Spin Master Corp.

Good morning, ladies and gentlemen, and welcome to Spin Master's Financial Results Conference Call for the fourth quarter and full year 2024 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 the star zero for the operator. This call is being recorded on Tuesday, February 25, 2025. I would now like to turn the conference over to Sophia Bisukis. Please go ahead.

Thank you and good morning. Welcome to Spin Master's Financial Results Conference call for the fourth quarter and full year 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 consolidated financial statements are available on the investor relations section of our website at spinmaster.com and on Cedar Plus. 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, Spin Master cannot guarantee any forward-looking statements will materialize and you are cautioned to not place undue reliance on these forward-looking statements. Except as may be required by law, Spin Master is no obligation to update or revise any forward-looking statements whether because of new information, future events, or otherwise. For additional information, these assumptions and risks, please consult our cautionary statements regarding forward-looking information in our earnings release dated February 24, 2025. And please note that Spin Master reports in U.S. dollars and all other amounts today are expressed in U.S. currency unless otherwise noted. I would like to turn the call over to Max.

Thank you, and good morning, and thank all of you for joining us. Thanks to the collective efforts of our global team across our three creative centers, we delivered several new milestones for the company in 2024, including achieving total revenue of $2.3 billion, an increase of 18.8%, including incremental revenue of $375 million from Elise and Doug. Fourth quarter revenue was just under $650 million, an increase of 29%, including $136 million from Elise and Doug. We were pleased with MND's top line performance for 2024, which was in line with expectations. Our investment in MND deepens our already strong presence in the key preschool toy category, extends our reach in childhood education and play, and supports our vision to reimagine everyday play. Integration of MND is progressing well, and we remain focused on revenue growth and cost synergies. Let's turn to our toy POS performance. We started off the fourth quarter with very strong results at retail in the US, growing more than three times faster than the industry in October, including double-digit growth for Melissa and Doug. However, we saw lower-than-expected consumption in the weeks following Black Friday, which reduced sell-through and replenishment. This past year, we introduced several new lines and expanded our core and license offerings. Some of these highlights included the launch of Toys for Unicorn Academy, which became the top new gaming property in Europe in 2024 per Sharkana, and the expansion of our Bitsy digital pet with the Magicals and Disney license editions. Bitsy was the number two brand in youth electronics globally for both the fourth quarter in 2024 and was also the number one growth brand for the super category per Sharkana. In 2025, we are further building this exciting play experience with innovative ways to engage and new licenses, including Jurassic World and Wizarding World. Licensed products represented 29% of our total portfolio revenue, thanks to Ms. Rachel, Monster Jam, Wizarding World, Gabby's Dollhouse, among others. Monster Jam made significant gains in 2024, growing POS by 13.2% globally per cercana. Monster Jam was the number one license in the vehicles super category for both the fourth quarter and 2024. Q4 was our first quarter with the Miss Rachel toy line on the shelf, and the line quickly gained strong traction, becoming the number one new license in toys within the infant toddler preschool super category in the US. The spring line is off to a great start, supported by curated content from Miss Rachel as part of our ongoing partnership. The combination of Spin Master and M&D has established us as the number one manufacturer for preschool toys per cercana. Paw Patrol POS declined both in Q4 and 2024, but Paw Patrol remained the number one preschool toy property globally for both periods. Our Paw Patrol rescue wheels figure and vehicle assortment was the number one new item in the infantile or preschool category in both Q4 and 2024 in the U.S. For 2025, we've introduced a Pauline design to offer the same play value at lower price points to match the trend towards lower retail price points in the segment. Value will be an important driver for consumers in 2025 as they continue to experience pressure on discretionary spending. We're continuing our strategic pursuit of the value channel to increase our share of these retailers. Our value channel storyline is now available in thousands of doors across US, Canada, and Europe and our SKU count will nearly double in 2025. Turning to entertainment, revenue decreases planned by $13.9 million for Q4 and $31 million for 2024 due to a slower pace of content deliveries this year compared to 2023. Paw Patrol continues to resonate with audiences globally and has maintaining status as one of the top preschool series in the world. Later this month, we will announce more details regarding our third Paw Patrol movie, which will launch in theaters in July, 2026, and which is starting to build momentum. In partnership with Nickelodeon and Paramount, we will also be announcing new seasons for both Paw Patrol and Rubble and Crew. Unicorn Academy is winning globally with fans, taking the number one spot for girls aged six to eight per Netflix September, 2024 report. We just announced two specials, which will drop on Netflix in 2025, and we will be expanding linear distribution of the series this year. We are continuing to expand our feature film slate with the Bakugan live-action film in development. Brad Payton is signed on to direct, write, and produce. A global multi-platform franchise, Bakugan has captured the imagination of millions of kids since it launched in 2007. We have co-produced nearly 300 Bakugan TV episodes, and our toy line has generated well over a billion in sales worldwide since it first launched. we are going to leverage the deep multi-generational fan base by bringing the franchise to the big screen. Turning to digital games, revenue for the fourth quarter increased by 13.5% due to high in-game purchases for Toca Poca World and a growth in subscription for Picnic and Paw Patrol Academy. We have continued to transition standalone app subscribers into Picnic, which is helping drive up our recurring revenue base. Fourth quarter improvement in Toca Boca World from a tough quarter three was anchored in the release of two new features and new content, which increased engagement with our players. I'm pleased to share that these measures are having a positive impact on performance. Fans loved the new features, and they were well-timed for the holiday period, during which we typically see kids spending more time on their devices. We ended Q4 with $61.2 million. monthly active users up from 50.5 end of Q3 and 62 million end of 2023. In Q4, we saw a steady continuation in the growth of subscriber base, and we ended 2024 with approximately 455,000 subscribers, up 14% over 2023. We have continued to transition standalone app subscribers into Picnic, which is helping drive our recurring revenue base. Unfortunately, the improvement we saw in Q4 was not enough to offset the declines we experienced earlier in the year, resulting in revenue decline by just over $9 million for the 2024 period. We are confident that with a continued rollout of new features, content, and collaborations, Toca Boca World will continue its upward momentum in 2025. Both Toca Boca World and POA Academy were just named as winners of the Kids Screen Awards, Best Alternative Kids Digital Game, and best learning app respectively i want to comment on the investment that we made in digital games development pipeline the market is competitive and introducing new titles at scale is challenging while we develop a high caliber match 3 game with rubik's match the cost to acquire new users in this older demographic segment relative to revenue did not generate our expected returns we made the difficult decision to wind down the north light studio and will be halting rubik's match development This will allow us to focus and maximize the significant growth opportunities we see both with Toca Boca and Picnic. Contextually for 2025, there are numerous points of volatility we are watching. The two primary ones are the health of the global consumer and potential U.S. tariffs on China-sourced toys. We are looking at our supply chain options carefully as well as considering pricing in order to mitigate the impact. However, our team remains focused on growth We are very excited about the lineup we are introducing within TOI. There will be several global theatrical releases driving growth and for which we have licensed products including Superman, How to Train Your Dragon, Jurassic World, and Gabby's Dollhouse. 2025 will be a foundational year for us to increase Melissa and Doug's penetration in key international markets. We will continue to expand our early childhood reach with Ms. Rachel. Beyond TOI, our entertainment creative center has a robust slate for 25 with Paw Patrol and Roblin Crew and is engaging new audiences with Unicorn Academy and Vita the Vet. We have strong digital games lineup for 25 with new content and features on Toca Boca World and the integration of Paw Academy and other content into Picnic, providing kids and parents with further excitement and value and access to digital learning. These combined with the improvements in retention and conversion features will drive subscriber growth. We are highly focused on executing our long-term growth strategy, and we continue to make significant progress by leveraging our deep expertise in play, well-established global network, and innovation capability to unlock growth and inspire future generations. We're confident in the strength of our diversified portfolio and our ability to drive long-term growth and create shareholder value. Now, I will turn the call over to Mark.

Thank you, Max, and good morning. We are pleased to report our fourth quarter and 2024 financial results. We generated Q4 revenue of $649.1 million, up 29.1%, including revenue of $136 million from Miller-Sandag. Excluding Miller-Sandag, revenue for the quarter increased 2.1%, with increases in toys and digital games offsetting lower revenue from entertainment. Adjusted EBITDA for Q4 was 113.9 million with a 17.5% margin, including 40.9 million from Melissa & Doug compared to 12.9% last year. Adjusted EBITDA excluding Melissa & Doug was 73 million compared to 64.9 million last year. Looking at our full year, We delivered as expected for both toys, gross product sales and revenue, which was up 18.8% to 2.26 billion. The 2.2 billion revenue highlights our position as a larger, more diversified organization with over $320 million of revenue or nearly 15% coming from digital games and entertainment. We are excited about the opportunities ahead as we build on this momentum and continue driving sustainable growth. Melissa and Doug revenue for 2024 in our first year of ownership was $374.7 million, in line with expectations. Excluding Melissa and Doug, 2024 revenue was $1.89 billion, down 90 basis points compared to 2023. Growth in toy revenue both with and excluding Melissa and Doug, was offset by declines in digital games and entertainment revenue compared to last year, which included the Paw Patrol movie and other distribution revenue. Adjusted EBITDA for 2024 was $463.6 million, including Melissa and Doug, up just under $45 million compared to $418.8 million. adjusted EBITDA margin was 20.5% compared to a reported 20.22%. As a reminder, 2023 adjusted EBITDA included the add back of the $15.6 million Paw Patrol movie amortization. On an apples to apples basis, 2023 adjusted EBITDA margin was 21.3%. And as discussed before, should be the basis of all year-over-year comparisons. 2024 adjusted EBITDA dollars and margins reflected both the weaker performance of digital games, especially in the earlier parts of 2024, and higher marketing spend in both Spin Master Toy and M&D late in Q4, which was not as effective at driving increased revenue as we had planned. Turning now to creative center performance, toy gross product sales in Q4 was up 31.4%, including Melissa and Doug. Excluding Melissa and Doug, toy gross product sales grew by 1%. Melissa and Doug delivered toy gross product sales of 152.6 million, contributing to the 176.4 million increase in our preschool, infant, and toddler and plush category. The other driver of growth was our activities, games and puzzles and dolls and interactive category, which was up 5.2%. This was offset by slight declines in our wheels in action and outdoor segments. New Ford toys adjusted EBITDA increased by 56.9 million to 76.2 million at an adjusted EBITDA margin of 13.6% compared to 4.7%. as a result of the inclusion of Melissa and Doug, which has revenue more heavily weighted to the second half. 2024 toy gross product sales increased by 444 million, or just under 25%. Excluding 2024 Melissa and Doug toy gross product sales of 433 million, toy gross product sales grew by 11 million, or 1%. Preschool, infants and hard land plush increased by 53.6% to 1.1 billion from the inclusion of Melissa and Doug and Miss Rachel, partially offset by Gabby's Dollhouse and Paw Patrol. Activities, games and puzzles and dolls and interactive increased by 21% to 710.5 million, mainly due to Hatchimals, Unicorn Academy and Bitsy, partially offset by the games and puzzles portfolio. Wheels and action, decreased 11.8% and outdoor was down 21.7% for the year. Full year sales allowances were 40 basis points lower at 13.4% compared to 13.8% in 2023 due to fewer markdowns and a favorable customer mix. Our sales allowances rate remains slightly higher than our traditional range of 12% to 13% as we worked through some acquired inventory from Melissa and Doug and grew our European business. Toys full-year adjusted EBITDA increased just under 95 million to 306.8 million from the inclusion of Melissa and Doug, higher gross profit, and lower administrative distribution and selling expenses. 2024 toys adjusted EBITDA margin was 200 basis points up at 15.8% compared to 13.8%. Excluding Melissa and Doug, toys adjusted EBITDA margin was 14.9% up 110 basis points from lower administrative selling and distribution expenses relative to toy revenue. 2024 adjusted EBITDA for Melissa and Doug was 74.1 million at a 19.8% margin. Melissa and Doug was accretive to the toy segment from both the gross margin and adjusted EBITDA margin perspective. Looking at entertainment, Q4 revenue decreased by $13.9 million to $41.3 million due to lower distribution revenue resulting from fewer content deliveries. Positive mix impact of fewer content deliveries contributed to an increase in adjusted operating income of 9.8 million to 20.3 million, with adjusted operating margin improving to 49.2% from 19%. 2024 entertainment revenue declined by 31.5 million to 158.6 million, reflecting fewer content deliveries. As I mentioned, 2023 included $15.6 million of revenue from the initial release of the second Paw Patrol movie as well as Unicorn Academy deliveries. 2024 adjusted operating income rose $9.6 million to $90.3 million compared to $80.7 million and adjusted operating margin improved to 56.9% for 42.5%. Turning to digital games, Q4 revenue increased by 5.5 million or 13.5% to 46.1 million due to growth in subscription revenue across Picnic or Patrol Academy and partnership revenue generated from various properties across Tokaboka and Seigo Mini. We're pleased to see partnership revenue beginning to grow in our digital games business, reflecting the strength of our strategic collaborations. We are excited about the revenue and increase of margin opportunities these partnerships will generate. Digital Games adjusted operating income remained relatively flat at $11.5 million, while adjusted operating margin was 24.9%, down from 26.6% due to increased investments in paid user acquisition. Following a challenging Q3, Tokaboka World performed significantly better in Q4, both sequentially and against Q4 2023, with improvements in downloads, engagement, and revenue. Sequentially, Tokaboka World revenue increased 22% Q4 compared to Q3. This improvement is a direct result of the strategic actions implemented, including targeted paid user acquisition in high monetization markets, the launch of new features designed to drive installs and a strong content pipeline that delivered revenue growth. In Picnic, we saw a steady continuation in the growth of our subscriber base in Q4, reinforcing the value of the bundled offering. The improved Q4 performance still resulted in a decline of 9.4 million in 2024 revenue to 164.5 million, mostly due to lower in-game revenue in Tokaboko World earlier in the year. The revenue decline in Tokaboko World was partially offset by growth in subscription revenue from both Picnic and Poor Academy. Our ongoing transition of standalone app subscribers into the Picnic bundle has helped grow our margin accretive monthly recurring revenue. 2024 adjusted operating income decreased by 18.2 million to 39.9 million from 58.1 million and adjusted operating margin decreased from 33.4% to 24.3% from the revenue decline and increased paid user acquisition costs. As a result of the structural changes in digital games that Max mentioned, we took impairments of 5.5 million on the Rubik's match intangible asset and 2.9 million for goodwill on the Northlight Studio shutdown. Many of the resources working on Rubik's Match will be reallocated to work on Tokaboka and Technic. However, some Nordlight employees were released, resulting in restructuring charges. Moving back to our consolidated results, Q4 gross profit increased by $103.5 million to $365.5 million from operational improvements in the toy segment and the inclusion of Melissa and Doug. Gross margin increased 420 basis points to 56.3% as a result of lower sales analysis as a percentage of toy gross product sales and fewer entertainment content deliveries. 2024 gross profit increased 152.5 million to just under 1.2 billion, and reported gross margin decreased by 190 basis points to 52.6%. However, This included charges of $66 million related to M&D acquisition-related inventory fair value adjustments. Excluding the $66 million inventory fair value adjustment, adjusted gross profit increased by $218.8 million to just over $1.25 billion, and adjusted gross margin was up 110 basis points to 55.6% from 54.5%, a strong performance. due to an increase in toys partially offset by the decline in digital games. 2024, full year adjusted SG&A increased by 135.4 million to 861.8 million from the inclusion of Melissa and Doug. However, adjusted SG&A as a percentage of revenue remained flat year over year at 38.1%. In 2024, we achieved $10.9 million in net cost synergies, which represents an annualized run rate of $14 million towards the target of $25 to $30 million in run rate net cost synergies by the end of 2026. Regarding 2024 tax, we had a one-time tax expense of $8.1 million in Q4, resulting in an increase of 6.8% in the final 2024 effective tax rate. The one-time expense comprises adjustments for the tax impact of foreign currency transactions and certain non-deductible transaction costs related to the M&D acquisition. Our effective tax rate excluding this one-time expense was 24.4%. Turning to the balance sheet, we finished 2024 with inventory of 184.7 million. At 9.4%, sorry, at 9% of Toys revenue, This is higher than the traditional range of 5% to 7%, driven by the relatively higher level of Melissa & Doug inventory. Melissa & Doug inventory declined $46 million to $67 million from $113 million at the beginning of 2024, excluding the fair market value adjustment. We are continuing to refine the Melissa & Doug inventory levels to improve and optimize working capital and free cash flow. In Q4, we generated $175 million in free cash flow, a very strong performance compared to $44 million in Q4 23. For the full year, we generated just over $215 million in free cash flow compared to $123 million in 23. We are reinvesting that free cash flow according to the capital allocation priorities we have described, strengthening our balance sheet and returning cash to shareholders. In 2024, we returned a total of $82 million to shareholders, $54.5 million through the buyback program, and $27.5 million in dividends. We also reduced our borrowings by $135 million and ended the year with $390 million in debt. We are just under $234 million in cash on hand, which put our net debt to adjusted EBITDA ratio at 0.7 times. including capitalized leases, below our guide of 0.9 times. Let's now turn to our outlook for 2025. Amidst the challenging macroeconomic environment, SpinMaster remains well positioned strategically, financially, and operationally. We also remain fully committed to continuing to execute our strategy for long-term growth and shareholder value creation. 2025 outlook. is on a consolidated basis, which will make year-over-year comparisons far simpler. We will no longer be breaking Melissa and Doug out. We expect 2025 consolidated toy GPS to increase 4% to 5% compared to 2024, driven by innovation and licensed portfolio growth, with seasonality in the first half to be between 31% to 33%. We expect consolidated revenue to increase 4.4% to 6% compared to 2024, fueled by growth in toy and digital games revenue. We have several key licenses in toy driving gross product sales and revenue growth, including toys for the How to Train Your Dragon, Superman, and Gabby's Dollhouse movies, as well as the relaunch of Dora the Explorer and the first full year of Miss Rachel. The digital games team is focused on driving growth in TokaLife World and Picnic in 2025. For Picnic, we have an exciting content lineup and with continued improvements in retention and conversion features, the inclusion of Poor Academy positions us to drive subscriber growth. In entertainment, we expect to see a revenue decline over 2024 from lower content distribution revenue which is in line with our expected content delivery cycle over the next five years. Entertainment revenue will grow in 26 as we deliver the third poor movie and other new content. On a consolidated basis, we expect adjusted EBITDA margin of between 20% to 21% compared to 20.5% in 2024. Our guidance at this point excludes the anticipated impact of U.S. tariffs on imports from China and Mexico. Given that the U.S.-China tariffs situation is fluid, we will update you at the end of April when we report Q1 results regarding our actions and the impact, if any, to our P&L. We are considering several mitigating factors, including leveraging our geographically diversified supply chain, the FOB versus domestic mix shifts, and potentially pricing. In parallel, we're continuing to diversify our manufacturing footprint in order to reduce our toy volume originating from China, from approximately 50% currently to less than 40% by 2027. Looking at some details for 2025, we expect depreciation and amortization to be approximately $132 million in 2025, of which around $90 million will hit COGS. Cash interest paid Net of interest received will be between $22 and $25 million, with a borrowing rate of approximately 5.5%. Our effective tax rate is expected to be approximately 25 to 26% on a consolidated basis. Capital expenditures in 2025 are forecast to be approximately 8% to 9% of revenue. up from 5% in 2024, as we continue to invest in creating new entertainment content and digital games content, as well as other corporate initiatives. The consistent cash flow we've generated gives us confidence in our ability to keep capacity for opportunistic M&A and share buybacks, maintain our dividend, and reduce debt. We are targeting to end 2025 with a net debt to adjusted EBITDA ratio of approximately 0.6 times, including capitalized leases. To conclude, we look forward to welcoming you to our Investor Day at New York Toy Fair on March the 4th. You will then have the opportunity to see our innovative toy lineup in person and hear from Max and all the Creative Center presidents. That concludes our prepared remarks. We will now be pleased to take questions. Operator, please open the line.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, simply press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, you may press the star followed by the number two. And your first question comes from the line of Brian Morrison with TD County.

Please go ahead.

Thank you. Good morning, Mark. Good morning, Max.

Morning. Morning.

So I want to look at digital games here because the decline year over year was really the shortfall from your guidance. And in Q4, it showed that your investment sequentially started to yield improvement, as Max noted. So I want to understand, there's a few questions baked in here. So I want to understand these recent investment initiatives, paid user acquisition at Tokaboka, and I think you said retention and conversion you're targeting at Picnic, just provide comfort in writing that ship for 2025 EBITDA growth from the 2024 decline. And then you said you rolled out new features late in the year, but why was this not implemented earlier in 2024? And then lastly, I think you said Rubix was geared towards more adults. didn't hit the mark, but so is Kubrick. So why should we expect different results there?

So I'm going to basically start and give you more of the strategic context, and then I'll let Mark compliment. Brian, in Q3, we spoke about Toca Boca and the challenges we were facing, and we basically were fixing already a few things, which include some very structural and fundamental things for not just quarter four, but for the future. And that's what gives us confidence. Number one, we had to basically address our technology, right? And so we've been doing that, which actually is helping us develop features, which we hadn't done in some time, faster. And it's also enabling us to actually get the play value for the players in a way in which they would enjoy the game more, which we now have confidence because we've seen that response from the players, number one. Number two, we stood up and started to be more aggressive with live operations, which is so critical for this audience and is so critical for the future as well. Those are two really important investments that we began to make. They didn't come earlier in the year because we started to basically make those really in the summer. Okay, so that's basically, that is the answer to your question on why did it not come earlier than that. The good news is that not only has that helped us in Q4, but it's given us momentum entering 2025 and we're confident. And the pace of feature development, the allowance of that feature to actually enable collaborations is really gonna help 2025 beyond what we were able to accomplish in Q4. In terms of the paid user acquisition, it's really important because what we've actually now been able to do is address cohorts that actually help us increase our monetization. And our monetization in this space is critical, and it's basically what will return a better dollar on the investment we make. And so this is also helping us, along with LiveOps and technology, have a better outlook for 2025. including all the features, content, and everything that we described in the script. Turning to other games, what we basically realized is that we have to focus on our core because our core has significantly more upside for us. And it was significantly more profitable and, quite frankly, for us to get and we tried. That's part of us being an innovative company and trying things in digital that happened to have been Rubik's. Quite frankly, it disappointed us to not be able to get the returns we were expecting, and we pivoted to make sure we doubled down on core TOCA and on PICNIC. The PICNIC focus is critical because it's monthly recurring revenue that is very profitable and has a higher LTV and helps us continue to fund not just that ecosystem, but the entire digital gains. So I hope that gives you context strategically. I'm going to now turn it over to Mark.

I think, Max, you answered that really well. I'll see, Brian, if you have any follow-up questions on that, and then I'll take it.

No, I think that was pretty well covered by Max.

So I guess my second question, if I can, is I heard what you said about your balance sheet target leverage, Mark. I think you said you're going to end the year at 0.6 times. Your valuation is unfortunately at all-time lows right now. I think clearly you had very strong free cash flow and it drove balance sheet strength in the year. Why would you not be comfortable at, say, one turn, which is where you were after the M&D acquisition? I know you have a small float, but the question really is, are you willing to get more aggressive with your NCIB here?

Well, Brian, just, you know, if you look at our capital allocation in 2024, You know, we actually returned about $82 million in total to shareholders. $54.5 million of that came from the NCIB, the buyback program. That was about five cents a share accretion to EPS as a result of that. We pretty much maxed out on our buyback in 2024, as you know. The way the buyback program works is that you get around 10% of your public float. And so we largely bought what we said we were going to buy in 2024 through that program. We also doubled our dividend and we paid $27.5 million to shareholders. So we really have approached capital allocation, I think, on a balanced total return basis. We've bought shares back. we increased the dividend, and we've paid down debt. And so I think we'll continue with a more balanced approach and leaving some room as well for opportunistic M&A that we see emerging. I think that's basically the way the board has approached this and what we'll continue to do for 2025.

We should expect you to utilize your NCIB in full for 2025 is a fair comment.

Well, look, we haven't, the NCIB, the buyback actually expires on March the 3rd. And we'll make an announcement in due course if the board approves a new NCIB for 25, 26. But I will, I expect that to be the case.

Thank you very much.

And your next question comes from the line of Adam Shine with National Bank Financial.

Please go ahead.

Hi, good morning. Maybe a couple for you, Mark, and then we'll pivot to Max. Just in terms of the guidance, entertainment you said was going to be down. Maybe you can help us analyze the rate of decline. Are we talking mid-single digits? Are we talking about something a bit more than that? Because then if we pivot to digital games, digital games would have to grow somewhere in the vicinity of 15% or more. Does that make sense, Mark? And then after that, I'll just go back to Max just with another question.

Sure. Good morning, Adam. So let me address your question in terms of the segmented element of the 2025 guide. As you know, we don't give specific guidance for each segment, but certainly we'll give you some color to help you build your model out for 2025. And what I could say to you is directionally you're accurate, like a mid-single-digit decline for entertainment in both revenue and EBIT. The reality is, and Adam, you know this very well from your entertainment knowledge, is is that we're kind of in a bit of an inflection point in the cycle on entertainment. We're actually going to be investing in growing content in 2025, which is why you actually see CapEx as a percentage of sales popping up as well, because we're putting a fair bit of money into new content, which is going to kick off a new four to five year cycle for the entertainment segment. As you know, you can't look at entertainment on a quarterly or an annual basis because the content delivery cycle is a lot longer than that. And so in 2025, we were kind of ending off one cycle and then starting off again a new cycle, which is going to drive growth in entertainment over the next four to five years. But 25 is a down year for entertainment. Digital games, on the other hand, we see revenue going up, as Max described very succinctly. We're doubling down on on Tokaboka and on Picnic and Sago. We see some partnership income growing in that area, which is margin accretive and exciting. So we have high expectations for digital games in 2025. And then on the toy side, you know, we see gross product sales going up four to 5%. driven by a very strong licensed product lineup in Spin Master, as well as international Melissa and Doug sales. We're now building Melissa and Doug into our international platform in Europe and Australia and Canada and Mexico. And then Melissa and Doug is also focused on growing the base through innovation and growing the existing core line. So that gives you, I think, a little bit of segmented color on the 25 guide. Does that help, Adam?

Yeah, thanks for that, Mark. In terms of Mac's digital games, there was a big push, obviously, going back to your investor day a couple of years ago. And then, of course, the objective of getting to 20% of revenues. I wonder if you can just talk to that objective and whether You know, it's being pushed out further in time. Is it also a function of whether, you know, the M&A appetite remains in the space? And then I would also just add one other question just around one of your peers, you know, recently noted. that they were seeing some inflation, both in terms of logistics and labor in the Q4 and into early 2025. And I was hoping if you could just speak to that in terms of how you're seeing things as well from your end.

Sure. Let me just address the last part of your question so we can focus on the other one. For us, that's not the case on labor and logistics inflation. I think we're in a good place. So I just want to make sure that's the answer to your question on that front. Turning to digital games, our ambition continues to be to basically get subscribers into Picnic. And we have high ambitions. So we're not backing out of what we actually told you a couple of years ago. And we want to get towards 100 million users in our Toca Boca ecosystem. We're not backing away from that. And we will be absolutely willing to complement our ecosystems both in Toca and in subscriptions. with accretive M&A. So that is a short answer to your question. And if you actually build the onion and want to go deeper, I'm happy to. And we're going to do that when we're with you next week, assuming you're joining us. But that's basically the answer.

Okay.

Thanks. I'll queue up again. Appreciate it.

Adam, I just want to add one. Sorry, operator. Just one thing on the question you asked, Max, on 20% of revenue. Adam, if you recall, and everyone, that was a target that we put in place prior to the Melissa and Doug acquisition. So obviously that has to come down as a result of the increase in the toy base and the overall revenue, just to call that out. So we'll update that in due course.

And your next question comes from the line of Martin Landry with Stipple.

Please go ahead.

Hi, good morning, guys. I'd like to dig into your toys, gross product sales guidance. Max, you did allude to value being an important factor in 2025 for consumers. So can you break down... volume versus price for 2025 for your growth guidance? And then what's your average price point in toys in 2025 and how does that compare to 2024?

Martin, good morning. So the growth in GPS that's built into our 2025 guidance is driven by three key components. First and foremost, we have an incredible slate of new theatricals that is making up basically revenue increases over revenue that did not exist in 2024. And that's an important component. When I think about what that is, the two that are most important are basically How to Train Your Dragons and Dora the Explorer. Those would have not had revenue in 24. They're brand new revenue building blocks in 2025. There are other theatricals that are basically helping us. And one is Superman, which is an increase. We didn't have any theatricals in DC in 2024. We'll have Superman. And then we have the Gabby movie, which is coming in late Q3, Q4, which is going to help the Gabby franchise later in the year. So those are the main components of the revenue building blocks of GPS in the guidance for the theatrical slate that we have. Separate from that, we have the annualization of Miss Rachel, which is basically a really important building block in terms of growth. And then last but not least, and Mark alluded to, we have the expansion of Melissa and Doug internationally. Those are the bigger volume slash revenue drivers in GPS that are capturing our guidance. From a pricing perspective and getting into your question of how are we 25 versus 24, we're likely going to end up with a lower average retail price of our entire portfolio in 25 versus 24. It is driven by, and it was part of the script, an intentional effort to get some of our core brands to offer really sharp price points and more value, including obviously the bigger brands like Paw Patrol. And then third, and importantly is, to make sure that we continue to expand the wide space that it is for us, the value channel. And we actually began and grabbed share in the U.S. in the value channel, but that is going to expand beyond the U.S., more intentionally in 25, into Europe. And so those are the components that are captured in the GPS guidance and then answering your question specifically on pricing.

Okay, that's helpful. And Mark, I was wondering if you could do a bridge for us of your EBITDA margin for 25 versus 24, just so that we have the main buckets that are at play here.

Well, we're guiding flat, Martin, effectively. I mean, we have given a range of 20% to 21%. If you take the midpoint of that range, it's flat. You know, there's puts and takes going in both directions. You know, we continue to invest for growth. We continue to manage our costs very, very tightly. You saw 24 versus 23 SG&A was flat year over year on an adjusted basis. excluding some one-time costs. If you look at 25, we do have some increased selling expenses because of the proportion of sales coming from licensed product. We are going to increase paid user acquisition costs, but to drive monetization in TOCA and subscriptions in PICNIC, We're also going to invest in some technology to build out our integrated platform, particularly to bring Melissa and Doug onto our systems. We're putting some money into AI investments, both operational efficiency and generative AI. And we continue to invest in the line for innovation. Remember what our product development in 2025 is effectively driving the 26 and 27 lines. And so, you know, we're, I think, balancing off our investments in growth with a very tight focus on our cost structure. And that's effectively why we're landing up guiding approximately flat.

Okay, that's helpful. I know you're guiding flat, but there's always puts and takes, right? So I'm just trying to understand, do you expect gross margin to increase, to decrease? Do you expect your SG&E as a percentage of sales to be flat, to be up? Just a little bit of color to help us out, just understand the evolution.

Yeah, I think overall, Martin, I would say to you that the puts and takes that I've given you on the SG&E side will result in a slight increase increase in adjusted SG&A as a percentage of revenue, and that'll be offset by a slightly higher gross margin.

Perfect. Thank you. Best of luck.

And your next question comes from the line of Drew McReynolds with RBC.

Please go ahead.

Yeah, thanks very much. Three for me. Maybe on just Melissa and Doug performance in Q4, a little bit lower than certainly what we had penciled in. And, you know, Max and Mark, you've talked about just kind of the late nature of drop shipments in December and obviously a shorter kind of shopping season. But can you just unpack, you know, what you learned on Melissa and Doug, you know, that you'd take forward given it was your first Q4 owning the app that And then on the housekeeping side, maybe for you, Mark, just the increase in CapEx, fully understand, go through that content investment. Is this a new normal as you kind of build for the next five-year cycle as you described, or are we running kind of at that higher level for a couple of years? And then second on housekeeping, just the M&D synergies, what you're expecting in terms of incremental growth

realization in 2025. Thank you.

Okay. Drew, good morning. On MND, the story is as follows in Q4. Following a really strong Q2 and Q3 in terms of both GPS or net sales and consumption, October was really going well. And then when the market began to actually go down, remember in Q3, I mean, you received public data. So in Q4, only two weeks of the quarter increased. So after Black Friday, bottom line, every week was declining and there was a lot of panicking by some retailers who basically shut down some SKUs to preserve their profitability. And so that is what affected us the most single-handedly and basically drove the performance. As we get into Q1 and going forward, we have great programs to basically get back to what we actually saw in Q2 and Q3 in October.

So, Drew, just to get back to you on the two questions, and just correct me if I miss anything, please, but you asked about CapEx over the next few years. The 8% to 9% for 2025 is higher than our historical numbers of around, 5% to 6%. Most of that is coming out of the, I would say, newly created entertainment cycle that I described earlier to Adam's question. So I think we will see some elevated capex for 25 and 26 and 27. Just keep in mind, during that period, we're actually building new content for both poor and rubble. for Unicorn and for Vida the Vet, but we're also doing the Paul movie three for 2026. So you're gonna see CapEx for that in 25 and 26, as well as the Bakugan movie in 25, 26 and 27. And so you are gonna see an elevated CapEx on entertainment content during that period, as well as some incremental CapEx on digital games as we build out Tokaboka and expand that franchise. We do Tokaboka Days. We build out the Sago mini franchise and with Picnic. So overall, entertainment and digital games will be driving higher CapEx levels, at least for the 25 to 27 period. Toy, both Spin Master and Melissa & Doug will remain relatively constant at less than 1% of sales. And then talking to M&D and then cost synergies overall related to the acquisition, we generated $10.9 million in 2024, and that equated to around $14 million on an annualized basis. For 2025, we're expecting around, cumulatively around $17 to $18 million. So, you know, an incremental, say, $7 million over the 2024 number, and then we're well on our path to achieving the 25 to 30 run rate by the end of 2026. So I hope that helps. Does that answer your question?

Yeah, it does, Mark. That's great. Thank you.

And your next question comes from the line of Jamie Katz with Morningstar. Please go ahead.

Hi. Good morning. I want to focus on gross margin again. I guess I was You know, you guys made it sound like gross margins would be incrementally higher this year, and I'm wondering what's holding them back from getting back to maybe like closer to the 2022 and 2023 levels. Is it a function of evolving mix, or is there something else that we should be thinking about?

So, Jamie, thanks. You know, gross margins are actually higher. I think it's very important to just call out the adjustment to reported gross margin because of the inventory fair market value adjustment on the Melissa and Doug acquisition. So, you know, if you add that 66 million back, which is a one-time accounting adjustment, you'll see that our gross margins were actually at 55.6% for 2024 compared to 54.5%. So 110 basis points up year over year.

I'm sorry, I just didn't know if you were guiding for the adjusted or the non-adjusted.

Yeah, that's correct. We are. Because there is no fair market value adjustment in 25 now. That's all gone. So we'll be in a normalized situation in 25. And we will be comping against the adjusted gross margin from 2024. And we expect gross margins to be slightly up.

And then can you size maybe the remaining lift from an increase in Melissa and Doug's distribution that you think you have left, I guess, as you move to a more global footprint for the brand? I think that would be helpful to know what has been achieved already and maybe what is remaining, even if it's just a percentage of progress.

Yeah, as I said to you, Jamie, we're not going to give specific M&D guidance anymore. But what I can tell you is that historically, Melissa and Doug was vastly a U.S. business. Less than 10% of their sales came out of international markets. And in 2024, we did actually get some international growth, very small in Canada and Mexico. We just got going in those markets. In 2025, We're actually, for the second half of the year, our international team is picking up the entire European and Australian markets. So we expect to see some relatively meaningful growth in the international sales area for Melissa and Doug in late 25 and then accelerating in 26 and beyond.

Really helpful. Thank you.

Our next question comes from the line of Luke Hannon with Canaccord Genuity. Please go ahead.

Thanks. Good morning, everyone. I wanted to ask, apologies if it's been asked already, but I wanted to ask about retail inventory to finish the year and maybe the progression thus far into 2025. I know you mentioned, Mark, that corporate inventory, I believe, was 9% of sales. You guys target 5% to 7%. But where do things stand from a retail inventory perspective?

So I think retail inventory is finished in a relatively good place, Luke, and good morning. For the year, U.S. inventory was down. Our U.S. inventory at retail was down 5% year over year compared to the industry at 1% down. And actually very similar results for global retail inventories as well. So we were actually down 5% for the year compared to around 1% down. So I think we're in good shape. We're in good shape both at retail and also on our own inventory. We made some really good headway, as you saw from my prepared remarks, on bringing Melissa and Doug inventory down. So they came down from about $114 million to $67 million. And our Spin Master inventory was relatively flat, maybe a little bit up, but in very good shape and good quality inventory as well.

I understood. Thank you. And then I wanted to follow up on the Rubik's Match discussion as well. I think I heard you say that the The resources that you had at Rubik's Match, some of them were reallocated internally to be working on Toca Boca and a picnic as well. maybe just a clarification on that then are those resources if let's say they're allocated to the toka boca team are there separate teams within toka boca one that would be focusing on you know introduce or focusing on live services or some of the new content or features for toka world and then others that would be focused on toka days or are those two separate teams i guess i'm trying to figure out because we've talked a lot on this call so far about toka world i don't know if we've necessarily talked about toka days how that's performing and maybe what the growth plans are for for 2025 but maybe that's a nice

Absolutely. Luke, good morning. The folks that we brought along from Northlight to actually help TOCA were actually people who are engineers. And so it's really more for technology. And those are the primary resources we were able to bring along and are helping with our tech debt that we basically have alluded to. And it's part of our investment. And it's basically across both TOCA Live World and TOCA Days. So that is basically the resource allocation choice we made. And so far, that's actually helped us. And with regards to TOCA Days, you know, we are continuing to work with that property to make sure as we expand it in the back half of this year, it is actually meeting the KPIs that we need for that property to meet.

So that's the plan.

Thank you very much. Our next question comes from the line of David McTighean. with Coremark Securities. Please go ahead.

Oh, yeah. Thank you. So, a couple questions. So, you said that, Paul, the POS declined in the fourth quarter in 2024. I was just wondering if you could give us any specifics on the amount of the decline on a percentage basis.

Hi, David. So, basically, the property declined as we expected. Recall in 23, we had the movie year. And so this is basically a decline that we saw as we expected the POS would decline. And so that is what we have in store. And as we actually go into 2025, we have a number of things that we're actually bringing back in terms of the themes. We have holiday specials. We have a number of things to once again get back on getting our POS to remain where it is. Remember, we're on the 11th season. And so we're also dealing with the cyclical nature of a property that has basically beat every yacht. but we're confident with the content slate and the support we have for the property that we actually have a plan that bridges us to the 26th period, which is, again, a movie year. There are a number of other things that the team has done really nicely for 25, including the innovation and the toy quality, and then, very importantly, price points to make sure that we are able to meet customers where they're shopping these days.

Okay. And then a question on the guidance. So if I look at the low end of the guidance range in terms of EBITDA, it would seem to imply that the business overall would be flat, but you would generate the cost savings you're expecting, incremental cost savings you're expecting from Melissa and Doug, and that would result in the low end of the guidance range. Is that a fair characterization?

David, the way I would characterize the guidance range is that Obviously, if you take the midpoint of the range, that would kind of be the target point. But implicitly, because of the uncertainty around tariffs, and we've kind of guided to both a downside and an upside. So when it comes to tariffs, we haven't articulated a specific impact yet. We're waiting to Q1 to do that as we figure things out on a number of supply chain and pricing fronts. But You know, our target is to remain neutral with tariffs, but there might be some downside. And so we wanted to actually present a range to help you, you know, position your, you know, as you actually build your model out. And that was the rationale for that.

Okay. And then just when I look at the sales allowance in the fourth quarter, It was down quite a bit. I was just wondering, what was driving that? Was that primarily the impact from M&D coming into the business next or some other factors?

No, it actually wasn't specifically M&D. What I can tell you is that the 2023 sales allowance, Q4 2023, was extremely high. It was 19-something percent. It was the highest we've ever seen in fourth quarter in 2023. And we brought that down significantly in Q4 of 24 to 15%. That was from lower markdowns and less promotions. And so I think we managed our sales announces really well on a year-over-year basis. But one of the issues that we had in terms of the miss to our consensus EBITDA number was that we didn't bring it down We didn't bring sales allowances down as much as we actually hoped. So if you looked at our guidance for 2024, we guided to a range of 12% to 13% at the top end. We actually landed at 13.4%. So even though we were lower year over year, we actually missed on our number in relation to our guidance. And that 40 basis points was around $8 to $10 million, and that was one of the reasons why we actually missed on our EBITDA number for 2024. Okay.

All right. Thank you.

And your next question comes from the line of Kylie Kohu with Jefferies. Please go ahead.

Hi there. Good morning, everyone. You mentioned in the prepared remarks that, you know, the global customer or consumer, excuse me, Um, it's kind of 1 of the biggest variables heading into 2025. I'm just kind of curious what you have been seeing seems to be less responsive to promotions. Anything else you can kind of flag about what you're seeing now.

Kylie, you're breaking up, we apologize, but we didn't hear your question. Well, can you please repeat it?

Hi, Kylie, if you're still there, would you mind repeating the question?

It didn't come through clearly on our end.

Hey, sorry, do you guys hear me now?

That's better, thank you.

Okay, yeah, sorry about that. I was just wondering a little bit on the global consumer and the health that you're seeing. It seems like there might be less responsiveness to promos. Anything you kind of can flag there would be helpful.

Yeah. So I think the consumer was really price sensitive and deal seeking in the fourth quarter. And when a lot of those deals dropped in October, people flocked to those deals. The promotion depth was actually wider than we would have seen. And that basically prevented them from going back and buying more later in the quarter, which prevented the replenishment that typically we expect. So We expect that that continues in 2025 and have adjusted our programs accordingly.

Gotcha. Super helpful.

And then just a last one. Wondering if you could dig in, give a little bit of color around the margins you expect for each segment. Obviously, I know you don't give it specifically, but just directionally, kind of similar to the revenue would be helpful.

Thank you.

Okay, Kylie, again, yeah, I'll give you some color. I think in the toy space, you know, we expect margins to be up over 2024, both in Spin Master and Melissa and Doug. I think entertainment will be down for the reasons I described earlier. And in digital games, revenue will be up. And EBITDA will be flat to down basically depending on the amount of paid user acquisition that we actually spend. So we have the ability in digital games to manage our paid user acquisition spend very tightly and in real time based on what's actually happening and based on what our return on investment ratios are looking like. So I would model digital games around flat at this point, toy app, digital games flat and entertainment down.

Awesome. Super helpful. Thank you.

I think, operator, we're at time now. So I think we're going to wrap up at this point. I just wanted to thank everybody for the call today and for your continued interest. And we really look forward to seeing you at New York Toy Fair. It's the first time it's been back in its full form since pre-COVID days. And I think you're going to enjoy the energy. You're going to enjoy the line. And we're looking forward to hosting you. So we'll see you then. Thank you very much, everyone.

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.