spin master corp. third quarter 2017 earnings conference ...€¦ · final transcript november 8,...

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FINALTRANSCRIPT

SpinMasterCorp.

ThirdQuarter2017EarningsConferenceCall

EventDate/Time:November8,2017—8:30a.m.E.T.

Length:66minutes

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FINAL TRANSCRIPT

November 8, 2017 — 8:30 a.m. E.T. Spin Master Corp. Third Quarter 2017 Earnings Conference Call

CORPORATEPARTICIPANTSMarkSegalSpinMasterCorp.—ChiefFinancialOfficerRonnenHararySpinMasterCorp.—Co-ChiefExecutiveOfficerBenGadboisSpinMasterCorp.—GlobalPresidentandChiefOperatingOfficerCONFERENCECALLPARTICIPANTSKenricTygheRaymondJames—AnalystSabahatKhanRBCCapitalMarkets—AnalystAdamShineNationalBankFinancial—AnalystBrianMorrisonTDSecurities—AnalystDavidMcFadgenCormarkSecurities—Analyst

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PRESENTATION

Operator

Goodmorning.MynameisCheryl(phon),andIwillbeyourconferenceOperatortoday.At

this time, I would like to welcome everyone to the Spin Master Third Quarter 2017 Earnings

ConferenceCall.Alllineshavebeenplacedonmutetopreventanybackgroundnoise.

Afterthespeakers’remarks,therewillbeaquestion-and-answersession.Ifyouwouldlike

toaskaquestionduringthistime,simplypress*,thenthenumber1onyourtelephonekeypad.If

youwouldliketowithdrawyourquestion,pressthe#key.Thankyou.

Mr.Segal,youmaybeginyourconference.

MarkSegal—ChiefFinancialOfficer,SpinMasterCorp.

Thank you,Operator. Goodmorning, everyone, andwelcome to SpinMaster’s financial

resultsconferencecallforthethirdquarterendedSeptember30,2017.

Myname isMark Segal, and I amSpinMaster’s Chief FinancialOfficer. I am joined this

morningbyRonnenHarary,Co-CEO,andBenGadbois,GlobalPresidentandChiefOperatingOfficer.

Followingourformalremarks,wewillopenupthelinesforyourquestions.

For your convenience, the press release containing our third quarter financial results is

availableon the InvestorRelations sectionof theCompany’swebsiteatwww.spinmaster.com,as

areourQ3MD&Aandfinancialstatements.ThisinformationisalsoavailableonSEDAR.

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

lookingstatementsaboutSpinMaster’scurrentandfutureplans;expectations;intentions;results;

levelsofactivity;performance,goals,orachievements;oranyotherfutureeventsordevelopments.

Forward-lookingstatementsarebasedon informationcurrentlyavailabletomanagement,andon

estimatesandassumptionsmadebasedonfactorsthatmanagementbelievesareappropriateand

reasonable in the circumstances. However, there can be no assurance that such estimates and

assumptionswillprovetobecorrect.

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-lookingstatementswillmaterialize,andyouarecautionednottoplaceunduerelianceon

theseforward-lookingstatements.

Except asmaybe requiredby law, SpinMaster does not updateor revise any forward-

lookingstatementwhetherbecauseofnewinformation,futureevents,orotherwise.Foradditional

information on these assumptions and risks, please consult the cautionary statement regarding

forward-lookinginformationcontainedinourearningsreleasedatedNovember7,2017.

PleasenotethatSpinMasterreportsinUSdollars,andalldollaramountstobeexpressed

todayareinUScurrency.

IwouldnowliketoturntheconferenceovertoRonnenHarary.

RonnenHarary—Co-ChiefExecutiveOfficer,SpinMasterCorp.

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Thank you,Mark. Goodmorning, and thank you for your interest in SpinMaster. I will

begin the call with some strategic highlights from the quarter. Followingmy remarks,Mark will

provideyouwithadetailedreviewofourfinancialresults,includingouroutlookforthebalanceof

2017,andthenwe’lldiscussouroperationalresultsandourgrowthinitiatives.

Overall,wecontinuetobeverypleasedwiththefinancialandoperatingperformanceof

the Company. Despite some of the uncertainty that has been evident in recent weeks, the toy

industrycontinuestogrow.September,accordingtoNPD,year-to-dateUSsalesfigureswereup3

percentcomparedtothesameperiodin2016.

Aroundthistimelastyear,Iwasexcitedtosharewithyoutheinitialresultsoftheglobal

launchofHatchimals.WetoldyouatthetimethatourplanswastobuildHatchimalsintoabrand

drivenbyinnovation.Wearenowexecutingonthatvision.

October6thwe revealedournewestbrand innovationonour secondglobalHatchimals

Day. Hatchimals Surprise are twin creatures in one egg, delivering a new hatching experience in

interactivitythatbuildsonbutsetsitapartfromtheoriginal.

WehadverystronginitialshipmentsofHatchimalsSurprise inthequarter,andit’sbeen

tracking as the number one toy in the industry since its launch. We have now successfully

established Hatchimals as a brand that includes a successful low price point collectible line,

Hatchimals Colleggtibles; innovative, higher price point items such as Surprise, as well as global

direct licensing andmerchandising programswith products such as backpacks, apparel, bedding,

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books, andmore. For the first time, we aremanaging the licensing andmerchandising program

internally,whichdriveshighermarginsforus.

We had another innovative product launch in Q3 with our Luvabella and Luvabeau

interactivedoll line.Theadvancedanimatronics technology in thebabydoll,whichallowskids to

interactwithandnurturethedollinuniqueways,droveexcitementforitslaunch.

Luvabellahasover500responses,creatingamoreengagingandimmersiveexperiencefor

children.Andinitialconsumerandretailerresponsehasbeenextremelypositive.

Luvabella and Hatchimals Surprise are excellent examples of our continuous drive and

focusonmakingtoysthatarehighlyinnovative,andthatcapturechildren’simagination.

We will continue to leverage our internal and external global R&D and product

developmentnetworktodriveinnovation.Weseethisasamajorcompetitiveadvantage.

Intheinternationalareaofourbusinessourestablishedmarketsareperformingwell.We

remain, however, relatively underrepresented compared to the industry as a whole. We will

continueto focuson increasingsales inestablishedmarkets throughnewchannelsofdistribution

andgrowingintonewmarkets.

ThecontinuedsuccessofPAWPatrolhighlightsourentertainmentstrategy.Accordingto

NPD,attheendofQ3PAWPatrolwasthenumberoneproperty inthe infant/toddler/pre-school

supercategory in theUSonayear-to-yearbasis.Thispast July the firstof theSeaPatrol-themed

episodesaired,withthehighestepisodicratingeverfortheseries.

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AndthesuccessfullaunchoftheshowonCCTVinChinainJulyisalsoveryencouragingfor

PAWPatrol’slong-termgrowthinAsia.

WearemanagingPAWPatrolasanevergreenfranchise,andwe’reworkinghardtoensure

thecontinued—thecontentresonateswith theaudiencesglobally tomaximize long-termgrowth.

Season5issettoairinNorthAmericainearly2018.Andweareindevelopmentandpreproduction

onSeason6.

We are currently consideringwhether to expand the PAW Patrol franchise into feature

filmsatsomepointinthenext12to24months.Weareinprogressofdevelopingafilmscript,and

weexpect tosee furtherprogress in2018.This isanexcitingdevelopment forourentertainment

franchise,andwewillupdateyouinthecomingmonthsasweprogressonthisinitiative.

Rusty Rivets,whichwas launchedonNickelodeon inNorthAmerica lastNovember, has

been rating consistently in the number two spot among boys two to five. Nickelodeon is now

planning to launch Season1 shortly in France, Spain, Ireland, and theUK.And Season2 is being

delivered inNorthAmerica later thismonth. After a very limited toy launch inNorthAmerica in

2017,thetoylineislaunchingbroadlyinNorthAmericain2018.

Intheacquisitionarea,theacquisitionofAerobiehighlightsthestrategyweannouncedin

Q3lastyearwiththeacquisitionofSwimways,wherebywesaidwewantedtouseSwimwaysasa

beachheadforfurtheracquisitionsintheoutdoorcategorywhenitmakessensetodoso.

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Turning to themobiledigital sideofourbusiness.TocaBocaandSagoMini continue to

buildfunandcreativeappsthatencourageopen-endedplay.

WerecentlybroughtourentertainmentteamandtheTocaBocaappdevelopmentteam

together inStockholm to start thinkingabout ideas.Ourvision,which is starting toemerge, is to

take our proven capabilities in toys and entertainment and combine itwith Toca Boca and Sago

Mini’smobile digital capabilities to provide an end-to-end experience for kids and accompanying

physicalproduct,entertainment,anddigitalmobile.

I’llnowhanditovertoMarkSegaltoreviewourQ32017financialresultsinmoredetail.

MarkSegal

Thanks,Ronnen.BeforeIbeginreviewingourresults,Iwantedtoremindyouthatwewill

no longerbebreakingoutSwimways inourquarterlyresults,as inQ32017wearenowoneyear

post-acquisition.

LateronwhenIgettotheoutlooksection,forcontinuityI’llcontinuetobreakSwimways

outinreferencetogrossproductsales,butthiswillalsonolongerbenecessaryafterthisquarter.

InQ32017,ourrevenueincreased27.6percentfromlastyear,growingfrom475million

to606.1million.RevenuegrowthwasdrivenbyHatchimals,HatchimalsColleggtibles,PAWPatrol,

andCardinalGames.

Foreignexchangetailwindsincreasedoverallrevenueby4.8million.Inconstantcurrency

terms,revenueincreasedby26.6percentcomparedto2016.

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Q32017grossproductsalesincreased27.4percentto660.9millionfrom518.6millionlast

year.

On a geographic basis, Spin Master’s global platform delivered gross product sales

increasesof22.6percentinNorthAmerica,37.2percentinEurope,and41.9percentintheRestof

World.Combined, internationalgrossproductsalescomprised32.5percentoftotalgrossproduct

salesinthequarter,increasingfrom29.9percentin2016.

Other revenue,whichprimarily reflectsmerchandising royaltyandtelevisiondistribution

incomefromproductsmarketedbythirdpartiesusingSpinMaster’s intellectualpropertyandapp

revenuefromTocaBocaandSagoMini,was17.7millioncomparedto17.3millionin2016.

Salesallowancesforthequarterasapercentageofgrossproductsalesdecreasedto10.9

percentfrom11.8percentlastyear.

Ourgrossprofit forQ3 increased to316.9million, representing52.3percentof revenue

comparedwith247.7million,or52.2percentlastyear.Thesteadygrossmarginrateforthequarter

reflectsthefactthatwearenowcomparingresults,includingSwimways,onayear-over-yearbasis.

As you may recall, up to this point Swimways has been dilutive to year-over-year gross margin

comparisons.

TotalSG&Aexpenses,excludingshare-basedcompensation,were162.6millioncompared

to124.4millionlastyear.Theincreasewasdrivenbyvolume-relatedvariablecosts,investmentsin

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marketinginitiatives,increasedwarehousingcosts,andincreasedpeoplecosts,aswellasacharge

relatedtotheToys”R”Usbankruptcyfiling,whichIwilldiscussshortly.

SG&A, excluding share-based compensation expenses, represented 26.8 percent of

revenuecomparedto26.2percentlastyear.

Within SG&A, marketing spend increases were driven by more media and experiential

promotions,suchasthePAWPatrolTourandtheupcomingMacy’sThanksgivingDayParade,offset

bylowerspendonmerchandisinginitiativesandthird-partyagencyfees.

Marketingexpensesasapercentageofrevenuedeclinedto4.3percentcomparedwith5.1

percentlastyear.

Productdevelopmentexpenseswere0.8percentof revenuecomparedwith1.3percent

last year, primarily due to the timing of projects within the Remote Control and Interactive

Charactersbusinesssegments.

Selling expenses declined to 6 percent of revenue compared to 6.4 percent last year,

reflectingthehigherproportionofsalesrelatedtoowned-IPproductsinthisquarter.

Distributionexpenseswere2.4percentof revenuecomparedwith1.6percent lastyear.

TheincreasewasdrivenbydomesticsalesvolumeincreasesprimarilyinEurope,aswellasongoing

investments to rationalize our supply chain as we continue to position ourselves for growth,

including by improving and integrating Cardinal and Swimways logistics structures. These

investmentswillbegintoyieldbenefitsin2018andbeyond.

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Adminexpensesrepresented13.7percentofrevenuecomparedto12.8percentlastyear.

Excludingtheimpactofshare-basedcompensation,adminexpenseswere13.2percentofrevenue

comparedwith11.8percentin2016,reflectingforthemostpartaonetimeexpenserelatedtothe

Toys “R” Us bankruptcy. Excluding this TRU-related charge, admin expenses were slightly higher

than2016duetohigherincentivecompensationcosts.

Netincomeforthequarterwas108.8million,or$1.07pershare,31percenthigherthan

netincomeforQ32016of83.3million,or$0.82pershare.Adjustednetincomeforthequarterwas

111.7million,or$1.10pershare,28percenthigherthan2016’slevelof87.5million,or$0.86per

share.

Adjusted EBITDA increased 27.8 percent to 170.3 million from 133.3 million last year.

AdjustedEBITDAmarginsremainedflatyearoveryearat28.1percent.

Asareminder,whenwetalkaboutthetimingofspendingandprofitability,asignificant

portionofourannualmarketingexpensesareincurredinQ4ofeachyearinordertomaximizethe

impactoncustomerpurchasesandourreturnoninvestment.Thistypicallycausesamisalignment

of salesandmarketingspendingbetweenQ4andQ3, resulting inadjustedEBITDAmargins inQ4

significantlybelowthoseinQ3.

Turningnow toourbalance sheet.Networking capital as apercentageof LTM revenue

decreased 3.5 percentagepoints to 12 percent in 2017 from15.5 percent in 2016. Thiswas due

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primarilytoimprovementsinallareasofnetworkingcapitalmanagementinourcorebusinessand

inrecentlyacquiredbusinesses.Asareminder,Q3istypicallythepeakofourworkingcapitalcycle.

Freecashflowwas145.2millioninQ3,up28millionor23.8percentcomparedto117.2

million last year. This increase is primarily attributable to an increase in cash from operating

activities,offsetbyhighercashusedininvestingactivities,excludingacquisitions.

OurnetdebttoLTMEBITDAattheendofQ3waszero,indicatingthecontinuedstrength

andfinancialflexibilityofourbalancesheet.

Before I go into detail regarding the performance of our business segments, I want to

brieflydiscusstheToys“R”UsbankruptcyfilinganditseffectonSpinMaster.

OnSeptember18,2017,Toys“R”UsannouncedthatcertainofitsUSsubsidiariesandits

Canadiansubsidiaryvoluntarily filed forbankruptcyprotection.TRU’s filingresulted inus takinga

baddebtexpenseof$5.4millionduringQ3.ThisbaddebtexpenserelatestoSpinMaster’sestimate

oftheco-insuranceportionofinsuranceclaimonpre-petitionreceivablesandthedeductible,which

weareresponsibleforunderthecreditinsurancepolicieswehadinplaceonourUSandCanadian

salestoTRU.

We estimate in addition that approximately $10million of shipments to TRUwillmove

fromQ3toQ4arrivingfromtheuncertainlyaroundthetimeoftheTRUfiling.

LookingatourbusinesssegmentsforQ3,grossproductsalesintheActivities,Games,and

Puzzles,andFunFurnituresegmentincreased2.5percentto$128million.Cardinal,EtchASketch,

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Kinetic Rock, and Dr. Dreadful grew steadily, which offset declines in Bunchems, Kinetic Sand,

KineticFoam,andMarshmallow.

We had another very strong quarter in the Remote Control and Interactive Character

segments.Grossproductsalesincreased78percentto$264million,drivenbytheongoingsuccess

of Hatchimals, Hatchimals Colleggtibles, and strong initial shipments of Luvabella, which offset

declinesinAirHogsandZoomer.

GrossproductsalesintheBoysActionandHigh-TechConstructionssegmentdecreased25

percentto$45million,primarilyduetothedeclineinsalesofTeenageMutantNinjaTurtles,Secret

LifeofPets,andAngryBirdslicensedproducts,partiallyoffsetbyanincreaseinsalesofTechDeck,

StarWars,Meccano,DreamWorksDragons,andPiratesoftheCaribbeanlicensedproducts.

In the Pre-School and Girls segment, gross product sales increased 19 percent to $216

million,drivenbyPAWPatrol andRustyRivets,offsetbydeclines inBrightlings,ChubbyPuppies,

andPopples.

IntheOutdoorsegment,grossproductsalesincreased69percentinQ3to8millionfrom

salesofSwimwaysbrand.

On July 28, 2017,we acquired certain assets of Aerobie, a leading producer of outdoor

flying distance sports toys. The purchase price was satisfied by $10.7 million in cash and was

financedfrominternalresources.Wewillalsopayasmallroyaltyonsalesforthreeyears.

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Sales of the Aerobie product line are reported in our Outdoor business segment under

Swimways.WeexpectAerobiewillbemodestlyaccretivetoour2018earnings.

Iwillconcludenowwithouroutlookfor2017.Weareconfirmingouroutlookforthefull

yearthatweprovidedinAugust2017.

Weexpectorganicgrossproductsalesgrowthtobeinthemid20percentrangerelativeto

2016.IncludingSwimways,SpinMastercontinuestoexpectgrossproductsalesgrowthinthelow

30percentrangecomparedto2016.

AdjustedEBITDAmargins in2017areconsistentwithguidanceprovided inAugust2017,

and are expected to increase by approximately 100 basis points over 2016. Please recall that

adjustedEBITDAmarginsarecalculatedasapercentageofrevenueandnotgrossproductsales.

Finally, some of the adjusted EBITDA margin upside that might otherwise have been

possiblefor2017hasbeenlimitedasaresultofthebankruptcyfilingbyToys”R”Us,asweexpect

somelimitedsalesdisruptiontocontinueintoQ4andintheearlypartsof2018.

Lookingaheadto2018,wewillprovidegrossproductsalesgrowth,expectedseasonality,

and adjusted EBITDAmargin guidance for 2018whenwe report our fourth quarter and full year

2017 results in early March 2018. This will allow us to incorporate customer feedback into our

outlookfromthecriticaltradeshowsthatstartedinLAthispastSeptemberandcontinueinHong

Kong,NewYork,andNurembergduringJanuaryandFebruary2018.

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Asareminder,Iwanttorepeatouroverallguidanceregardingsalesgrowththatoverthe

long term the growth rate for organic gross product sales is expected to converge towards the

Company’slong-termgrowthtargetofmid-tohigh-singledigits.

IwouldnowliketoturnthecallovertoBenGadbois.Ben?

BenGadbois—GlobalPresidentandChiefOperatingOfficer,SpinMasterCorp.

Thankyou,Mark.Thebusinesscontinuestoperformverywell.Wearecontinuingtogrow

atamuchfasterratethantheindustryoverall.

IntheweekofOctober8th,accordingtoNPD,SpinMasterhadfourproductsamongthe

top tenbest-selling toys in theUnitedStates.Our twoHatchimalsSurpriseSKUswereatnumber

oneandtwo, followedbyLuvabella,numbersix,andthePAWPatrolSeaPatrolleratnumber10.

Wewere the third largest toymanufacturer in theUS for thatweek, thevery first timewehave

achievedthatmilestone.

Inlinewithourgrowth,wecloselymonitoredPOSandsupplyanddemandbecausePOSis

notonlyanimportantmetricforbrandhealth,butalsoakeymetricformanagingtheCompanyand

thebalancesheet.

Overall,weareverypleasedwith thewaywehavemanagedour retail inventoryduring

Q3.Werigorouslymeasurebeginninginventory,shipmentin,POS,andendinginventory.Duringthe

thirdquarterourPOSgrowthwas in linewithour shipmentgrowth, reflectingpositiveconsumer

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engagementforourproductline,whileourretailinventorylevelsindollarsattheendofQ3were

flattobarelyupcomparedtoretailinventorylevelsattheendofQ32015.

This means we have seen a tremendous improvement in our days-on-hand inventory

metricsatretailcomparedtolastyear.Wearepleasedwithourmixinoverallinventorypositionat

retailgoingintoQ4,andarewellpositionedtoendtheyearwithahealthyinventorylevelatretail.

TherewereanumberofuniquefactorsthataffectedtheindustryinQ3.Somewereofa

onetimenatureandothersindicativeofanemergingandongoingtrends.

The TRUbankruptcywas amajor factor across the industry inQ3.AsMarkhighlighted,

someofoursalesshiftedfromQ3intoQ4,andweexpectsomelimiteddisruptionin2018asTRU

implementsitsrestructuringplan.

We have resumed shipping in key jurisdictions, and as you are aware, TRU filed for

bankruptcyintheUSandCanadaonly.However,TRUisaglobalcorporationandhaslicenseesand

JVpartnersinmanycountriesandregions.Wewillmonitoreventscarefully,andcontinuetowork

withTRUcloselyasoneofourkeypartnersas theywork towardreestablishing themselvesasan

importantlong-termparticipantintheglobaltoyindustry.

The SpinMasterMexicooffice located inMexicoCity experienced some interruption to

businessfromtheearthquakeinSeptember.Thankfully,ouremployeesandtheirfamiliesaresafe,

andwe’redoingwhatwecando to support themduring thisdifficult timeof rebuilding.Weare

backtobusinessasusualwithminimaldisruption.

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Theshift toonlinesalescontinues.Onlineretailersaregainingshareasconsumerdesire

for online shopping grows. Currently, approximately 23 percent of our sales are made through

online channels, which is in line with the overall industry. The industry average is expected to

increaseto28percentin2018,accordingtoNPD.

Asmoreofourconsumersmoveonline,wearereallocatingagreaterpercentageofour

marketingspendingtowarddigitalandsocialandawayfromtraditionalTV.

Mediabehaviouramongadultsandchildrenismorefragmentedin2017,withthemixof

traditional TV and mobile and streaming shifting. Curated social feeds, unboxing videos, and

influencersallplayarole indigitalmarketingoftoystoday.Wehaveaverystrongteam,andare

ensuringthatourdigitalmarketingeffortsarefocusedinthoseareasthataregoingtoreceivethe

mostattentionbyourconsumersandgeneratethehighestROI.

WerecentlyreceivedthreeplatinumandtwogoldinternationalMarComAwardsfromthe

AssociationofMarketingandCommunicationProfessionalsforourintegratedmarketingcampaign,

digital marketing campaign, and public relation campaign, among others, related to our 2017

HatchimalsWhoWillyouHatchcampaign.

Wearelaunchingournewandimproveddirect-to-consumerwebsiteinNorthAmericain

Q4.Thiswillberolledoutintootherareasoverthenextfewyears.

TheD-to-Csite isprimarilyatooltosupportourbrand, increaseconsumerresearchand

testing,streamlineconsumercommunication,andofferourfullproductlineassortmentsinanarea

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where it might not otherwise be available. The revenue generated from this initiative is not

expectedtobematerial,andweviewourD-to-Csiteashighlycomplementarytothoseofourretail

partners.

Despite some of the external challenges during the quarter, we clearly demonstrated

growththat is faroutpacingthe industry.Thisgrowth isgrounded inour fourclearlydefinedand

consistent strategies, which are to innovate, create successful global entertainment properties,

growourinternationalsales,andidentifyandexecutestrategicacquisitions.

Our first growth strategy, to continue to innovate the core, relies on our ability to

consistentlyinfuseinnovationintoourportfolio,brands,andproducts.Ourinternal36-monthbrand

innovationprocessfacilitatestheproductdevelopmentnecessaryforsustainableinnovation.

In Radio (sic) [Remote] Control and Interactive Character, our second global Hatchimals

DayonOctober6thwasabigsuccess.Hatchimalswasmentionedevery fourminutesonaverage

acrossallsocialmediaplatformsintheUSonHatchimalsDay.

HatchimalsSurprisewereset inover5,800stores in theUS inasingleday forcustomer

purchase.Thelaunchweekwasup42percentfromlastyear’slaunch.Salessignificantlysurpassed

bothlastyear’sHatchimalsDaysalesandretailers’expectation.

HatchimalsbecamethenumberonetotalpropertyintheUStoyindustrybytheendofthe

thirdquarter.ThisisthefirsttimethataSpinMasterpropertyhastakenthenumberonespotsince

NPDstarteditsUStracking.

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ThepopularityofColleggtibles isstillveryhigh.HatchimalsColleggtibleswas launchedin

May, and is anexcitingbrandextensionoffering thehatchingexperienceat lowpricepoints and

with82characterstocollectinastoreseason.Colleggtiblesisbecomingmorethanjustcollecting.

The importance of the experience, slowing down the unwrapping process and prolonging the

anticipationandbuildingexcitement,areequallyimportanttokids.ColleggtiblesSeason2launches

December1stwith105all-newcharacters,andSeason3willlaunchin2018.

Luvabella continues to sellout, andwillbe significantly short relative toglobaldemand.

ThisgivesustheopportunitytocontinuetobuildLuvabellain2018.

WelaunchedtheStarWarsBB-8duringQ3,andearlyreadshavebeenstrong,especially

withStarWarscollectors.

AirHogsflyingtoysaresoftacrossmostSKUs.Whatweareseeingisthataproliferationof

higherandlowerpricepointdronesissplittingthemarket.Weareactivelyworkingonrepositioning

AirHogstomakeitmorerelevantinthemarket.Youwillseetheresultsinourproductinnovationin

2018.

InZoomer,bothZuppsandZoomerPony,Unicornaredoingwell.Thehigher-pricepoint

items tend to beweightedmore heavily toward the later part of Q4whenwe runmost of our

media.

In Activities, Games, and Puzzles and Fun Furniture, Soggy Doggy was launched with a

strongTVandsocialmediacampaign.Salesareverystrongoutofthegate,andmanyretailershave

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designateditatoptoyfortheholidayseason.Ithasbeenthetop-sellinggameintheindustryfor

thelastfewweeksatmostofthemajorretailersaccordingtoNPD.

Cardinal’snewgamesandpuzzlescontinuetoseestrongsell-through,aswell,andgrowth.

InActivities,we’realsoseeingpositiveresultswithStyleCoolandDr.Dreadful.And just

afterthequarterendwelaunchedJoJoSiwaBowMakertoastrongreaction.WeexpectmoreJoJo

SiwaactivitieslaunchinginJanuarytobeverypopular.

InBoysActionandConstruction,POSreads forTechDeckareverystrong.TheMeccano

core line is trackingverywellwith licensedproductuparoundtheworld. InMeccanohi-tech,we

havelaunchedtheMeccanoM.A.X.andMeccaSpider.ThesehigherpricepointTVitems,similarto

Zoomer,tendtoselllaterintheyearwhenwerunmostofourmarketingcampaigns.

PAWPatrolcontinuestoshowyear-over-yearglobalgrowth.ThePAWPatrolSeaPatroller

andLifeSizeTowerarebothtrackingverywell,andareamongthetop-rankingsellingtoys inthe

industry.TheSeaPatroller,whichisonmanyretailers’toptoylist,hasbeenthenumberoneSKUin

theentirepre-schoolsegmentinrecentweeks,andinthetoptentoysoverallaccordingtoNPD.

Welookforwardtosharingmoreinformationwithyouaboutupcoming2018lineatthe

NewYorkToyFairinFebruary.

Oursecondgrowthstrategyistodevelopevergreenglobalentertainmentproperties.The

PAWPatrol brand is showing strongmomentumgloballywhere it is entering its third and fourth

seasonsinmostmarkets.

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PAWPatrolwasthenumberoneUKtoypropertyinthemonthofSeptember,andshowed

stronggrowthinthosemarketsthathaveonlyrecentlybeganairingthetelevisionshow,especially

inGermanyandChina.Thelatestteam,SeaPatrol,isreallyresonatingwellwithkidsglobally.

PAW Patrol continues to engage fans through high-impact experience, like the highly

successful PAWPatrol Tourwhere thousandsof consumers linedup for the chance toboard the

PAWPatrollerand interactwith their favouritepups.TheRoadTourhitmanycitiesacrossNorth

AmericaandtheUKthroughQ3andintoQ4.Inaddition,NickelodeoncontinuesitsPawPatrollive

stageshows,whichisbuildingfurtherconsumerengagement.

As Ronnen discussed earlier, Rusty Rivets is rating very well on Nickelodeon. The

entertainmentgroup isactivelyworkingwithourbrandteamtoensurethesecondseasonof the

showwillbetightlyintegratedwiththetoylinelaunchingin2018.

WearealsoworkingonseveralexcitingTVshowsinourentertainmentgroupfor2018and

2019,includingBakugan,whichweareworkinghardonwithourpartnersofboththetoylineand

TVshow.

Our third growth strategy is to grow our international sales. Our goal is to get our

internationalsalesto35,40percentofourtotalsalesinthenextfewyears.Wearewellonthepath

toachievethatgoal.

Letmegiveyouaflavourforsomeofourkeyinternationalmarkets.AccordingtoNPD,we

currentlyhaveeightof the top50 toys in France. TheUKwas the firstmarket globally to launch

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Luvabella, and the demand is currently far exceeding supply. In Mexico, we are now the third-

largesttoymanufactureraccordingtoNPD.Ourinnovativeproduct,combinedwithourstronglocal

marketingcampaign,areengagingtheMexicanconsumersstrongly.

InCentralEasternEurope,wearetrackingaboveourinternalexpectation.InAustraliafor

themonthofSeptember,SpinMasterwasrankedthe fifth largest toymanufactureraccording to

NPD,withamarketshareof3.5percentdespitehavingonlyestablishedadirectpresencetherein

January2017.

In China, our go-to-market strategywith a dedicated storefront on Tmall Alibaba and a

distributor who handles bricks-and-mortar is working very well for us. We are ahead of our

expectationssofar,butwecontinuetotakeameasuredapproachtothismarket.Whilestillsmall,

webelieveweareontracktoscaleChinasignificantlyoverthenextfewyears.

LeveragingSpinMaster’s global footprintwaspartof theacquisition thesis forboth the

CardinalandSwimwaysacquisitions.TheCardinalbusinessisstartingtogetsolidtractioninEurope

andelsewhereglobally.Weareactivelyplanningthe2019Swimwaysproductlinefordistributionto

ourglobalpipelineandarepositiveabouttheupsidepotential.

Ourfourthgrowthstrategyistoidentifyandexecutestrategicacquisitions.Aerobiewillbe

rolledupwithSwimways,andthetransitionoverAugustwentwell.Weshippedcustomersthrough

the Aerobie warehouse, andwe’re now currently set up to ship customers globally through our

Swimwayswarehouse.

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Aerobie’s been added to the Swimways spring 2018 Catalogue, and we hosted an

international line reviewduringourmost recent international sales summit inQ3.TheSwimways

teamhaskickedoffanewbrandingexercise,includingnewpackagingandinternationaltranslation

thatwillbecompletedintimetosupportspring.

Marbles,whichweacquiredinQ2,isfullyintegratedintoourGamesdivision,andweare

activelyshippingtitles.AlthoughMarblesdoesn’trequireourinnovationcapabilitiesthewaysome

ofourotheracquisitionhave,it isgettingthebenefitofourexperiencedgamemarketingteamas

werefreshthepackagingandputourownspinonthesegreatbrandgames.

Onthemobiledigitalfront,ourappbusinesscontinuestogrow.Todate,wehave65titles

betweenTocaBocaandSagoMini.DuringQ3,TocaBocalaunchedTocaLife:Office,itsnewestapp

in the popular Toca Life series. SagoMini launched SagoMini HatMaker, and continues to add

subscribers toSago’s first subscriptionapp,SagoMiniWorld launch inMay2018,whichprovides

access to Sago’s complete collection of apps in one convenient app, as well as other exclusive

content.

WecontinuetoseeopportunitiestoexpandtheTocaBocaandSagoMinilinesbeyondthe

digitalworld,andweareactivelylookingattoysandotherproductlicensinginitiatives.

Wehavedemonstratedsuccessinacquiring,integrating,andinnovatingstrategicbusiness

andmakingeachtransitionaccretivetoourfinancialresults.Wewillcontinuetobuildourpipeline

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through acquisition; however, we will remain careful and disciplined when evaluating M&A

opportunitiestoensureouracquisitioncriteriaaremet.

Toconclude,asweareheadingintothefourthquarter,westillhavealotofworkaheadof

ustofinishtheyear.Whilewe’reverypleasedwithourperformancetodate in2017,westillsee

many growthopportunities in 2018 andbeyond, andwe are confidentwewill be able to act on

theseopportunitiestodeliveronthelong-termgrowthtargetwehavesetfortheCompany.

As theholiday seasonapproaches, it is important to recognize thenumerousways Spin

Mastergivesbacktothecommunity.Givingbackhasalwaysbeenpartofourculture.Overthepast

fewyears,SpinMasterhaspassionatelyledaninitiativecalledtheToyMovementthathasdelivered

over 150,000 toys to underprivileged children in countries such as Turkey, Mexico, Jordan, and

Israel.

ThisyearourgoalistocompletefouradditionalmissionstoSouthAfrica,Iraq,Mexico,and

Nicaragua.Our goal is toprovide children indifficult circumstanceswith theopportunity toplay,

learn,andgrow,allowingkidstobekidsnomatterwheretheylive.

Thatconcludesourformalremarks.NowRonnen,Mark,andIwouldbepleasedtoanswer

yourquestions.Operator,youcanbeginthequestionperiod.

Q&A

Operator

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Thankyou.Andjustareminder,that’s*,1toaskaquestion.

OurfirstquestioncomesfromKenricTyghe,RaymondJames.Yourlineisopen.

KenricTyghe—RaymondJames

Thankyou,andgoodmorning.JustwithrespecttotheperformanceofColleggtibles,could

youspeaktoyourperformancerelativetothecategorywhere itappearsyouessentiallyownthe

space, but also with respect to geography? It appears you’ve sort of lit up a lot more kids’

imaginationsorparents’walletsinRestofWorldandEuropethanexpected.Couldyoujustwalkus

throughperhapswhereyourshareisnettingoutinthisspace?Orsomeoftheotherdriversbeyond

theobviousonpriceintheColleggtiblescategoryastoquitehowyou’rehavingthesuccessyouare

inRestofWorldandEuropeinparticular?

BenGadbois

Yeah.Icananswermostofyour—mostofit.Sofirst,ifyou—thethreekeytrendsthatare

emerging this year in the industry is we are seeing plush doing extremely well, we are seeing

collectiblesdoingverywell,andwearealsocontinuingtoseegamesandpuzzlesdoingverywell.

Andwhenyou…whenwezeroinonColleggtibles,ifyouactuallylook,gobackthreetofouryears,

the collectibles segment in most markets have more than doubled, in some cases tripled or

quadrupled.

SoIthinkwhatisactuallyhappeningintheindustryisthesmall—thelowerpricepointsfor

mostColleggtiblesisveryattractivetomostkidsaroundtheworldindifferentdemographics.Ialso

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thinkthatsomethingthatishappeningrecently,andwebrieflymentioneditafewminutesago,is

theunveilinghasbecomeavery,veryimportantpartofColleggtibles.

Andthisissomethingthathasreallycapturedkids’imaginations.Andforusasfaraswhat

itmeansforusintermsofmarketshareinthatcategory—I’mnotsurethatwetrackitexactlythe

wayyou’requestioncame,Kenric—butwith that said,we’revery, verymuchawareof the trend

andwe’reveryfocusedonit.Andasyouseeour2018line,youwillseeuscontinuetodoourglobal

marketingonourColleggtiblesandalsointroducenewlinesin2018.

Yeah.Yeah.Andthen—andobviouslytheotherthing,too,thatMarkjustremindedmeis

notonlyit’sresonatingwellinNorthAmerica,butit’sresonatingwellinmanyothergeographiesin

oneofourotherkey—wehavealotofbusinessaswellisEurope.

KenricTyghe

Great.Andthen,Ben,justonswitchingtoHatchimalsSurprise,youhighlightedobviously

theverystrongsell-throughandtheincrediblelaunchweek.WhatI’mcuriousaboutlookingtothe

fourth quarter is how is the sell-through skewing? Is it skewingmore online ormore bricks-and-

mortar in this quarter now that people are a littlemore familiarwith theHatchimals toys, so to

speak?And then secondlywouldbehowcomfortableareyouwithyour inventorypositionmore

broadlygoingintothispeakonline/holidayseasonwiththeHatchimalsSurprise?

BenGadbois

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Yeah.Sowhatweareseeingoverall is theHatchimals franchise isextremelystrong, the

POSisverystrong,andwhatisimportanttonoticetooislastyearwhenwelaunchedHatchimals,as

youknow,itbeganaglobalphenomenon.Weweremuchmorereadythisyear,wehaddata,andas

farasmakingsure that retailersandconsumercanhaveaccess to inventory, I’d like tosaywe’re

muchbetterprepared.

Furthermore,whatweare seeing this year iswehave reallyHatchimals Surprise,which

wasontheOctober6ththatwastheunveilingonHatchDay.WealsohaveHatchimalsGlitterthat

waslaunchedearlierintheyearthatisalsodoingincrediblywell.AndontheColleggtibles,wehad

somesupplyissuethatisnowbeingremediatedacrossallofourmarket.SothePOScontinuestobe

verystrong.

Andasfarasthemix—thelastpieceofyourquestionwashowmuchwe’reseeingonline

versustraditionalretail—Iwouldsaythatwhatwe’reseeingnowisthefranchiseisreallyfollowing

runratefortherestofourbusiness.Andouronlinee-commerceisapproximatelyit’sinthelow20s.

So it’sapproximately22,23percent,aswe justmentioned,andwe’reseeingthismixtomoreor

lessholdtrueaswellforHatchimals.

KenricTyghe

Thankyou.And justaquick finalone forme;Mark,couldyou justwalkmethroughthe

EBITDAmargincommentaryinyouroutlookwithlimitingtheupside?Isthatjustareflection,given

yourconfidenceonyour salesoutlook? Is the limitingofEBITDAmargins justa reflectionofyour

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havingtoperhapsmovesomesalesaroundorsomesortofajugglingofsalesinthisfourthquarter,

given theToys“R”Us filingandsomeof thecostsassociatedwith that?Orhowshouldwe think

aboutthelimitingofthatEBITDAmarginupsideinthisfourthquarter?Couldyouperhapsjusthelp

usbetterunderstandsomeofthecommentaryonthelimitingoftheEBITDAmarginupside?

MarkSegal

Thanks,Kenric.Yeah.Asyouknow,weconfirmedourEBITDAguidancethatwegaveyouin

August,which representeda100basispoint increaseover2016numbers.Butwedid feel itwas

importanttokindoftamperanypotentialupsidethatyoumightfeelcompelledtobuildintosome

ofyourreportsormodels,perhaps,justgiventhestateoftheindustry;thatrecognizingtheindustry

isalittlebitfragile,givenwhathappenedlateinQ3withToys”R”Us.

Andsowejustfeltitwasjustnecessarytobealittlebitcautious,andnottoletthemarket

getaheadofthemselvesintermsofuspotentiallybeatinganyguidancethatwe’vegivenyou,which

iswhywebuiltthatcautionin.

KenricTyghe

Great.Thankyou.I’llleaveitthere.

Operator

Thankyou.OurnextquestioncomesfromSabahatKhan,RBCCapitalMarkets.Yourlineis

open.

SabahatKhan—RBCCapitalMarkets

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Thankyou.JustyouprovidedsomecolouronRustyRivetsearlierintermsoftheTVshow.

Canyoumaybetalktousabouthowtheproduct line isdoingsofar?Andhowmuchyouplanto

expanditnextyearwhenyourollitoutbroadly?

RonnenHarary

Yeah.Hey,Sabahat.It’sRonnen.Yeah.It’sagreatquestion.Theproductactuallyrolledout

inToys“R”Us,andthesalesaredoingokay.Weareactuallyseeingsomegrowthofthesalesinthe

last few weeks. But what we’ve noticed with Rusty Rivets is that from a reach and frequency

perspective if you compare it to Season 1 of Paw Patrol, it doesn’t have the same reach in

frequency.Andsowhatwe’vedecidedtodowastobuildthereachandfrequencywastogowith

Season2inthemarketplace,whichisgoingtobelaunchinginthenextcouplemonths,andtodoa

broaderlaunchofthetoylineinthethirdandfourthquarterof2018sothatthere’smorekids,they

gettolearnthecharacters,learnabouttheshow,andreallygetintoSeason2.

Sowhatwe’veactuallynoticedisthatnotallpre-schoolshowsfollowthesametrajectory.

Somepre-schoolshowstakelongertotakehold.Ifyou’relookingbackinhistorythere’sshowslike

PeppaPigthattookfour, five,sixyearstobeonairbefore iteven launchedanyproduct intothe

marketplace.Andsowe’renoticingthatRustyistakinglongertotakeholdwiththeconsumers.

But if you look at the ratings, the ratings are super high, and thatmeans the kids are

engaged. So we are looking forward to actually getting more kids into the franchise, and then

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putting the product out into retail at the appropriate time, which we think is more of a fourth

quarterlast(sic)[next]year.

Andalso,which is really important,we’reveryhappywith the fact thatwe shipped the

product into Toys “R” Us because we got a lot of learnings, okay, in terms of what SKUs are

resonatingwithkidsandwhatSKUsaren’tresonating.Andwhenwegooutwiththebroaderlaunch

inthefourthquarterofnextyear,we’llbeabletohaveamuchmorehoned-in,focusedproductline

thatwillresonatewiththekids.

SabahatKhan

All right. Thanks.And then just followingupon the content side, youmentionedyou’re

doingsomeinitialworkforaPawPatrolmoviepotentiallyin12to24months.Howshouldwethink

aboutthat?Isthisjusttestingthewatersfornow?Orareyoukindofonyourwaytoputtingouta

movieinthenextonetotwoyears?

RonnenHarary

No,we’re—Icautionbysayingthatgettingmoviesmadeisaverydifficultthing.Andit’s—

whenyouworkinHollywoodit’sabitofanartform,butthatbeingsaid,weareveryfocusedon

working hard at getting amovie out. And we think that the Paw Patrol franchise from a global

perspectivedeservestohaveamoviebecauseofitsglobalappeal,andsowe’restartedtheprocess.

We’veengagedwithawriter. Ican’tpubliclyannouncewho it is justyet,butwehavea fantastic

writerwho’sworkingwithourteamhereandourbraintrustthatunderstandsPawPatrol.

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Thewriter’sgotanincrediblepedigree,andwe’regoingtogodownthatroad.Andonce

we have the 120 pages written and a script that we think is fantastic and a look and feel—we

startedwithsomeanimationtestsintermsoflookandfeelofthecharactersandhowtheywould

translateontothebigscreen—wewillmoveforwardandactuallytrain(phon)thefilm.

Themostimportantthingisthattheintegrityofthefilmmatcheswiththeintegrityofthe

franchise,right?AndIthinkit’snotthatdifficulttowriteafilm,butit’sverydifficulttowriteafilm

thatkeepstheintegrityofthecharacters.Andthat’swhatwe’redoing,andIthinkthere’sinterest

fromthestudioperspectiveonactuallywantingtoputoutafilm.

SabahatKhan

All right. Thanks for that.And then justoneon, I guess, theproduct sideof things. The

BoysActionsegmenthasbeensomewhatsoftcomparedtosomeofyourothersegments.Canyou

maybetalkabouthowyouthinkaboutthatsegmentoverthenextcoupleofyears?Anybigproduct

launches? Or anything you can talk about forward looking in terms of driving growth in that

segment?

BenGadbois

Yeah.ImeanIthink,Sabahat,ifyouanalyzethissegmentforourbusiness,youwillnotice

that this year we did not comp some of the movies that we did last year. So as a result, that

obviouslycreatesadecreaseinthesegment,butthatdecreasewascertainlyplanned.

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The other thing, too, that we continue to be focused on internally is really looking at

building our own franchise and IP. And that takes time, but we’re actually refocusing our—this

category into really drivingmorebuild internally created IP forus. Sodoesn’tmeanwedon’t do

movies.Wewill continuetostilldosome,butyouwill seeamore—you’ll seeabitofadifferent

strategygoingforward.

Yeah. Yeah. And then the other thing, too, is … but we also have some really positive

resultsinthissegment.SoifyoulookatMeccano,forexample,we’veseenreallynicePOSresults

andgrowthinMeccanothisyear,andinthepastyearswe’veseenalotofthepullinMeccanowas

comingfromourMeccanotechsegment,whichwetalkedaboutafewminutesago.Butwhatwe’re

alsoseeingthisyearisaswehaveredesignedandaddednewlicencetotheMeccanocoreline,itis

actuallyworkingverywell.Andagain,sothisis—sowe’vereallyrefocusedMeccanocoreaswell.

SoIthinkwehavealotof—we’reverypositiveaboutthesegmentforus.Althoughevenif

thisyearthenumbersdon’tshowit,we’repositivewiththeoutlook.

SabahatKhan

Allright.Thanks.Andthenjustonelastoneformeandfollowinguponthecommentary

about movies, obviously that’s been something that’s impacted the overall industry, not your

company specifically, but just sales related to movies. How do you think about when a licence

opportunitycomesuphowmuchvisibilitydoyouhave?Kindof just likedecision-makingprocess

aroundwhetheryoupursueacertainlicensingopportunityornot?

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RonnenHarary

Ithinkwehaveprettygoodvisibility.Wehavegreatrelationshipswiththemajorstudios

that are producing the films. And we’re actually investing more time developing even stronger

relationshipswiththem.AndIwouldsaythatmoviesarealwaysgoingtobeapartoftheindustry.

Ithinkthatinthelastyearthere’sbeenabitofasaturationandthingshaven’tconnected

asmuchastheyhaveinpreviousyears,butIthinkit’sacyclicalthing.AndIthinkit’sdefinitelygoing

to be part of SpinMaster’s portfolio, and I think that as the Company grows and we grow our

internationalfootprint,webecomeamuchmoreappealingpartnerforthestudiosbecausethey’re

always looking for the global partners. And I think that Spin Master’s a very viable option for

companies toworkwith in the future. Andwe’re going to look and really focus in on taking the

propertiesthatwethinkthatarereallygoingtoresonatewiththeconsumerattheendoftheday.

Sowe’redefinitelygoingtobeinthefoldandinthefray.

SabahatKhan

Allright.Thankyou.

Operator

Thankyou.OurnextquestioncomesfromAdamShine,NationalBankFinancial.Yourline

isopen.

AdamShine—NationalBankFinancial

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Thanksalot.Goodmorning.MaybejustgoingbacktoToys”R”Us,andreallynotputting

wordsinyourmouth,butjusttheread-throughhereisthatonthebackoftheHasbroandMattel

wherewe did see outlooks reduced partly for other company-specific issues, but clearly also for

Toys ”R” Us. For you guys, we’ve seen a shift ofmaybe somemuted revenues Q3 to Q4; some

limitation in regards toupsideperhaps to theguidance,butnet-net you’llwatch this closely,but

we’renotseeingasignificantmaterialimpacttothebusinessinanyway?Isthatafairassessment,

Mark,ofthesituation?

BenGadbois

Hey,Adam.What—I think yourassessment is fairly accurate. Sowecan say that is that

most of our holiday’s planwere unaffected. Toys “R”Us is executing on the plans thatwe have

madetogethersowe’re—and I think they’reexecutingactuallyverywell.Westill,with thatsaid,

we’restillverycarefullymonitorallofthecountriesbecause,asyouknow,USandCanadafiledfor

bankruptcyandtheyhavemanyotherstructuresaroundtheworld.Sowe’rekeepingoureyesvery,

veryclose,andasaresultwe’resomewhatconservativeonhowwe’relookingatthefutureandthe

nextcouplequarters.

Butlook,withthatsaid,TRUhasbeenagreatpartnertoourcompanyforyears.Andwe

reallybelieveintheirmanagementteam,andwe’rejustwaitinglikeeverybodyelsewhat’snextto

beunveiledintheirrestructuringplan.Andthere’salotofdetailsthatarestillforthcoming,soasa

resultit’sprudentfortobeconservativeinouroutlook.

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AdamShine

No, I fullyunderstand that.Andso letme jumpnext toHatchimalsandmaybebuildon

someoftheearlyquestionsfromKenric.You’velearnedalot inparticulartohavemoresupplyin

themarketthisyearversus lastyear.Canyougiveusanykindofsensewithoutgettinginto2018

guidanceofsortofhowthepickupinsupply/salesforHatchimalsheadingintoQ4potentiallyhad

some implications for howwe should think about early quarters in 2018, given the fact thatwe

continuedtoseeverystrongflow-throughofundersuppliedHatchimalsintoearly2017?

BenGadbois

Yeah.Ithink,Adam,thatwecanneveractuallygetitperfectatanygiventime,otherwise

itwouldbetooeasy,so.Butwiththatsaid,fromasupplystandpointwehadlastyearwelearneda

lotlastyear.We’veactuallyhadsalesthroughouttheyear,sowehaveseenthedemandcontinue

forHatchimalscontinueverystrongthroughthewholeyear.

We are also really working on building the Hatchimals franchise to be a long-standing

franchise. So this iswhy you’ve seen, for example, the innovationonColleggtibles. There’smore

coming.We’realsoreally,reallyfocusedonhowwe’remarketingtheproperty.Soforexample,ina

fewweekswe’relaunchingacampaignthat’scalledHatchiChristmas,whichwillhave12webisodes

leading to Christmas. So we’re really, really staying focused on the brand to continue driving

demandfortheproducts.

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AndasfarasPOS,again,whatImentionedearlier,Adam,thatisveryencouragingforusto

see is that, again,we have three different—wehave theHatchimalsGlitter,we haveHatchimals

Surprisethatwejustlaunched,andtheColleggtibles,andthethreearestilldoingvery,verywellin

allgeographies.

AdamShine

Is it—maybe Mark doesn’t want to answer this question—but is it fair to say that

Hatchimalsisprobablytrackingclosetoaround20percentofGPS?

MarkSegal

So,Adam,ifyourecall,weusuallydonotprovidedetailsonindividualproductsales.What

we’vedonehistoricallyisonlytalktothenumberonesellingitemoftheyearineachfinancialyear,

andin2017wecontinuetoexpectthattobePAWPatrol.However,Hatchimalsisasignificantline,

butI’mnotgoingtocommentspecificallyonapercentage.

AdamShine

Okay.Fairenough.IfiguredI’dtry.MaybejustonelastoneforRonnen—andbesidesthe

fact maybe there should be a Hatchi Hanukkah also because that’s a pretty decent alliteration

there—butforRonnen,itsoundsasthoughwhenwethinkaboutwhatBenwassayinginregardsto

reallyfocusingoninternalIP,aswelooktotheentertainmentsideofthebusiness,lotsseemstobe

underway. Is there any particular appetite for going out and making acquisitions of character

brands?Oristheentertainmentfocusreallyskewedmuchmoreinternally?

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RonnenHarary

Adam, I’msohappysomeoneaskedmeadirectquestion. Igetexcited.And I thinkthat

we’re focused on producing our own internal IP. I think that the cost to try ismuch lower than

acquiring, and I think that our ability to marry our understanding of toys and storytelling and

charactercreationlendsitselfmoretointernallygeneratedIPthangoingoutandacquiring.

I will say—I will temper that and say if there was a great licence out there that came

availableandwaspricedright,wewoulddefinitely lookat it. If itwasfiveyearsagoandTeenage

MutantNinjaTurtlescameupforsale,whichgotboughtfiveyearsago,wewoulddefinitelylookat

something like an asset like that. But it would have to be something with a very long, strong

pedigreethat’sstillrelevanttoday.Ithinkthatpotentiallyreinvigoratingolderproperties,justgiven

themarketplace,isprobablynottherightstrategyforus.

And I will say that we are very busy here at the entertainment team with our own

properties.We’reveryexcitedaboutourthirdpre-schoolshowwhichisgoingtobelaunchinginthe

fourthquarterofnextyear. It’sagreatpre-schoolshow, it’s totallydifferentthananythingwe’ve

everdonebefore,andwe’rereallyexcitedaboutit.AndwehavethingslikeBakuganandfilmsand

potentiallysomecontentforHatchimals,whichwe’reconsideringdoing.

Sowe’reveryfocusedonourownstuffinternally.

AdamShine

Great.Thanksalot.Appreciateit.

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RonnenHarary

Yup.

Operator

Thank you. Our next question comes from Brian Morrison, TD Securities. Your line is

opened.

BrianMorrison—TDSecurities

Goodmorning. First question is for Ben. Can I just goback to your globalmarket share

gains?Obviouslythey’rereallyimpressive.Ijustwanttodigdown.I’mcuriousinthequarter,what

geography is having thebiggest impacton thematerial year-over-year growthwithin theRest of

Worldsegment?AndthenwhenitcomestoCardinalandSwimways,obviouslyasyoumentioned,

theybothhavematerial internationalopportunity.Wheredoyoucurrentlystandintermsoftheir

internationalpenetration relative towhereyou thinkyoucanget to?Andam I right inassuming

thatSwimwaysreallyjustgetsgoingonthatfrontin2018?

BenGadbois

Hey.Goodmorning,Brian.Soletmetakethefirstpartofthequestion.Whenwelookat

allofourgeographies,thegoodnewsiswe’reseeingreallynicegrowthacrossalmostallofourkey

markets.AndIcanjust,forexample,Icanjustkindofrattleoffsomefunfactsforyouandgiveyou

alittlebitofflavour.

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But in China, for example—we talked about it in the last quarter—but we had certain

expectations,andwewilldosignificantlybetterinChinaandwewillbeprofitablerightawayinyear

one. So we have taken a very, very controlled approach to this market, and now our strategy

appearstobeworking.

InGermany,we’vehadfree-to-airPAWPatrolforthefirsttimethisyear,andthatreally,

reallyunlocked themarket forus. Sonotonly itwasPAWPatroldrove—wehavea lotof strong

growthinGermanydrivenbyPAWPatrol,butalsofortherestoftheportfolio.

France,asImentionedearlier,wehave8ofthetop50SKUsintheFrenchmarket.UKis

havingareally,reallygoodyear.CentralandEasternmarket,whichwelaunchedrecently—lessthan

a year ago, as you know—we’re seeing double-digit growth over our internal plan. In Australia,

whichwe launched,asyouknow,earlier thisyear,we’vealreadyrepresented (phon) thetop-five

supplier.

And then something else, too, thatwedon’t spend a lot of time talking about, but our

third-partydistributorsarealso seeing similargains.Andone thingofnotehere iswe’veactually

madesomereallyniceprogressinLatinAmericathisyear.AndMexicoisactually—we’reseeingthe

growth in Mexico where they’re really having the best year they’ve ever had in our company

history.Sooverall,it’sreallyacrossmostgeographies.

And then going back to the second part of your question, Brian, on Swimways and

Cardinal, I think you—Cardinal is underway, andwe’re seeing some really nice growth in Europe

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now.TheteamsarefullyengagedinmakingCardinaldistributionworkandmarketingtheproduct,

soCardinalunderway.Swimways,youarecorrect,ittakeslonger,butyouwillreallynotseemuch

Swimways European progress until 2019, just because 2018 it’s pretty much done already. So

Swimwayswillbemoretoward2019fromaglobalexpansion.

BrianMorrison

Thanks,Ben.CouldI just—intheRestoftheWorldsegmentwouldtheprimarydriverof

thatgrowthhavebeentheChinamarket?

BenGadbois

No.It’sactuallya—it’sactuallystillverysmallforus—

BrianMorrison

Okay—

BenGadbois

—so. But Imeanweobviously see this as a really nicemarket to grow in the next few

years.Buttodateandwhenyoulookatourresults,it’sactuallyfairlyimmaterial.

Mark?

MarkSegal

Just,Brian,justtoaddtothat.WhenyoulookattheRestoftheWorldsegment,Chinahas

beenjustsaythere’sasmallcomponentofthat,anditwillbequiteimmaterialforawhile.Butthat

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segmentcomprisesallofourthird-partybusiness,aswellasMexico.SoMexicoandallofourthird-

partydistributorscomprisesthatRestoftheWorldsegment.

BrianMorrison

Okay.Mark,onthebalancesheetyou’vecurrentlygotnetcashnow.Asidefromproviding

great flexibility for acquisitions, where do you stand upon potentially returning capital to

shareholdersthroughadividendorabuyback?

MarkSegal

So we’re consistent with where we were previously. We still see opportunities for us,

Brian.There’s—asyouknow,wegeneratecash,andwe’reusuallypluscashattheendofeachyear.

Andweseeopportunitiesforustocontinuetogrow.Therearenoplansatthispointtodeclarea

dividend. Ifat somepoint in the futurewe felt that thereweren’topportunities, thenwe’d think

aboutthat.Butthat’snotthemodethatwe’reinrightnow.

BrianMorrison

That’sfair.Andthenjust,Mark,onotherrevenue.It’sessentiallyflattolastyear.Iassume

thevariabilityinthisfigureistypicallythelicensingrevenue?Iknowyou’vehadsometoughcomps,

butit’salsosequentiallyflat.What’sthetrajectory?Canyoujustmaybeaddressthetrajectorythis

quarterandmaybetheoutlookforthelicensinggrowthaswegothroughthenextyear?

MarkSegal

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Licensingandmerchandising isonlyonecomponentof theother revenue.There’s really

twoelements.There’sthelicensingandmerchandising.There’sthesaleoftheshow,thebroadcast

showsaroundtheworld,andthenthere’salsotheapprevenuefromTocaBocaandSagoMini.So—

BrianMorrison

But the growth in the past few quarters has been driven, I believe, by the licensing

revenue,no?

MarkSegal

Yeah.That’ssafetosay,althoughourappbusinesshasalsobeengrowing,Brian.SoToca

andSagohasbeendoingnicely,andwecontinuetoexpectthattogrowin2018.

It really comes down to the licensing and merchandising going forward for all of our

propertiesaroundtheworld.Asyouknow,mostofthatismanagedbyNickelodeonforPAWPatrol

andourotherbrandslikeRustyRivets.

We are actually taking Hatchimals ourselves internally and marketing that ourselves

aroundtheworld.SowedoseesomegrowthfromHatchimalsin2018;nothingmaterialin2017.So

Iwouldnotexpecttoseeotherrevenuegrowattheratesthatwe’veseeninhistoricalyears,butwe

docontinuetoseeotherrevenuesbeingasignificantpartofourlinein2018.

BrianMorrison

Allright.Goodquarter.Thankyou.

Operator

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Thankyou.OurnextquestioncomesfromBrianMcFadgen—DavidMcFadgen,pardonme,

fromCormarkSecurities.Yourlineisopen.

DavidMcFadgen—CormarkSecurities

Great.Thankyou.Coupleofquestions.Sogiventhebigsalesgrowthwe’veseenthisyear

forHatchimals,anditseemsliketheproductdefinitelyhasa lotofmomentumin it,doyouthink

that2018wouldbeanothergrowthyearinrevenueversus2017forHatchimals?

MarkSegal

Well,Brian,Ithinkfor‘18Ithinkweshouldbealittlebitcautiousondiscussionsaround

‘18atthispoint.Asyouknow,ourguidanceisreallydrivenbythecycleofLosAngeles,HongKong,

NewYork,andNuremberg,whichwe’llbeenteringintoveryshortly.Andsowhenweactuallyget

back to you inMarchwithour full year results, I thinkwe’ll be in amuchbetterposition to talk

aboutguidanceinmoregranulardetailandtogiveyousomemoreinsightsintothat.

Atthispoint,I’dratherstayawayfrom‘18.

DavidMcFadgen

Okay. And then just on Luvabella, Imean obviously it looks like you’ve got another hit

here.HowwouldthisrankrelativetoHatchimalswhenHatchimalsfirstlaunched?

BenGadbois

Sotheproductissellingouteverywhereit isnow,soweknowwearedefinitelyshortof

the product. And similar to Hatchimals, actually, this product took over two years to actually

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develop.It’sextremelycomplex,andasRonnenmentionedearlier,there’sa lotofcomplexities in

theproduct.

Itisoneofthemostlifelikedollseverseenintheindustry,sowearevery,veryoptimistic

withtheLuvabellafranchise.Butweknowtherewillbe—inLuvabellaandLuvabeau—andweknow

there’sgoingtobesomeniceopportunitiesin2018tobuildonthebrand.Butweknow,again,we

willbeshortthisyear.

RonnenHarary

Yeah.IthinkjustbuildingonBen’spoint,Ithinktheoneexcitingthingisthatwehaven’t

beeninthiscategoryinourhistory.Wetriedacoupletimesintheearlypartofwhenwestartedthe

Company,andit’saverydifficultcategorytobreakinto.

Soit’sactuallyquiteexcitingforSpinMastertobreakintoanewsegmentandbeableto

continuedevelopingproductsinthatsegment,anditdoesn’tcompetewithanyofourotherparts

ofourbusiness.

DavidMcFadgen

So when you talk about the fact that you’re going to be short in terms of units for

Luvabellathisyearjustduetothedemand,isitaboutthesamemagnitudethatyouwereshorton

Hatchimalslastyear?

BenGadbois

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No. It’snotgoing tobe the samemagnitude,butat thispoint,David,wedon’twant to

speculate on how shortwemight be. Butwe just know thatwewill be short, based on current

demandthatwe’reseeing.

DavidMcFadgen

Okay.Allright.Thankyou.

Thanks,David.

Operator

Thank you.And that concludes thequestions in thequeueat this time. I’ll turn the call

backtothepresenters.

MarkSegal

Okay.Well, thankyou,everyone. If thereareno furtherquestions,wewillnowendthe

call.

Thankyouforparticipating,andwe’lltalktoyouagainsoon.

BenGadbois

Haveagreatday.Bye.

Operator

Thankyouverymuch,ladiesandgentlemen.Thisconcludestoday’sconference.Youmay

nowdisconnect.

*****

spin master corp. third quarter 2017 earnings conference ...€¦ · final transcript november 8,...

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