Spin Master Corp. Second Quarter 2018 Financial Results Conference Call August … · 2018-08-15 · Spin Master Corp. Second Quarter 2018 Financial Results Conference Call PRESENTATION

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FINALTRANSCRIPT

SpinMasterCorp.

SecondQuarter2018FinancialResultsConferenceCall

EventDate/Time:August2,2018—9:30a.m.E.T.

Length:69minutes

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FINAL TRANSCRIPT

August 2, 2018 — 9:30 a.m. E.T. Spin Master Corp. Second Quarter 2018 Financial Results

Conference Call

CORPORATEPARTICIPANTSKarolineHunterSpinMasterCorp.—SeniorDirector,InvestorRelationsRonnenHararySpinMasterCorp.—Co-ChiefExecutiveOfficerMarkSegalSpinMasterCorp.—ChiefFinancialOfficerBenGadboisSpinMasterCorp.—GlobalPresidentandChiefOperatingOfficerCONFERENCECALLPARTICIPANTSAdamShineNationalBankFinancial—AnalystSabahatKhanRBCCapitalMarkets—AnalystKenricTygheRaymondJames—AnalystGarrettJohnsonBMOCapitalMarkets—AnalystBrianMorrisonTDSecurities—AnalystStephWissinkJefferies—Analyst

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PRESENTATION

Operator

Goodmorning.MynameisLindsay(phon),andIwillbeyourconferenceOperatortoday.

Atthis time, Iwould liketowelcomeeveryonetotheSpinMasterSecondQuarter2018Financial

ResultsConferenceCall.Alllineshavebeenplacedonmutetopreventanybackgroundnoise.

Afterthespeaker’sremarks,therewillbeaquestion-and-answersession.Ifyouwouldlike

toaskaquestionduringthistime,simplypress*,thenthenumber1onyourtelephonekeypad.If

youwouldliketowithdrawyourquestion,pleasepressthe#key.

Thankyou.Youmaybeginyourconference.

KarolineHunter—SeniorDirector,InvestorRelations,SpinMasterCorp.

Thank you, Lindsay. Good morning, everyone, and welcome to Spin Master’s financial

results conferencecall for thesecondquarterended June30,2018.Myname isKarolineHunter,

andIamSpinMaster’sSeniorDirectorofInvestorRelations.

I’mjoinedthismorningbyRonnenHarary,Co-ChiefExecutiveOfficer;BenGadbois,Global

PresidentandChiefOperatingOfficer;andMarkSegal,ChiefFinancialOfficer.

Followingourformalremarks,wewillopenupthelinesforyourquestions.

For your convenience, the press release, MD&A, and audited consolidated financial

statementsforthesecondquarterareavailableontheInvestorRelationssectionoftheCompany’s

websiteatwww.spinmaster.com,aswellasonSEDAR.

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Beforewe start, pleasenote that remarks on this conference callmay contain forward-

lookingstatementsaboutSpinMaster’scurrentandfutureplans,expectations, intentions,results,

levelsofactivity,performance,goalsorachievements,oranyotherfutureeventsordevelopments.

Forward-lookingstatementsarebasedon informationcurrentlyavailabletomanagement,andon

estimatesandassumptionsmadebasedonfactorsthatmanagementbelievesareappropriateand

reasonable in the circumstances; however, there can be no assurance that such estimates and

assumptionswill prove tobe correct.Many factors could cause actual results todiffermaterially

fromthoseexpressedorimpliedbytheforward-lookingstatements.

As a result, Spin Master cannot guarantee that any forward-looking statements will

materialize, and you are cautioned not to place undue reliance on these forward-looking

statements.

Exceptasmayberequiredbylaw,SpinMasterhasnoobligationtoupdateorreviseany

forward-lookingstatement,whetherasaresultofnewinformation,futureevents,orotherwise.

Foradditional informationontheseassumptionsandrisks,pleaseconsultthecautionary

statementregardingforward-lookinginformationcontainedintheCompany’searningreleasedated

August1,2018.

PleasenotethatSpinMasterreportsinUSdollars,andalldollaramountstobeexpressed

todayareinUScurrency.

IwouldnowliketoturntheconferenceovertoRonnenHarary.

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RonnenHarary—Co-ChiefExecutiveOfficer,SpinMasterCorp.

Thank you, Karoline. Good morning, and thank you for your interest in Spin Master.

Yesterday,wereportedourfinancialresultsforthethreeandsixmonthsendedJune30,2018.

I’dliketostartwithsomehighlightsforthequarter,aswellastheyearaheadbeforeMark

provides you with a more detailed review of our financial results, including our outlook for the

balance of the year. Ben will then discuss Spin Master’s operational results and our execution

againstourfourgrowthstrategies.

As everybody is aware, after years of financial struggles caused by unsustainable debt

burden,Toys“R”UsfinallycloseditsdoorsintheUnitedStatesattheendofJune.Wedon’tbelieve

that the demise of Toys “R” Us is an indication of the fundamental health of the toy industry.

AccordingtoEuromonitor,the industryhasbeensteadilygrowinggloballyat justunder5percent

peryearforthepastsixyears,andaccordingtoEuromonitor,globalindustrygrowthissettobe7

percentfor2018and4percentfor2019.

TRUwasaglobalbusiness,andmanyofTRU’soperationsaroundtheworldhavebeensold

orareintheprocessofbeingsoldandwillcontinuetooperate.WhiletheliquidationsalesintheUS

did have a negative effect on our results this quarter, we are confident in the resilience of the

industryandourgrowthstrategies.

Aswehavementionedpreviously,therearestillsome…stillthesamenumberofkidsout

therecelebratingbirthdays,andholidayswillcomearoundeverysingleyear.

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One of our core strategies is to create evergreen TV and short-form content that

maximizes our franchise’s value. Since 2008, we’ve been creating content that has delivered

exceptionalresults.Kidstodayaremediamultitasking,simultaneouslyaccessingdifferentsourcesof

media,includingTV,theweb,digitalapps,radio,phone,andprint.

Kidscanjugglethesevariousmediaformsbecausetheyaredigitalnatives.They’vebeen

born intoandhavegrownup in thedigitalage.Wearevery focusedon reachingand interacting

withkidswherevertheyplaytoensurethatourproductsandcontentremainrelevantintheireyes.

ThedemandforPawPatrolcontinuestobestrong.Theshowistelevisedanaverageofsix

timesmorefrequentlythananyotherpreschoolshowonNickelodeon.Season5iscurrentlyrunning

inNorthAmerica. The firsthalfof season5wasa continuationof SeaPatrol theme thatwe first

introducedinSeptember2017.

We just launched thesecondhalfof season5onNickelodeonwith theUltimateRescue

theme. The pups will be leaping into each other’s super-sized rescue team vehicles for exciting

ultimateteamworkrescuemissions.Thefirstepisode,UltimateChase,airedonJune22nd,andthe

ratings for the episodes were the strongest the show has ever received—sorry, the show is the

strongest—the ratings were the strongest for 2018. I’d also encourage everybody to watch the

show.

We’re continuing to invest in PawPatrol franchisewith 52 creativenewepisodes every

single year. We’re also launching exclusive direct-to-video content and toys at Walmart in

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September. Mighty Pups, a 44-minute special, will be released in DVD before it premieres on

Nickelodeonthisfall.Thespecialisalsoasneakpeekintoourthemeforseason6.

WeplanonmoreoftheseexclusiveDVDandtoylaunchesinthefuture.We’realsohardat

workonplanningforthePawPatrolmovie.

OursecondpreschoolTVshowcurrentlyonairisRustyRivets,andtheratingsfortheshow

continue to be strong.According toNielsen, RustyRivets is ranked in thenumber three spot for

boysagestwotofive.Inseason2,RustyandRubyusetheirknowledgeofengineeringtorepurpose

machinepartstobuildnewcreatures,includingBotarilla,Tigerbot,andElephantbot.Wefoundkids

reallygravitatedtotheBotasaurcreatureweintroducedinseason1.Wearenowindevelopment

forseason3togetherwithNickelodeon.TheRustyRivetstoylineislaunchinggloballythismonth,

andistiedcloselywiththebuildingthemeprominentintheshow.

AsImentionedinMay,wearehardatworkonthesecondnew—ontwonewshowswe’ve

beenreleasingin2019:thepreschoolpropertyAbbyHatcherFuzzlyCatcherairingonNickelodeon

inlate2019,andtherelaunchofourboysactionproperty,Bakugan,airinginspring2019.

Weareaggressivelyplanning for theseentertainmentandtoy launches,andarealready

startingworkforseason2onBakugan.Bothfranchiseshave innovativeand imaginativetoysthat

wethinkwillresonateverywellwithkids.

Moving to the Hatchimals franchise, which is continuing to build momentum, we’re

innovating largeeggs toensure thatwecontinue todeliver themagical surprise that theoriginal

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higher-pricepointeggwasbasedon.Atthesametime,we’redevelopingnewthemesforthelower-

pricepointcollectibleline.

Theentertainmentteamishighlyengagedinproducingshort-formcharacter-based,story-

basedcontentfortheHatchimalsfranchise.

Wearealsofortunatetohavesuchatalentedteamin-housetobringthesecharactersto

lifeininnovativeandcreativeways.Thiswilllaythefoundationtobuildalong-termfranchise.

Weareveryexcitedabout the in-house licencecapabilitieswearenowdeveloping.Our

firstmajorinternallymanagedlicensing-outprogramisforHatchimals,andlicensedmerchandiseis

doing well across a broad range of merchandise categories. We are continuing to add new

categoriesbothdomesticallyandinternationally,andthesecapabilitiesthatwearenowbuildingin

thisareawillprovideafoundationforotherfranchisesovertime.

OurmobilestrategyplaysintothemediamultitaskingthatIreferredtoearlier.TocaBoca

andSagoMininowhaveover70appsbetweenthemandcontinuetogrow.Currently,9outofthe

top10paidappsforkidsareTocaBocaapps.WearealsofocusingonB2B,andinQ2werolledouta

programwithSingaporeAirlinesandAmericanAirlineswherebyselectTocaBocaappsareavailable

on in-flightentertainmentsystems.Weare lookingatawiderangeofadditionalopportunities to

introducekidstoourapps,andtiethemtoourinnovation-ledtoydevelopmentcapabilities.

IwanttoconcludewithapointonthemomentumweareseeingintheActivities,Games

&Puzzlesarea.Benwill talkmoreabout this later,but Iwant tocallouthowexciting it is tosee

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these segments of business thatwe have nurtured for some time now start to grow. Across the

businesswehavean innovative anddynamic fall product line, andwe look forward toexecuting

wellagainstourkeygrowthstrategiestodeliveranamazingexperienceforourcustomers.

NowI’llhandovertoMarkSegal,ourChiefFinancialOfficer,toreviewourfinancialresults

inmoredetail.

Mark?

MarkSegal—ChiefFinancialOfficer,SpinMasterCorp.

Thanks,Ronnen.Wearepleasedwithourfinancialperformanceinwhatwasachallenging

quarterfortheindustry.

Overall,oursecondquarterrevenueincreasedby12.6percentto311.5millionfrom276.7

million in2017.Mostofourkeycompetitorssufferedrevenuedeclines inthequarter,sothis isa

verygoodresult.

FXtailwindsincreasedoverallrevenueby2.4million.Inconstantcurrencyterms,revenue

increasedby11.8percent.Grossproductsalesincreased4.6percentforthequarter.

Onageographicbasis,whileourglobalplatformdrovegrossproductsalesgrowthinNorth

America and very strong growthofover25percent in the restof theworld, Europe showeda7

percentdecline in shipments.TheUKandFranceareEurope’s two largest toymarkets. InMarch

andApril,Toys“R”UsUKwasliquidated,andinearlyJuly,TRUFrancewentintoreceivership,butis

stilloperating.

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The UK liquidation and the uncertainty in France in Q2 created a climate of caution in

thosemarketsandinsomeotherEuropeanmarkets.Thiscautionaryclimateresultedinanoverall

reductioninordersandshipmentsinthesecondquarter.

Despite this, certain markets in Europe, such as Germany and Central Eastern Europe,

continued to show a strong performance. We are now seeing a return to normal purchasing

behaviourinEuropeasthecautionaryclimatedissipatesandthesemarketsstabilize.

Overall, international gross product sales as a percentage of total gross product sales

continues togrow. Internationalgrossproductsalescomprised32percent in thesecondquarter,

increasingfrom30.9percentlastyear,andcontinuingthesteadyprogresswehavemadeoverthe

lastfewyears.

TheliquidationofToys“R”Us’USbusiness,morethan700stores,wascompletedduring

the second quarter. This had an impact on our sales volume and gross margin, as TRU did not

replenish its sold inventory in these stores, nor did TRU forward buy the initial FOB purchases

towards full set as they normally would late in Q2. For perspective, in Q2 ’17, we shipped

approximately$25milliontoToys“R”UsintheUS.

In general, the TRU liquidationwent aswe expected,with amajority of their inventory

soldthroughbytheendofJune.

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Outside of the US, Smyths Toys agreed to purchase TRU in Germany, Austria, and

Switzerland.FairfaxannouncedtheacquisitionofToys“R”Us’Canadianoperationsandagreedto

repayallpriorindebtednessowing.

Toys“R”UsAustraliaannounceditwasclosingits44stores,andfollowingtheendofQ2

TRUFranceannounced itwillenter receivership.Wecontinue tosupplyFrance,butonaprepaid

basis. We have managed credit in both those countries very tightly, and we do not have any

materialcreditexposureineitherFranceorAustralia,oranyotherTRUentityforthatmatter.

Onour lastearnings call,wediscussedhow the timingofEaster this yearaffectedboth

comparisons forQ1andQ2against2017’s results.Asa reminder, in2017Easteroccurred in the

middleofApril,which fell inQ2. This year Easter fell onApril 1, resulting in Easter sales volume

fallingintoQ1.IfyoulookatsalesH1’18versusH1’17,grossproductsalesforthehalfyearwereup

14.1percent,whichisaverystrongperformance,takingeverythingintoaccount.

Salesallowancesasapercentageofgrossproductsaleswas6percentforthequarter.This

iswellbelowourannualsalesallowancerangeof10to12percent.Thedecreaseisattributableto

thetimingofpromotionalandmarkdownspending,somecloseoutactivityinthequarter,andour

continuedtightfocusonthemanagementofallowancesingeneral.

Other revenue,whichprimarily reflectsmerchandising royaltyandtelevisiondistribution

income from products marketed by third parties using our intellectual property, as well as app

revenuefromTocaBocaandSagoMini,continuestogrowandincreasedforover88percentforthe

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quarter.AsRonnenmentioned,weare seeing the resultsof the strong licensing anddistribution

programs associatedwith our brands and entertainment franchises, and entertainmentwith our

mobiledigitalappsisgrowing.

Ourgrossmarginforthequarterdecreasedby1.9percent.Thismarginerosionwasmainly

attributable to the amortization associated with the delivery of more entertainment episodes

compared to last year without their full revenue being reflected, and closeout sales of certain

discontinuedlinesduringthequarter.Thedecreasewaspartiallyoffsetbyhigherotherrevenueand

lowersalesallowances.

TotalSG&A,excluding share-basedcomparising fromtheequityparticipationawardsat

the timeof the IPO, increased1.9percentasapercentageof revenue.The largestdriversof this

increasewerehighermarketingandadminexpenses.

Regardingmarketing, spending for thequarterwas8.5percentof revenue,up from7.4

percent lastyear.Themedia landscape isevolving,andweareattheforefrontofthis.Marketing

initiativesforthequarterincludedtraditionalmedia,tradeshows,andcontentandmerchandising

initiatives. In line with the changes in the way kids consume content, we’ve been allocating a

greaterproportionofourmarketingspendtowardsdigitalandsocialmedia.

Several unique spring product launches affected our total marketing costs during the

quarter, including marketing for the new seasons of Colleggtibles, Party Popteenies, and Flush

Force,aswellasincreasedsupportforHatchimalsandPAWPatrol.WedelayedthenewPAWPatrol

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Ultimate Rescue theme until closer to the key selling period inQ3, andwe usedmarketing as a

replacementforthatnewTVcontent.

Productdevelopmentexpenseswereslightlyhigherthanlastyearasaresultofthetiming

ofourdevelopmentprogramswithinthe36-monthbrandinnovationpipeline.

Selling expenses and distribution expenses decreased as a percentage of revenue

comparedtoQ2lastyear.Inthecaseofsellingexpenses,third-partylicensedproductscontinuedto

makeupa lowerproportionofoursalesmixaccountingforthedecrease.Wearealsoseeingthe

benefitsof investmentswe’vepreviouslymadetooursupplychain infrastructures tosupportour

domesticbusinessinEurope,growthinCardinal,andouroverallgrowth.

AdminexpensesinQ2asapercentageofrevenueincreased60basispointsfromlastyear.

The increase is primarily attributable to people costs associated with our recent acquisition of

GUND,themark-to-marketofourLTIP,whichresultedina$4.6millionchargecomparedtonullin

Q2lastyear,andadditionalresourcestosupportourinternationalexpansion,whichhasaveryhigh

ROI.

Themark-to-marketoftheLTIPisnotaddedbacktoadjustedEBITDA.Andgoingforward,

weintendtochangetheLTIPstructurefromcashtoequitysettlementtoavoidthisP&Lvolatility.

Theincreaseinadminexpenseswaspartiallyoffsetbyacontinuedfocusoncostcontrolinallother

areasofG&AandlowerIPO-relatedshare-basedcompcosts.

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Netincomeincreased21.7percentyearoveryear.Partoftheincreasewasduetoa$15.5

million legal settlement in our favour relating to a long-outstanding claim.We can’t get into the

details,butweareverypleasedtohavesuccessfullyconcludedthiscase.Wewillreceivethe$15.5

millioncashduringthisyear.

Giventhenatureoftheclaim,wehavenot includedit inadjustedEBITDA.Onthisbasis,

adjustednetincomedecreased20.4percentfromQ2lastyear.

AdjustedEBITDAforthequarterincreased3.8percentto45.4millioncomparedto$43.7

millionlastyear.WeareverypleasedtoshowadjustedEBITDAgrowthforthequarter,despitethe

manyheadwindswefaced.

AdjustedEBITDAmargindecreasedby1.2percent,mostlydue to the increase in SG&A.

However, as Imentioned earlier, the nature of the SG&A increase is such that we expect these

investmentstohaveastrongROIinlaterquarters.OrinthecaseoftheLTIP,mark-to-marketshould

nolongerbeafactor.

LookingatourbusinesssegmentsforQ2.IntheActivities,Games,Puzzles&FunFurniture

segment, gross product sales maintained their strong positive momentum, primarily due to

increasedsalesofgamesandpuzzles,which includesCardinal, theCoolMakerbrandedproducts,

andKineticSand,offsettingdeclinesinBunchemsandBuild-A-Bear.GUNDgrossproductsalesinthe

quarterwereapproximately$10million.

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In the Remote Control and Interactive Character segment, Hatchimals Colleggtibles and

Luvabella are driving growth. However, sales of the higher-price point Hatchimal eggs have

declined,ashavesalesforZoomerandAirHogs.Ifyourecall,thelargeegginthefirsthalfof2017

generatedsignificant salesdue topent-updemand from its launch inQ4 ’16.For this reason,we

always expected H1 ’18 to be a difficult comp for the large egg. Overall, the Hatchimals brand

continuestoshowstrengthdrivenbyColleggtibles,andwecontinueto innovateanddevelopthe

brand.

Grossproductsales intheBoysActionandHigh-TechConstructionsegment increased in

thequarterasaresultofsalesofTechDeckonthebackofaresurgenceintheskateboardmarketin

advanceof the2020TokyoOlympics, inwhich skateboarding isnowanofficial sport for the first

time.Initialsell-inofBoxerandsalesofdiscontinuedStarWarslicensedproductalsocontributedto

growth,partiallyoffsetbydeclinesinMeccanoandPiratesoftheCaribbeanlicensedproducts.

In the Pre-School andGirls segment, new product launches of Party Popteenies, Twisty

Petz,andRustyRivetsdrovegrowth.ButthiswasmorethanoffsetbyadeclineinsalesofZhuZhu

Pets,ChubbyPuppies,aswellasPAWPatrol.

PAWPatrolisobviouslyanimportantdiscussionpoint.GlobalPOSforPAWPatrolforthe

quarterwaspositive,andourretail inventoryposition isverytight.But theTRU liquidationhada

negativeeffectonPAWPatrolintheUSforthequarter.Benwillprovidemoredetailsonthislaterin

thecall.

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In the Outdoor segment, gross product sales decreased marginally in the quarter, as

SwimwayswasdisproportionatelyaffectedbytheTRUUSliquidation,whichoccurredduringtheir

largestseasonalsellingseasoninH1.Despitethis,OutdoorwasstillupforH1.

Ourbalance sheet remains very strong.Networking capital as a percentageof revenue

decreasedby1.2percentagepointsto9.6percentofLTMrevenue.Thiswasduetoimprovements

inallareasofworkingcapitalmanagementinbothourcoreandacquiredbusinesses.

Ourcashconversioncycledecreasedbynearlyninedaysinthequarter.

Free cash flow, while still positive, was lower this quarter compared to last year. The

decline in free cash flow is attributable to lower cash flow from operating activities and

nonrecurringCapExrelatedtoournewcorporateofficebuild-outinToronto.

Given the TRU liquidation and the timing of Easter, I wanted to share a few important

pointsforH1,aswhenyouhavematerialevents inaquartersuchasthosewejustdescribed, it’s

alsoimportanttostandbackandreviewafullerperiodwhichismorereflectiveofperformance.

AsImentionedearlier,forH1,revenuewasup18percentandgrossproductsaleswereup

over14percent.Europe isupnearly14percent forH1,withverystrongsalescontributions from

someofourkeyEuropeanterritories,suchasGermany,theUK,andCEE.Therestoftheworldisup

over35percentbasedonstrengthinMexicoandAustralia.

Activities,Games&Puzzles,Radio(sic)[Remote]ControlandInteractivecharacters,Boys

ActionandHigh-TechConstruction,aswellasOutdoorareallmeaningfullyupforthehalf-year.Pre-

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SchoolandGirls ismarginallydown,butthis is largelyduetothedeclinein licensedproductsand

the impactofTRU.Asyouwillhear later fromBen,weremainpositiveaboutPAWPatrol for the

balanceof2018,aswellassomeofournewlylaunchedownedIPbrands.

OverallglobalPOSisup20percentforH1,andretail inventoryisdownover25percent.

This sets us upwell for the second half of the year. Despite the decline inQ2 from theUS TRU

liquidation,theincreaseinamortizationfromhigherTVshowdeliveries,andthecleanupofsomeof

ourdiscontinuedinventory,ourgrossmarginforH1ismarginallyupover’17.

Aswerefineourbrandinnovationprocess,weacceleratedourcontentproductiontiming

and influencedsomemarketing investments inH1,whichwilldrivebenefits inH2.Ourmarketing

spendoverallremainswellwithinourhistoricalspendlevelsofapproximately10percentofsales.

SG&A forH1, excluding the TRUbad debt inQ1 and equity participation awards at the

timeoftheIPO,isup90basispointsover’17.Butthisismainlydrivenbyhighermarketingcosts;

some investment spending with a strong ROI, such as the GUND acquisition and international

expansion;andthemark-to-marketofourLTIP,whichIreferredtoearlier.Ifthemark-to-marketof

the LTIP is excluded, SG&A is flat H1 ’18 versus ’17. All other areas of SG&A, such as selling,

warehousinganddistribution,andnon-payrolladmincosts,aredownasapercentageofrevenue.

Costcontrolandproductivityprogramsremainakeyareaofmanagementfocusglobally.

AdjustedEBITDAisup18.9percentforH1,nearly5percenthigherthanourgrossproduct

salesgrowthrate.AnddespitethedisruptionofTRU,weheldouradjustedEBITDAmarginflatwith

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2017at14.8percent. If themark-to-marketoftheLTIP isexcludedyeartodate,adjustedEBITDA

marginis80basispointshigherin’18versus’17.

OnApril 2nd,weclosed theGUNDacquisitionon terms in linewithwhat Idescribed in

May.AlsoonJuly10,2018,weamendedourUS$510millioncreditfacilitytotakeadvantageofthe

improvedpricingenvironmentandtoaccommodateourgrowthplans.Thematuritydatehasbeen

extended by 18 months to June 2023. This gives us more flexibility to continue to execute our

organicandacquisition-drivengrowthstrategy.

Iwill concludewith our outlook for 2018. For the full year 2018, organic gross product

sales are expected to be in linewith prior guidance,which is formid-single digit organic growth

compared to ’17. Including GUND, gross product sales are expected to be in line with prior

guidance,whichisformidtohighsingle-digitgrowthcomparedto’17.Thisgrowthoutlookisinline

withourlong-termgrowthtargetofmidtohighsingledigits.

WeareseeingsignsofstabilizationintheindustryfollowingToys“R”Us’demise.Whilewe

havekeptoursalesguidanceconsistentwithourprioroutlook,wearehopefulthattheindustrywill

recover fasterthanweexpected,andthatourcustomerswillbeabletorecapturemoreofTRU’s

volumethanweexpected.Wehavepositionedourselvesthroughourtightenedfocusedinventory

managementtocapturethispotentialrecovery.Benwilltalkaboutthismoreinaminute.

Turningtoouroutlook forprofitability.WeexpectadjustedEBITDAmargins in ’18tobe

slightlyhigherthanthoseweachievedin’17.Weareextremelyfocusedoncostmanagementand

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productivity,andexpectthatwewillbegeneratingfurtheroperatingleverageinthesecondhalfof

theyear.Combinedwithaproductmixwhichcontainsmoreowned-IPproducts,thiswillleadtoa

slightlyhigher…thiswillleadtoslightlyhigheradjustedEBITDAmarginsoverallfor’18.

Asareminder,pleasenotethatadjustedEBITDAmarginiscalculatedonrevenueandnot

grossproductsales.

I’dnowliketoturnitovertoBenGadbois.

Ben?

BenGadbois—GlobalPresidentandChiefOperatingOfficer,SpinMasterCorp.

Thank you,Mark.We’re pleasedwith our financial and operating results in the second

quarter of 2018. Our solid performance is grounded in clearly defined growth strategies that

continuetoworkwell.

As expected, the US liquidation of TRU dominated the quarter. These liquidation sales

discountsdroveconsumerstoToys“R”Us,whodidnotreplenishtheirshelves,andconsequently

wesawdecreasedactivitiesatotherretailers.

Despitethis,westillgrewgrossproductsalesover14percentforthefirsthalfoftheyear.

We think this is an incredible achievement and showed the strength of SpinMaster’s brand and

franchises.

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Butbasedon the TRUUK liquidation results, it appears thatmost liquidationpurchases

madewereforimmediateconsumption.Webelievethisisconsistentwithwhatwillhappeninthe

US,andthat80,90percentofToys“R”Usvolumewillberedistributedinthesecondhalfof’18.

Battleformarketsharecontinues,withretailersaggressivelylookingforagreatershareof

the market previously held by TRU. We are seeing retailers considering out-of-aisle option or

borrowingspacefromotherdepartmentstoaccommodatetheextrainventory.

At the end of the day, however themarket is dividedwe are agnostic as towhere the

consumer wants to shop. Our goal is to give end consumers the best experience we can in the

channeloftheirchoice.

We closely monitor POS and supply and demand because they are not only important

metrics of brand health, but also critical to managing the Company and our balance sheet.We

rigorouslymeasurebeginninginventory,shipmentin,POS,andendinginventory.

In H1, our global andUS POS growthwas over 20 percent, yet at the same time retail

inventorylevelsdeclinedbyover25percent.ThegrowthinPOS,coupledwithadeclineinchannel

inventory,indicatesthatourfocusonmanagingtherightbalanceatretail isworking.Butthiswas

notaneasyresulttoachieve,giventheTRUliquidation.

As Mark mentioned earlier, we saw a decline in PAW Patrol shipments in the second

quarter. This was fully expected, as PAW Patrol comprised a significant proportion of TRU’s

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inventory.PAWPatrolhasadominant leadershipposition in thepreschool categoryandwas the

largestdollarpositionheldbyTRUwhentheyenteredliquidation.

This resulted in actual PAW Patrol POS growth at TRU, but a decline in POS at other

retailers,anddroveshipmentdecreaseofPAWPatrolatretailoverall.However,despitethedecline

inQ2shipments,globalPAWPatrolgrewforthefirsthalfof2018.Wecarefullymanageinventoryat

retailtoensurestrongnewproductmerchandisingonshelvesforfall2018.Aswegetdeeperinto

thesecondhalfof2018,ourremainingretailcustomerbase iswellpositionedtocapturemostof

thelowervolumeinPAWPatrolinQ2.

WeareseeingthisalreadyinearlyPOSreadsfollowingthequarter,wherewehaveseen

thecurrentPAWPatrolPOSgrowthisnowbackatthesamelevelweobservedin2017,indicating

thattheTRUliquidationhasnothadapermanenteffectoncurrentpurchases.

Overall,wearepleasedwithourinventorypositionatretailgoingintoQ3,asthissetsus

upforastrongsecondhalfoftheyear.

Theshifttoonlinesalescontinue,andinthewakeofTRUwebelievethistrendisgrowing

quickly. Some long-term forecasts indicate that online should and could reach 50 percent of toy

salesinthenextfiveyears.In2017,onlinerepresented27percentofalltoysalesgloballyaccording

toNPD.Weareroughlyinlinewiththispercentage.

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Oure-commercegrowthcontinues tooutpace traditional retail growth. For theyear-to-

date, our US e-commerce POS was up low-double digits compared to last year. Asmore of our

consumersmoveonline,webelievewearewellmobilizedtocapturethee-commercemomentum.

I’d now like to briefly review our four key growth strategies, and provide you with an

updateonsomeofourcurrent initiatives.Ourfirstgrowthstrategy istocontinueto innovatethe

coreproductline.Wearehardatworkacrossallourbusinesssegmentsusingourrolling36-month

brandinnovationprocess.Weexpecttodeliversomeexcitinganddisruptive innovationsoverthe

nextfewyears.

Our product line in 2018 is strong across all our business segments. In the Activities,

Games, Puzzles and Fun Furniture categories, we continued to have high double-digit growth.

Cardinal in particular is doing very well, and we are excited about its global potential. We are

excitedaboutthissegmentgenerally,asGames&Puzzlesdeliversstable,recurringrevenue.

Kinetic Sand is showing a very strong resurgence, andwe have established a long-term

positionforKineticSandinthecompoundcategory.Weareveryexcitedabouttheinnovationwe

have brought to the classic play pattern of making friendship bracelets with the KumiKreator

braidedbraceletmaker,andhavehighexpectationsforthisitemthisfall.

InRemoteControlandInteractiveCharacters,wecontinuetogrowHatchimals,expanding

in both size and scope with innovation in the big egg, the introduction of additional series of

Colleggtibles,short-formcontentforYouTube,andadiverselicensingandmerchandisingportfolio.

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Wewill be launching a new innovative Hatchimal product on our third global Hatchimal Day on

October 5, 2018. We also expanded our short-form content, launching the live unboxing series

calledHatch Club on YouTube, andwe are also seeing some great innovation in the pipeline for

2019andbeyond.

Moonlite has been designed to bridge the gap between traditional and digital books,

deliveringanimmersivestorytellingexperiencewithvividprojection,soundeffects,andbackground

music.ThestorylibraryforMoonliteisgrowingwithover50titlesinthemarket,andwehaveplans

toexpandMoonlitegloballyin2019.

InPre-SchoolandGirls, thenewPAWPatrolUltimateRescue team in season5 is timed

with thedeliveryofour fallproduct line that features some incrediblevehicles. EarlyPOS is very

strong.RetailersareparticularlyexcitedaboutMarshall’sUltimateFireTruckasakeydriverforthe

holidayseason.

Thedelayofthenewthemeuntilclosertoourfallsellingseasonisalsopartofthereason

weincreasedmarketingspendinthefirsthalfof2018.Wedidnotrefreshthethemeinspring2018,

choosingtocarryovertheSeaPatrolthemeweintroducedinJuly2017.Weincreasedmarketingin

thefirsthalftocontinuetogrowthebrandaheadofthenewcontentandtheme.

Theplayset doll segment is oneof the top gaining categories year to date according to

NPD. We have two new exciting product lines that we developed internally through our brand

innovationpipelinethatfitswithinthosesubsegments.TwistyPetzisacutelineofcollectiblesthat

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transformsfromadorableanimalsintobraceletswithasimpletwist.Earlyreadsonthislinearevery

positive.

Toward theendofQ2,we launchedParty Popteenies, the girls collectibledolls product

line we’ve been keeping under wraps. We created a fan music video featuring some popular

YouTubepersonalities,anditalreadyhasover5millionviews.

InBoysActionandHigh-TechConstruction,POSreadsforTechDeckarehigh.TechDeckis

a cool boys collectible grounded in authenticity. Skateboarding culture is cyclical in nature, and

we’renowintheupswingofthistrend.

Weareexcitedabout theupcoming launchofBoxer,anewtiny intelligent robot. In the

constructive—intheConstructionsegment,weareworkinghardatreconnectingtheconsumerwith

theErectorbrandnamefromMeccanoproduct intheUS.For fall,wehavenewlicensedmodels,

includingJohnDeere,Ducati,andFerrari.

In thesecondhalfof2018 inwhat isa slower-sellingseason forOutdoor,weare taking

timetofocusongrowingSwimwaysinternationally.DespitetheTRUsituation,Outdoorstillgrewin

the first half, andAerobie in Europe is growing nicely. The product line and packaging are being

refocusedforconsumersoutsideofNorthAmerica.

Wearecontinuingtocarefullymanageourentirebusinessonaportfoliobasisinlinewith

our36-monthforward-lookingbrandinnovationpipeline.Weareespeciallyfocusedontheneedto

drivediversifiedbalancedrevenuegrowth,aswellasmanagefixedandoverallcostsconservatively.

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WewillprovidefurthercategoryperformanceupdatesasweusuallydoinNovember.As

part of our product development process, we also consider potential licence opportunities that

complement our core business. Content-based products, whether the content is internally

generated or licensed from third parties, remain important as the intersection between content,

community,andcommercegrowstronger.

Onourpreviouscall,wehighlighted twoof theexcitingnew licenceswehave for2019:

Monster Jam and How to Train Your Dragon. Spin Master is the master toy partner for both

franchises.Wearecurrentlyworkingonthesetoylines,andlookforwardtosharingthemwithyou

atthe2019ToyFairinNewYorknextFebruary.

Our second growth strategy is to significantly increase our international sales. Our

established markets are performing well, with exceptional growth this quarter in Central and

EasternEurope,Germany,Australia,andMexico.

InGermany,forexample,themarketwasuplowsingledigitsandwereupmorethan14

times that number.We remain, however, relatively underrepresented compared to the industry,

withouroverallmarketsharebeinglessthan1percent.Weareincreasingdigitalmarketingefforts

inEuropesignificantlyversuslastyear,asthismarketcontinuestoevolvetowardsdigitalinasimilar

waytotheUSandCanada.

In2019,wewillbesellingdirectly inRussia,Switzerland,Austria,andGreece.Russia isa

multibilliontoymarketandgrowingrapidly.Itisstrategicallyimportantforustobedirectinthiskey

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global market. We will distribute directly in most of the territories centred in the Moscow-St.

PetersburgareastartinginJanuary2019,andusethird-partydistributorsforcertainlesspopulous

regions.

Switzerlandisahigh-incomemarketofnearly9millionpeoplewherethetopfourretailers

control 80 percent of the marketplace. This plays well to Spin Master’s strength. These new

territories represent market penetration opportunities to increase our scale outside of North

America, supporting our growth and margin expansion strategy. Remember that we achieved a

meaningfulmarginpickupbysellingdirectatwholesalepricesversusthird-partydistributorpricing.

We launched China in July 2017 with a core group of products, including PAW Patrol,

Hatchimals,Bunchems,andSewCool.AccordingtoEuromonitor,Chinaisexpectedtoovertakethe

USasthelargesttoymarketgloballyby2021.PAWPatroltookitsfifthawardlastweekattheChina

LicensingAwardswherePAWPatrolwonBestYoungPropertyoftheYear.CCTViscontinuingtobe

astrongpartnerinairingthePAWPatrolepisodesfreetoairinChina,withseason3launchingthis

fall.

We are expandingdistribution in China in 2018 to includeWalmart, department stores,

andwholesalechannels. Inaddition,wehaveopenedanew flagshipSpinMaster storeonTmall,

whichasyouknowisadivisionofAliBabaandthelargestretailerinChina.Wefeelconfidentinour

ability to grow in China, and we have been expanding our product offering to meet consumer

demand.

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Adding to the existing brand we have already launched will be Air Hogs Supernova,

Luvabella,PartyPopteenies,andCoolMakerforfall2018.SpinMasterhasbuiltaglobalreputation

forproductinnovation,strongpartnership,andcreativemarketing.Wenowunderstandwhatworks

andwhatdoesn’tmuchbetterthanjustafewyearsago,andthat’scontributingtotheacceleration

ofourgrowthstrategies.

Webelieveinourabilitytoincreasesalesinestablishedmarketsthroughnewchannelsof

distribution and successfully enter into markets. We’re driving toward a medium-term goal of

generating40percentofannualgrossproductsalesinternationally.

Third, we continue to develop evergreen global entertainment properties. As Ronnen

alluded to earlier, we are ramping up our effort to deliver short-form and other entertainment

content.Thisispartofourlargerstrategytobuildandmaintainfranchisedproperties.

We continue to work very hard in a coordination of the global toy and entertainment

launchforBakuganearly in2019andforAbbyHatcher later intheyear.Earlyretailerfeedback is

veryencouraging.

Fourth,weintendtogrowthroughstrategicacquisitions.Wearelookingforopportunities

toacquirebrands, fuse thesenewlyacquiredbrandswithour innovation capabilities, anddeliver

growthinsalesandmarginbyleveragingourglobalinfrastructure.

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Ourresultsexemplifyhowouracquisitionstrategyisworking.Wehavethebalancesheet

and financial flexibility for acquisition, and we are actively seeking opportunities with the right

strategicfit.

OurmostrecentacquisitionwasGUNDinApril.Theintegrationisgoingwell,andwehave

justgoneliveonSAP.GUNDhasputusinaleadershippositionintheplushcategory.Ourstrategyis

nowtoraisebrandawarenessgloballyandleverageGUND’sexpertiseacrossourotherbrands.

I want to conclude with a comment on our focus on cost management and driving

productivityacrosstheorganizationthroughvalueengineeringandautomation.Asamanagement

team,wehaveacontinuousfocusondrivingincrementalimprovementacrosseveryaspectofour

business.

This constant focus fosters a strong, results-driven culture that allowsus to continue to

execute on all our growth strategies. For example, we have spoken on past calls about the

diversification of our supply base in Vietnam andMexico.We have now established an office in

Bangalore, India, andwe are building ameaningful supplier base in places thatwill grow further

overtime.

Overall,weareconfidentforthesecondhalfof2018,butwestillhavealotofworkahead

ofustoensurethatmanagementandshareholdersexpectationsaremet.Wearelookingforward

tothis,andareverythankfulforourgreatglobalteamwhocontinuetoworkhardtodeliverforall

ofus.

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Thatconcludesour formal remarks.Ronnen,Mark,and Iwillnowbepleased toanswer

yourquestions.

Operator,pleasebeginthequestionperiod.

Q&A

Operator

Atthistime,ifyouwouldliketoaskaquestion,pleasepress*,thenthenumber1onyour

telephonekeypad.

Ourfirstquestioncomesfromthe lineofAdamShinewithNationalBankFinancial.Your

lineisnowopen.

AdamShine—NationalBankFinancial

Thanksa lot.Goodmorning.Sogoodsolid resultsobviously ina tryingQ2environment.

MaybeforMarkafewsortofhousekeepingitems.Whenwethinkaboutmodelling,you’vetouched

on some timing factors as it related to lower than expected sales allowance line. I think we

ultimatelysortofbouncedbackwithin thenormalizedrange,asyoualludedto,10percent to12

percent.Butontheotherrevenuesfront,whichwasparticularlystrong,you’retrackingat63million

firsthalfoftheyear;lastyearyouwere86millionfortheyear.Canyougiveusanycolouronthat?

AndthenI’llfollowupwithafewmore,please.

MarkSegal

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So, Adam, thanks. Other revenue is tracking strong. I don’t think that it would be

appropriateorwiseto justextrapolatethatoutfortheyearonthesamebasis.Justkeepinmind

thatotherrevenueisacombinationofvariouselements.Andabigchunkofwhatwe’regenerating

in other revenue now comes from licensing and merchandising programs which are actually

managedby thirdpartiesonourbehalf. Sowedon’tnecessarilyhave that visibility tobeable to

actuallyprovideformalguidanceonthatrightnow.

Andsoaswebringmoreofthatin-houseandbuildourownin-housecapability,whichis

something that Ronnen discussed in his section,we’ll kind of getmore visibility on that. It is an

importantpartofourbusiness, it isaccretivetomargins,butwhatwe’vedoneisfromaguidance

perspective given you that gross product sales guidance, as well as the adjusted EBITDAmargin

guidance.AndIthinkyoushouldfocusonthat.

Andaswegetmorekindofmatureover time,wecould thinkaboutgivingguidanceon

revenue,butnotatthispointintime.

AdamShine

Okay.And justwhenwe lookat the line itemdepreciationandamortization included in

thecostofsales,itdiddoubleyearoveryearandcertainlyastepupfromtheQ1level.Nowsome

ofitIthinkyoualludedtorelatestothenatureofadditionalentertainmentcontent.Howshouldwe

thinkaboutthatincomingquarters?Isthatanewpotentialrunrate?Ordowetakeastepdownto

morenormalizedlevels?

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MarkSegal

IthinkyoushouldfromamodellingperspectivethinkaboutD&Aataround3.5percentof

CapExintermsofmodelling,whichisalittlebithigherthanwehaveactuallymodelledinthepast,

we’vegivenyouguidanceoninthepast.Butthisquarterwasalittlebitunusualinthesensethat

we have a conservative accounting policy. If we actually make a delivery on a TV show in one

territory,weactuallyamortize100percentofthatepisode’scost.

Andso I’mnotgoing toget into thedetailsofspecific showshere,butweactually took

100percentamortizationona certaindeliveryeven thoughweactuallydidn’thave revenue that

matched it. And in future periods, you’re going to then get that revenue coming inwithout any

amortization,sothere’salittlebitofatimingissuegoingonhere.

AdamShine

Okay.Great.Andthen,Iguess,justinregardstotheTRUliquidationdynamic,youtouched

onthefactthatobviouslyclearlyQ2wasimpactedfromaGPSbasis.Idon’tknowifyouwanttoget

intoanyspecificityastoquantum.Butyoualsohighlightedthenatureofsomeimpactonmargins.

Andmaybe forMark and/or even Ben, aswe look into the back half of the year dowe see, for

example, some of the pick-up of sales from TRU at other retailers, but retailers potentially

demanding above normal price concessions? Is there obviously incremental spend related to

heightenedawarenessofthetoyproductthatdidn’tnecessarilycomefrompriormarketingspend

onthepartofToys“R”Usspecifically?Canyoutalktothatdynamic?

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MarkSegal

Yeah.So in thequarteryounoticed thatweactuallyhadakindofdilutiononourgross

marginforthesecondquarter,partofwhichwasdrivenbyamortization,whichI’vedescribed,and

part of which was actually due to some closeout activity. We actually took the … we took the

opportunity in the quarter to clean up some inventory that we had in our warehouse relating

primarilytodiscontinuedStarWarslinesandFlushForce,whichdidn’tactuallyworkverywell.So

wecleaneditoutandwetookthegrossmarginhitinthequarter,whichsetsusupverywellforthe

secondhalfoftheyear.

Andasitrelatestotheotherpartofyourquestion,Ben,doyouwantto…

BenGadbois

Yeah. Good morning, Adam. So look, all the retailers are happy that the Toys “R” Us

liquidationisover.Sothat’sthefirststatementtobeclearon.Buteveryoneisworkingonsecuring

extra dollars inmarket share aggressively, so we’re holding a lot of thesemeetings with all the

retailers.Andthere’sa lotofworkaheadrightnowinQ3andQ4toensureproperexecutionnot

just on our behalf, but on behalf of the retailers to secure extra space in their stores, extra

merchandising.

Andalso every retailer, I think, is formulating their ownplan,whichweobviously don’t

disclosepublicly.ButIthinktheretailersareveryeager,andtheyseetheopportunitiestogaintheir

own fair share of the Toys “R” Us business that was left. And again, we’ve said before that we

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expect80to90percentoftheToys“R”Usvolumetocomebackthisyearandmoreorlessbeall

backnextyear,andIthinkwe’recontinuingtoholdthatthesenumbersarewhatwestillbelievein.

AdamShine

Okay.Great.I’llleaveitthere.Thankyouverymuch.

BenGadbois

Thanks,Adam.

MarkSegal

Thanks,Adam.

Operator

Ournextquestioncomes fromthe lineofSabahatKhanwithRBCCapitalMarkets.Your

lineisnowopen.

SabahatKhan—RBCCapitalMarkets

Right. Thanks, andgoodmorning. Just to followup thereon theother retailers. I guess

earlierintheyearIthinkonsomeofthepastquartersyou’dcommentedthatsomethinglike80to

90percentofthedemandcouldbepickedupbysomeoftheotherretailers.Canyoumaybegivean

updatedviewonthatnowthatyou’repastQ2?Andkindofisthekindoftheliquidationbasedon

what you sawacross the industry, is it kindof as you expected in termsof the broader industry

inventoryaswellratherthanyourinventorywithretailers?

BenGadbois

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Yeah.Goodmorning,Sabahat.So letme just, inQ2,particularly inQ2 ifwestepupand

lookat the impactofToys“R”Uson theglobalbasis, theUS,UK,andFrancewere impacted the

deepestwithToys“R”UswhereinQ2,forexample,theoverallmarketintheUSthePOSwasdown

1.7percent,theUKwasdown14percent,Francewasdownover9percent.Wehadprettymuch

anticipatedallofthistohappen,aswediscussedpreviously.

Butfurthermore,Ithinkdespitealloftheseheadwinds,ouroverallportfoliocontinuesto

doreallywellonaglobalbasis.AndforusatSpinMaster,ouryear-to-datePOSisupapproximately

20percent, yetour retail inventory isdownover25percent. Sowhat thismeans is thatweasa

company have been incredibly prudent to ensuring that all of our product shipments were not

overdone inQ2.Andwewanted tomake sure thatwe leftQ2 in a very, very goodending retail

inventory position in order to make sure that the shelves were not going to be clogged, which

preventsthefullshipmentinQ3andQ4ofourfallproductline.SoIthinkwe’veactuallyexecuted

reallywellonthis.

AndwefeelthatwearewellpositionednowafterToys“R”Usfortherestoftheyear,and

wealsofeelthatwe’vemanagedthesituationprettywell,whichwillsetusupaswewantedforthe

backhalfoftheyear.

SabahatKhan

Allright.Thanks.Andthen—

BenGadbois

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Yeah.Goahead.

SabahatKhan

Iwasjustgoingtosayontheentertainmentcontentlaunchesthatyouhaveplannedfor

2019,soitseemsliketheAbbyHatchershowwilllaunchlatenextyear,sotheremightnotbeany

toysforthat.AtwhatpointintheyearwouldyouexpecttolaunchtoysforBakugan?Wouldthatbe

inconjunctionwiththeentertainmentcontent?Orwouldyouwaitalittlewhileanditcouldbean

H2‘19event?

RonnenHarary

Yeah.Thanks,Sabahat.Letmeclarifymyopeningremarks.AbbyHatcher isscheduledto

beonNickelodeonattheendofthisyear,orveryshortlyinJanuaryof2019.Andthetoyswillbefall

2019.Sotheywillhitnextcalendaryear.

And for Bakugan, the toys are expected to be out in the first quarter of 2019. And the

showwillalsolaunchin2019.

SabahatKhan

Okay.Thanksforthat.Andthenjustonelastone;Iguessasyouthinkaboutsomeofthe

headlinesthatwe’reseeingaroundthetradedisputes,howdoyoukindoffeelyou’repositionedin

terms of some of your options to move production around to maybe other jurisdictions? And

obviously it’s a broad industry headwind, but how are you guys thinking about planning for the

downsideriskthere?

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BenGadbois

Yeah. I thinkwhenwe look at tariffs, we obviously know the same as what everybody

knows.Thesuggestionisitwouldbeinthreewaveswithsomefocusonindustrialgoods,andIthink

consumergoods is inwavethreewheretheysuggesteda10percenttariff.Toyswerenotnamed

into theconsumergoods.Nonetheless,we’restayingveryclose to it,but I think it’s important to

notethatoverthelastseveralyearswe’veworkedveryhardtodiversifyoursupplychainfromjust

SoutheastChina.

SoweopenedourMexicansourcingoffice in2015. In2017,weopenedourVietnamese

office.JustafewmonthsagoweopenedanofficeinIndia,asIjustmentioned.Soweremainvery,

veryfocusedondiversifyingoursupplychain.Andtodayfortodaywhatthatwouldmean,basedon

theinternationalmixandtheprovenanceofthegoods,itwouldbeapproximatelymaybe3percent

impact on our product if we did absolutely nothing, which of course the management of this

companywouldbeveryfocusedinfindingwaystooffsetitwiththedifferenttoolsthatwe’dhave

atourdisposition.

SabahatKhan

Justtoclarify,that’s3percentincreaseinCOGSmaybe?Isthatwhatyoumean,Ben?

MarkSegal

SoletmejustwalkyouthroughsomeofthenumbersbehindwhatBensaid.Rightnow,75

percentofourproductionisinChina,25percentisoutsideChina.Andsoifyouactuallytakethat75

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percentrelativetowhatwouldactuallylandupintheUS,thenwethinkitwouldhaveanimpactof

around 3 to 4 percent on COGS, and we’d find a way to either pass that through or through

productivityprogramsmakesureweoffsetthat.

So we do not think that the impact of tariffs is going to be significant to us, although

obviouslywedonotwantittohappenoverall.Itwouldn’tbeagoodthing.

SabahatKhan

Great.Thankyou.

Operator

OurnextquestioncomesfromthelineofKenricTyghewithRaymondJames.Yourlineis

open.

KenricTyghe—RaymondJames

Thank you, and good morning. Ben, just with respect to the buzz on PAW Patrol and

holdingback,sotospeak,onUltimateFireTruck,would itbeafaircharacterizationtosaythat it

wasasmuchstrategic inholding itbacktogetthatbuzzamplified,butalsoanopportunity,given

the Toys “R”Us disruption for retailers and retail partners to clear out ormaximize value on in-

channelinventories?Andwasthereanysortofatwofoldplaytherethatseemstoworkratherwell?

BenGadbois

Yeah.No,Ithinkyour,Kenric,yourstatementis100percentaccurate.PAWPatrolwhen

we look at the first half of the year, our global POS is still up in the low single digits, and as I

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mentioned earlier, we’ve seen the POS accelerate in July as soon as the TRU shutdown was

completed.We’vealsojustlaunchedanewseason,theUltimateRescue,andthefirstepisodethat

wejustbroadcastgaveusthebestratingssofarthisyear.

Ronnen also mentioned new content, direct-to-video special around the Mighty Pups

that’scomingforthefall.Sowe’reveryhappywiththequalityofthecontentcominginthemarket

now, thenew content.Andwe feel likewe’re in a very strongposition at retail to shipour new

themevehiclebasedonhowwemanagedthetransitioninthemarketwithToys“R”Us.

And I think it’s also, the one last point I’d like tomake is, it’s just important to remind

everyonethatatanygivenquarterwecouldalwaysshipmorePAWPatrol,butwetakealong-term

viewonmanaging the franchise, andwe always dowhat is right for the long-termhealth of the

franchise. And despite the fact that even in the first half the POSwas positive, we really, really

wantedtomakesurethatweleftQ2,theToys“R”Usliquidationinasgoodofapositionforthen

the new theme to be launched and merchandised and marketed properly in the marketplace

aroundtheworld.

KenricTyghe

Great.Thankyou.Andjustaquickfollow-up.Wouldyoucharacterizethebuzzaroundthe

UltimateFiretruckinthisnextseasonasequivalenttoorbetterthantheLifeSizeTower,whichwas

sortoftheanchorsortofproductinthebackhalfoflastyear?

RonnenHarary

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It’syettobedetermined.Ithinkthat…ImeantheTowerissuchaniconictoytotheshow.

It’s thefoundationofPAWPatrol.But I thinktheamazingthingabouttheUltimateRescue,and I

encourageallyouguystostartwatchingtheepisodes,isjusthowampedupthevehiclesare.And

it’snotjustthefiretruck,okay?It’sthepolicetruckandit’sSkye’shelicopterandit’sRocky’struck,

andthey’realltheultimatevehiclesandthey’reallgoingontheseamazingrescuestogether.And

the show and the story is just amped up. So I think it offers a new way for kids to play that’s

complementarytotheTower;Idon’tthinkonetakesawayfromtheotherone.

AndthenIthinkthereallyexcitingthingisthatwe’redoingthisspecialone-hourmovieon

Nickelodeonwithaspecificproductlineattachedtoit,andwe’veneverdonethatbefore,around

theMighty Pups, which is also an amazing strong theme. And I think that that’s going to really

resonatewithkids.

AndIthinkthereallyimportantthingtoknowisjustthatwe’renotjustcreating52new

episodeseverysingleyear.We’retryingdifferentthings.Andwe’rebeingverybold,okay,withthe

franchise,andhavingthefranchisebeinnovative.We’reaninnovative-leadcompany,andsowe’re

innovatingthewaywe’redoingtelevisionforkids,tryingdifferentthingsthathaveneverbeendone

before,andcreatingourownplaybookandnotfollowingotherpeople’splaybooksfromthepast.

And I think that really will resonate with the consumers, and actually grow the

marketplaceinthefuture.

KenricTyghe

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Great.Thanksverymuch.

BenGadbois

Thanks,Kenric.

Operator

OurnextquestioncomesfromthelineofGarrettJohnsonwithBMOCapitalMarkets.Your

lineisnowopen.

GarrettJohnson—BMOCapitalMarkets

Thankyou.Goodmorning.Hey,IjustwantedtomakesureIheardyourightonPOS.The

20percent growth you’re talking about, that’s first half?And is that inclusiveor exclusiveof the

Toys“R”Usliquidationsales?

BenGadbois

ItisinclusiveGarrett—

GarrettJohnson

Okay.Andthechannelinventory,samething?

BenGadbois

Thatiscorrect.

GarrettJohnson

Okay.Doyouhaveanumber,aPOSnumberexcludingToys“R”Us?

BenGadbois

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No,wedonot.Butyouknow,Garrett,whatissointerestingwhenyoulookatthePOSis

that, as you know, POS is measured in dollars, so when you look at the POS in the overall

marketplace, given thedeepdiscount, there is actually—we’ve lost—themarket has lost a lot of

dollars.ThemarkethasgaineddollarsbecauseToys“R”Usliquidatedandtheyhadthepricing,the

deepdiscountsonpricing,obviouslydrovesomePOS,yetthePOSwasataprettydeepdiscount.So

Ithinkit’sextremelydifficulttomodeltheexactimpactinthemarketplace.

GarrettJohnson

Okay. And again, just to clarify, you’re measuring POS at retail dollars as opposed to

wholesaledollarslikeHasbroandMatteldo,right?

BenGadbois

Correct.

GarrettJohnson

Okay.Cool.Andon theother revenue,howmuchdid thechange inaccountingonapps

affectthat?Iassumenotawholelot,butifyoucouldtellushowmuchthatwasaffected?

MarkSegal

Therewasnochange,justtobeclear,Garrett.We’vealwayshadarelativelyconservative

accountingpolicy,which is thepolicy that I justdescribed. Soas soonaswedeliveroneepisode

anywhereintheworld,wetakethefullamortizationofthecostofthatepisode,sothatweapplied.

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It wasn’t—I’m not going to break it out exactly, but it was a few million dollars that actually

impactedusinthequarterforthatparticularline.

GarrettJohnson

Okay.Andsothat’stheappsthere’sacouplemillionbucksfromgoingto—

MarkSegal

Ohno,sorry,areyoutalkingabouttheapps?Orareyoutalkingabouttheamortization?

I’msorry.

GarrettJohnson

I’mtalkingabouttheapprevenuegoingfromnetto—

MarkSegal

Oh,sorry.Wedon’tactuallybreakouttheapprevenue.Wedon’tbreakoutapprevenue

aspartofotherrevenue.

GarrettJohnson

Okay.Iwasjustaskingbecauseyoudiditonthefirstquarter;youtolduswhatthegrowth

wasinclusiveandexclusiveofthatappaccountingchange.

MarkSegal

No,sorry,yeah.Iwasactuallyconfused.Thechangeinaccountingpolicydidactuallyrefer

toapps.Andsotheimpact,Ithink,wasabout20basispoints, Ithink,ongrossmarginifyoulook

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at—yeah, ifyouactuallytakeawaythe IFRS15change,theyear-to-dategrossmargin impactwas

about20basispointsless.

Soourgrossmarginwould’vegonedown1.7percentinsteadof1.9percentintheabsence

ofthataccountingchange.Ithinkthat’swhatyouwereaskingme.Iapologize.

GarrettJohnson

Yeah.AndIwasaskinghowmuchdiditaffecttheotherrevenue,butwecanmoveon.It’s

onlygoingtobeacouplemillionbucks.

MarkSegal

Yeah—

GarrettJohnson

Were thereanyothershifts inother revenue?Youhaveright touseandright toaccess

licences,andsoI’mwonderingiftherewasarighttousesortofbumpinthequarter?

MarkSegal

No,therewerenootherimpactstootherrevenue,Garrett,onthatfront.

GarrettJohnson

Okay.Thankyou.

BenGadbois

Thanks,Garrett.

Operator

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Ournextquestioncomesfromthe lineofBrianMorrisonwithTDSecurities.Your line is

nowopen.

BrianMorrison—TDSecurities

Thankyou.Goodmorning.Hey,Mark,justonthecapitalintensity,isthat3.5percentboth

thisyearandin2019?

MarkSegal

That3.5percentthatIreferredtowasthedepreciationandamortizationcomponentsof

the—relative to CapEx. So just remember, Brian, the guidance we’ve given you is that CapEx

typically runs at around 5 percent of sales; the depreciation/amortization runs at around the 3

percent.Forthisyear, I’msuggestingthatwegoto3.5percentandtheCapEx, includingourKing

Street,wouldprobablybeclosertoaround6percent.

BrianMorrison

Sorry,ImeanttheD&A.Iapologize.Butthat’s3.5percentfor‘18and‘19?

MarkSegal

Yes.Correct.

BrianMorrison

Thankyou.

MarkSegal

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Becausewe’rebuildingmoreentertainmentfranchises,soIthinktheD&Aisgoingtotick

upalittlebit,soIthink3.5percentforyourmodelismorereasonable.

BrianMorrison

Yeah. That’s fair. And just on the acquisition scene, maybe for Ben, are you seeing

increased opportunitieswith suppliers that are potentially captive to TRU? And just from a high

level,arethereanyopportunitiesofmagnitude?

BenGadbois

Morning,Brian. Ithink—I’mnotsurewe’reseeinganincreaseinactivityyet. Ithinkthat

will take a fewmoremonths and quarters towork its way throughwith everything settled.We

continue to always be in discussionwith several companies, andwe’re always very active in this

areaofthebusiness,butnonetheless,I’mnotsurethatwehaveseenanuptickjustyet.

BrianMorrison

Okay.Andthenfinalquestion;justcanyoujustdiscussorrankthechannelsthatyousee

replacingTRU,beitmassoronlineoralternative?Ijustwanttounderstandwheree-comis—Ithink

yousaid22percent industryandyourselvesrecently—whereyouthink it’sgoing?Andcouldthat

increaseforthcomingpotentiallyrequireanyinvestmentinyourdistributioncapabilities?

BenGadbois

So I think thee-commerce today, Imean lastyear itwasapproximately27percent.We

thinkit’llgrowsomethisyear;it’llprobablygetcloseto30percentthisyear,soIthinke-commerce

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will continue to gain some market share. And I think a lot of the rest, Brian, will most likely

redistributeitselfinthemarketplacealmostintheproportionthatyouseewherethechannelsare

today.

SoIthinkhighlevelthat’sprobablythewaywewouldmodeleverything.Forustoneedto

makesomeincrementalinvestmentindistribution,webelievethat—actuallyifyourememberlast

year,we’vealreadydonealotofinvestmentinour—

BrianMorrison

Yeah.

BenGadbois

—in our go-to-market capabilities. And they’re already bearing a lot a fruit from an

operational standpoint.We feel likewe’reproperlypositioned for the future.Andwith that said,

internallywecontinuouslyalwaysreassessandlookatreallocatingtalenttowarde-commerceand

thedifferentpartofthebusinessthatweseeasstrategicgoingforward.

BrianMorrison

Allright.Well,congratulationsonweatheringthemacro.

RonnenHarary

Thankyou.

BenGadbois

Thankyou.

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MarkSegal

Ithinkwehavetimeforonemorequestion,Operator,andthat’sit,ifthereisany.

Operator

Okay.AndournextquestioncomesfromthelineofStephWissinkwithJefferies.Yourline

isopen.

StephWissink—Jefferies

Thanks.Goodmorning,everyone.Hopefullythis’llbeaquickone,butI’mwondering,Ben,

ifyoucantalkaboutyourportfolioofbrandsasyouthinkaboutotherrevenue,so in licenceand

entertainmenthowareyoutappingyourtotalportfolioversusjustsomeofyourleadbrands?And

howshouldwethinkaboutthatcontributingoverthenextmaybeonetotwoyears?Thankyou.

BenGadbois

Well, I think, Stephanie—and I’m going to let Ronnen chime in as well because he’s

incrediblypassionateaboutthistoo—butIthinkthewaywelookatwhenwelookatour36-month

brand innovation pipeline, I think everyone’s familiar what our process, so we feel very, very

rigorous in not just developing great innovation for each one of our key segments, but also we

believe that storytelling and entertainment is becoming amore andmore important part of the

globalmarketplace.Andwe’realsovery focusedoncontinuing tocreatedifferent franchises that

willallowfortheseincrementalrevenuestreamstocometolife.

RonnenHarary

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Yeah.IthinkthatwespentalotoftimetalkingaboutHatchimalsandtalkingaboutPAW

Patrol,andI’msohappythatyouaskedthisquestionbecausewe’reseeingverygoodmomentumin

the Games, Puzzles area of the business, and Activities. And those teams are putting out super-

innovative products. The Games and Puzzles part of the business is expanding. In Europe, our

acquisitionofCardinalinternationallyit’sreallykickingin.

Soweseea reallygoodmomentumfor thebalanceof theyearandgoing into ‘19.And

there’snewproductlaunchesthatarehappeningthisyearliketheTwistyPetz,whichisseeingsome

very,very,verystrongsalesanduptakewiththekids,whichwillleadinto2019.Andthenthenew

franchises.We’vebeenworkingonBakugannow for close to36months.Wewaiteda full seven

yearsforafreshgenerationofkids.Wewaitedreallypatientlytorelaunchthat,andgaveitalotof

thought,andbringingnew innovation, something freshandnew,buildingon theexistingmagical

essenceofwhatBakugan’sallabout,andbringatelevisionshowtothemarketthatisrelevantand

in keepingwith theway kidswatch TV in 2019. Sowe’re very excited for that to come into the

marketinthefirstquarterofnextyearandveryfocusedonBakugan.

AndthenagainwithAbbyHatcher,Imean,IthinkthatIprobablycouldhavehadfourkids

inthetimethatittooktomakeAbbyHatcher.Notmyself,butmaybemygirlfriend.Butanyways,

it’sbeenfouryearsinthemaking,andI’mveryproudofthefocusthattheentertainmentteamand

the Company as a whole has taken to bring something to market that we think is going to be

nonderivativeandstandoutandbesomethingthatisverydifferentfromwhatisinthemarketplace

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todayandisgoingtoresonatewithkids.SoveryexcitedtoseethataironNickelodeon.Andthetoy

linelooksamazing.

Sobringfreshnessintoourfranchisesissuperimportant.Andveryexcitedforyouguysto

starttoseethefall2019linewhereI’mnotgoingtomentiononthecall,butthere’salotofother

initiativesinBoysandthere’salotofinitiativesinGirlsthatarecomplementarythataremoretoy-

based that potentially also have the long-term potential to be turned into franchises like a

Hatchimals.Andwe’reveryfocusedonthatandcomplementingthatwithshort-formcontent,and

reallyleveragingthein-housecapabilitiesthatwehavefromtheentertainmentteamindelivering

story-basedcontentandhowtobringcharacterstolifetokids.

Solookingforwardforyouguystoseewhat’sinthepipeline.

StephWissink

Thankyou.

MarkSegal

Thanks,Operator.

KarolineHunter

Okay.Nowwe’llendthecall.Thankyouforparticipating,andwelookforwardtospeaking

withyounextquarter.

BenGadbois

Thanks,everyone.

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MarkSegal

Bye-bye.

Operator

Thisconcludestoday’sconferencecall.Youmaynowdisconnect.

*****

Documents

Spin Master Corp. Second Quarter 2018 Financial Results Conference Call August … · 2018-08-15 · Spin Master Corp. Second Quarter 2018 Financial Results Conference Call PRESENTATION