Spin Master Corp.

Good morning, ladies and gentlemen, and welcome to the Spin Master Corp second quarter 2024 results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call has been recorded on Wednesday, July 31st, 2024. I would now like to turn the conference over to Sophia Vasoukas.

Please go ahead. Thank you, Joelle, and good morning. Welcome to Spin Master's Financial Results Conference Call for the second quarter 2024. I'm 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 interim consolidated financial statements are available on the Investor Relations section of our website at spinmaster.com and on CEDAR+. 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, level of activity, performance goals or achievements, and 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 the circumstances. However, there can be no assurance that certain estimates or 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 info on these assumptions and risks, please consult our cautionary statements regarding forward-looking information and our earnings release dated July 30, 2024. Please note that Spin Master reports in U.S. dollars and all other amounts to lead today are expressed in U.S. currency unless otherwise noted. I would like to turn the call over to Max.

Good morning, and thank you, Sophia. Thanks for joining us today. We are pleased to report that our second quarter financial results were within our expectations, and we are maintaining our full year guidance. As expected, our Q2 revenue declined 2.1% to $412 million due to continued pressure on consumer spending, which impacted toy gross product sales and in-game purchases within digital games. Toy gross product sales were down to $384.7 million, a decrease of 1.4% versus 2023. Sales were lower for two primary reasons. First, due to shipments moving from Q2 to Q3. And second, as a result of us lapping the initial shipments in Q2 last year related to the launch of the second Paw Patrol movie. Liz and Doug had a strong quarter with revenue of $43.3 million as we invested in in-store programs and marketing support. We're pleased with the pace of our integration efforts and are realizing cost synergy opportunities across many different areas. Our commercial teams continue to collaborate to help drive penetration of Melissa & Doug products at retail, primarily in Mexico, Canada, and Europe, where the brand is significantly underrepresented. Consumer spending across discretionary categories remains challenged. According to Cercana, G11 POS was down 4.7% in Q2, while Spin Master was down 8.1%, and Spin Master, combined with Melissa & Doug in 2024, was up 11.9%. We maintain our position as the fourth largest manufacturer globally in Q2. Our retail inventory, excluding Melissa and Doug, is down just over 5%. The average selling price of our U.S. retail inventory is down 8% compared to 2023 as we have increased the mix of lower-priced items. More of this inventory is in our key brands with Trunks POS, as well as new brands. All in all, U.S. inventory is in much healthier state than last year. In Europe, retail inventory is down nearly 7% and in an equally healthy position. ListenDog retail inventory in the U.S. is down double digits versus 2023. All these bodes well for toy sales in the back half of 2024. Let me review performance by category. Beginning with infant, toddler, and preschool, we finished Q2 as a number two corporate manufacturer in the G11, Berserkana, off from number three previously and owing to the inclusion of Melissa and Doug. We had two of the top 10 items for Q2 and year-to-date Berserkana. The lower price point items within our line are performing the best, reflecting current consumer shopping trends. Our Paw Patrol Jungle Pups vehicle line was the number one new item in the infant toddler preschool super category for second quarter 2024. Spin Master was the number one corporate manufacturer and property in the preschool toys segment year to year in Q2 and year to date. Paw Patrol is the number one preschool toy property in the G11 for the 14th straight quarter, dating back to the first quarter in 2021. We anticipated some softens in Paul this year, following the second movie and are making incremental investments in retail programs and marketing in Q3 and Q4. We are also continuing our efforts to grow viewing minutes across traditional and non traditional platforms to further drive toy demand. We are seeing strong international growth for gabby's dollhouse. DreamWorks has a number of experiential events planned in the U.S., combined with more content releases on Netflix in advance of the Gabby movie launch on September of 2025. Bliss and Doug had a strong quarter in shipments and saw improved POS performance. Low retail inventory levels at major U.S. retailers are helping to drive replenishment orders for M&D earlier in the cycle, which bodes well for the back half of 2024. Melissa and Doug gained market share in the arts and crafts category in G11 in the second quarter and year-to-date, driven by the StickerWow launch, and Melissa and Doug also grew share in Puzzles in the U.S. After the quarter, Melissa and Doug had a strong organic sales growth over last year during Amazon Prime Day, with EOS POS up 40%. This performance was driven by a focus on lower price point items in the range and which resonated well in the current environment. MND is launching Blockables in the fall, an exciting new line of wood-based construction toys that allows multi-sensory play and which fits well into the growth of the construction and building sets category. Finally, Melissa and Doug will have two items within our total Ms. Rachel assortment, which has just started shipping for this fall. And speaking of Ms. Rachel, We continue to strengthen our presence in early childhood toys with the launch of the new Spin Master and, as I just said, Melissa & Doug toy line set to launch in October. This is one of the most anticipated toy launches of the fall, with pent-up demand for the property continuing to grow as evidenced by the strong early performance of the Miss Rachel book presale and initial pajama launch earlier in the year. With her huge YouTube viewership, Miss Rachel has captivated and connected with children and parents. Our toy collection is inspired by the learning approach loved by parents in her show. We are thrilled with the line, and retailers have responded very positively. In Dulse and Interactive, we have a host of new introductions leading into the fall. We released our teaser for our latest innovation in Hatchimals. Something magical is coming on Hatchimals Day, which is October 4th. when we will have the full reveal of our re-imagined Hatchimals with new features and expanded interactions for a new generation of kids. Since first launching Hatchimals in 2016, over 14 million of the Big X have been sold. The Unicorn Academy toy line hits shelves in June, time with the new content of Netflix, and early POS reads show very encouraging performance. We have gained share in the youth electronics category with the continued popularity of Bitsy and the introduction of two new iterations, Bitsy Magicals and Disney Bitsy. Adding to our growth is Peony Rooms, the squishy digital pet from Japan, in partnership with Takara Tomy. While these items just started to set in June, they are each off to a very strong start. We increased our market share in arts and crafts in the second quarter and year to date. According to Cercana, Kinetic Sand grew POS 6.6% in the second quarter compared to a 12% decline in the arts and crafts super category. Kinetic Sand was a number two brand up from number three in 2023. Monster Jam continues to have an excellent year, and our POS grew over 33% in the second quarter and over 32% year-to-date per Cercana. Monster Jam was the number one license in the second quarter and year-to-date in the super category, and overall was the number two property year-to-date in the vehicles super category. With families prioritizing experiences, the Monster Jam live shows are creating a core of loyal fans. This fall, a new line of monster trucks from Marvel featuring popular superheroes, including Spider-Man, and a new RC vehicles collection and play sets will launch. and this will help the brand tap into an expanded fan base and encourage them to grow their collection. Our entertainment creative center had another solid quarter with revenue increasing by over 7%. We released chapter two of Unicorn Academy season one on Netflix globally. It quickly shot to the top spot for kids and families in over 90 countries. In addition to the content on Netflix and off platform on YouTube and TikTok, Our team is also rolling out licensed consumer products for the franchise, which now has over 35 licensed partners across lifestyle goods, publishing, and accessories, with many more to be announced this fall. I am very pleased to announce that we just completed our deal with Netflix for a further 16 episodes, which will give us two more seasons in 2026. Paw Patrol continues to reign as a top preschool show, Total gross viewing minutes for the PAW Universe were up 24.5% in the quarter. In May, we launched a PAW Patrol short-form content series on YouTube as part of our strategic alliance with Moombaq to capture additional viewing minutes and deepen engagement with preschoolers. This August, we have several exciting premieres planned for the PAW Universe, including a special episode of Rubble and Crew with Aaron Judge, as well as a Paw Patrol Rubble and Crew crossover event. In addition to short-form content, the team is in production of season 11. For 2025, the team is producing several TV specials, including a holiday special, which will give families a chance to co-view during the season with their favorite pups, leading to the reimagined third movie in the fall of 2026. Within our digital games creative center, mobile gaming spending slowed at the industry level in Q2, and in-app purchases within Tokalive World experienced a similar decline. Overall, Q2 digital games revenue declined by just over 14%. Picnic subscriptions grew in the quarter, driving higher subscription revenue, validating that our model of bundling together multiple apps in an appealing offering for parents is working. Paw Patrol Academy will become part of the business subscriptions bundle in Q1 of next year, which should help grow further business subscriptions as well as expand the user base. Despite a decline in in-app purchases in the Tokalive world brand, engagement remains near our all-time high. Monthly active users were at 61 million at the end of Q2, up 3%. and fans are responding positively to content drops, including our first-ever artist collaboration with global superstar Conan Gray, which launched in June. If you recall, last year we released SpongeBob, and we saw a halo effect throughout the summer. We are seeing similar trends with this strategic collaboration. Rubik's Match, our new Match 3 game, leveraging the brand awareness of the Rubik's Cube, continues to roll out in select markets, leading up to the full global release in September. The game is now available for pre-order on both the App Store and Google Play. TOCA Days, our multiplayer mobile game, continues to roll out on a targeted country-by-country basis, and we are gathering the learnings and feedback from players to enhance and fine-tune the experience as we ramp up to a global release. This space of engaged players provides us with real-time KPIs and learnings to help us refine the game and maximize results when we launch on a global scale. In closing, the quarter met our expectations from a revenue perspective, and we are confident that our innovation across toys, entertainment, digital games has positioned us well for the second half. We are capturing, we are encouraged that consumer sentiment appears to be improving and that families intend to prioritize purchases that bring both joy and value for their family, including toys. Even though the consumer continues to face many financial headwinds, particularly in the U.S., there are reasons to believe that the back half of the year will be positive for the toy category. Our innovations and the introduction of new licensed brands, such as Ms. Rachel, will positively impact volume in the fall. Beyond this year, we have a strong growth potential in 2025 with new licensed properties, with a full year of Ms. Rachel, and the reintroduction of Dora the Explorer the new theatrical toy lines planned for 2025, including Superman, Dragons, and Gabby's Dollhouse, as well as disruptive innovation in our toy line, together with expanding digital games experiences to attract new players. We are in a strong financial position, and combined with our diversified portfolio and leadership in the children's entertainment industry, we will deliver our long-term strategic and financial goals. Before I turn it over, We announced that Mark Siegel, our chief financial officer, has made the decision to retire in the first half of 2025. Mark originally joined SpinMaster in 2001 and spent 10 years as CFO. This was an unprecedented time of expansion for SpinMaster, and due to that time, Mark helped to build the infrastructure to enable SpinMaster to continue to grow profitably through international expansion, acquisitions, partnerships, and innovation. Mark left for a while. but he could not stay away and rejoin SpinMaster in 2015 to lead our IPO and help build SpinMaster's internal and external capabilities as a public company. Marcus steadfastly guided us forward by applying his exceptional financial leadership to preserve a strong balance sheet and generate cash flow, which in turn has helped the company to provide a platform for our future growth ambitions. He has been an invaluable advisor to me during my time at the company, consistently demonstrating his integrity, financial discipline, and commitment to our strategic goals, while also establishing a strong finance team. We are fortunate to have Mark with us as CFO into the first half of 2025, and following the transition to a new CFO, I look forward to working with Mark as a strategic advisor to SpinMaster. On behalf of Renan, Anton, Ben and the entire team, I want to thank Mark for his incredible contributions that have furthered our leadership within the children's entertainment industry. And now with that, I will turn it over to Mark.