FINAL TRANSCRIPT

Spin Master Corporation

Second Quarter 2021 Results Conference Call

Event Date/Time: August 5, 2021 — 9:30 a.m. E.T.

Length: 63 minutes

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CORPORATE PARTICIPANTS

Sophia Bisoukis Spin Master Corporation — Vice President, Investor Relations

Max Rangel Spin Master Corporation — Global President and Chief Executive Officer

Mark Segal Spin Master Corporation — Executive Vice President and Chief Financial Officer

CONFERENCE CALL PARTICIPANTS

Brian Morrison TD Securities — Analyst

Stephanie Wissink Jefferies — Analyst

Sabahat Khan RBC Capital Markets — Analyst

Martin Landry Stifel GMP — Analyst

Jaime Katz Morningstar — Analyst

Gerrick Johnson BMO Capital Markets — Analyst

2

PRESENTATION

Sophia Bisoukis — Vice President, Investor Relations, Spin Master Corporation

Thank you, and good morning everybody, and welcome to Spin Master’s Financial Results

Conference Call for the second quarter ended June 30, 2021.

I am joined this morning by Max Rangel, Spin Master’s Global President and CEO, and Mark

Segal, Spin Master’s Chief Financial Officer.

For your convenience, the press release, MD&A, and unaudited, condensed, consolidated interim financial statements for the second quarter 2021 are available on the Investor Relations section of our website at spinmaster.com and on SEDAR.

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, levels of activity, performance, goals or achievements, or any other future events or developments. Forward- looking statements are based on the information currently available to Management and on estimates and assumptions made based on factors that Management believes are appropriate and reasonable in the circumstances.

However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result, Spin Master cannot guarantee that any forward-looking

3 statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Spin Master has no obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information contained in the Company’s earnings release dated August 4,

2021.

Please note that Spin Master reports in U.S. dollars and all dollar amounts to be expressed today are in U.S. currency.

I would now like to turn the conference call over to Max Rangel.

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

Thank you, Sophia. Good morning everyone and thanks for joining us today.

This quarter marks our second consecutive quarter of increased profitability for Spin Master, resulting in a very strong first half. For the quarter, gross product sales grew over 27 percent and total revenue climbed by 39 percent to over $390 million.

In reflecting on our performance, what stands out is the diversity of the growth we saw across all our creative centres and all our geographies. The efforts we’ve made to grow our global footprint, develop our entertainment capability as well as the early investment we made in Digital Games through the acquisition of Toca Boca and Sago Mini are paying off. Approximately 20 percent of our Q2 total revenue resulted from Digital Games & Entertainment.

4 Much of the success we are seeing is due to the passion that our global teams have for our vision of creating magical experiences for children and their families. I want to thank all our employees around the world who have helped us achieve and exceed our revenue and operational targets while working under very difficult circumstances caused by the pandemic.

Digital Games’ growth was driven primarily by the Toca Life World platform and our Sago Mini subscription base. The sharp increases in growth we experienced, starting in Q2 2020, have been sustained. Kids are spending more time socializing with their friends in these expansive digital playgrounds through the new content releases and tools that allow them to create, connect, and share.

Toca Life World is a game that regularly evolves with new content, new playgrounds, and creator tools that allow kids to personalize their experience, and kids are playing and creating games, videoing themselves and streaming these videos onto TikTok, Twitch, and YouTube for others to watch. Toca Life

World has seen explosive growth in consumer engagement, and we believe this is a major factor behind its growth. Toca Life World has now over 39 million monthly active users, and the entire Toca World ecosystem has over 57 million monthly active users compared to 33 million last year. We are seeing growth in core markets such as the U.S. and Western Europe, but also increasingly in countries such as

Russia, Mexico, and Brazil, and in Eastern Europe as well.

The Sago Mini subscription business also grew to over 294,000 subscribers across Sago Mini

World, Sago Mini School, and Sago Mini boxes, compared to 184,000 last year. The continued expansion of our monthly active user and subscriber base provides us with a tremendous asset to develop a direct

5 relationship with the consumer, further deepening our relationship with them and expanding their loyalty with our Digital Games offering.

We are continuing to make progress on the opening of Noid, our new studio in Stockholm that will actually focus on developing digital games, leveraging Spin Master’s own IP. We have already hired a

General Manager and some key talent and are actively recruiting in Stockholm, well-known for its density of game development talent, to complete the team. We expect Noid to be operational by the end of 2021, and we’ll begin developing digital games during 2022 for launch in 2023.

One of our key 2021 priorities is to accelerate digital games through acquisitions. Parents and teachers are increasingly turning to engaging digital solutions when it comes to education. We see an opportunity to expand our presence in the digital games edutainment market, an area that has been the primary focus of Sago Mini. This past quarter, we took a step forward in this direction with the acquisition of Originator Inc. Originator is a digital game studio based in San Francisco and is the creator and publisher of entertainment education mobile apps for kids and families, all of which have reached the number one position in their categories in the Apple App Store. This acquisition will complement

Sago Mini’s edutainment offering while leveraging our substantial subscription user base to expand the

Originator apps to new audiences. We continue to actively look for further accretive digital games acquisitions and investment opportunities globally.

Now turning to our entertainment creative centre; telling stories and creating engaging and enduring characters that resonate with kids around the world is important to us, regardless of what screen kids are watching. We are rapidly approaching a major entertainment milestone with the highly

6 anticipated release of our first-ever feature film on August 20. The excitement for PAW Patrol: The

Movie is really building. On August 20, the film will be unleashed in theatres, distributed by Paramount

Pictures and on Paramount+ streaming in the U.S. Paramount has begun an extensive global marketing campaign and, in partnership with Viacom, we have over 200 consumer goods partners leveraging the

PAW Patrol movie and franchise.

In addition to our feature film debut, the Entertainment team continues to work on the development and production of new content. PAW Patrol will be entering its ninth season on

Nickelodeon in September, and continues to be rated as the number one preschool property, broadcasting in 160 countries, into 350 million homes.

We continue to take a multi-prong approach to our entertainment content creation, led by exceptional storytelling that we know will resonate with kids globally. The team has a rich slate of new entertainment series and feature films in development and are on track to produce and introduce one to two new entertainment properties a year. We continue to expand our distribution strategy to ensure that we touch multiple screens and platforms to reach kids wherever they are consuming content.

Finally, within our toy creative centre, as mentioned earlier, our retail customers have responded positively to our portfolio, propelling our gross product sales well above the same quarter last year.

Gross product sales in the quarter grew to over 27 percent. This increase was driven by Preschool &

Girls, and Boys, and can be attributed largely to our evergreen brands, including PAW Patrol and

Bakugan, as well as Kinetic Sand and Activities. Mark will provide more detail on our category performance.

7 I will now provide perspective and details on our POS. When we look back to last year’s second quarter, we were at the height of COVID lockdowns globally. Kids weren’t going to stores with their parents, they weren’t going to school in most cases, and the transitional social gatherings like birthday parties were not permitted. As a result, (inaudible) related items and those more aligned with social play experience had negative impact to POS.

A year later, we’ve seen these lines rebound. According to NPD, in-store sales in the U.S. have not only recovered from ’21, but are ahead of 2019. Toy industry growth continues but is slowing as we lap the first COVID quarter in 2020. Our data suggests that globally, the toy industry is up mid-teens on a quarter to year-to-date basis, which has slowed since Q1. In comparison, our global POS share and growth is flat on a year-to-date basis. Internationally for NPD, our Q2 POS is up 10 percent year-over- year, well ahead of the industry. On a year-to-date basis internationally, we are ahead of industry growth at 8 percent.

In the U.S., our POS declined 12 percent for the quarter, due to retail inventory gaps in Q1 and

Q2 that we described in May. We expect that through Q2, we still have continued gaps in inventory at retail, but we are now seeing strong signs of recovery with in-stock levels rising, which will improve further as the new fall line arrives at retail.

Despite lagging the industry growth rate in the U.S., momentum continues to accelerate on our core and franchise brands. PAW Patrol in Q2 was up 5 percent globally and flat in the U.S. Year-to-date, for NPD, PAW is up 17 percent globally and 14 percent in the U.S. This bodes well for the health of the franchise long-term and in advance of the movie launch later this month.

8 Bakugan continues to drive the battling toys segment and has grown by over 50 percent year-on- year every week. POS for Bakugan in the second quarter increased 62 percent on a global basis and over

80 percent in the U.S. for NPD. Bakugan’s strong growth in the quarter was driven by an integrated content and marketing plan that included an innovative new gaming experience in Roblox, which has now seen over 68 million plays since April. The combination of the new Netflix content, media, and

Roblox gaming yielded significant POS lifts that is driving Bakugan’s growth. Bakugan will go into deeper metaverse (phon) this fall and will become the first-ever property to premiere a full-length series episode of Roblox.

An interesting data point in the Boys product category is Tech Deck. According to NPD, in Q2,

POS increased 76 percent globally and 49 percent in the U.S., in anticipation of skateboarding making its

Olympic debut, which is sure to incite more skateboarding and fingerboard fandom.

From a DC Comics license perspective in Q2, our DC Universe POS was up 41 percent globally and up 15 percent in the U.S. We have successfully implemented price increases for our fall line effective July

1, that provide a partial offset to the sharply rising input and ocean freight costs that we are seeing. In addition, we are seeing logistics disruption driven by congestion in key ports, combined with rising

COVID cases in some areas of Asia.

The Supply Chain team is doing tremendous work with our partners, from manufacturing to logistics to our retailers, to ensure we deliver product to meet demand. This macro supply chain and cost pressures are meaningful, but given the actions we have taken and continue to take, we believe we can meet our full-year customer commitment. As a reminder, approximately 20 percent of our revenue

9 that comes from Digital Games & Entertainment is insulated from the impact of supply chain disruption.

Mark will speak to this in more detail in a moment.

As you know, Spin Master is renowned for its innovation. While we have successfully built evergreen brands like PAW Patrol, Bakugan, and Kinetic Sand, what sets us apart is our innovation mindset and our ability to surprise kids with magical experiences. This season, our team of designers have created a terrific line that will spark imagination while leaning into current trends and evolving play patterns. Some of the most innovative items launching this fall include: Purse Pets, an interactive fashion accessory that you can wear and play with; our new Sonic Fin Football, which was featured on the Today

Show with our ambassador, NFL quarterback Russell Wilson; a new fashion-forward plush line from

GUND, P.Lushes, has shown very strong POS so far. We believe we have several strong top toy contenders.

In addition to our intellectual property, we are also launching several newly acquired licensed toy lines in the back half of the year, in addition to Monster Jam and DC Comics, which continue to perform really well. Our toy line of Gabby’s Dollhouse, a top 10 preschool show on Netflix, has already debuted at retail, and initial POS results show strong pent-up demand for the toys. Our take on Wizarding World in partnership with Warner Bros is also hitting shelves this month. From an interactive Hedwig to a

Hogwarts Castle replica, our new range of toys celebrates and reimagines the beloved characters from the Harry Potter film series. Finally, this fall, we are launching our line of action figures, play sets and roleplay items from Riot Games’ League of Legends, the most played PC-based game in the world. We are excited to move into this category to leverage the attention of this loyal and international fan base and capture our share of sales in this rapidly growing “kidult” market.

10 We continue to evolve our approach to marketing, starting with a focus on consumer centricity to enable an in-touch driven approach. We expect consumer behaviour to continue to be dynamic through the balance of 2021. We’re keeping an eye on the following key trends: first, the economic recovery. While there’s no expected future COVID-related stimulus, the U.S. child tax credit and lower unemployment could contribute to higher consumer spending. We are focused on marketing spend to capture interesting new items and increase presence in our brand.

Across much of the world, children will return to school this fall, which will see a return to word of mouth on the playground and a craving for newness. We are focused on early execution around the back to school season leading into holiday. We will benefit from the return to physical retail as we are over-indexed in brick-and-mortar. We will continue to mix our spend against both kids and shoppers, in line with shifts we’ve made last year to support an omnichannel experience. For many families, there won’t be a full return to work with parents, increasingly given hybrid work options. For those still working from home, they’ll need toys to keep kids occupied.

To comp strong early promotion in 2020, we expect retailers to begin early price promotions.

Given store traffic growth continues, the season could extend later into December with last-minute shoppers having the option to buy in-store.

We are continuing to build our digital-first in-house capability with 50 percent of our U.S. marketing focus on digital channels. We have an e-commerce omnichannel focus, evidenced by our substantial increase in e-commerce marketing spend, with a strong physical retail program to

11 complement it. We are focusing on creating innovation on programs like Bakugan and Roblox, live- selling commerce, experiential retail, TikTok co-creation, and location-based mobile advertising.

To conclude, we are extremely proud of our global Spin Master team. Our founders have set a clear vision for our future as a fully imagined children’s entertainment Company, and this vision is being realized. We are very well-positioned entering the back half of the year with an amazing product lineup, strong momentum on our Digital Games offering and the highly anticipated release of our first feature film in less than three weeks.

Looking to the future, we are ready to adapt to the changing dynamics of play through innovation, customer-driven decision-making, partnerships, and a relentless drive to reimagine where imagination can take us. With these goals well in our sights, we will deliver profitable growth and continued value for our shareholders.

I will now turn it over to Mark to provide some further detail.

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Thank you, Max, and good morning everyone.

We started 2021 with strong financial results and extended these improvements through the second quarter. Q2 reflected the continued strength of our diversification efforts, with very strong

Digital Games & Entertainment growth, significant improvement in gross margin, and continued operational improvement. These factors combined to produce a $60 million improvement in our Q2 year-over-year Adjusted EBITDA.

12 In addition, we continued to strengthen our balance sheet, ending Q2 with net cash of $311 million. Our core business is healthy, and we continue to actively leverage our assets to deliver value to shareholders.

Gross product sales in Q2 rose 27.2 percent to $359 million, with a favourable foreign exchange impact of $6.5 million. On a constant currency basis, gross product sales were up 24.9 percent. Total revenues, including other revenues, climbed by 39 percent to $390.8 million, up from $281.1 million.

Other revenue for the quarter grew $35.9 million, or 126 percent, to $64.4 million. Both primary components of other revenue, Entertainment and Licensing, and Digital Games, were up strongly.

Entertainment and Licensing grew 30 percent, driven by growth in TV distribution revenue as well as licensing and merchandising income. In Q2, Digital Games revenue increased 262 percent to

$36.9 million, driven primarily by growth in Toca Life World and our Sago Mini subscription base. On a year-to-date basis, Digital Games revenue grew 315 percent to $71 million, from $17 million for the same period last year.

The gross product sales increase was driven by all geographic markets and exceptional sales growth in both Preschool & Girls, and Boys. On a geographic basis, the rest of the world was the strongest growth region, as gross product sales rose 58.2 percent, and in Europe and North America, gross product sales were up 23.7 percent in both regions. International gross product sales for the quarter represented approximately 30 percent of total gross product sales, up from 28 percent.

Our Preschool & Girls segment grew by $56.1 million, or 60 percent, to $149.6 million in Q2, driven primarily by strong sales of PAW Patrol, Gabby’s Dollhouse, and Present Pets. PAW Patrol is

13 performing well, accounting for a significant portion of the growth. Retailers are extremely enthusiastic about the movie toy line, while the core line continues to perform.

In Boys, gross product sales were up approximately 44 percent, driven by higher sales of

Bakugan, Monster Jam, and Tech Deck. This increase follows a year where we saw a decline in Action

Figures & Collectibles, which was affected by restrictions from COVID. Gross product sales in the

Activities, Games & Puzzles, and Plush category declined slightly by 1.8 percent to $98 million. The decline was driven primarily by the Games & Puzzles portfolio, which had unprecedented growth in Q2

2020, during the height of the pandemic. Relative to 2019, our Games & Puzzles business is strongly up.

Sales of Kinetic Sand, Orbeez, and Inkfluencer all positively contributed to sales. Included in

Activities, Games & Puzzles, and Plush were gross product sales of Rubik’s product of just under $5 million, and $7 million on a Q2 and year-to-date basis respectively.

From a channel perspective, retail is experiencing a shift back to in-store, and online growth, while still strong, is moderating. As Max mentioned earlier, industry in-store sales in the U.S. have not only recovered in 2021, but are ahead of 2019 levels by 30 percent. Overall, on a year-to-date basis, our e-commerce POS is up 5 percent compared to last year. Looking over a longer period, e-commerce sales in Q2 2021 are 84 percent ahead of where they were in Q2 2019.

Sales allowances in the quarter were 9.1 percent of gross product sales, down 140 basis points from 10.5 percent last year. Our improved inventory management led to reduced markdowns. In addition, year-over-year operational improvements drove significant reductions in noncompliance charges over the last year. These improvements were offset to some extent by continued growth in

14 Europe, which has a higher overall sales allowance rate than the global average. On a year-to-date basis, sales allowances were 11 percent versus 12.7 percent last year. Historically, we have operated in the 10 percent to 12 percent range. We expect to be within that range, but towards the upper end of the range for 2021.

Gross profit for the quarter was $209.9 million or 53.7 percent of revenue, compared to $180.2 million or 42 percent. This significant improvement in gross margin is a result of the growth in Digital

Games and Entertainment & Licensing, as well as the year-over-year cost reductions from our operational improvement initiative. These cost reductions include lower scrap and obsolescence, reduced closeout sales, reduced reconfiguration cost, and lower sales analysis (phon). In Q2 2020, we identified approximately $13 million in costs within gross profit, which related to inefficiencies from our operational issues, which have now been remediated.

Selling, general, and administrative expenses decreased as a percentage of total revenue to 38.2 percent, down from 40.8 percent. The 260 basis point improvement was driven by a significant reduction in distribution cost, which declined by $5.1 million to 3.5 percent of total revenue, compared to 6.7 percent.

Offsetting these improvements was higher marketing, selling, and administrative costs.

Marketing costs increased $15.8 million to 7 percent of revenue, which represents a more normalized level of marketing spend for Q2 when compared to 4.1 percent last year as a result of COVID. We now expect our full-year 2021 marketing spend to be at approximately 10 percent of revenue, in line with

15 2018 and 2019. We will invest in marketing strategically to support sell-through, share growth, brand momentum, and channel country mix goals.

Selling costs as a percentage of total revenue declined from 7.3 percent of revenue to 6.2 percent due to a lower proportion of licensed products in our mix this quarter. Administrative expenses increased over last year by $22.3 million or 40.4 percent to $77.5 million. The increase was primarily due to personnel-related costs, including higher incentive compensation accruals driven by improved operating results, as well as higher professional service expenses.

Administrative expenses as a percentage of total revenue increased slightly to 19.8 percent from

19.6 percent. Adjusted administrative expenses increased by $19.5 million to $72.9 million. Adjusted administrative expenses as a percentage of total revenue decreased to 18.7 percent from 18.9 percent.

In Q2, we recorded net income of $33.5 million, or $0.32 per diluted share, compared to a net loss of $14.9 million or a loss of $0.15 per diluted share. Adjusted net income in the second quarter was

$41.6 million, or $0.40 per diluted share, an improvement of $51.1 million when compared with an adjusted net loss of $9.5 million or $0.09 per share.

Adjusted EBITDA was $81.8 million in the quarter compared to $21.5 million, an improvement of

$60 million. The significant increase in Adjusted EBITDA was driven by higher gross profit and (audio interference) distribution costs, partially offset by higher selling, marketing, and administrative expenses. Adjusted EBITDA margin was 20.9 percent, up from 7.6 percent.

16 From a tax perspective, we had an income tax expense of $11 million in the quarter at a rate of

$0.25. Free cash flow was $62.5 million compared to $40.2 million, driven by higher cash flow from operations. Inventory at the end of the quarter was $135.7 million, down by $18.6 million compared to

$154.3 million in Q2 2020.

Regarding acquisitions, as Max mentioned, we acquired Originator during the quarter for $15 million, plus further performance-based payouts, assuming certain financial and operating performance thresholds are met over the next five years. Originator will continue to operate from San Francisco and will be reported within our Digital Games creative centre.

Turning now to our view for 2021, we are holding our gross product sales growth out for the full year at high-single digits, consistent with our guidance in May. Whilst we have continued optimism for

2021, based on orders on hand and retailer demand, we are seeing some headwinds which require us to be cautious about our expectations for growth. A significant headwind we are experiencing is from the global delay in shipping caused by a variety of factors, including logistics disruptions from COVID-related shutdowns at key ports in China, the ripple effect of the Swiss canal blockage, and from COVID-related labour shortages in certain areas in Vietnam and China, all of which has resulted in a shortage of empty ocean containers in Asia, which is disrupting and delaying customer pickups.

We are working hard to mitigate this. Our efforts include sourcing products earlier, increasing the number of ocean carriers we work with, and utilizing more ports to expedite the delivery of our product.

We continue to anticipate some port congestion and on ocean container capacity constraints for the second half of 2021.

17 From a timing perspective, we are working extremely hard to ensure full product availability during the holiday season, and we’re doing all we can to meet demand. We anticipate experiencing some shift in timing of revenue between Q3 and Q4. Overall, given all the above, we want to maintain a cautious bias when it comes to GPS growth expectation.

Turning to total revenue, we continue to see an acceleration of our momentum in

Entertainment, and in particular, Digital Games. Based on this momentum, we are pleased to raise our guidance for total revenue, and now expect it to increase mid-teens compared to our prior outlook of low-double digits that we shared in May.

Regarding the PAW movie, in May, we advised you that in Q3, we expect to reflect in our results the distribution revenue received from Paramount and a portion of the amortization previously capitalized. Our previous guidance was based on a release schedule that provided for an exclusive theatrical period followed by the subsequent release on other delivery platforms. Due to the uncertainties of COVID, the shift was made in Q2 in the movie’s U.S. distribution strategy to a simultaneous release in theatres and on Paramount+. As a result, we now expect distribution revenue of approximately $23 million in Q3, compared to $13 million previously advised, as well as approximately

$22 million of amortization of the capitalized intangible asset, compared to $12 million previously. The net impact of this distribution strategy change on our gross profit will not be material, but it will positively impact Q3 Adjusted EBITDA by $10 million.

18 Consistent with what I described in May, both licensing and merchandising revenue from the movie will continue to flow into Q3 and Q4 and into 2022, and, depending on the movie’s ultimate box office performance, we could see additional revenue in late 2021 and possibly in 2022.

Turning now to profitability; consistent with what is being experienced across the toy industry and many other industries, we continued to see increases in input costs, primarily from plastic resin, paper and cardboard packaging, and more recently from electronic chips, and in particular the ocean freight, which has nearly doubled as a percentage of our COGS compared to prior years. These cost increases accelerated significantly in the latter part of Q2.

In early May, we advised you that we have implemented cost containment and productivity programs to offset cost increases, but where necessary, we were implementing price increases to help us offset inflationary pressure. These price increases became effective early in Q3 as planned.

Normally, if we were raising our guidance for total revenue, we would also expect to raise our

EBITDA margin guidance. Gross profit and Adjusted EBITDA are benefiting from the remediation of our operational issues and the positive mix effect of Digital Games and Entertainment revenue growth.

However, given the incremental cost pressures the industry is experiencing and which are expected to continue, we’re maintaining our Adjusted EBITDA margin guidance and we continue to expect our 2021

Adjusted EBITDA margin to be towards the higher end of the mid-to-high teens range.

Capital expenditures and our effective tax rate are expected to be consistent with previous guidance.

19 To conclude, we have advanced our strategic initiatives and made great progress across all three creative centres, continuing to demonstrate our ability to produce compelling entertainment and digital content, magical toy experiences, and to be a great partner for the licensed toy lines. We have built a strong and focused global platform and are incredibly proud of the effort and results that our employees have delivered.

We are committed to our long-term financial framework for value creation, underpinned by our formula for innovation and global growth across Toys, Entertainment, and Digital Games. Our solid financial position, together with the achievements of our operational improvement initiatives, sets a very solid foundation for growth for 2021 and beyond.

That concludes the formal part of our call. We will now be pleased to take questions. Operator, please open the line.

Q & A

Operator

Thank you.

Your first question comes from the line of Brian Morris from TD Securities.

Brian Morrison – Analyst, TD Securities

Hey, good morning. First question for Mark; you kind of answered it, but just on guidance, if I understand, gross product sales being flat, and with the total revenue increase, I would’ve expected a

20 commensurate increase in the margin. But just walk me through the guidance. This seems like a conservative view taking into account for maybe logistic headwinds, because you are putting in the higher-margin Digital and Licensing revenue there we’ve seen.

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Yes, so Brian, as I just described, we maintain a cautious bias just given what is actually happening out there in the industry and in Asia. We’re experiencing crunches on ocean container capacity, and for that reason, despite the fact that we have strong orders and a great fall lineup we wanted to maintain a cautious bias on our top line, on gross product sales. We are going up on total revenue due to Digital Games and Entertainment strength, but we are maintaining our EBITDA margin guidance because of the inflationary cost pressures that we’re seeing, most recently on ocean freight and on electronic chips.

Given all those uncertainties, Brian, we thought it would be prudent to maintain a cautious bias in terms of guidance on those two metrics.

Brian Morrison – Analyst, TD Securities

Okay, thank you for that.

The second question’s for Max. I think I understand it, but I think it would be helpful to make sure it’s clear. You’ve got this negative 7 percent POS decline in the quarter, and it sounds like you had bloated inventories a bit over last year versus a constraint this year, maybe some timing of the PAW

Patrol Movie. But can you just provide some colour relative to the industry, your expectations for the

21 second half, and are you—it’s early, but can you provide some early PAW Patrol Movie POS presale data, anything on that front?

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

Absolutely, good morning, Brian. I want to give you context for our POS, and I’ll start with global and then come down to the U.S., which is the numbers you’re alluding to. Globally, we are outpacing category internationally, and actually grew share in 7 of 11 countries. As you actually have pointed out,

U.S. is our single largest opportunity.

From a category perspective, total POS, six of our nine total global franchises or brands are growing ahead of industry, outside the U.S. As you pointed out, inventory challenges are the single biggest reason for the lack of progress in the U.S. during quarter two at large, and it’s something we have shared with you in May. I think we’re at that point where inventory is beginning to look better, and we’re seeing tremendous growth on PAW Patrol. Let me get into that in one second.

Now, it’s not just within the U.S. that you have PAW Patrol. I think there are other things happening that are noteworthy performances we want to highlight, and I want to just bring you up to speed on that. Bakugan is one; we mentioned that in the prepared remarks. That franchise is growing very aggressively. Tech Deck is growing incredibly aggressively in the U.S., 49 percent growth in Q2. Our

DC Universe products are growing tremendously in the U.S. as well, 15 percent, Batman being the star performer. Kinetic Sand continues to grow in the U.S. as well, and what you see there is just declining category performance, but we’re growing share. We now have two items of the top five in the U.S. Arts

& Craft category, and so we’re feeling very strongly about that.

22 Then finally, PAW is up 14 percent in the U.S. year-to-date, and what’s really most exciting, what’s driving that is strong awareness increases and penetration increases in households, which is great news ahead of the movie.

Now, as you ask about the movie effect, obviously early days, but early POS rates are very positive. Right now we have basically our train set at Walmart and the numbers at Walmart are very, very encouraging. Last week, we set our (inaudible) target and it’s too early to tell; we haven’t even gotten the read yet. So far, we’re looking very, very good from a PAW Patrol, early days, anticipating the movie.

Brian Morrison – Analyst, TD Securities

Overall, it’s fair to say that you’ll be—by the end of the year you should see POS in line with the industry average, is that fair?

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

Yes, and that is our expectation and so, that’s what we’re gearing up to. We have, obviously, marketing lined up to basically drive that demand. We have more marketing this back half than we did a year ago; we’re actually going back to our more normal levels of investments, and in some lines, we actually have focus, so we are not spreading the peanut butter too thin. We are going after our franchises and core brands more aggressively. We expect performance to come back in the second half as we actually basically guided back in May.

23 We are continuing to see some really good performance in some of our bigger e-commerce accounts as well, so we’re growing share, first half to first half last year, at the biggest pure-play customer, and also at one of our other customers that is omnichannel. We’re seeing that continue. We made some interventions in Q2, and so our share has really grown, so we’re feeling very bullish about that.

Brian Morrison – Analyst, TD Securities

Thank you very much.

Operator

Your next question comes from the line of Steph Wissink from Jefferies.

Stephanie Wissink – Analyst, Jefferies

Thank you. Good morning, everyone.

I wanted to follow-up on Brian’s question on EBITDA; Mark, maybe this is a good one for you.

Just to help us bridge the EBITDA guide, because you are guiding to margins so you’re raising sales, holding the margin rate at that upper end, which does imply EBITDA dollars are going to be going up versus the prior model. I wanted to just make sure that that’s exactly what you’re saying.

Then secondly, just to help us think through the reference you made to the timing of the PAW

Patrol Movie, rev rec, it sounds like it’s going to hit EBITDA by $10 million in the third quarter, but maybe just help us think through the balance of Q3, Q4.

24 Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Sure. Steph, we do guide to margin as you say, so to the extent that our total revenue goes up, we would expect dollars to go up as well. But obviously, the situation is quite fluid. The Digital Games and Entertainment growth and the positive margin impact of that is being offset, to some extent, by the inflation that we’re actually seeing on ocean freight and plastic resin, and packaging, and other areas.

The situation is quite fluid and nothing has really stabilized completely yet, which is why we’re maintaining somewhat of a cautious bias on margin.

In connection with the PAW movie, essentially, because of the change in distribution strategy, we’re actually recognizing more distribution revenue and higher amortization in the third quarter. It’s really just a timing issue, although it does have a positive benefit in Q3 of $10 million on Adjusted

EBITDA. Some of that incremental EBITDA was actually going to flow through in Q4 and in later quarters, so now it’s really coming forward into Q3 because of the simultaneous release of the movie in theatres and on streaming with Paramount+ in the U.S.

In connection with licensing and merchandising, there’s no real change on the movie licensing and merchandising impact; that will flow through in Q3 and Q4, and also 2022, and then again, to the extent that the box office is really higher than expectations overall, there might be some upside in terms of income that we could see from that. But Steph, that is something that we haven’t necessarily built into our models, and I’m encouraging you not to do that yet because we just don’t know how this is going to play out. But it does represent upside, ultimately, to all of our models, if it was to be really successful at the box office.

25 Stephanie Wissink – Analyst, Jefferies

Okay, that’s great. Then my last question is just on advertising and marketing. Your marketing budget for the year sounds like it’s going to be closer to that 2018/2019 level. Your business has actually gotten somewhat more profitable since 2018/2019, especially with your operational improvements. As you realized upside, how do you balance passing that through to the bottom line versus reinvesting into areas of marketing and development to just continue to fortify the innovation pipeline?

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

Stephanie, we are, as I suggested and I’ll get into more colour—we are indeed investing in a few new lines that we’re bringing to market, particularly in the Dolls segment, something that we don’t have that we had to invest. We are reinvesting some of that margin, as you suggest, in things that we’re bringing new to market, so we’re excited about that.

Similarly, we have a few lines that we are bringing, like Gabby’s Dollhouse, that has basically incremental marketing that we need to now invest, and we’re excited about that, and has begun to done really well in retail. It’s beaten our expectations handily, so we have actually flowed in marketing dollars to that.

Then importantly, some of these items are now making it to Europe as well, so we are strengthening our European marketing. We are doing very well in Europe; we’re growing in most

European markets, and so marketing has to flow so we can continue that momentum.

26 Then as we look to ’22 and beyond, you are correct. We are strengthening our innovation ideas and bringing them to market next year, not just for the spring, but fall and even into ’23 with incremental investments as well.

As we talked earlier and Mark reiterated, our Noid studio is coming up and we are excited about that. There are some properties that actually will have multi creative centre impact, and so we are going to gear up and invest in that as well.

I hope that gives you colour beyond just the high level numbers that we have on your P&L.

Stephanie Wissink – Analyst, Jefferies

That’s very helpful, thank you very much.

Operator

Your next question comes from Sabahat Khan from RBC Capital Markets.

Sabahat Khan – Analyst, RBC Capital Markets

Okay, great. Thanks and good morning.

Today you mentioned that DC Comics progressing well in the U.S. earlier, particularly the Batman platform. Do you have any insight, I guess, into the movie pipeline or the opportunities there into kind of the next couple of years for the remainder of that license?

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

27 Sure, Sabahat, I’ll take that one. Actually, 2022 is going to be a big year on the DC front. There are actually four movies that are scheduled to come out from a new content perspective. You’ve got the

Batman movie that’s scheduled to come out in March of 2022, you’ve got Black Adam in the middle of

2022, and then towards the back end of 2022 you’ve got The Flash and Aquaman that are coming out, so four movies associated with the DC slate in 2022. Obviously we’re very excited about all of those and our toy lines associated with those, and we feel good about that license overall.

Max, is there anything you want to add?

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

I think you said it well, because we’re gearing up for it. We have great toy lines for that, so we’re excited.

Sabahat Khan – Analyst, RBC Capital Markets

Given, I guess, those all sound like they’re in the Boys category I guess, those would be sort of within the framework of the license that you have?

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Yes, those are within the license and they would be in the Boys category that we report.

Sabahat Khan – Analyst, RBC Capital Markets

28 Okay, great. Then in the quarter, I think what stood out was the POS related to Bakugan. I guess, is there anything—is it the new product line, is it content behind that? Maybe some colour on what’s driving some of that growth in that platform?

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

Yes, so great inferences, Sabahat. We actually had content drop in Q3 that was really, really successful, and as it dropped, it was basically done concurrently with activation in Roblox and activation in YouTube. The combination of all this, Netflix, Roblox, our marketing innovation, truly propelled a lot of users to engage with the brand. The engagement went up significantly, and we’re super excited to announce. We actually just mentioned earlier, we are releasing our new series on Roblox which is new for us and for a lot of the market. We get a lot of play patterns that we’re actually getting back into to supplement, obviously, with toys, all that great content and engagement by the new audiences that we’ve brought to the franchise.

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Just to add to that, Max, Sabahat, as you know, Bakugan is a game and a toy that actually thrives on kids playing together. As COVID restrictions have eased and kids are socializing more, that’s also helped, and the new toy line has received a great reaction. Kids getting together and word of mouth has definitely improved as well.

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

29 Just to reflect on Stephanie’s question, Sabahat, just to build on your question too, we actually have had great investments in marketing on Bakugan, and we’ve had great lifts on ROIs, so that gives us confidence to continue to invest on that franchise as we get into Q3 and beyond. We’re excited.

Sabahat Khan – Analyst, RBC Capital Markets

Okay, great. Just one last one for me; I guess with some of the concerns around freight and supply chain issues in Asia too, are you taking some mitigation measures like pulling deliveries earlier or bringing more product to your domestic warehouses? Just any colour around how you’re looking to prepare for the holiday season?

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Sabahat, we’re doing whatever we can to make sure that our toys get to our customers and that kids can buy them when they want to buy them with parents. We’re definitely doing everything we can, working with other carriers, moving things around, using other ports, working with logistics carriers wherever we can to move the goods, including potentially bringing some goods in on a domestic basis a little earlier. But it’s a very fluid situation right now. All I can say to you is that our Supply Chain team is extremely focused on doing all we can to make sure goods are on the retail shelf when we actually want them to be.

You want to add anything?

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

30 All I would add is basically, it’s an all hands on deck, it’s a daily effort between our teams, our retailers’ teams, our suppliers, and basically, weekly connections with the leadership of all those stakeholders so that we make sure we bring products to America and to Europe, particularly.

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Sabahat, the one thing I would add just in addition to this is that, because of the fluidity of the situation, I do see a potential shift in revenue between Q3 and Q4. Obviously from the perspective of the retailer, retailers look at this in the context of fall as opposed to Q3 and Q4, but obviously from our perspective, we report the quarters, so there might be a shift from September into October, in terms of some revenue shifting into Q4 as things move late September, early October, so just keep that in mind.

Sabahat Khan – Analyst, RBC Capital Markets

Just on the shipment issue, I think a few years ago, you guys had about two-thirds of your products selling, FOB, where retailers picked it up in Asia. Where does it stand today, I guess, post- pandemic?

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Yes, so 2020 was not a good reference point because of the inventory issues that we had in 2019.

What you see in 2021 is a shift back towards FOB overall. Now, keep in mind the U.S. market is always more FOB, and Europe is much more domestic, but what we’re seeing right now is a shift back towards

FOB, which is typically where we have been as a Company; not as much as the 60/40 that we used to see, probably more in the low-to-mid 50s FOB as a percentage. For the year, I suspect that we’ll be

31 somewhere around 50/50 for the year, maybe a little bit more weighted towards FOB but in that order of magnitude.

Sabahat Khan – Analyst, RBC Capital Markets

Thank you.

Operator

Your next question comes from the line of Martin Landry from Stifel GMP.

Martin Landry – Analyst, Stifel GMP

Hi, good morning. You’ve talked about supply issues and challenges. I’m wondering, for your

PAW Patrol Movie theme toys, I know you expect it to be at retail on August 1. I visited the retailer, a large retailer in Canada, and I couldn’t find your toys, and I can’t find them on the website as well. Just wondering, do you have some delays in Canada for your PAW Patrol Movie theme toys?

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

I think all those toys—good morning, Martin, are underway. In some other retailers, as we described earlier, they already are set, on train displays or on basically end caps. If you go to other pure- play, you’re going to find the toys as well, and you’re going to find a couple of handfuls of key items that we’re launching, already featured and selling. You can order them, obviously, online.

32 I am very well-aware that those actually are in their warehouses and making their way to the retailer shelves. Apologies that you couldn’t find it; everyone’s really working hard to get them to you. If you need them before you actually get back to the store, I think we can help on that front.

Martin Landry – Analyst, Stifel GMP

Thank you.

My other question was on your point of sale metrics. You do a really good job fleshing out what’s been the drive—or working really well and growing well, but what’s dragging a little bit your global point of sales? They’re down 7 percent year-over-year. Does it have to do with Activities and Puzzles due to hard comp, or anything else?

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Yes, so I think what we need to really level-set here is, and I think it’s taken me a couple of months, we play in part of the market, in categories that are smaller than, obviously, some of the larger super-categories in the space, that are growing. If you look at where we play and where our share is more developed, we’re now benefiting when you look at total Spin Master share from just basically our, if you will, where we play perspective.

We remain very focused on every brand and making sure every brand is growing share, and that’s why I talk about six out of nine brands growing share. But when you aggregate it and you look at the whole toy world and how it reports, then you can see the weighted average of our play and our performance be basically not necessarily recognized by a total Spin Master share performance. I hope

33 that makes sense, but that’s really one of the things that is hurting us. As you well point out, we have an overdevelopment in Games & Puzzles, and Games & Puzzles is one of the largest declining segments in

Q2, given the year-ago base, and for us in that category, it’s even more pronounced because, in the year-ago based period, we had basically some promotional items that we were selling at that time which we don’t have this year, because they were basically being liquidated.

I hope that explains a bit of the context. We’ve talked about basically, Kinetic Sand and how well we do from a share perspective, but that category as well, from a year-ago pandemic base, is also not one of the fastest-growing categories. I hope you get that where we play and where we put effort and investments may not be in the larger categories and the ones that are growing fastest. I think if you look at it in that context, hopefully the math squares for you.

Martin Landry – Analyst, Stifel GMP

Yes, it does, perfect. Thank you.

Operator

Your next question comes from Jaime Katz from Morningstar.

Jaime Katz – Analyst, Stifel GMP

Hi, good morning. I’m hoping you guys could share your updated expectations for gross margin.

Obviously, you’ve made a lot of progress year-to-date on the gross margin, but as the FOB, (inaudible) mix shift ahead and then Digital and Entertainment versus the traditional sales channel shift as well.

34 Should we be thinking that the opportunity for that gross margin is a little bit better than maybe it has been in the past?

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Jaime, good morning. Historically if you look at the Company, we’ve been in the high 40s overall,

49 percent, 48 percent, in that range, and we’ve always targeted to be north of 50 percent at a minimum and continue to grow from there. We had an exceptional quarter in terms of our gross margin at over 53 percent. On a year-to-date basis, we’re at just over 51 percent.

Gross margin is improving and has improved because of all the operational initiatives that we have implemented, as well as Digital Games growth and Entertainment growth, which are gross margin accretive, as well as product mix. Product mix has been a big factor as we ship more product where we own the IP, that has a positive impact on gross margin.

I will say to you, we’re going to continue to focus on that. I don’t believe we’ll be able to keep the rate at the same level that we were at in Q2 for the balance of the year, but certainly our goal is to be well north of 50 percent and to continue to grow from there. We’ve focused on all of the levers that are driving gross margin, whether it’s value-based pricing, lower sales allowances, increased Digital Games and Entertainment content, productivity programs in Asia, volume rebates, cost engineering, and all of those factors that drive higher gross margins.

But the cautionary reality that we’re dealing with right now is that there is inflation on all of the inputs into COGS, whether it’s plastic resin, whether it’s paper, cardboard, packaging, chips and ocean

35 freight, we just have to maintain reasonably cautious expectations around where our gross margins are going to be at this point until things settle down.

Jaime Katz – Analyst, Stifel GMP

Of course. I think in the prepared remarks, there were some comments about potential early price promotions or last-minute shoppers. Is there anything in the purchasing pattern from consumers now that would indicate that things were moving that way, or is that more just surrounding uncertainty in the environment right now and what issues may surface?

Max Rangel — Global President and Chief Executive Officer, Spin Master Corporation

Good morning, Jaime. I think if you look at Q2, and we talked about the overall market being 15 percent versus being 30 percent in Q1 and as we go into Q3, what would be the impact of that? We’re seeing, because of programs we have and how we actually share with you the fact that we’re trying to lean into, for example, some things with back to school. Our Sonic Fin Football program is off the gates and basically trying to reach that audience and get behind that period before the holidays. We expect that it will not just pick up in Q3, but it also will have residual purchases back in Q4. That’s just one example. The same is true for Tech Deck.

Then, the same is true for PAW Patrol. As PAW Patrol has now hit the retail stores and the movie will start to play and streaming will continue to get kids engaged and kids actually re-watching that video, we expect that that repurchase will once again happen.

36 We’re seeing, right now, really, these are early days, tremendous momentum in our POS on PAW

Patrol, particularly the low and mid price points. As the more expensive price points come closer to the holiday, you can imagine that that will continue to fuel our POS momentum into late Q3, early Q4, and prior to the holidays.

Jaime Katz – Analyst, Stifel GMP

Okay, thank you.

Operator

Your live question comes from the line of Gerrick Johnson from BMO Capital Markets.

Gerrick Johnson – Analyst, BMO Capital Markets

Hey, good morning. Could you talk about what drove Entertainment Licensing growth? I’m not sure you went into detail. There was some early CP (phon) revenue from the PAW Patrol movie.

Then my next question is on your own inventory on your balance sheet, down 12 percent. I would assume with cost increases, the units are actually down probably a little bit more than that. Is that sufficient to help hit your back half gross product target, which seems to be about flat year-over- year? Thanks.

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

37 Yes, so I’ll start with the second part of your question first, Gerrick. Yes, so inventory was down around 12 percent even though our sales were up 27 percent, so good inventory management and good results from a working capital perspective. We did see some inflation starting to creep into Q2, which will obviously affect the costs ultimately, and we’ll see more in the second half of the year. That will actually drive up inventory carrying values, even if units are flat.

We do expect our inventory levels to increase year-over-year at the end of 2021. I think we actually ended 2020 a little bit too clean in many areas, and that’s part of why we struggled with POS in the first six months of the year, because particularly in the U.S., we actually really were very low at retail and in our own warehouses on the inventory levels.

In connection with Entertainment and Licensing, we’re seeing both our TV distribution revenue, as we’re delivering our new shows, we have new shows on PAW Patrol, Mighty Express, Bakugan, and others all delivering, which is driving TV distribution revenue up, and then also, because of the strength of PAW Patrol in general, it’s not just toys that are strong, but also the licensing and merchandising program globally is driving increased licensing and merchandising revenue in PAW Patrol, and that’s driving up Entertainment and Licensing within other revenue.

Just keep in mind, we have over 200 partners around the world that are selling PAW Patrol licensed product, and with a movie coming along in Q3, we’re obviously excited about licensing and merchandising for Q3 and Q4 as well, but we did see strength in Q1 and Q2.

Gerrick Johnson – Analyst, BMO Capital Markets

38 Okay. Thank you, Mark.

Mark Segal — Executive Vice President and Chief Financial Officer, Spin Master Corporation

Thanks, Gerrick.

I think that’s our last question, Operator. So, let me just say thank you to all of you for participating this morning, and Max and I and Sophia look forward to chatting with you again in

November for Q3. Thanks everyone.

Operator

This concludes today’s conference. You may now disconnect.

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