Spin Master Corp.

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

Thank you, Justin. Good morning and welcome to Spin Master's financial results conference call for the third quarter ended September 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 at spinmaster.com and on CDAR. Before we begin, please note the remarks on this conference call may contain forward-looking statements about Spin Master's current and future plans, expectations, intentions, results, level 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 these circumstances. However, there can be no assurance that the estimate 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, SPIN Master 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 or cautionary statements regarding forward-looking information in the company's earnings release dated November 2nd, 2022. 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.

Thank you, Sophia. Good morning. Thank you for joining us today to review our third quarter results. To begin, let me remind you that we are committed to building on our legacy as a growth company by reimagining everyday play and leveraging common IP across our three creative centers, including innovative toys, engaging multi-platform entertainment content, and open-ended digital game experiences. We believe this powerful combination provides SpinMaster with a distinct competitive advantage while also creating a robust platform to deeply engage with, entertain, and inspire children and their families globally. We are investing in our shared capabilities to sustain our presence and influence in children's lives now and for generations to come. Following strong performance over the first half of the year, our total revenue for the third quarter was $624 million, a decline of 12.7% compared to last year, primarily due to the pull forward of toy shipments into Q2 this year, coupled with inventory correction by retailers in Q3 giving lower category consumption as inflation pressure consumer spending. The difficult, although expected, comparison against the Paw Patrol movie launch last year, decelerating digital games revenue and foreign exchange were also factors. Excluding the distribution revenue from the Paw Patrol movie last year, revenue in Q3 in constant currency declined by 6.5% compared to 2021. For the third quarter, adjusted EBITDA margin declined to 26.9% from 30.4%, and Mark will provide further color on this later in the call. As you are aware, we are operating in a very uncertain macroeconomic environment. We spoke last quarter about the possibility of declining consumer confidence and the pressures of inflation impacting discretionary spending. The toy category has historically been more resilient than others during recessionary environments. Since 2005, for example, industry growth has consistently exceeded GDP growth. However, we have seen an impact on point-of-sale trends in the category as the year has progressed, and the average consumer becomes increasingly price sensitive. According to MPD, while toy demand remains stronger than 2019 levels, it has been slowing. On a year-to-day basis, our POS is up 3% and has continued to grow ahead of the toy industry globally, which grew at 1% per MPD. We also remain the number four manufacturer globally, making this the fourth consecutive quarter we have held this position. We are starting to see the effects of the current economic climate and shifting customer dynamics. Retailers have begun to reduce orders due to higher inventory levels industry-wide and have put a greater focus on profitability over growth. Consumers are more price sensitive given inflationary pressures and are more susceptible to promotions as a result. This activity has an adverse impact on the launch of new items at retail. While our year-to-date growth is ahead of category performance, our third quarter POS declined compared to the total industry, which grew 2%. A material part of our year-over-year decline is from lower Paw Patrol POS, lapping movie POS last year. We anticipated a decline in preschool, dolls, and interactive category in Q3 this year, given the exceptional growth we experienced last year coming off the heels of the strength of the Paw Patrol movie toy line. While global POS for Paw Patrol decreased in Q3, the franchise remains the number one preschool toy property globally, both on a quarterly and year-to-day basis per MPD. If we exclude Paw Patrol POS, our point of sale grew by 4.5% in Q3 and 7.8% year-to-date for the G11 countries per MPD. We firmly believe in Paw Patrol's tremendous brand equity with preschoolers and are looking forward to celebrating Paw Patrol's 10th anniversary in 2023 with the launch of our second Paw movie in the fall, the Robo spin-off and new content. Our retail customers toured our LA trade show in September, and we're very excited about the innovation we are bringing to both the core and the movie toy line. You will have the opportunity to see our Fall 23 showroom in LA this coming January, so stay tuned for your invite coming soon. With fresh content, a blockbuster movie, and a milestone anniversary, we believe we can continue to attract new Paw fans and further solidify our position with our current preschool fan base. I wanted to speak to Gabby's Dollhouse, which has been a tremendous partnership with Universal Studios. Gabby's has been a runaway success since the launch of the animated property last year and speaks to the power of strong entertainment driving consumer demand. The Gabby's Dollhouse Perfect Playset was the number one item in the infant, toddler, and preschool super category in Q3, and even year-to-date in the U.S. per MPD. Gabby's is a great example of how we apply innovation to licensed brands. Our licensed portfolio continues to resonate with consumers. According to MPD, our licensed portfolio POS was up 32% in Q3 on a year-to-date basis, up 39%, and this is mostly driven by Gabby's Dollhouse, Wizarding World, and Monster Jam. Within Wilson Action, our licensed toy properties continue to perform well. According to MPD, DC Universe POS decreased in Q3, as gains in the first half connected to the Batman movie tapered off. Our new Black Adam toy line, inspired by the feature film that debuted October 21st, is now set at retail, and we have an early indication of solid performance. In 2023, we have a series of DC Universe movies slated for theaters, as well as an epic new playset for the line. Monster Jam remained the number two property in vehicles for the third quarter per MPD, and POS increased 3.7%. Fandom for Monster Jam is being driven by a combination of spectacular live events complemented by new spin master innovation. In 2023, we will have a new all-terrain vehicle and new play patterns within the traditional 164 vehicle lineup. We are excited to launch two new license partnerships in 2023. The first is for Disney's new preschool animated series, Firebots, with toy launches beginning in spring 23 and a full rollout in the summer. The second is with Sony Interactive Entertainment, which will see us become the global master toy licensee for PlayStation games, including titles such as God of War, Horizon Zero Dawn, The Last of Us, and others. In activities, Kinetic Sand POS was down by 4.4% in Q3, in a category which also saw overall declines. Kinetic Sand has made such amazing strides over the past few years and remains the number two brand within the arts and crafts category. Strong brand affinity and continued innovation in the line gives us confidence for the remaining holiday season and for 2023. I wanted to touch on sales within our games and puzzles category. During the pandemic, we saw a tremendous resurgence of classic games. Today, much of the growth in this category is being fueled by trading cards and new board game titles. Our POS sales are mirroring the trends within the category at large. With continuous softness in classic titles such as chess and checkers, offset by the introduction of new titles and next editions of our own IP, like headbands. Rubik's Cube was the number eight brand within the category for the quarter, with POS up 13% compared to 4.7 for the category. Fandom for Rubik's runs deep, and when we introduced our own spin on the classic puzzle this fall, the Rubik's Phantom, featuring thermochromic technology, it quickly sold out. We are chasing opportunities to ship new inventory into retailers over the next few months. We know that innovative marketing is critical for the big holiday season. We are leveraging our in-house agile team to adjust our marketing with precision. Most of our marketing investments is against our priority brands, designed to sustain and build momentum in support of selling through our key toy drivers. E-commerce sales continue to outpace brick and mortar, although we are expecting brick and mortar to accelerate later in the season. We are making the necessary investments in marketing from an omnichannel perspective to ensure an exceptional experience and a clear path to purchase for the consumer. As mentioned last quarter, we are taking a balanced approach to pricing and promotions, investing where it makes sense to remain competitive, while also preserving our profitability. Turning to entertainment, our team are experts at creating engaging stories that transcend boundaries and platforms. In turn, this content will serve as a catalyst for growth and innovation in toys, digital games, and licensed consumer products. This quarter, the team launched Sega Mini Friends on Apple TV, our first major collaboration between the digital games and entertainment creative centers, which saw us bring the popular characters from the award-winning Sega Mini app to episodic content. The launch on Apple TV in September was our first distribution deal with a streamer, and we have been thrilled to see the enthusiastic reception to the series across the world. Looking ahead to 2023, our Entertainment and Creative Center will have one of the biggest years ever. 2021 was a landmark year for us as a result of the release of our first movie. The box office results for Paw Patrol the Movie demonstrated our ability to tell a story for Paw on a much bigger canvas. Fans globally are eagerly awaiting our second feature film for the franchise. Paw Patrol The Mighty Movie, which will be hitting theaters in October 2023. Further building on the Paw Patrol world, Rubble and Crew, our first spin-off, will debut in Q1 2023. We will also introduce a series of specials throughout the 2023 year to commemorate Paw's 10th anniversary. Our new animated series, Vita the Vet, will debut on premier children's broadcasters, BBCs in the UK, and Chorus Entertainment's Treehouse in Canada in the fall of 23, with more international broadcasters to follow. A new toy line and full consumer products program will follow in 2024. While we have seen exceptional growth within our digital games creative center over the past two years, driven by new content and features as well as COVID-related lockdowns, we are starting to see the market normalize. We are seeing this play out more broadly across the video game and mobile gaming industry landscape. Last quarter, we commented on the overall slowdown of revenue growth across the digital games industry as kids return to in-person schooling, play dates, and extracurricular sports driving lower in-app purchases. As a result, we saw a decline in revenue in quarter three, despite MAU remaining at comparable levels to 2021. We have ambitious growth plans for our digital games creative center. In the long term, the mobile game market's growth potential is very attractive with mobile gaming being the largest and most popular form of gaming for kids. We are not discouraged by the revenue decline we experienced in the quarter compared to 2021. As I mentioned, we continue to see strong engagement with our properties despite a decline in in-app purchases. Monthly active users for Toca Boca were flat in the third quarter, with some decline coming in September as children returned to school following the summer break. For Toca Live World, we were at 49 million monthly active users for the quarter. Sego Mini downloads increased in the quarter, but the active subscriber base was flat at 340,000 subscribers. With the help of the Sego Mini Friends series, we hope to continue to attract new users and drive further downloads of the award-winning app. We are evaluating a Segal bundle approach for 2023, which will combine several apps into one cost-effective subscription. We think this will drive growth and will be a simpler, more cost-effective way for parents to manage a subscription for their kids. Originator's teams continue to work on two major initiatives, including a Paw Patrol digital game, Paw and Friends, which will launch together with the second PoMovie in 2023, and an exciting new educational learning game. We expanded our digital game ecosystem with the acquisition of Nordlight in August, following an initial investment in the gaming studio through Spin Master Ventures. The gaming studio has been working on the development of the Rubik's digital game in the casual gaming space, set to launch in 2023. In addition to collaborating with Norlite on the Rubik's game, our Noid Studio is working on several other digital game initiatives, leveraging our toy and entertainment IP. We continue to drive towards our long-term goal, which is for digital games revenue to represent 20% of our total revenue. We will achieve this through a combination of growth in existing games, the development of new games, and a creative M&A. With our 2,500 employees around the world, we are excited to bring our magical content and experiences to children and their families this holiday season. While it is too early to discuss specific guidance for 2023, we want to provide some context on how we are approaching next year. We expect the external environment to be dynamic and challenging in 2023, and we are taking actions to ensure we navigate this backdrop and positions being mastered to thrive. We continue to look for accretive acquisition opportunities and balance investments designed to deliver on our long-term business strategy while also effectively managing our costs and navigating retailer and consumer dynamics to deliver profitable growth. We remain very excited about our prospects both for 2023 and beyond and continue to focus on driving growth throughout all our creative centers driven by innovation and collaboration. We firmly believe the power of our innovative toy portfolio, diversified entertainment pipeline, and our suite of digital games will drive shareholder value now and into the future. I am going to now pass it over to Chief Financial Officer Mark, who will share more details on our financial performance and outlook.