Spin Master Corporation Second Quarter 2021 Results Conference
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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 "While Cision has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript is error-free. Cision will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or liabilities which may arise out of or result from any use made of this transcript or any error contained therein." « Bien que Cision ait fait des efforts commercialement raisonnables afin de produire cette transcription, la société ne peut affirmer ou garantir qu’elle ne contient aucune erreur. Cision ne peut être tenue responsable pour toute perte de profits ou autres dommage ou responsabilité causé par ou découlant directement, indirectement, accessoirement ou spécialement de toute erreur liée à l’utilisation de ce texte ou à toute erreur qu’il contiendrait. » 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.