Everyday Play: Spin Master and Cross-Collaborative Selling

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Brian Morrison:
Okay, afternoon, everyone. My name is Brian Morrison, one of TD Cowen's Retail Analysts, coming to you from TD Cowens 8th Annual Future of the Consumer Conference. Thank you for joining us for our Retail Visionary series where we feature premier companies that influence the world of retail through innovation, collaboration, and technology. Today I'm excited to host the management team of Spin Master, one of the top five global toy companies. Thank you for joining us today, CEO Max Rangel and CFO Mark Segal.
So with that, maybe we'll just start with Max on the general state of the industry. And it's early in the year, but maybe you can share with us your view on the state of the toy industry, the levels of retail inventory, and also the consumer in general.
Max Rangel:
Thanks for having us, Brian. The toy industry in 2024 is basically growing units, very slightly. Average selling prices are actually flat, and so you can expect for the balance of year that it's going to be about a flattish to maybe slightly declining market. This basically follows years of COVID bumps, and so we're basically returning to more normal levels.
Retail inventories, to get to the next part of the question, are actually come down and they're more normal. And as we head to the key selling period, we actually face a really good selling environment from a retail inventory perspective. And from a state of the consumer, consumers have basically in 2024, continue to be very promotional oriented. And so, you can expect that that will continue for the balance of the year.
Brian Morrison:
So, that leads me into my next question. In terms of toy trends, are we seeing pressure on price points with more challenges to discretionary spend? And then maybe comment on your agility, your ability to adapt to that environment.
Max Rangel:
So, price points have definitely become more a key selling point for consumers. And we actually have representation across key price points, including from the very low entry price points all the way to the 80 to 90 to a hundred dollars price points. You can expect that in the coming season, prices between 10 to 30 bucks will be the majority of the selling of the toys. We're well represented. In fact, this year we actually had an initiative to expand our portfolio into the value channel. So, we've come up with a really nice range to represent our portfolio in that key growing channel.
Brian Morrison:
And then maybe if I turn to Mark, just from a high level summary, can you maybe just talk about your three creative centers and how they collaborate with each other?
Mark Segal:
Sure. So we have our toy creative center, which represents around 80% of our sales volume right now. We have our entertainment and digital games creative centers, which represents around 20% our revenue. And we actually try and leverage IP across all three. So, that's a fundamental part of our business model. Unicorn Academy is a great example of that where we're starting off with the TV show. We're leveraging it into a toy line that's launching in fall. And then next year we're doing a digital game. So, leveraging IP and developing IP is a key part of our business model.
Brian Morrison:
Okay. Maybe we can turn to the key global business units and the growth pillars. And maybe because it's the largest division, let's start with physical toys, and specifically the acquisition of Melissa & Doug because that's been at the forefront of investors recently. So Max, at $950 million, this is the largest acquisition in the company's history. Why was this asset a must have? And maybe you can talk about the opportunity it provides, the opportunities you have, pardon me, with respect to the growth at Melissa & Doug. And also how it will be complimentary to your existing business lines.
Max Rangel:
Absolutely, yeah. Brands like Melissa & Doug don't come into to the market often. It's actually a brand that we follow for a number of years. It absolutely compliments our portfolio. It gets us to open-ended play and wooden toys, which we don't have in our portfolio. These are evergreen heirloom toys that are going to be with us for a long, long time, and therefore we're super excited.
The prospects for Melissa & Doug and why we actually brought that into our speedmaster portfolio is threefold. One, it's an incredible brand with significant awareness potential. So, the investment in marketing that we will make with the brand is really important. Two, it's mostly a U.S. business. We have actually a global footprint, so we have planned to expand this brand starting next year in a very material way. And then third, I think this brand has the shoulders from an equity perspective to be able to be expanded into other wide spaces. And so, we're excited about that prospect.
Brian Morrison:
I think Max, we need to address the acquisition has not been without its speed bumps. Maybe you can clarify the issues that you encountered upon acquisition, and if you feel this has any way tarnished the brand or impacted its midterm potential.
Max Rangel:
Yeah, so I think the brand in the latter part of 2023 under previous management, was underinvested. And so when we took it, it actually had a lower starting point. Since we acquired the brand and integrated, we've actually begun to invest in the brand and it has sequentially improved. So, we have great prospects ahead of us to be able to leverage what we thought we were buying. So, we feel great about the brand and it hasn't tarnished the brand. In fact, the net promoter score through the first four months, which we track and actually measure, is the highest of any toy brand has recently measured. And I'm talking about a month ago.
Brian Morrison:
Very good. Okay, I'm going to turn the page and maybe we can talk about external licenses for a moment. Max, I think they represent about 30% of the toy industry. You've gone from being under-indexed to now over-indexed. You're gaining share from a-list entertainment companies. Maybe share the rationale with us, why you're achieving these market share gains, and maybe some of the more exciting licenses that you see coming down the pipeline.
Max Rangel:
Sure. So we actually treat licenses and nurture the brands that come with licenses like they're our own. So, we have great access to audiences and play patterns that we normally won't have in our own portfolio. So when you think about the DC license, which we love, and the audience that it basically serves, we are doing great innovation for that line. Similarly, on Monster Jam with the Feld group, we are serving an audience we don't have basically a portfolio brand for. And we're putting great innovation working very collaboratively with Feld. So, there are two examples of basically licensed properties that we treat as our own, innovate as our own, and therefore are creating great value for both us and our licenser.
Brian Morrison:
And in terms of exciting new properties or licenses coming down, I think there's one within the Melissa & Doug category.
Max Rangel:
We have amazing opportunities with Melissa & Doug, which is under licensed vis-a-vis the market averages and versus our own. And so we're going to start to basically under new innovation [inaudible 00:06:51], begin to put PAW Patrol, which is really our own brand. And beyond that, other properties. And beyond just our own, we have Dora the Explorer coming to Spin Master and basically is a property that's already out in P Plus and Nickelodeon. And we're going to basically start selling toys in spring 2025.
But before that, we have a super exciting new license, which is Ms. Rachel. Ms. Rachel's a YouTube sensation, and we're going to start to bring Ms. Rachel into its own line of toys and through Melissa and dog toys as well, starting in fall 2024.
Brian Morrison:
Very good. And Max, you alluded to something earlier, I'll turn to Mark to answer this. But you alluded to your entry into the value chain segment. So maybe just, Mark, touch on the opportunity you see in this segment and why now in terms of timing. And then the question I often get, is there any variance from your existing financial profile?
Mark Segal:
Sure. So the value channel, if you think about it globally, is somewhere around 60 or 80,000 stores in it. So, it's a huge opportunity. We haven't historically played in that space. And what we're doing now in the second half of 2024 is launching a new specifically designed toy line to address the value channel. We're kicking off in the U.S. These are mainly price points below around $5. In fact, most of them are below $2. So at 99 cents, $1.99.
Now what we've done is we've actually built a separate supply chain in China and we've designed specifically for cost. So in other words, we're not diluting our margins by going into the value channel. We're actually maintaining our margins by virtue of using the specific value channel that we've created its supply chain. And so, this is going to be incremental volume for us in a distribution line that we have not yet actually dealt with before.
Brian Morrison:
And sorry, did you say the timing of entry in the market?
Mark Segal:
We're entering the market in the second half of 2024. So '25 will be our first full year in the market.
Brian Morrison:
Okay. I'm going to turn to the entertainment segment. You have developed very impressive content over the years. You have a nice portfolio of IP, PAW Patrol obviously being probably the most notable. So Mark, can you frame the key priority of the entertainment segment so people it's role?
Mark Segal:
Think about entertainment as a catalyst for IP and franchise creation. Probably the two best examples would be PAW Patrol and Bakugan. PAW Patrol started off as a TV show and then became a toy line. Bakugan started off as a toy line and then became a TV show. But the way we invest in entertainment is by creating content and then building a toy line and a licensing and merchandising program, and potentially even a digital game like we're doing with Unicorn Academy around that. So, it really is a catalyst for franchise creation.
Brian Morrison:
I think that really illustrates the collaborative business model. Well, and then, Max, maybe just further in the entertainment side of things, let's focus on PAW Patrol for a minute. It's been a mega success, an evergreen property. I guess the question is, how do you maintain relevance year over year, both in terms of content? And then maybe what can we expect in terms of new excitement coming down for PAW Patrol in 2024 and 2025?
Max Rangel:
Yeah, sure. As we enter our 11th season on PAW Patrol, we've basically come up with a really very engaging new series for 2024, which is doing incredibly well in the marketplace. We've extended PAW Patrol with one of the characters, Rubble, which we green lead season number two. And that's doing really well as well. In fact, Rubble is now getting a toy line in Europe and rest of world. So the success of the first introduction of toys in the U.S. has now followed on beyond the U.S. And that is therefore proof point this is truly getting an audience that is really in love with Rubble himself and that's resonating.
Beyond that, we have content for 25, which is really extending us beyond the seasons to get basically into short form content to basically get into YouTube, and actually build the bond for kids with characters with new stories. So, we're going to have a Rocky's Garage story that actually just launched and is being really well received. And you can expect that we have Skye and other characters that we'll basically create short form content for.
In '25, we're also going to do a holiday special. So, think about that. We think about PAW being with us forever, as a rite of passage. And what a better rite of passage season than to have actually a holiday special? So, that's coming in 25. And let's not forget that we already made public that in '26 we have PAW Patrol movie number three. And we have not yet disclosed what exactly it will be about, but we're super excited. It's incredibly on trend. And I think people that are writing and creating this are super, super excited about the content they've actually come up with.
Brian Morrison:
Well, I think based on the success of the second movie, I think that there's a lot of people that'll be looking forward to that.
Max Rangel:
Yeah, I will tell you, Brian, this is a franchise that is also given us the ability to get that content into a PAW Patrol Academy digital game. And so now, kids are able to experience the content of PAW Patrol in a digital format while they actually learn their ABCs and do math, and do basically logic games. And watch content that we've created for the last 10 years. So, I think super excited.
Brian Morrison:
Very good. And then Mark, maybe new product development. You have two exciting new television series that you've alluded to in Vida the Vet and Unicorn Academy. Maybe just summarize the development of TV shows in terms of the financial risk. And with the changes in how children consume content these days, how you decide what is the appropriate distribution channel.
Mark Segal:
So if you actually think about the economics first of a TV show, what we do, Brian, is we develop a Bible. We then sell that to a network or whoever it may be. And we actually get distribution revenue from that sale. So even though we have to put out a fair bit of capital upfront, we actually get a lot of that capital back from the sale of distribution rights. Also, because we make the shows in Canada, we get tax credits back from the federal and Ontario governments. And so our net equity in these shows is actually relatively light, relative to the initial capital outplay.
From a channel perspective, I would say to you we relatively channel agnostic. We want to be wherever the kids are. So if it's AVOD, we'll send it to AVOD. If it's SVOD, we'll sell it to SVOD. If it's linear, we'll sell it to linear. And so as Max has described, we want to make sure we get the entertainment content out to wherever the kids are actually consuming it.
Brian Morrison:
Right. And then Max, turn this back a little bit and obviously it ties into collaboration. But in terms of seeing the market, how do you generate excitement in advance of the market debut?
Max Rangel:
One of the best ways to do that, Brian, is kids basically are participating in the number one channel globally, which is YouTube. And so ahead of getting into any specific channel, we're building our audience through YouTube releases. And that's proven to be very effective. In fact, it's how we built audience on Unicorn Academy before we had our first episode air on Netflix. And by the way, that is how Netflix is collaborating with us to make sure we have an audience that is really expecting the show. And it made it very successful.
Through Q1 after the first season, we've maintained about 51 million gross viewing minutes. And the awareness levels are incredibly high. So as we get into the next drop in June, for Netflix, it's actually a win-win for everyone. So, it is been terrific.
Brian Morrison:
Well, to put a plugin for you, I think to say it's been a successful launch would be an understatement. Just to remind the listeners, Netflix has already picked up the series for 2026.
Let's turn to digital games portfolio, as we get near the end here. Having attended your investor's today in Stockholm last summer, I think the market greatly underestimates the capabilities in this vertical. So Max, start with you. What is your vision of where you fit in this market and what you see as your target audience?
Max Rangel:
So where we fit in the market is basically in the specifically mobile digital space, which is about a hundred billion dollars. That's a huge market. So from that perspective, we're very focused on young children to begin with, but we're expanding beyond that. And so when you think about this category, you have to think about genres and you have to think about audiences. So, we've been very focused on two specific spaces. One is subscriptions for very young kids, which is where Piknik and Sago Mini and MathTango and Endless Learning Academy Live. And that is a subscription model, which by the way is up to 435,000 subscribers and growing, and where basically PAW Patrol Academy will also contribute new subscribers too. So, that's one business model, that's one area.
The second one is in basically the young kids, basically five to 10, 12 years old. And that is where Toca Boca lives with Toca Live World primarily. 60 million kids have come to that ecosystem monthly. And so we are expanding that, which is a single app game into multiplayer this coming fall. So, we're very excited about that. And then beyond that, we're expanding beyond those two core parts of our business into new genres and audiences. So, we have the Rubik's Cube Match 3 game launching here in the next month or two. And then we also have the Adventure Game Unicorn Academy to compliment the launch of Unicorn Academy.
Brian Morrison:
And then you answered my next question, but I'll turn it back to Mark. And maybe you can just put into context the margin profile of this segment relative to your legacy toy business, your midterm revenue targets, and what to expect in terms of new product introduction in '24 and '25.
Mark Segal:
Just to pick up on what Max just said, the segments that he covered means that our total addressable market in digital games, given our new product introductions, is probably around 15 to $20 billion. We have a tiny sliver of that. So our business right now, is about a $200 million digital games business. We run it around 30% plus EBIT margins, so it's actually very margin accretive for us. We're looking to double that at least at a minimum in the next medium [inaudible 00:16:42] to turn it into around a 400 million business. And that'll be accretive to Spin Master overall, because those 30 to 35% EBIT margins are obviously very accretive.
Brian Morrison:
And in terms of new product introductions, the ones that we should really think of?
Mark Segal:
So, the way the new products work is that you have Rubik's that Max just described, as well as Toca Boca, which is our multiplayer version of Toca Life World. You have to think of it almost like an entertainment property. You capitalize the asset on the balance sheet until it launches. And then once it launches and you start generating revenue, you start amortizing it. Once you hurdle that amortization, you're able to generate those 30% plus EBITDA margins, but prior to that, it's slightly margined dilutive until you've hurdled.
Brian Morrison:
Right. Okay. I'm going to finish off with the financial outlook here. And Mark, your EBITDA guidance for this year is slightly under 500 million. That's up about 20% from last year. Just touch on the growth drivers of what we call a transition year, I believe. And then realizing you don't have guidance yet for 2025, but maybe how this positions you going into that year. And share with us some of those key growth platforms in 2025.
Mark Segal:
Sure. So, we sing out EBITDA margins in the low 20% range. And that's a combination of our toy business, our entertainment business, and our digital games business, which is actually significantly up when you go back to when we first IPO'd the period of time in between the IPO and now. So, we've really grown our EBITDA margins. That's through entertainment, it's through digital games, it's through supply chain efficiencies in Asia. It's through creating licensing and merchandising revenue from our entertainment business. And so, we feel good about where our margins are going. And as we grow our digital games area, those will continue to expand.
If you think about 2025, we have some really exciting things happening in the business in 2025. We have some movies that are coming and licenses that Max described. Dora the Explorer, we have Dragons, we have the Superman movie. We have the first year of Ms. Rachel in full, and we also have the first year of Rubik's and Toca Days in full. So overall, we feel good about '25 as a year that is going to be a growth year, relative to what we've seen in the past few years.
Brian Morrison:
Great. And currently you're trading at about five times EBITDA. That's well below your peers. You're only at one turn of leverage. We have seen you get quite active with your NCIB recently. You have doubled your dividend. These are both new steps for the company. Why this new approach to allocation?
Mark Segal:
Well, we see our trading multiple right now around five times as a real investment opportunity for ourselves. We believe in the story. Our historical trading in EBITDA has been around nine times, and we've beat as high as 11. So we think that the five times multiple for us represents a real opportunity for us to buy back stock in the light of what we've just been describing.
We also looked at our dividend and we kind of have adopted a more total shareholder return approach. We realized that our dividend yield was relatively low, so we've bumped that up. Which I think is a sign of confidence in our business and in our cashflow. So the combination of our buyback program and our increase in the dividend, I think, is a signal that we believe in the strength of the business, we believe in the strength of our ability to generate free cashflow. And we think we're undervalued right now, and that's why we're doing what we're doing.
Brian Morrison:
Very good. Well, those are all my questions for today. I think you've really outlined a clear path to creating tremendous value for shareholders over the next 12 to 18 months, both in terms of financial growth and the potential for multiple expansions. So, certainly look forward to further innovation, the ramp of your digital games, and also the maturation of your promising entertainment portfolio. Thank you both for joining us today.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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