Spin Master Corp.

looking statements, whether because of new information, future events, or otherwise. For additional info on these assumptions and risks, please consult our cautionary statements regarding forward-looking information in our earnings release dated May 3, 2023. 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 call over to Max.

Good morning. Thank you for joining us today. Our first quarter performance was ahead of our expectations and reflects both encouraging entertainment and digital games performance, as well as expected toy performance despite tough comparables against 2022. Our three creative centers provide us with a strong integrated platform to create holistic play experiences for kids and families and help to enact our strategy to reimagine everyday play. In Q1, as expected, We experienced pressure on toy gross product sales resulting from excess inventories at retail carried over from Q4 2022. This in turn caused retailers to slow orders for the front half of 23. We are also lapping an unusually strong Q1 22 characterized by shipments from both our first Palm movie and the Batman movie. As a result, our toy revenue in the quarter declined 46.9% year over year in line with expectations. We see the industry's retail inventory situation improving steadily. From a Spin Master's perspective, our U.S. retail inventory at the end of 2022 was up $117 million compared to 2021. However, at the end of Q1 2023, our U.S. retail inventory was flat compared to 2022. Since the end of Q1, both industry and our retail inventory continues to decline, and we expect any remaining 22-related retail inventory overhang to unwind by the end of Q2, positioning us for a strong second half. While historically the toy industry has been resilient amidst economic downturns, the start to 23 for the industry has been soft from a POS perspective. According to Cercana, previously known as MPD, in Q1-23, consumers globally bought fewer toys and spent slightly less on the toys that they purchased. Global toy POS declined 3.1%, while our global POS was down 4.8% per Cercana. In the U.S., our POS declined 9.2%, compared to a decline of 4.7% for the industry. Conversely, our international POS performance fared better, and in Q1, POS was growing 3.9% compared to the industry, which was flat. We grew POS in seven of the 11 countries measured by CERCANA, outperforming the industry in most countries. It's important to remind you that the first quarter of any year is our seasonally lowest quarter, and this was exacerbated in Q1 23 for the reasons we have discussed. We believe that Q1 POS data, particularly in the U.S., may not be representative of full year performance. As we look to the fall, we have a strong toy lineup with breakthrough innovation and impressive launches within our core and licensed brand portfolios, coupled with exciting content releases. Our commercial teams are focused on working closely with our retail partners to deliver on the second half. Execution on shelf will be supported by measured investment in fully integrated marketing plans with digital campaigns and portfolio-led initiatives to incent and convert consumers. We have built an industry-leading preschool business, driven by globally acclaimed entertainment series and toy lines with deep character affinity. Paw Patrol, which is celebrating its 10th anniversary this year, continues to lead the way as a number one preschool toy property globally in Q123. According to Cercana, global POS for PAW declined by 7.1% in Q1 2023, mainly from declines in Europe. We expected this decline as we were lapping the continued consumption from the PAW movie in Q1 2022, and Europe had not yet benefited from the distribution of our Aqua Puffs theme or the Rubble and Crew product launch. While overall POS was down, The availability of the strong theme and rubble distribution drove POS gains in some key markets, including the U.S. In the broader infant-toddler preschool toys supercategory, as defined by Sarkana, we had three of the top 10 items in the U.S., including some of the new items for 2023. This demonstrates our ability to win by innovating our core brands, Another example of winning with innovation is Bakugan within our Wheels and Actions category. Bakugan was relaunched in 2019 after its first reign as a global phenomenon from 2007 to 2010 and has proven to be an evergreen brand with a strong following. In Q1, we introduced Bakugan Legends, and the brand reached number one in the battling toys and play sets class globally, up from number two in 2022 for Sharkana. We are excited to launch a whole new way to battle with Bakugan this fall, supported by new content. Speaking to all their successful IP, Hatchimals was a global breakthrough toy when it launched in 2016, creating a new play pattern with a toy that unboxed itself, generating over a billion in gross product sales from 2016 to 2018. Over time, We have evolved the brand beyond the initial big egg, extending it to a successful line of collectibles. As many of you saw in our LA short room in January, we are launching a new way to hatch characters this fall with the launch of Hatchimals Alive, using water to unveil the characters inside. We continue to explore infusing innovation into the Hatchimals line with exciting new product innovations in 2024 and beyond. We have invested in our ability to secure top licenses, And over time, we have steadily grown our reputation as an innovative and collaborative global partner. Licensed products now comprise just under 30% of our POS per cercana. Gabby's Dollhouse, in partnership with Universal DreamWorks Animation, continues to win the hearts of children everywhere. In Q1 23, Gabby was the number five preschool toys property, compared to number 10 in Q1 2022. And what's the largest dollar global growth property in the super category? Berserkana. Sales for the DC line softened in Q1 as we lapped the Batman movie toy line launched last year. However, we regained our number one manufacturer position in Q1 for DC Universe globally. With four new films in the DC Universe planned for 2023, we are excited about our lineup of action figures, vehicles, and role-play items to enable kids and collectors to bring their action and adventure from the big screen into their homes. Warner Bros. is committed to investing in these franchises with more theatrical releases and content extensions launching over the next several years. Our design teams are looking forward to working with the toy lines, which will accompany the upcoming Batman and Superman movies in 2025. The last major license I want to comment on is Monster Jam, in partnership with Feld Entertainment. Monster Jam had placed the category globally in Q1 and remained the number two property in the vehicles category and the number one license brand in vehicles. Within games, category growth is being led by the trading cards games and adult party games. Many of these games are inspired by social media trends and viral concepts. We are leaning into the popularity of these types of games in 2023 with several new titles, including If You Know, You Know and Dumb Ways to Die. The catchy song for Dumb Ways to Die was originally created to promote railway safety in Australia and has become a viral sensation on social media. Our Dumb Ways to Die card game will launch this summer. We're also leaning into giant games. which are also becoming increasingly popular with the license of Monopoly, and we will launch Giant Monopoly late this fall. We have always been a disruptor in the toy industry known for our innovation. We expect to deliver exciting innovations for the holiday season as retailers look to differentiate themselves on shelf and in the hearts of kids and families around the globe. Looking forward, we are doubling down on innovation by starting a new internal group that will be solely focused on developing breakthrough innovation. Our most innovative and creative talents will be working in this group with a sharp focus to deliver significant disruptive breakthrough toys for the future. Entertainment had a very strong quarter with revenue increasing 69.4%, driven by higher distribution and licensing and merchandising revenue, primarily related to the Paw Patrol universe. Our strategy to invest in the creation of multi-platform content will result in the releases in 2023 and 2024 of our most diverse entertainment slate in our history. Part of that success can be attributed to Paw Patrol, a franchise which continues to expand its reach, attracting new audiences and connection to these heroic pups. This fandom has allowed us to grow the Paw universe with the launch of the Rubble & Crew series, which debuted on Nickelodeon in February. Rubble and Crew delivered top-performing ratings with the premiere ranked as the number one show on cable with kids 2 to 5 in its time slot, pacing double digits ahead of competition. Rubble and Crew also posted the strongest share for a preschool series launch since 2019, capturing viewership with over 20% of kids 2 to 5 in the U.S. PAW continues to perform well on both linear and streaming platforms. We have strong momentum heading into our movie launch and are looking forward to entertaining preschoolers and their families with another epic big screen adventure. We remain on track to deliver the second Paw Patrol movie, which is set to debut September 29th. We are launching two brand new properties in 2023. Vida the Vet, our new preschool series, is set to debut on BBC CBBs in the UK and on Chorus Treehouse in Canada this fall. In addition to these initial broadcasters, we are pleased to share that Netflix has acquired streaming rights for Vita for the U.S. market. The team is also closing a raft of other international distribution deals, which should be announced soon. We are also very excited for the launch of Unicorn Academy. Our Fantasy Adventure series, which is launching in Netflix in November, is amazing. We are putting our full franchise development and management support behind Unicorn Academy which will cross over from entertainment into both toys and digital games in 2024. We are building an expansive licensed consumer products program that will span apparel, publishing, accessories, and many other categories. We can't wait to show you Unicorn Academy. It is unlike any other property that we've created and is for sure to enchant kids and families. Turning to our digital games creative center, In March, we indicated we were seeing some positive momentum. The industry new baseline is lower than it was during the COVID years, but has stabilized at a much higher plateau than in pre-pandemic years. We are seeing a similar pattern in our own digital games business. We are actively expanding our digital games portfolio with several new digital games launching this year. We will be entering new and large mobile gaming categories that will increase our addressable market and broaden our audience base. Our anchor games, including Tokolive World and Sega Mini, have been created for children, but we are thinking more broadly in designing digital games play that will attract kids of all ages and spawn a growing player network anchored in safe and fun play. In Tokolive World, player engagement remains high, In early April, we hit a new record of 12.5 million daily active users in Toko Live World, beating our previous record in early 2022. This reflects the success of the Games as a Service model, where fresh and relevant content drives player satisfaction and engagement. We have more exciting content drops planned throughout 2023, including an exciting collaboration to be announced in June, as well as enhancements to our creator tools, which will allow players to express themselves creatively and share their stories. We've talked to you in the past about TOCA Days, our first 3D multiplayer game set in the same universe as TOCA Live World. At its core, the game is about social interactions between players, but also within a broader community. TOCA Days is currently in early soft launch, and we are testing cross-promotion between Toka Live World and Toka Days to drive traffic across the Toka universe. Player sentiment has been high so far, and based on the initial feedback and learnings, we are fixing bugs and prioritizing features. We will continue to roll out soft launch to additional markets in 2023 with a full go-live plan for 2024. In SEGO Mini, we are also focusing on new content and late in Q1, we saw indications of growth in subscriptions and downloads. We are launching our Sego Mini subscription bundle in Q3 to give families more access to content at a better value. Between Sego and Originator, we currently have around 330,000 subscribers, and the bundle will allow parents to make one streamlined purchase that will provide access to hundreds of games and activities, including all the Sego World, Sego School, SEGO First Words, and Originator developed endless learning and math tango apps, as well as the Toka Jr. app library content, with six titles growing to nine by the end of 2023. Leveraging Speedmaster's trove of IP is a key priority for our digital games creative center. Our new casual mobile game, Leveraging the Iconic Rubik's Cube, will soft launch this summer. We will also appeal to the deep global fan base for Paw Patrol, through the creation of our first in-house developed digital game, Paw Patrol Academy. The app combines hundreds of show clips that are unlocked through play, creating a seamless and immersive experience between our entertainment and game-playing content. There are also exciting missions and educational content that will keep preschoolers engaged in fun and emotional learning. Paw Patrol Academy will launch in tandem with a movie in October. and will also be available as part of the SEGL subscription bundle. In 2024, we will be launching the Unicorn Academy digital game, which will bring the magic of Unicorn Island into the digital world with an action-adventure game designed for mobile devices. We have an exciting 2023 and 2024 plan for digital games, and we look forward to sharing more details and live demos with you at our Analyst and Investor Day in Stockholm in late August. While we are investing for growth, we are also closely managing our costs. Our prudent fiscal management has put us in a strong financial position and allows us to invest in acquisition opportunities within each creative center. We remain confident in our strategy to reimagine everyday play, leveraging the power of our three creative and integrated creative centers to capture market share, deliver profitable growth, and create long-term shareholder value. I am now going to pass it over to our CFO, Mark Siegel, to provide further commentary on our performance in the quarter and our outlook. Mark?

Thank you, Max, and good morning. Against challenging comps, we delivered $271.4 million in revenue in Q1-23 across all three credit centers, down 36% from 2022. The year-over-year decline is primarily reflected in a shift in order timing in the toy creative center, offset by an increase in revenue and entertainment. In March, we discussed how the toy industry felt the impact of retailers entering Q123 with significant carryover inventory from Q422. Comparisons to Q122 look especially unfavorable since we had an unusually high sales as retailers brought inventory in early to avoid anticipated supply chain disruptions, as well as some large entertainment-related shipments. Thanks to the hard work of our commercial teams, we ended Q4-22 with very clean on-hand inventory, reducing the need for aggressive clearance activity in Q1, which, together with higher entertainment and digital games revenue, led to solid gross margins and a better-than-expected adjusted EBITDA margin. Looking at Q1 performance by Creative Center, TOI gross product sales were $216.3 million, down 45.6%. Foreign exchange did not have a material impact, and on a constant currency basis, gross product sales declined 44.7%. In 2022, 45% of our gross product sales occurred in H1, compared to 30 to 35% typically. which creates a tough H1 comparative for us. Difficult Q123 comps against last year are exacerbated further by the large volume of toys we shipped in Q122 for the Batman movie, as well as toys for the first poor movie from 2021, for which demand continued into Q122. We also had $11 million of sales in Russia in Q1 of 2022. Geographically in Q1, North America saw the biggest decline both in dollars and percentage terms, as the trends discussed earlier were more pronounced in this region. Revenue declined 133.1 million, or 56%, to 105.5 million and accounted for 48.7% of Q1 GPS, down from 60%. International sales, comprising Europe and the rest of the world, declined 48.1 million, or 30% to $110.8 million, comprising 51.2% of Q1 GPS. Preschool and dolls and interactive declined 44.7%, primarily from a drop in sales of Paw Patrol, Hatchimals, Wizarding World and Purse Pets, partially offset by an increase in Gabby's Dollhouse and Rubble and Crew. Activities, games and puzzles and plush were down 40%, mainly due to a decrease in the games and puzzles portfolio and kinetic sand. Wheels in action dropped 56.1%, driven by a decline in DC, especially Batman, as well as Bakugan and Monster Jam. Outdoor was down 37.9%. Q1 sales allowances were 13.9% as a percentage of gross product sales compared to 11.7%. Whilst higher than 2022, It was a good result considering the broader retail environment we were operating in. We continue to expect sales allowances of approximately 12% for 2023. Q1 adjusted EBITDA for toys was a loss of $21.4 million compared to adjusted EBITDA of $58.9 million, a margin of negative 11.5% compared to 16.8%. The lower volumes driving deleveraging was the main driver of the EBITDA margin differential. In Q1, entertainment revenue increased $15.4 million, or 69.4%, to $37.6 million from higher distribution and L&M revenue. Adjusted operating income was $29.9 million, up 162.3%, and adjusted operating margin was 79.5% compared to 51.4%. The increase in entertainment profitability was driven by higher distribution and L&M revenue and lower costs from fewer content deliveries. Q1 revenue in digital games was down 7% to $47.5 million compared to last year from lower in-app revenue in Toker Life World, but sequentially was up 25.3% compared to Q4 2022 from higher engagement and in-app revenue in Toker Life World. Over the last three years, our digital games revenue has grown significantly, and we have increased revenue by over 575% since Q1 of 2020. Digital games adjusted operating margin in Q1 was 40%, down from 42.3%, due to higher development costs related to investments in future games. Q1 consolidated gross margin was 58.4%, compared to 55.9%, an outstanding result. The 250 basis point increase arose primarily from high margin entertainment revenue and lower ocean freight, partially offset by higher sales allowances. The deleveraging I referred to earlier was evident in our SG&A of 149.3 million, representing 55% of consolidated revenue, compared to 158.6 million, or 37.4%. Marketing costs were down $2.9 million at 9% of revenue compared to 6.4%. Administrative expenses were up due to higher personnel and travel expenses offset by lower incentive comp. During the quarter, we implemented a global workforce reduction program and booked a restructuring charge of $3.8 million included in administrative costs. Adjusted SG&A was 139.5 million or 51.4% of consolidated revenue compared to 153.8 million or 36.3%. On the topic of restructuring, we are making good progress on our Calais, France facility shutdown project and will account for the one-time restructuring cost in Q2. Combined, our two restructuring projects will, when completed, result in run rate savings of approximately $15 million in 2024 and beyond. In Q1, our net loss was $1.9 million or a loss of 2 cents per diluted share compared to net income of 45.6 million or 43 cents per diluted share. Adjusted net income in the quarter was 12.3 million or 12 cents per diluted share compared to 57.5 million or 55 cents per diluted share. Adjusted EBITDA was $30.6 million compared to $95.7 million. Adjusted EBITDA margin was 11.3%, down from 22.6% in Q1-22 from low operating leverage, partially offset by higher gross margin. Turning to our balance sheet, our on-hand inventory at the end of Q1 was in very good shape. At just under $110 million, inventory was essentially flat to your end, but approximately $38 million lower than Q1 2022. Free cash flow in Q1 was $34.4 million negative compared to negative $79.4 million, primarily from changes in non-cash working capital. We ended Q1 with $569.3 million in cash, down $75 million from the year-end of $644 million, and which is in line with normal seasonality. In Q1, we deployed $26.5 million for the acquisitions of 4D brands and hex bugs. We also invested $23.4 million in intangible assets for entertainment and digital games content. We continue to be in an extremely strong liquidity position with available liquidity of over $1 billion. From a capital allocation perspective, investments in innovation, content, and M&A remain our priorities. In addition to our dividend, regarding which we will introduce a dividend reinvestment program in Q2, we initiated a share buyback program. The program has been executed through a normal course issuer bid, which was approved by the TSX in early Q1. We repurchased 241,500 shares in Q1 for $6.3 million. In April, we repurchased a further 156,200 shares for $4.2 million. Repurchasing shares at current market prices represents an attractive investment opportunity for us, given our strong liquidity position and growth prospects. We will continue to opportunistically use the NCIB and believe that it, together with the dividend, represents a prudent use of capital and an important part of our efforts to create value for shareholders. Turning to our outlook, there remains a long way to go for 2023, but current trends in our business are matching the expectations for 2023 we communicated in March. We continue to expect 2023 toy gross product sales to be flat to slightly down compared to 2022. We expect H1 2023 toy gross product sales to be toward the low to midpoint of the seasonality range of 30% to 35% in H1 we guided to in March. We are maintaining our expectations for 2023 revenue to be in line with 2022, excluding the $17 million Paw Patrol movie distribution revenue expected in Q3. Foreign currency translation is expected to have a neutral impact on revenue based on current rates. We discussed the primary revenue and cost drivers in detail in March, and there have been no major changes. We are maintaining 23 adjusted EBITDA margin expectations, which should be flat to slightly above 2022, excluding the $17 million Paw Patrol movie distribution revenue. To remind you, total depreciation and amortization for 23 is expected to increase from $68 million in 2022 to just under $150 million in 2023, primarily from more deliveries of entertainment content. From a phasing perspective, DNA will be approximately $33 million in Q2, $53 million in Q3, and $44 million in Q4. To conclude, we continue to execute on our growth strategies and build our integrated Creative Center platform to generate above-industry growth in the medium to long term. We have the scale and talent across our creative centers combined with a strong balance sheet to capitalize on both organic and acquisition opportunities and in doing so, build long-term shareholder value. That concludes our prepared remarks. We will now be pleased to take questions. Operator, please open the line.