Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Spin Master Corp (SNMSF, Financial) maintained its full-year guidance despite a 2.1% revenue decline, showing resilience in a challenging market.
- The company saw strong performance from its Lucent brand, with revenue of $43.3 million and significant market penetration in Mexico, Canada, and Europe.
- Spin Master Corp (SNMSF) maintained its position as the fourth largest global toy manufacturer in Q2, with retail inventory levels in a healthier state compared to last year.
- The company experienced strong international growth for its Gabby’s Dollhouse brand, with new content releases on Netflix and experiential events planned in the US.
- Spin Master Corp (SNMSF) saw a 7% increase in revenue from its Entertainment Creative Center, driven by successful content releases and licensing deals.
Negative Points
- Revenue from digital games declined by 14.3% due to lower in-game purchases in Toca Life World, reflecting broader industry trends.
- Adjusted EBITDA margin decreased to 13% from 21% due to a higher proportion of revenue from the Toys Creative Center and dilution from the Melissa & Doug acquisition.
- Gross profit decreased by $31.4 million to $199.6 million, with gross margin declining to 48.4% from 54.9%, primarily due to the impact of the Melissa & Doug inventory fair market value adjustment.
- Consumer spending across discretionary categories remains challenged, with Spin Master Corp (SNMSF) experiencing an 8.1% decline in POS in Q2.
- The company faces inflationary pressures on certain lines of ocean freight, which could impact costs and margins moving forward.
Q & A Highlights
Q: Max, in your opening remarks, you mentioned your capabilities in toys, entertainment, and digital games. Can you expand on Spin Master's long-term financial goals?
A: We are committed to delivering this year's guidance and have started Q3 positively. Our goals include growing our toy business beyond industry rates through innovation and expanding our licensed portfolio. In entertainment, we aim to nurture existing IPs and introduce new ones. For digital games, we plan to build Toca Boca into a large franchise and grow our subscription business, targeting one million subscribers by next year.
Q: Are the aspirational goals of mid-single-digit organic growth and high-single-digit revenue growth through M&A still achievable?
A: Yes, those goals remain unchanged. Historically, our gross product sales growth has been around 8%. We aim for mid-single-digit organic growth, supplemented by acquisitions. We also target 20% of total revenue from digital games, with gross margins north of 50% and adjusted EBITDA margins above 20%.
Q: Can you provide more color on Q3 expectations and any early indicators from July?
A: We started Q3 with double-digit EPS growth, partly due to shipments moving forward. In June, our POS was in line with the industry, and in Europe, we grew 3.2% while the industry was down 2.7%. This positive trend continues into July, giving us confidence in our Q3 outlook.
Q: Can you elaborate on the impact of tariffs and how prepared Spin Master is for potential disruptions?
A: The reference to tariffs was related to electronic components and solar panels, not toys. This caused some volatility in ocean freight pricing, leading to delayed deliveries from Q2 to Q3. However, this has no direct impact on our toy business.
Q: How are Toca Days and Rubik's Match performing in their soft launch markets?
A: Rubik's Match is achieving good soft launch KPIs with strong app stability and healthy retention and conversion rates. Toca Days has also shown positive engagement and retention metrics, with MAU crossing 400,000 organically. We are on track for a broader launch in September for Rubik's Match.
Q: What is driving the year-over-year softness in digital games revenue?
A: The decline is primarily due to lower in-app purchases in Toca Life World, reflecting broader industry trends. However, our subscription revenue is growing, and we have significant content drops and new features planned for the second half of the year.
Q: Can you provide an update on the macro environment and its impact on consumer behavior?
A: Retail inventories are cleaner, and retailers are now looking for growth opportunities. Consumers continue to seek deals but are also engaging with new items. We have addressed price points across our line and are seeing success with well-priced items, as evidenced by strong performance during Amazon Prime Day.
Q: How is Melissa & Doug performing, and what are the expectations for the second half of the year?
A: Melissa & Doug saw significant improvement in Q2, driven by increased marketing. The Q3 order book is strong, with some orders turning to direct import. We have more innovation in Q4 than last year, including new products and channel expansions, giving us confidence in meeting our guidance.
Q: Can you provide the split between FOB and domestic sales for 2024?
A: Historically, the split was around 50-60% FOB and 40% domestic. For 2024, we estimate it to be around 52% FOB and 48% domestic, influenced by the growth in Europe and the inclusion of Melissa & Doug.
Q: What gives you confidence in the core business going into Q4?
A: Our confidence is driven by a higher percentage of new products, increased marketing support, and expansion into new channels. Additionally, we expect replenishment orders in Q4, which were absent last year due to inventory issues.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
