Spin Master Corp.

Good morning, ladies and gentlemen, and welcome to the Spin Master Corp first quarter 2025 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 is being recorded on Thursday, May 1st, 2025. I would now like to turn the conference over to Sophia Bisoukis. Please go ahead.

Thank you, Joelle. Welcome to Spin Master's financial results conference call for the first quarter of 2025. 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 currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such assumptions will prove to be correct and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information in our earnings release dated April 30, 2025. Except as may be required by law, Spin Master disclaims any intention to update or revise any forward-looking statements, whether because of new information, future events, or otherwise. 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 now like to turn the conference call over to Mac.

Good morning, and thanks for joining us. We had a solid start to 2025. And thanks to the efforts of our teams, we drove an increase in total revenue while also delivering increased profitability in the quarter. Our performance reflects the power of our three creative center approach and global appeal of our toy brands, entertainment content, and digital play experiences. We are pleased with our revenue performance from toys. Toy gross product sales increased just under 19%. demonstrating our team's commitment to innovation, the expansion of licensed partnerships, team's commitment to continue momentum of our core brands, including Liz and Doug, which grew year over year. Several global theatrical releases for which we have licensed products began to drive revenue. In Q1, Superman and How to Train Your Dragon began shipping, and Jurassic World and Gabby's Dollhouse will ship later this year. From a POS perspective, SpinMaster's POS was down 6.4% per cercana. In comparison, the industry's POS was up 1.1%. It is important to note that the majority of the industry's growth was driven by adult targeted building sets, strategic trading cards, and sports trading cards, categories in which SpinMaster does not compete. We capture market share in many of the categories we play in, including vehicles, plush, dolls, and infant-toddler preschool. In fact, we retained our leadership position in the infant-toddler preschool category thanks to the combination of our strong-owned NIP license, including Paw Patrol, Liz and Duck, Miss Rachel, and Gabby's Dollhouse. Let me now address the issue regarding our toy business that I am sure is on everyone's minds. U.S. tariffs on China and other countries. The timing, extent, and enforcement of the potential tariffs on goods entering the U.S. remains very fluid, and we continue to monitor trade policy developments closely. The industry is working hard to get the message across, which is, very simply put, save Santa's supply chain. Given these complexities and uncertainty related to the implementation of global tariffs, we are withdrawing our 2025 guidance. Now, let me tell you what we are doing to mitigate the impacts of tariffs based on what is within our control. Our actions break down into four primary buckets, procurement, supply chain, pricing, and cost management. Regarding procurement, over the past decade, we have built a diversified global toy supply chain. Since the imposition of tariffs, we have aggressively sought to move more production for the U.S. market out of China for the second half of 2025, primarily by increasing production in Vietnam as well as India, Mexico, and Indonesia. This puts us in a much stronger position than many others in the industry. China source production for 25 will, where possible, be focused on non-US markets. Our major theatrical releases this year are, for the most part, coming in from outside of China. We have been operating in Vietnam for close to 10 years, Mexico eight years, India seven years, and as you can tell, we're far more established across these markets and with more capacity than most of our competitors, which represents a potential opportunity for us. From a supply chain perspective, we are actively looking at managing our inventory levels globally by moving non-tariff inventory from Canada, Mexico, and Europe to meet U.S. demand. We are also looking at different shipping methodologies to minimize the impact of the tariffs on retailers and ultimately consumers. I want to thank our global procurement supply chain and IT teams who have been working tirelessly to make this happen. These actions aim to preserve margins where possible, protect and potentially grow the company's market share, and meet consumer demand. And while we are able to leverage manufacturing from other regions in our global supply chain footprint, many toy companies cannot. We expect that there could be gaps in inventory availability in the fall. and these gaps might create opportunities for us. Now, despite these mitigation efforts, there will still be a negative impact to profitability. Neither we nor our retail partners will be able to fully absorb the higher tariff costs. Cost increases cannot be upset, that cannot be upset, will result in higher prices to our customers and will likely be passed on to the end consumers in the U.S. We are currently in discussions with retailers regarding price increases, and we remain focused on maintaining price competitiveness and delivering strong value propositions across our portfolio with particular emphasis on lower price points. Now, regardless of the level of the price increase, we need to aggressively manage cost. We are seeking to manage profitability and liquidity through cost takeout and cap as reduction to protect profitability margins and cash flow, and Mark will comment on this more specifically later. Within entertainment, we are continuing to develop our third Paw Patrol movie, which will launch in theaters in July 26, as well as new seasons for both Paw Patrol and Rubble and Crew. We are excited to begin showing seasons one and two of Paw Patrol on Netflix in the U.S. for the first time, and it starts in July. Turning to Unicorn Academy, we continue to expand the linear distribution and just dropped the first of two specials planned for 2025 on April 5, on Netflix, which once again entered the top 10 kids show in many markets. We spoke to you in February about our strategy in digital games to refocus on Toca Boca and Picnic in 2025. That strategic focus and investment has begun to deliver results as we recorded the highest revenue for digital games in the past eight quarters. Within Toca Boca world, our new features and new content are built upon our new and evolving live services tech stack, which is allowing us to release at a faster pace and rapidly testing what resonates with our global player community. We are extremely pleased with some of the metrics that we're seeing, including higher average revenue per paying user. Within BICNIC, we have expanded the app bundle offering to include Paw Patrol Academy, providing even greater value. We have seen solid cost per acquisition metrics from POA Academy showing demand for our branded IP. We remain committed to delivering on our own purpose of creating magical play experiences for kids and families around the world. Our ability to innovate and to broaden our portfolio supported by our geographic footprint, talented team, and strong financial position gives us confidence that we can continue to deliver long-term growth and shareholder value. Before I turn it over to Mark, I want to take a moment to recognize his significant contribution to Spin Master as he looks forward to his retirement as CFO. This will be Mark's final earnings call, and I want to thank him for helping us grow, expand, and mature to the leadership position we hold today. Mark has helped Spin Master build a strong foundation, financial platform that provides us with the stability to weather a crisis such as the one before us, and provides BinMasher with the financial and operational flexibility we need. On behalf of our founders, our board, and our executive leadership team, thank you, Mark. I also want to welcome Jonathan Reuter, who will be joining us in mid-May as our new CFO. Jonathan brings a wealth of experience in finance, operational leadership, M&A, and capital markets. He has a deep understanding of the consumer packaged goods industry and has a proven track record of supporting the expansion and growth of mid-sized companies. You will have an opportunity to meet Jonathan in the coming weeks. And with that, I will now turn it over to Mark.

Thank you, Max, and good morning, everyone. I'm going to discuss the quarter briefly and then add to the topic of tariffs, which is weighing heavily on everyone's minds. Looking back, We're pleased to report a strong start to the year with our Q1 performance reflecting solid execution across our three creative centers in what is typically our seasonally lowest quarter. We generated $359 million in revenue, an increase of 13.6%, and adjusted EBITDA of 21.6 million, up 3 million year over year. We continue to focus on delivering shareholder value by investing in our business, paying down debt and returning capital to shareholders through our buyback program and dividends. I will now turn to the financial performance of each creative center. Toy gross product sales in Q1 were up almost $50 million or 18.8% year over year, driven by innovation, growth in our license portfolio and Melissa and Doug. Several key licenses contributed to the growth, including shipments for the How to Train Your Dragon and Superman movies, along with Ms. Rachel. Sales allowances for Q1 were 12.9% compared to 14.5%, reflecting lower markdowns and promotional activity. The result was toy revenue of $273.7 million, a 20.9% increase, which translated to toys adjusted EBITDA loss improving by $12 million to $20.5 million. Toys adjusted EBITDA margin was negative 7.5% compared to negative 14.4% due to operating leverage from higher toy revenue. Entertainment revenue decreased by 6 million or 13.7% to 37.8 million due to lower distribution revenue from the Paw Patrol series and movie. Entertainment adjusted operating income declined by 3 million to 26.1 million, but adjusted operating margin increased to 69% from 66% as a result of lower amortization of production costs and lower marketing expenses. Digital games revenue increased by 1.8 million or 3.9% to 47.8 million, driven by increased in-game purchases in Tokaboko World and growth in subscriptions across Picnic and Paw Patrol Academy. The initiatives we outlined at URN to enhance our ability to capitalize on strong player acquisition trends are delivering as expected. Tokaboka ended Q1 with 58 million now, up 6% compared to the same quarter last year. In Picnic, we saw a steady continuation in the growth of our subscriber base, and we ended Q1 with approximately 488,000 subscribers, up over 13% compared to 430,000 at Q1 2024, and $455,000 at the end of 2024. Digital games adjusted operating income declined by $5.7 million. Margin decreased from 33% to 19.9%, primarily from investments in paid user acquisition. Moving back to our consolidated results, adjusted gross profit increased by $17.8 million to $194.9 million. driven by higher toy gross product sales and revenue. Adjusted gross margin this quarter decreased by 180 basis points to 54.2% due to the higher proportion of gross profit contributed from the toy segment. Adjusted SG&A increased by 12.5 million to 186.1 million. Adjusted SG&A as a percentage of revenue declined by 310 basis points to 51.8% from operating leverage. We realized 6.5 million in total net cost synergies for Melissa and Doug, bringing our total annualized net cost synergies to 21.6 million against our target of 25 to 30 million in run rate net cost synergies by the end of 2026. Turning to the balance sheet, we ended Q1 with inventory of $180 million. Given the recently announced tariffs, our inventory level positions us well in the near term as retailers look to replenish stock heading into the second half of 2025. We ended Q1 with $153 million in cash. In Q1, we returned a total of $30 million to shareholders, $21 million through the buyback program, and $9 million in dividends. We also reduced our borrowings by $30 million and ended Q1 with approximately $360 million in net debt and a leverage ratio of 0.8 times, including leases. The combined cash balance and credit facility availability gives us over $500 million of liquidity. The defensiveness of our balance sheet and the insulation provided by our strong cash generation gives us a high level of confidence as we navigate these uncertain times. As we work through various scenarios related to tariffs, our balance sheet strength, coupled with our global footprint and geographically diverse manufacturing and retail partnerships, positions us to be more agile and resilient than many of our competitors. Regarding tariffs, the timing, extent, and enforcement of tariffs remains fluid, as Max described, which introduces meaningful uncertainty to the remainder of 2025 and which makes forward-looking projections very challenging. As a result, we are withdrawing our 2025 outlook previously provided on February 24, 2025. Let me add a few points to the commentary Max provided earlier. Please note that this data is included in the supplemental deck that we have posted to the investor relations section of our website. Our toy segment, represents approximately 85% of our total revenue, of which approximately 50% is from the US and 50% from non-US markets. The remaining 15% of our total revenue comes from our entertainment and digital game segments. We want to continue to accelerate the growth of this non-toy part of our business. Taking this revenue breakdown into account, this means that approximately 57.5% of Spin Master's total revenue is not subject to tariffs and, in the case of entertainment and digital games, does not have a physical supply chain at all. This geographic and segment diversification continues to provide revenue and margin protection against global trade pressures on the US toy market. Of the approximately 42.5% of our total revenue that is represented by the US market, Approximately 55% of our blended total Spin Master and Melissa & Doug toy production is sourced from China and 45% from outside of China. When you do the math, this implies that approximately 27.5% of our toy cogs is subject to the 145% tariff. Toys not produced in China are currently sourced from Vietnam, India, Mexico, Indonesia, and the European Union, representing 22.5% of our toy cogs, and which is subject to a tariff of 10% presently. By the end of 2025, our target is to produce approximately 70% of toys for the US market from outside of China. By the end of 2026, we are targeting to have 75 to 80% of toys for the U.S. market produced outside of China. This will be a major accomplishment and underscores the strength of our supply network and the agility of our global procurement and supply chain teams. We are executing against the four strategies that Max described to mitigate the impact of the tariffs. We are actively monitoring all developments and are taking measured steps to protect the business while also continuing to invest for growth. Our goal for 2025 is to generate over $100 million in cash flow savings through a combination of cost takeouts and CapEx reductions. To conclude, today is my last Spin Master earnings call. I'm retiring as Spin Master CFO 10 years after our IPO in 2015. and after 20 years in total. It has been an honor to work with the founders, Rene, Anton and Ben, and alongside such a talented management team to help guide the company through periods of growth, challenge and transformation. I want to thank all of you, our investors, analysts and all of our stakeholders for your engagement and support over the years. I have full confidence that Max and the new CFO, Jonathan Reuter, will do an outstanding job going forward. Thank you again and I look forward to sharing in Spin Master's continued success in the USAID with all of you. Operator, that ends the formal part of the call. Please open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys.

One moment, please, for your first question.

Your first question comes from Luke Hannon with Canaccord Genuity. Your line is now open.

Thanks. Good morning, everyone. Congratulations, Mark, and best of luck in your next chapter. I think we'll start with the topic du jour being tariffs. Max, you touched on in your prepared remarks, you have several levers to pull when it comes to being able to mitigate the impact of tariffs. Maybe just a two-part question to start with. One, you outlined the sort of different buckets that you have, being changing procurement, supply chain management, cost savings, passing through price, etc. Can you give us a rough idea of which of those buckets you intend to rely on more so than others, if so? And then secondly, when we think about the goal that you have of being able to move more of your production forward, or sourcing, rather, outside of China into some of these other jurisdictions. Can you give us an idea of how we should think about the impact on lead times, if any, any impact when it comes to FOB versus domestic, et cetera, some other considerations to think about as you get to that target? Thank you.

Great. Good morning, Luke.

I think I'm going to start with the four as follows, procurement first. And I want to be, as Mark said, very clear about what he stated, which is

We expect that by fourth quarter of 2025, 70% of the items coming into the U.S.

will be coming from countries outside of China. 70% of items coming into the U.S. in Q4 will be from outside of China. And the good news for us is that if I were to break it down further, it's going to be about close to 100% of items on preschool coming from outside of China by Q4. Wilson Actions already out of China at 100%, activities almost 100%. And so quite a bit of our items that are the main core brands are going to be coming from outside of China. Mark touched on the theatricals coming mostly from outside of China as well. We are well positioned. That's the most important thing we'll do. When it comes to cost control, Mark used a figure. He expressed over $100 million in a combination of cost takeout and, of course, CapEx. And we are balancing taking those steps to not just continue to drive the business this year in the second half, but, of course, drive innovation in 2026 and beyond and give us optionality as we are well positioned, as you can tell from a supply chain perspective. When it comes to supply chain, we have basically items across Europe, Mexico, Canada that we're able to, given the fact that they're non-tariffed and some of the items are global, basically redirect to the US. What it means is that we have items in China that would have actually made their way to America that will now be sent to Europe, Canada, and Mexico. And I think those are the most important components before I get to the obviously important pricing consideration. So after doing all that, and you can imagine you do pricing at a skew level. So now that we have the ability to source quite a bit of our items from outside of China, the impact of cost increase on those items is less. And so therefore we're working with retailers in close partnership to make sure we have great value equation when we get to the season. And so the pricing for us would be an important consideration. And I can tell you with confidence that, you know, between $0 and $20, close to 50% of our items would be priced in that range. It goes to about 70% when you go to $30. And between $30 and $50, you know, it's really all about the new wow toys that kids will be asking for. and that you got to see, for those of you who attended, at Toy Fair in New York. I hope that gives you context.

Luke, there was a second part to the question. What was the second part?

The second question was more specifically about the impact of moving from China to some of these other jurisdictions. Obviously, you are going to be saving quite a bit on tariffs, but what should we be thinking about or what should investors be thinking about when it comes to the impact, if any, when it comes to lead times on that product and then anything perhaps when it comes to the mix of FOB versus domestic, if there's anything we should be thinking about there.

Yeah, no change.

Okay. Great. And then so for my follow-up here, and then I'll pass the line. So when it comes to, I guess, what it is specifically that you're hearing from retailers today, I mean, you can correct me if I'm wrong. I know that you're in constant dialogue with them, but typically those talks eat up a little bit more closer to the summertime when it comes to thinking about the assortment. and the back half then. So, I mean, what exactly are you hearing from them today when it comes to either consumer behavior? I don't know if it's possible for you guys to share anything on POS trends today, but if so, that would be great. But what specifically is it that you're hearing from them when it comes to perhaps the ability to pass through price and also what they're seeing for consumer behavior specifically for toys thus far in April and into May?

Sure. I think as it relates to fall 25 and Christmas specifically, I mean, some retailers are in close partnership looking at their plan around set dates and being agile in basically moving those so that we can actually get, and I'm sure beyond those, people can get them products so they can set those for the holidays. So typically those would have been, if you, I mean, you've been with us for a while, typically July, you can expect that those will shift. So that's one key consideration and key action item that's happening. In terms of the consumer demand, you know, consumption, remember, through the year to date, is highly affected by basically the shift of Easter. But I can tell you in every holiday so far this year, we've seen consumption as we would expect.

And taken outside the categories where we don't compete, in those we compete, we're seeing good takeaway. Okay, thank you very much.

Your next question comes from Brian Morrison with TD Cowen.

Your line is now open.

Yes, thanks very much, and Mark, it's been a pleasure, and congratulations. Thank you. Max, I want to circle back to the China exposure. It sounds like you're able to mitigate a lot of the sourcing, and especially with your primary lines, but The retailers, as the previous question asked, are we seeing some pre-buying? Are the retailers willing to pay up? Are we seeing cancellations, reduced orders? Maybe just what you're seeing in general as it comes to the China exposure.

No, I think we're not seeing cancellations, but you, as you have read in the press, would have read that it was halted a few weeks back, and I think those orders are resuming. That's what we're seeing, and so we're basically very optimistic as we go forward, given our

diversification footprint, but no, no cancellations. Okay. And pull forwards, did you see any of that?

Pull forwards, no. Okay. And then maybe for Mark, just, you know, you've got this encouraging digital game acceleration, but clearly at a cost to do so. You know, what is the strategy here in terms of driving this digital games revenue while managing to wean yourself off the investment to drive operating income? Or is it simply that you're going to outgrow this investment over time?

Yeah, so Brian, I think you're referring to the increase in paid user acquisition in the digital games. And so obviously, let me answer it by saying, you know, let's look at it through the lens of Toka and then through the lens of Sega Mini with Picnic, because it's two different business models. As you know in Toka it's in-game purchases and what we've seen is that we get a very effective return on investment on paid user acquisition in that space. We've seen higher average revenue per paying user, we've seen higher conversion rates and so the ROI on that user acquisition spend I think is very effective in terms of driving the top line and profitability. In the subscription business, it takes a little bit longer to see the returns being generated. So we are seeing increases in subscription numbers. As you saw, we reported higher increases over the quarter and relative to year end. So we've seen growth. We have to watch our user acquisition spend to drive those subscribers because you actually get a return over a period of time. which we call our lifetime value or LTV. And so the, the model of managing our LTV to the cost of that user acquisition is something that's very live. We've started getting a little bit more aggressive in Q1 and we're going to, uh, we're going to watch that very carefully to make sure that we are balancing both growth with profitability in our subscription business.

Okay. And your strong balance sheet, do you plan to be active with your NCIB?

Yeah, we continue to be active on the NCIB, Brian. We just had the NCIB renewed to March 7th of 2026 for just under 2.5 million shares. We actually bought back 1.2 million shares in Q1 for about $22 million. So we've been pretty active on the NCIB. Our previous NCIB was fully utilized. That was the 24 to 25 one. and then the 25 to 26 one will continue to be active, as I've just described.

Enjoy your retirement, Mark. Thank you, Brian.

Your next question comes from Kylie Kohu with Jefferies. Your line is now open.

Hey, good morning. Thank you so much for taking my questions, and congratulations, Mark, on your retirement. I was wondering if you could talk about Yeah, no, of course. I was wondering if you could talk a little bit about, just talking or thinking about elasticities, if you've done any work on that recently that you could share with us.

Price elasticity, yeah. So we have done price elasticity work, highly.

But I think, as you can imagine, and being a student of the industry, I'm sure, there's never been the level of price increase on some of the items at the 145% tariff rate. So you have to not just use price elasticity. There's a lot of judgment and there's a lot of retailer input as well. And so the reason we've been basically honing in our pen in terms of the price points and the reason we were so aggressive to pivot on our supply chain is because there are certain price points that are going to be really difficult unless you have these wild, very magical toys that everyone's going to want. And even then, I think we have to be very cautious to not go beyond certain price points. And so we're basically trying to get as much done between 50 and below, but really below 30, to be very honest.

No, that's super helpful. And then on retail inventory, obviously we've heard comments in the news about potentially empty shelves. And I think it is encouraging to hear that we haven't seen this big uptick in cancellations. But I was just wondering if you could talk to how inventory levels are currently. both on like a year-over-year basis and just like normal seasonality.

So, Kylie, our retail inventory in the U.S. was actually down around 6% for Q1 relative to the industry being slightly up, low single digits. And I think globally our retail inventory was down 1% to 2%. And the industry was up slightly. So I actually think in the normal circumstances, we actually have a very healthy inventory position. I think the quality of the inventory at retail is good. And we have $180 million of owned inventory, both from a Spin Master and Melissa and Doug perspective. And we're going to use that inventory strategically in the second quarter to fulfill demand and beyond. But overall, I think our inventory is in good shape.

Next, you want to add anything? I think you said it well.

Awesome. Well, thank you guys so much. Your next question comes from Martin Landrieu with Stifel. Your line is now open.

Good morning, guys.

My first question, I want to dig a little bit more into the tariff impact. you know, you have mitigation measures that you've put in place and you want to offset the remaining impact with price increases. So is it fair to say that there's a scenario where you could offset all of the tariff impacts on your costs with those mitigating measures?

Yeah. Hi. Good morning, Martin. I think at the end of the day, the four buckets that we described that Max went through in detail, I think at the end of the day, there's still going to be an impact. And we don't know exactly what that impact is. And obviously, due to the fluidity, it's why we're actually withdrawing guidance, because we can't be specific at this point. But overall, there will be an impact. It's unlikely that we're able to recover everything.

Why is it then that you're not passing on all those costs as price increases? Why is it that you're going to be hurting your margins or your dollars?

No, so I think, good morning, Martin.

So I think on most of what we're able to mitigate out, There is still tariff on non-China source items, remember. So there's a 90-day pause and a 10% tariff on everything non-China. Those things we're mitigating quite well. And the remaining percentage would basically be price increases we're now working with retailers to pass to them, and they will ultimately pass it on to the consumer. So we are doing that. But the just sheer amount is such that, you know, you have to be cautious to not basically get yourself in a situation where you're not going to supply the market and have basically a brand that you're protecting strategically, not just for this period, but for the future. And so, and I think ultimately, you know, as the forecast comes down for a retailer, we're just basically working with them to make sure we come out better positioned than the rest of the market.

Okay.

And, you know, is there a scenario, I mean, the demand in dollars, consumers are going to spend a similar amount of dollars on toys this year as they did last year, absent an economic slowdown. So isn't there a scenario where, yes, you know, volumes are a little bit down, but that's offset by pricing? Isn't that a scenario where your sales could be somewhat stable year over year?

Yeah, I think there is basically, there will be, given the price increase on some of the items, lower demand for those items. And you're correct, the price increase will basically catch up quite a bit of that lower unit volume. However, there will be certain items and price points that that's not going to be possible all the way. And then on top of that, you know, you have a consumer discretionary wallets that basically have other inflationary pressures. And we just don't know the impact of that, you know, fully. So we're being prudent. And so that's really what Mark alluded to. We're not going to and we don't see recovering 100 percent of the tariff just through pricing and unit declines.

Okay, that's helpful. And Mark, best of luck in your future projects. It's been great working with you.

Thank you, Martin. Appreciate it.

Your next question comes from Adam Schein with National Bank. Your line is now open.

Thanks a lot. Good morning. And of course, Mark, happy retirement. Maybe we could just start with a topic that wasn't touched on, container ship fees. It's still unclear exactly what the implications of those are going to be. But Mark, can you just help us a little bit in terms of what your initial thoughts are on freight costs this year?

Hi Adam, thank you. Yeah, so actually there's a couple of things to penetrate on that particular topic. The reality is that in Q1 and what we're seeing right now is that rates have actually come down quite dramatically. And so so we're actually getting the benefit of lower rates as we currently speak there is a discussion around some kind of surcharge on Chinese owned vessels that has been mooted by the current administration But which has not been firmed up yet? So we don't know where that's going to go Adam and we're not really modeling anything on that because we just don't know what it looks like but I The question that we all have to ask ourselves and everyone in the industry is asking the same question is, you know, what is going to happen in the future if the, you know, the tariff situation becomes more clarified or tariffs go down or if they don't go down because really the ships are potentially going to be in the wrong place, right? If demand picks up suddenly. And that could actually lead to increases similar to what we saw during the COVID years. So that is potentially a threat that is out there. But as things stand right now, rates are significantly down. I hope that gives you some color.

No, thanks for that, Mark. And I realize obviously it's very fluid. One of the earlier questions at the start of the call, you know, did address domestic versus FOB. And Mark, you've talked about this in recent years, particularly, you know, some shifts. You know, Hasbro a week ago talked about the presumption that, you know, they would probably have to do more domestic and obviously, you know, deal with inventory that retailers are going to be a bit more conservative around. Can you elaborate a little bit further on how you're likely to see things shifting? Because I think you kind of said not really earlier, but maybe I misunderstood that.

No, let me clarify our position. And firstly, you have to understand Spin Master as a company has actually always been much more FOB orientated than some of our larger competitors. It's just the nature of our business and the way we've operated. So I don't want to compare ourselves too directly to them. They have different business models. We actually are working very closely with our retail partners on different business models. And those business models will be kind of driven towards reducing the impact of tariffs. And so we actually think that our FOB percentage will be relatively constant, which is somewhere in 55% to 60% range. and might even be a little bit higher this year if things actually continue at the rate that they are. But so we don't see a massive shift towards domestic in our particular case, Adam.

Okay. No, thanks for that. And then just maybe lastly, you know, you're pushing very aggressively uh this is probably as aggressive as we've seen spin master in terms of you know looking for cost savings and obviously being forced to do so but when we hear about all the moving pieces with the mitigation efforts in particular around supply chain and and the reality that you're going to be doing this very much in real time and hitting into you know your seasonally important back half of the year Can you, Mark or Max, maybe talk to how much work the team has already been doing either before April 2 or subsequently? And also, how should we think about how much more of the heavy lifting ultimately potentially skews into the fall period?

Okay, so just to reiterate, Adam, what I said on the call, we have set a target of exceeding over $100 million cost reductions and CapEx. So, you know, one of the things that we did say to you last quarter in February when we released our year-end was that CapEx rates are going to be higher than they were last year. We are looking very hard at CapEx and potentially deferring a fair amount of CapEx. into 26 and beyond, and that's already underway. So a lot of that's already done. On the sourcing side, as Max described, the amount of progress that we've made already is very significant. And then there are other programs that we're working on in terms of absolute cost reductions, many of which we've actually already started and executed, and others will continue for the balance of the year. So I would say, Adam, overall in terms of that $100 million plus, cash savings target. I think we're well on our way, but we still have some work to do for sure.

I want to just, Adam, good morning, give you a bit more context. So part of the reason that it's not impossible is that we've been doing this for a while. So if you take Preschool Paw Patrol, for example, a very important brand for us, we have been dual sourced on the great majority of our line for quite a while. We've been basically doing this for over five years. So therefore, to shift that sourcing is significantly easier. It's a little bit different when you take something like the BT hamster ball, which would have been made in China, and that will make that in a place other than China, and we'll still do it by Q3, Q4, so we can supply the demand. And so that requires incremental work, but you can imagine that all the lines will require the same level of work. And so your question is a good question. We are well positioned to absorb that.

Okay, thank you very much. I appreciate it.

Your next question comes from Drew McReynolds with RBC. Your line is now open.

Yeah, thanks very much and good morning and congrats, Mark, and happy retirement, of course. Two for me. First, maybe over to you, Max. Some of your toy peers talk about the lobbying and advocacy effort that's underway for the industry and getting the message through, you know, with respect to the treatment of toys. I'm just wondering, can you kind of drill down a little bit more on if there's any real progress with that effort, if there's any kind of further steps that are definitive here looking forward? And then secondly, maybe to you, Mark, appreciate all the tariff guidance and perspective you've given us. under the assumption, and I know this is a big assumption at this point, that the 145% does go down, are you able to be at a point of whenever that percentage is put firmer into place, is it kind of a sliding scale of impact where once you get a percentage, you can provide us with enough visibility to provide an update on

of financial impacts at that percentage or are there other bigger moving parts here that you're focused on okay so the first part of the question so um the u.s toy association is uh absolutely taking the leadership position uh to get to zero reciprocal tariffs and they basically engage with 20 plus global toy associations including those in vietnam china India, et cetera, and they've made great, great strides to basically get to the white house, both the department of commerce and the treasury, which is where a lot of these decisions are being made and more work is ahead of the group. And we all, we are all participating to be very clear. Uh, nothing has yet come out of it, uh, via president Trump, but it hasn't been for lack of all the different, you know, players making great efforts to actually get to the right people in the white house. So you can expect that that effort continues, and it's not completely, you know, unknown to everyone in our industry that this group is doing a great job basically getting the voice to those who need to decide. So we'll continue, but that's the effort.

So, Drew, just to come back to the tariff, you know, and just to remind you and everyone, when we actually had the call on February the 24th, the tariff rates that were being mooted at that time were between 10% and 20%. In fact, it started at 10%, then it went to 20%, then it went to 54%, then it went to 125%, and then it went to 145%. And so to answer your question, which I think is a very good question because you're trying to figure out how to model our business going forward, in the 10% to 20% range of tariffs, I would say to you it would be relatively comfortable for Max and I to give you forward-looking guidance and to be relatively specific about how we would handle that, right? We're comfortable in that range. In the 54% range, it starts getting a little trickier to do that because they're more unknowns. In the 125 to 145 range and 145 where we're at now, it becomes very difficult, which is why we really are not comfortable to give guidance at this point. because to Kylie and Martin's questions earlier about price elasticity and overall demand, at 145%, when you have 70% of our product shipping in the second half of the year, becomes very difficult to model your business because you don't know what your orders are going to be for the second half, and then you don't know the impact on overall demand and price elasticity and volume impacts. And so, you know, when you're north of, 100% that we're in a very difficult place to give forward-looking guidance. So I hope that gives you some context.

Yeah, it does, Mark, and definitely understood all the other dynamics. So thank you both.

Thanks.

And your last question comes from David McFadden with Cormark Securities. Your line is now open.

Oh, great. Thank you. Yeah, so first of all, congratulations, Mark. All the best in the future. Thank you, Brock. And then just on, like, we just focus in on 25. Just given the long lead time of the business and, you know, you probably already got most of the toys produced or, you know, they're being produced as you speak. I mean, and these tariffs come in. Isn't it really difficult to really do anything for 25 and what we're really talking about is 26 and beyond?

Yeah. Hi, David. No, I think as I was just mentioning, we are dual sourced in quite a few of the items. So where we are dual source, we're able to pivot with quite agility. Where we have not been dual sourced in the past, we have great partners in different places like Vietnam and India and Indonesia whom we work with. And so we are basically, along with retailers, setting back planet ramps, right, from July to call it October. able to make that up. So we have an incredible team in Asia of engineers and designers. And so it's not basically, we're not starting from scratch. We've been doing this for a while.

So that's what allows us the agility to basically go do it.

But I mean, you know, we're talking about, you know, very high tariffs on China, but the U S is also, you know, putting in very high tariffs on basically all the Asian countries. So, you know, You can try and source it from different Asian countries, but maybe they're not at 145%, but they're, I think, in the 30%, 40% range, which is still quite a bit, no?

They're at 10% for now in their pause time, which is 90 days. But the arbitrage between some of the places we're going to and 145 is huge. And so we're taking the risk. And importantly, we'll be dual source. We already can make it in China. So once again, we are just giving ourselves optionality.

Okay. All right. Thanks.

I think that was the last question, operator. So let me thank you all again. And I'll be listening to the call for the second quarter, not participating. But thank you all. And the next call will be in July. So talk to you then. Take care. Thanks.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.