WildBrain Ltd.

Hello and welcome to Wildbrain's fiscal 2022 Q4 and full year earnings call. Today's conference is being recorded. All lines have been placed on mute to prevent any back or noise. After the speaker remarks, there will be a question and answer session. To ask a question during that time, please press the star then one on your telephone keypad. If you would like to withdraw from the queue, please press star two. I'd now like to turn the call over to Nancy Chan-Palmatier, Director, Investor Relations at Wildbrain. You may begin the conference.

Thank you, everyone, for joining us. Speaking on the call today are Alex Aaron-Bolden, our CEO, and Aaron Ames, our CFO. Also with us today and available on the Q&A are Josh Sherbrock, President, as well as Dana Leith, our MDT of Finance and Chief Accounting Officer. And I'm Kathleen Persaud. The new EVP of Investor Relations and our outgoing director of IR, Nancy, is on as well. First, we have some standard cautionary statements. The matters discussed in this call include forward-looking statements under applicable securities laws with respect to WildBrain, including that limited to statements regarding investments inside the company, commercial arrangements of the company, and the business strategies and operational objectives and financial and operating performance of the company and the value of the assets. Such statements are based on factors and assumptions that management believes are reasonable and at the time were made and information currently available. Forward-looking statements are subject to a number of risks and uncertainties. Actual results or events in the future could materially differ universally from those described in the forward-looking statements as a result of important factors. including the risk factors set out in the Transnational Discretion of MDMA and annual information form. Please note that all currency numbers are in Canadian dollars unless otherwise stated. For the question and answer session that follows, we ask that each analyst give to one question and one follow-up. If you'd like to ask an additional question, please rejoin the queue. I'll now turn the call over to our CEO, Eric.

Good morning. Thank you, Kathleen, and thank you all for joining us today. Fiscal 22 was yet another successful year for Wild Brain as we continue to execute on the strategy that we put in place starting in 2019. Our focus on the 360-degree platform for the end-to-end reactivation of beloved entertainment brands from our deep vault of IP led us to return to growth in 2021, and that trend has accelerated in 2022. And over the last three years, we've deliberately built the resources and teams needed to create and integrate this unique 360-degree platform. I believe we are the only independent kids and family entertainment company with a fully integrated suite of in-house capabilities that span production, distribution, digital media, and consumer products licensing. And our global reach and our ability to leverage IP across this platform positions us as truly unique and valuable in today's media landscape. Erin is going to give you the details on our results, but I'd first like to take a few minutes regarding the highlights of the year. We generated growth in revenue and EBITDA for the second year running. We have an incredibly strong content pipeline, an unparalleled executive team, We're building earnings and growth momentum as we bring more and more of our branded IP to market. We line up more consumer products opportunities in the coming years. In content production and distribution, we continue to reactivate treasure brands from our evergreen library. And just recently, we announced that Peacock has commissioned 52 brand new 11-minute CG animated episodes of Caillou for the U.S. market. and they're picking up as well five new CG specials for the brand. This deal followed last year's announcement that Cartoon Network has picked up the classic Caillou Library following our repatriation of U.S. rights for the brand and PBS. And since we repurchased U.S. rights for Caillou, we've achieved more than a 50% return, underscoring the value of being an all-rights owner. And this is entirely consistent the strategy for Caillou driven by our visibility and popularity of our brand on the YouTube, Spark YouTube network. It also bears mentioning here that in Q4, our Wild Brain Spark digital platform crossed the threshold of 1 trillion minutes of watch time since being unveiled in 2016. That's not a mistake. That's 1 trillion minutes with a T. And to our knowledge, This puts Spark in an elite class of kids' content providers on YouTube. And within Wildbrain Spark, many of our brands are posting spectacular viewing numbers, but none more popular than our own Caillou, which has garnered over 75 billion minutes of watch time. And in addition to streaming the classic Caillou series on Wildbrain Spark, we've also been steadily releasing new short-form Caillou content. Delivering the series to audiences worldwide on Wild Brain Spark is driving deep engagement for Caillou. It's growing the audience and amplifying the brand. And this popularity was a springboard for reactivating the brand and leveraging new and classic content across multiple platforms, including SVOD, AVOD, and linear. In the past, it's been widely misreported that Caillou has been canceled As you can see from the deals and the numbers, Caillou is stronger than ever. I know that all of you follow the SVOD space and you've read about how streamers are refining their content plans and moving to premium programming, quality premium programming, all of which favors us. And while this may lead to some short-term reduction in certain new commissions across the industry, we think we're extremely well positioned in the changing environment. And Netflix strategy in particular has favored Wild Brain as evidenced by our ever-growing relationship. Demand remains extremely high for known kids' IP. And that drives subscribers. It keeps down churn. And we are the foremost independent owner and producer of that kind of content. We have an incredibly strong content pipeline. And as I said at the top of today's remarks, we're building earnings momentum as we launch more and more of our branded IP. On just Netflix, as an example, our new Sonic Prime series, which is co-produced with Sega, is set to launch in winter 2022. There's tremendous positive buzz for Sonic Prime, and we've already begun signing global toy and merchandise deals for the new series, with consumer products set to roll out in calendar 2023. This builds on the already burgeoning Sonic franchise following the launch, enormously successful, feature films from Paramount, which have grossed over $720 million worldwide to date, with a third film slated for release in 2024. And please bear in mind, this is not a work-for-hire project. We are full partners in the profits of Sonic Prime, as well as being additionally compensated as producers, distributors, and licensing agents in consumer products, I should note as well, also on Netflix, which was announced just last week, a refreshed version of our 2015 Teletubbies series is launching this November. This new version has been updated for U.S. audiences with fresh elements, including new narration, music videos, and diverse sun babies, all reimagining another beloved brand from our library for today's generation. And it's also worth noting that that on our own Wild Brain Spark platform, Teletubbies has garnered over 44 billion minutes of watch time since just 2016. And we're going to be making additional exciting announcements about the Teletubbies franchise in the coming weeks, so please stay tuned. Also on Netflix was the announcement of season four of Chip and Potato, which will be launching this fall. And Chip and Potato is a terrific example of our brand capabilities extending from development and production through global distribution, consumer products licensing, and even new toys launching at retail this fall. Chip and Potato is really a great example of leveraging our 360-degree capabilities, which start with owned IP, producing creative content, engaging viewers, and finally moving to consumer products upside. And last, but certainly not least, Netflix is also behind to our original Strawberry Shortcake series, Berry in the Big City. And as we continue to ramp up the launch, relaunch, I should say, of Strawberry Shortcake, we're looking forward to the exclusive launch on the platform next year of four new CG animated specials for the brand. So in addition to Netflix, our Apple TV relationship remains stronger than ever. Apple TV last month on the platform launched our latest Peanuts family special, Lucy's School, well as additional episodes of the snoopy show so in total now there are four family specials on the platform multiple seasons of two original peanut series 48 series episodes in class and in addition there are two original documentaries and 13 classic peanut specials apple tv is the greatest home ever for peanuts and there's a lot more to come in that pipeline So let me turn to consumer products. Within our wholly owned CPLG business, we secured the rights as the exclusive licensing agent for the Peanuts brand in Asia Pacific, which bolstered the recently announced expansion of our agency's business into that region. And the deal consolidates CPLG's longstanding Peanuts licensing relationship across EMEA. And more recently, we added India, which has seen Peanuts featured in extensive cross-category promotions, for apparel, toys, games, homewares, and more. Global annual consumer product sales for peanuts now exceeds $2.5 billion at retail. As we continue to roll out our new peanuts content on Apple TV+, as well as additional platforms in China, we believe there's plenty of runway to continue to grow the brand. So with that, I'll turn the call over to Aaron to review our results in detail.

Thanks, Eric. In fiscal 2022, we delivered a strong year, reflecting growth across all our content-driven businesses. Growth accelerated with revenue of $507.2 million, reflecting a 12% increase over fiscal 2021, and EBITDA was $88.8 million for growth of 7%. Excluding one-time items in fiscal 21, adjusted EBITDA increased 23% versus the prior year. We also saw double-digit growth across content production, distribution, SPARC, and consumer products. Net income grew to $5.6 million compared to a net loss of $7.1 million in fiscal 2021, reflecting higher gross margins. Fiscal 2022 free cash flow was negative $17.4 million compared to positive free cash flow of $31.5 million in fiscal 2021, reflecting higher accounts receivables associated with larger deals, growth initiatives, and working capital timing. One of the drivers in the working capital timing was the catch-up related to the Canadian production expenditure for our broadcast business due in part to COVID-related live action production delays. We also had a step up in proprietary live action production, which requires short-term working capital, which we talked about last quarter. As we discussed in the past, we're in a growth phase, so there are short-term working capital needs as we execute on content deals and bill receivables. Turning to the quarter results, revenue was $112 million, consistent with $112.6 million in the year-ago quarter. Net income was $1.1 million compared to net income of $11.4 million in Q4 2021. Adjusted EBITDA was $11.4 million compared with $19.2 million in Q4 2021. Free cash flow was negative $4.7 million a quarter compared with positive free cash flow of $13.9 million in Q4 2021. Looking forward to 2023, we expect revenue of approximately $525 million to $575 million. We expect adjusted EBITDA of approximately $95 million to $105 million. Our guidance is based on our current pipeline and timing of revenue recognition. Before handing the call back to Eric, I'd like to take a moment to thank Nancy Chan-Palmatier for her service to the company as our Director of Investor Relations over the last seven years. Nancy is leaving Wellbridge at the end of this month. She's been a very valuable member of the team and will be missed. So thank you, Nancy, for your time. And I'd also like to welcome Kathleen Persaud, our new VP of IR, who has recently joined the company and will be managing investor relations going forward. I'll now turn the call back to Eric.

Thank you, Aaron. So looking ahead, we're going to continue to focus on the execution of our integrated 360-degree strategy. We're investing in the business to harness new opportunities for both our and partner IP. And we'll also continue targeting new partnerships and strategic acquisitions that will cement our position as the foremost independent producer of kids and family content in today's market. With our strong management team and our deep IP portfolio, we're extremely well positioned to drive future growth. Before we open up to questions, I'd just like to say on both a personal and professional note how excited I am for the road ahead, having recently renewed my contract with the company for another three years. We've spent the past three years completely realigning our business. We've laid the foundations, and we're building for the future. actions which are now beginning to show considerable returns in our financials. We have an incredibly strong management team, I think one of the best in the entertainment industry, and I'm delighted to continue working with this talented group to propel Wildbrain at its next stage of growth. I'd like to send out my thanks to all of our dedicated, hardworking employees across the global Wildbrain organization, without whom none of this would be possible, and also to my fellow board members for their continued support. It's really an exciting time for everyone at Wildbrain as we look to the future. And I'm now happy to open up to questions from analysts.

Thank you. At this time, if you would like to ask a question, please press star then one on your telephone keypad. If you would like to withdraw from the queue, please press star two.

Please stand by while we comply the Q&A roster. Thank you for waiting.

Your first question comes from David McFadden from Cormac Securities. Please go ahead.

Oh, yeah. Hi. A couple of questions. First of all, I was just reading through the MD&A, and there was mention about Degrassi. And I was just wondering, can you give us an update on that? Because you said you're in negotiations with HBO Max, and production's been halted. So I was just wondering what's happening with the new shows there.

No other update, David. Good morning. Other than we're in constructive discussions with them right now. And, you know, HBO has indicated, I think, widely a change in strategy. What hasn't changed is the streaming of our deep library on HBO. And as soon as we have more information regarding the Degrassi series, we'll definitely share it.

Okay. I mean, do you expect them to continue with the series or you just can't comment right now?

We really can't comment at the moment. But, you know, huge fan base, great success story around Degrassi, one of our great franchises. But as soon as we have more news, we'll definitely share it.

Okay. And then just on the TV revenue, I noticed there was a rate adjustment. I'm just wondering, does that impact the future revenue of that business? Is it going to be a bit lower now, or is that just a purely one-time item?

Let me give that to Aaron, who can speak to that point.

Yeah, our TV business continues to perform and is a very good contributor for revenue at EBITDA, and we're continuing to manage the business efficiently through cost controls. And so this is absolutely a one-time item, and we will continue to manage it the way we have historically.

Okay. And then just on the free cash flow, this year the free cash flow is negative. I was just wondering... What your thoughts are for fiscal 23? Do you expect it to be positive? And then, sorry, just one last one after that. In the past, you gave an indication of leverage and where you thought that would go. And so it's decreased this year. I was just wondering what your thoughts are for leverage at the end of fiscal 23.

Yeah, so I'll start with the latter one on leverage. Our leverage over the last couple of years has continued to decline, and we're feeling very comfortable with where our leverage is and that it will continue to decline over time. I think you mentioned about free cash flow. Obviously, we right now are in growth mode, and with all this activity, that requires a short-term cash need. And we've had, as you can see, I think approximately an $80 million increase in accounts receivable. And so that, of course, results in some negative cash flow. But that reflects the higher volume and the increasing revenue that we are doing. And what's great is it gives us a lot of visibility on our future cash flow because we will collect those receivables, and therefore it will generate cash flow going forward. So our future cash flow is positive and looks positive, and we're excited to keep growing our business.

Okay. All right. Thank you.

We will now take our next question from Dan Kernels from the Benchmark Company.

Please go ahead.

Great. Thanks. Good morning. Eric, first, let me just congratulate you on the contract renewal. I think you've done a terrific job turning this story around, even if the equity markets don't exactly recognize it yet. So I'm looking forward to see what you come up with next. I have a couple two-part questions. First, I can't help but notice that all of your new deals with Netflix seem to be coinciding with their brand-new AVOD launch. Maybe I'm reading too much between the lines here, but It feels like others are going to need to come up to keep up with this content arms race, perhaps at maybe more thoughtful cost structures, Eric. So other than, I don't know, Disney and maybe Paramount to an extent, although obviously Sonic Prime is doing really well there, it feels like there's a lot of greenfields for your phone to keep ringing. So how are you thinking about the landscape? And as the second part of that question, there's obviously this tack on CP opportunity, which know all of these guys clearly need to make some money given how much they're spending so so how do we think about the cp upside opportunity relative to the guidance your uh relative to your guidance depending on sort of how integral you become to the ecosystem's you know monetization push um good morning and thank you dan um so first about the landscape um and you know again widely reported

A lot of analysts taking a look at this. I think these are course corrections as each of the services refines and defines their identity and place in the competitive marketplace. What we aren't seeing is any erosion in spending. I saw a number yesterday, actually, which I thought was surprising in a good way, the level of what Amazon is spending. I think the number was something on the order of $15 billion in content commitments. And, you know, the great part for us, and Netflix is a prime example, is branded content counts. And to the best of my knowledge, I have not seen any announcements of shows that they've taken down or cut back. that are global brands. And I think it's the reason that that relationship thrives and grows. And I think the other services are sort of in the same place. As to the APOD piece, it's only what I've read that Netflix is not intending to put advertising against kids' content. That isn't, of course, the case in the other AVOD networks where we broadly distribute our content in our sort of always-on strategy with a lot of us. I mean, Strawberry Shortcake is out there on myriad networks, Teletubbies as well. And, you know, the way we go about ubiquity with our content, which, to your point, is the consumer product's drivers. And what I would just say in general is that it's the layering of each of these new content launches. And so as you see these announcements, and I think you've picked up on this, what we're talking about is results that come in, you know, 23, 24, 25 and beyond. Peanuts is just a fabulous example of that because, you know, we probably have the most new content associated with that franchise. And we're seeing the results globally. You're seeing it come through in double-digit growth in consumer products. And it just takes time. And getting that traction and, again, the distribution, that's the great part about these platforms is most of them are global. And those that aren't are definitely making plans to do so. So I would say that's kind of the way we look at it. It's just about those brands. And the vault is deep and, you know, not mentioned in addition to Teletubbies, Yo Gabba Gabba. We're also super excited about Sonic Prime, which I mentioned in my talk. I think that's just a monster property and has incredible global popularity. And as I noted, we are full partners in that business. So lots and lots of exciting developments here. And, yeah, the landscape has changed, but I have to say, you know, we have not or yet to see the effect of that where branded content is concerned. I really don't see a change. Pretty confident.

To your point on Netflix, Eric, I believe they also at one point said they'd never have an AVOD product either. So I'm not sure I'd exactly believe a lot of what they put in print around maybe monetizing kids' content with advertising. But, no, I mean, I think quite the opposite. I think you're sort of in an efficient cost production outlet for many of these guys looking for branded kids' content. So I'd be surprised if there aren't more partnership work. licensing deals in your future or near future. Aaron, maybe just on the guidance, and Eric, you can obviously feel free to chime in too. I guess last time that we spoke, you know, I just want to get a sense of, you know, obviously everybody's paying attention to what's going on in the macro, and obviously there's this sort of war between inflation and then the jobs market not pointing to a recession, but you know, CP could be impacted by macro. So I'm just curious how much conservatism you think is sort of baked into your guide just around sort of uncertainty, maybe offset by the increased visibility you have with, as you pointed out, your accounts receivable and obviously a lot of these licensing deals that you have in the pipeline.

Sure. I'll take part of this and then... Erin can pick up on it, but just going back to the advertising note, I'm a product of Saturday morning TV and I did not suffer any trauma as a result of all the serial advertising I saw. Look, I think as far as the macro environment, we've taken great caution in reflecting that and where we're thinking going, where we're going on the guidance and, you know, very conservative about what's going on in the advertising space, et cetera. So, you know, I think we've been very, very cautious and obviously can see what's going on there. But, you know, I have to say we're pretty, you know, agnostic about the macro environment. I know as an example, when we came through the COVID period, we did extremely well with consumer products. And, you know, we're deep in production and delivery on so many of these franchises. So, you know, these things are, you know, so many of them kind of set in stone right now as we roll out the franchises. But I'll let Aaron speak to any other aspects of that.

Yeah. Hi, Dan. So what I would just add to what Eric said is, we've been adding and signing contracts and building our book of business and our pipeline with quality partners. And that's what gives us the confidence and visibility in our growth trajectory for our earnings from 23 and in future years, because we've continued to layer on, you know, layer on more and more deals, which builds that pipeline. And so, and as Eric said, it's all about the branded content of which we have, you know, a tremendous amount of, And because, you know, we did see also in that COVID time that people tend towards branded content, and growth will continue to scale as those new franchises and deals continue to flow through our financial statements. So that's why we're confident.

Got it. And if I may sneak in just one last one, you know, your EBITDA guidance is pretty much in line with, I think, where we were sort of in that range And so I just want to get a sense, you know, from you, I guess, Eric, or maybe Aaron too, just how much of that is a choice at this point, again, growth mode, right? So how much of that is you guys making some incremental investment decisions versus obviously you guys are clearly getting premiums. And I think we've all heard what the crazy CPMs are being asked for out there. So, yeah. you know, how much of that you could pass through versus how much that is a choice at this point.

Well, I mean, our guidance is based on our latest projections and our current pipeline. So our plans are baked into our guidance at this point. And we're planning to continue to invest in IP and build that IP and continue to grow our business, you know, in production and distribution and in consumer products going forward, and that's baked into our – our plans are baked into our guidance.

Okay. I'll follow up a little bit more on that.

Thank you for all the color. I appreciate it. Thanks for bearing with me, and it's going to be very exciting or interesting 12, 18 months here.

As a reminder, please press star one.

We'll pause for just a moment to allow Evelyn an opportunity to signal for questions.

There are no further questions over the phone lines at this time.

I will now turn the call back over to Nancy Chan-Palmatier.

Thank you, Operator, and really thank you, everyone, for joining us today. We look forward to updating you on more exciting news in the next quarter.

This concludes today's conference. Thank you for participating.

You may now disconnect.