is PursePets. It's amazing to think we launched this collection of interactive fashion purses less than a year ago. It is a great example of Speedmaster's ability to innovate and understand what surprises and delights kids. Perspex made MPD's list of the top five new properties in 2021 and continued that leadership as a number four new property globally in the second quarter and year to date. In August, we are launching a new collection in collaboration with Sanrio's Hello Kitty and Friends, which will continue to drive collectability and attract a new audience. In activities, Kinetic Sand POS grew 7% in Q2 and remains the number two brand within the arts and craft category. This fall, we are launching Swirl and Surprise, our most hands-on approach to kinetic sand art play, which will actually allow kids to create original sand art. Our games and puzzles category experienced mixed results in Q2. While the pandemic saw the resurfacing of classic titles, consumers are now shifting to new game innovation. We saw softness in cardinal games, but are encouraged by our POS performance of our core game IP, such as headbands, which grew 32%. Last quarter, I mentioned that we were focusing heavily on Rubik's and are putting a lot of marketing innovation and global scale behind this popular puzzle. Rubik's Cube saw strong double-digit POS growth in Q2, and we are launching an innovative line this fall, including Rubik's Phantom, featuring innovative thermochromic technology that temporarily reveals the tile colors when the cube is touched. After highlighting Gaby's dollhouse, I now want to spend some time on the rest of our license portfolio, which has been performing extremely well. According to MPD, our license portfolio POS was up 46% in Q2, and on a year-to-day basis, PIN's license portfolio POS was up 44%. We continue to be the number two manufacturer for the Wizarding World franchise in the quarter, supported by the latest movie, Fantastic Beasts, The Secrets of Dumbledore. We are introducing new dolls and play sets within the line this coming fall, and we will enable loyal fans to expand their collections and imaginative play experiences. Within Wheels in Action, we have a robust assortment of licensed toy properties, including Batman and DC Universe. According to MPD, global POS for Spin Master's line of Warner Bros. DC Universe increased 12% in the quarter. The next major theatrical release for the DC Universe is Black Adam, hitting theaters this October, with toys launching early fall. Monster Jam remains the number two property in vehicles per MPD, and the success of this action-packed line is helping to fuel POS within vehicles, which increased 20% in Q2. We have demonstrated a solid track record for delivering innovation, growth, and global distribution capability for licensors. It is this reputation that helped us recently win two new major licenses. The first is an all-new preschool animated series license from Disney called Firebots, which has been mastered as a North American toy licensee. Firebots will air on Disney Junior in 2023, and the toy line is anticipated to launch in summer 2023. The line will include figures, play sets, vehicles, and more. Fire Butts is set in a fantastical world where talking vehicles live, work, and play with the humans who drive them. The whole team is very excited to bring the inspirational characters from the show to playrooms next year. We've seen a trend within the toy industry regarding the growth of the Kittle category, and it's an area that Spin Master has historically been underrepresented. Given the opportunity to grow penetration within this consumer, We have been developing toys and collectibles that transcend into the video gaming and eSports worlds. We started with the launch of League of Legends, and we just announced a new multi-year license with Sony Interactive Entertainment as the global master toy licensee for the PlayStation brand, including titles such as God of War, Zero Dawn, The Last of Us, and others. We will develop product across a wide range of categories, including action figures, collectibles, play sets, role play, vehicles, games and puzzles, all of which will bring the interactive storytelling of Sony's immersive games to life. I will now take a moment to discuss our key marketing initiatives. We are applying the same principles of innovation to marketing as we do with our toys, entertainment and digital games creative centers. This starts with a focused approach to our priority brands and franchises, where we're basically investing over 80% of our global marketing dollars. We have built an agile, innovative in-house team that has allowed us to test and adjust at scale as the market changes quickly around us. This flexibility has helped us grow reach more efficiently, predict performance, and improve our sell-through sequentially for the last couple of years. We will continue to apply this playbook in the second half of 22, leveraging both commercial focus and marketing innovation to our priority brands to maintain and build our momentum, supporting our innovation and positioning us for a clean inventory sell-through. We are investing early in the season to establish strong baselines for our innovation and combining marketing and promotional pricing strategically to grow share. We continue to see our promotional efficiency grow and will invest in this area this fall as consumer behaviors shift in reaction to the microeconomic environment. We continue to activate with shoppers fluidly across channels, both online and in-store. Our spend is increasingly digital first, helping us to grow ROI and market share. In 2022, digital is approaching 50% of our global spend, with major growth in Europe and nearly two-thirds of our spend in digital here in the U.S. and Canada. Despite e-commerce becoming a significant larger portion of the overall industry POS, when compared to just a few years ago, we are seeing moderation of growth. With sales shifting back to bricks and mortar, we believe we have opportunities to elevate our in-store displays in partnership with our retail customers. We are taking a balanced approach to pricing, promotions, and investing where it makes sense to remain competitive, but also preserving our profitability. Now I'm going to turn to entertainment And in this creative center, our team is focused on creating content that will serve as a catalyst for toys and digital games. We're building diversified content squarely focused on children across many age segments with a multi-platform approach. Fans of our entertainment are engaging across channels from traditional linear to streaming and to digital platforms like YouTube. And Speedmaster Entertainment is strengthening our execution across all dimensions to capture our share of viewing minutes. This past quarter, we made a few exciting announcements regarding our entertainment content pipeline. We announced the upcoming launch of an all-new animated series, Vida the Vet. Season one will debut on premier children's entertainment broadcasters like BBCs in the UK and Treehouse in Canada this coming fall, 2023. The team is working on securing more international broadcasting partners to expand the reach of the show. We are excited to invite fans on yet another epic adventure on the big screen with our second movie in the Paw Patrol franchise, The Mighty Movie, and it's coming to theaters in October of 2023. Production is progressing well, and our new Paw Patrol-derived spin-off, Rubble and Crew, will debut in 2023, and specials to celebrate Paw's 10th anniversary are also in the works. Turning now to the Digital Games Creative Center, we have experienced explosive growth over the last two years, Kids have evolved to digital playgrounds as a key form of engagement with their friends. This trend was further compounded by the pandemic, where kids were largely out of school, restricted to their own homes, and forced to engage with friends online. The industry is now seeing a shift in the macroeconomic environment with kids spending more time in school and extracurricular activities unencumbered by pandemic restrictions. In addition, families have been able to travel for vacations more, that they were able to in 2020 and 2021, leading to a shift in how leisure time is being spent. We continue to see engagement with our properties remain very high. However, in line with trends with the global digital gaming industry, we have seen a reduction in in-app purchases and a slower growth within our edutainment-focused apps from Sega Mini and Originator. Monthly active users, a key performance indicator of franchise health, remains very strong. In the second quarter, The entire Tokaboka ecosystem had over 75 million monthly active users, up 32% compared to the same quarter in the prior year. We know that the open-ended creative play that Toka Live World provides is relevant and engaging for kids around the world. In addition to being named the Apple Store's App of the Year in 2021, Tokaboka was just awarded Best Original Game App by Kids Screen just last week. Active SEGO subscribers also increased 4% over the prior year, and we expect that the launch of the new SEGO Mini Friends series in Apple TV Plus this fall will increase brand awareness for SEGO Mini World and drive increased engagement with our Play to Learn apps. Our Originator Studio is hard at work on two major initiatives, including a Paw Patrol digital game called Paw and Friends and a STEM-based learning app. We remain focused on expanding our digital game ecosystem to leverage our trove of IP to reach and leverage new users. Noid, our newest digital game studio in Stockholm, is well down the path of developing a Rubik's digital game, which will launch in 2023. We have several other digital games initiatives in development, leveraging Speedmaster's toy and entertainment IP. We have also expressed our desire to grow our digital games presence through acquisition. We now have an experienced team to help us find potential acquisitions within this rapidly evolving and growing space. Before I turn it over to Mark, I wanted to comment briefly on the macroeconomic environment. We recognize that the consumer spend in some regions is slowing, with concerns regarding inflation and the impact that this may have on discretionary spending. As we've said in the past, the toy category trends tends to be less affected by recessionary environments, partly due to parents' choice to ensure their children will always receive the toy they've been dreaming of for the holiday season or for their birthday party, but also because toys are an efficient, low-cost form of entertainment during tougher times, as we saw in previous economic downturns. We've heard reports of high inventory levels at retail due to delays in shipping from the tail end of 21, combined with slowing spending. We have learned many lessons from the operational challenges we experienced in late 2019 and have embedded proactive, rigorous planning practices to ensure we manage inventory levels very tightly. We remain in a very strong position financially and are maintaining our outlook for 2022. We believe SPIN Master is well positioned to manage through external market pressures to deliver profitable growth and long-term shareholder value as demonstrated by our plan to return capital to shareholders while continuing to invest in growth initiatives. Looking to the balance of the year, we are confident in our ability to execute against our strategy of reimagining everyday play, powered by our deep expertise across toys, entertainment, and digital games. I will now hand over to Mark, who will share more details on our performance.