Spin Master Corp. Q1 2018 Financial Results Conference...

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FINALTRANSCRIPT

SpinMasterCorp.

Q12018FinancialResultsConferenceCall

EventDate/Time:May9,2018—9:30a.m.E.T.

Length:60minutes

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May 9, 2018 — 9:30 a.m. E.T. Spin Master Corp. Q1 2018 Financial Results Conference Call

CORPORATEPARTICIPANTSKarolineHunterSpinMasterCorp.—SeniorDirector,InvestorRelationsRonnenHararySpinMasterCorp.—Co-ChiefExecutiveOfficerMarkSegalSpinMasterCorp.—ChiefFinancialOfficerBenGadboisSpinMasterCorp.—GlobalPresidentandChiefOperatingOfficerCONFERENCECALLPARTICIPANTSSabahatKhanRBCCapitalMarkets—AnalystKenricTygheRaymondJames—AnalystStephanieWissinkPiperJaffray—AnalystAdamShineNationalBankFinancial—AnalystDerekDleyCanaccordGenuity—Analyst

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PRESENTATION

Operator

Goodmorning.MynameisAdam,andI’llbeyourconferenceOperatortoday.Atthistime,

IwouldliketowelcomeeveryonetotheSpinMasterQ12018FinancialResultsConferenceCall.

All lines have been placed on mute to prevent any background noise, and after the

speakers’remarks,therewillbeaquestion-and-answersession.Ifyouwouldliketoaskaquestion

duringthistime,simplypress*,thenthenumber1onyourtelephonekeypad.Andifyouwouldlike

towithdrawyourquestion,pleasepressthe#key.Thankyou.

Youmaybeginyourconference.

Ryder—PAWPatrol

Thanks,Operator.Goodmorning,everyone.It’sRyderfromthePAWPatrol.AndI’mhere

towelcomeyoutoSpinMaster’sfinancialresultsconferencecallforthefirstquarterendedMarch

31,2018.

On thecall thismorning fromSpinMaster isRonnenHarary,Co-ChiefExecutiveOfficer;

BenGadbois,GlobalPresidentandChiefOperatingOfficer;MarkSegal,ChiefFinancialOfficer;and

KarolineHunter,SeniorDirectorofInvestorRelations.

Followingtheformalremarks,we’llopenupthelinesforyourquestions.

Uh-oh,lookslikeI’mneededinAdventureBay.PAWPatroltothelookout.

Karoline,takeitfromhere.PAWPatrolisonaroll.

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KarolineHunter—SeniorDirector,InvestorRelations,SpinMasterCorp.

Thanksfortheintroduction,Ryder.GoodlucktoyouandthePAWPatrol.

For your convenience, the press release, MD&A, and audited consolidated financial

statements for the first quarter are available on the Investor Relations section of ourwebsite at

www.spinmaster.comandonSEDAR.

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

lookingstatementsaboutSpinMaster’scurrentandfutureplans,expectations, intentions,results,

levelsofactivity,performance,goalsorachievements,oranyotherfutureeventsordevelopments.

Forward-lookingstatementsarebasedon informationcurrentlyavailabletomanagement,andon

estimatesandassumptionsmadebasedonfactorsthatmanagementbelievesareappropriateand

reasonableinthecircumstances.

However,therecanbenoassurancethatsuchestimatesandassumptionswillprovetobe

correct.Manyfactorscouldcauseactualresultstodiffermateriallyfromthoseexpressedorimplied

by the forward-looking statements. As a result, SpinMaster cannot guarantee that any forward-

looking statementswillmaterialize, and you are cautioned not to place undue reliance on these

forward-lookingstatements.

Exceptasmayberequiredbylaw,SpinMasterhasnoobligationtoupdateorreviseany

forward-lookingstatement,whetherasaresultofnewinformation,futureevents,orotherwise.For

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

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regarding forward-looking informationcontained in theCompany’searnings releasedatedMay8,

2018.

PleasenotethatSpinMasterreportsinUSdollars,andalldollaramountstobeexpressed

todayareinUScurrency.

IwouldnowliketoturntheconferenceovertoRonnenHarary.

RonnenHarary—Co-ChiefExecutiveOfficer,SpinMasterCorp.

Thankyou,Karoline,andthankyou,Ryder.Ibetterwatchoutbecauseyou’resoarticulate,

youmaybethenextCEOhereatSpinMaster.

Andgoodmorning,everybody,andthanksfortheinterestatSpinMaster.

Yesterdaywe reportedour financial results for the first quarter endedMarch 31, 2018.

And I’llbegin thecallwith somebriefhighlights for thequarteraswellas theyearaheadbefore

Markprovidesyouwithamoredetailedreviewofourfinancialresults,includingouroutlookforthe

balanceoftheyear,andBenwillthendiscussouroperationalresults.

Letmestartbysayingthatasalongtimeparticipantinthetoyindustry,itisverysadtosee

Toys“R”Us’demiseintheUSandintheUK.WeareofthebeliefthatTRUhadagreatfranchise.Itis

notasignalasthestrengthortheweaknessofthetoyindustryorretailingeneralforthatmatter,

ratherasafunctionofToys“R”Us’specificownership,capitalstructure,andoperationalissues.

WearepleasedtoseethatmayofToys“R”Us’operationsaroundtheworldhavebeen

solidorareintheprocessofbeingsoldandwillcontinuetooperate,includingToys“R”UsCanada.

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WeareconfidentthatwewillmanagetheToys“R”Usdisruptionin2018,andbelievethat

theindustrywillcontinuetolevelsetitselfin2019.Attheendoftheday,thereissomenumber—

thereisthesamenumberofkidsouttherecelebratingbirthdaysandholidays,andholidayswillstill

comearoundeverysingleyear.

The entertainment group at Spin Master remains the cornerstone of our strategy that

enhancesourabilitytodriveconsistentrevenuesandearningsgrowththroughthecreationofour

own content. In 2018, we will produce over 100 half-hour episodes over five current and new

productions.

PAWPatrolcontinuestoperformwell.PAWPatrol’sratingsareconsistentlyatthetopof

theNielson’sratings.ForQ12018,PAWPatrolwasrankednumberoneamongstkidsages2to5for

bothnewandrepeatepisodes.

InQ4,Nickelodeonwill be airing the first PAWPatrol one-hour TV special titledMighty

Pups. In this TV special, our PAW Patrol pups gain superpowers from a meteor that lands in

AdventureBay.We’realsolaunchingtheultimaterescuethemeforthesecondhalfofseason5later

thisyear.PAWPatrolpupswilleachgetanewultimatevehiclethatallowsthemtotraveltogether

onrescuemissions.Thefallof2018,atoylinewillfollowtheultimaterescueteam.

WearefindingthattheaverageageofrecipientsofPAWPatroltoysisskewingolder,as

bothboysandgirlsarestayingwiththefranchiselonger.Thisisprovidingalargermarketsharefor

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theproduct lineandallowsus toparticipate inprofitable incremental revenuestreamsdrivenby

licensing,merchandising,andbroadcastrevenues.

OursecondpreschoolshowcurrentlyonairisRustyRivets.Welaunchedseason2inNorth

AmericainQ1ofthisyear,andtheratingstodatehavebeenstrong.AccordingtoNielsondata,new

episodesofRustyRivetsarerankedinthenumberthreespotsforbothkidsandboysages2to5.

We’renowdevelopingseason3togetherwithNickelodeon.

The Rusty Rivets toy line is launching globally in August 2018 and we’ve developed

innovative,easy-to-usebuildingsetsspecificallydesignedwithpreschoolers inmind.Toysaretied

closelywith thebuilding themesprominent in thesecondseasonof theshow,andwe’realready

gettingsomegreatfeedbackonthetoyline.

We’reveryexcitedournewentertainmentcontentcurrentlyinproductionandslatedfor

release in 2019. Our new preschool show, Abby Hatcher Fuzzly Catcher, will be airing first on

Nickelodeon in the US and TVO in Canada, and global distribution will follow. This adventure

comedy series follows our heroine, the 7-year-old Abby Hatcher, as she rescues her favourite

creatures,theFuzzlys,fromwhatevertroubletheyhaveaccidentlylandedthemselvesin.

Wewillbestrategicallylaunchingthetoysfollowingaperiodoftheshowbeingonair.This

allowsthepropertytoreallybecomeestablishedwithitspreschoolaudienceandbuildsanticipation

forthetoysinthemarket.

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Wewillbe relaunchingBakugan,both the toyand the televisionshow,globally in2019.

BakuganbecameaglobalhitforSpinMasterwhenitoriginallywas launchedback in2008. Itwas

ourfirstforayintodevelopingourowncontentandallowedustobuildtheexpertisetocreateour

ownin-houseentertainmentgroup.

Weproduced186TVepisodesofBakugan,andtheresultwasaglobalentertainmentand

toy phenomenon with significant toy and licensing and merchandising income. We believe the

globalrelaunchofBakuganwithahighly innovative,reimaginedtoythathasevolvedbutremains

truetoitsrootsrepresentsanexcitingopportunityforfuturegrowth.

On licensing, which complements our core business, we’re always looking for new

properties;however,weremainveryselectiveaboutthelicenceswechoose.Oneofthelicenceswe

are very excited about investing in is through our partnership with Feld Entertainment for the

MonsterJammastertoylicence.

MonsterJamisanaction-packedliveeventwherethedriverscompeteinfrontofstadium

crowds inbothmonstertrucksracingandfreestylecompetitions.Forover25years,Monster Jam

has been combining spontaneous entertainment with the ultimate off-road motorsport

competition.Thisisaglobal10-yearpartnershipprimarilyfocusedonthedie-castandradiocontrol

segments.

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We’reworkinghardondevelopingthe linenow,whichwillbereleased inJanuary2019.

We are also working closely with Feld Entertainment on further developing the global growth

potentialofMonsterJam.

We also have themass toy licence for the third feature film in the How To Train Your

Dragon franchise tobe released in2019.We’vebeena toypartner for these filmsand television

series since its original debut in 2010. TheHow To Train Your Dragon films have grossed over 1

billionworldwide. The third filmwill feature new characters and dragons andworlds to explore,

extendingthecollectibilityofthetoyline.

Wearealso leaning inon somekey toyetic themes for the film, suchasbioluminescent

colouring and dragon armour to be represented across innovative products ranging from

collectibles, core action, plush, and role-play. Andwe are excited to be part of this phenomenal

franchise.

RegardingTocaBocaandSagoMini,theycontinuetogrowsteadily.Sinceacquiringthese

twomobiledigitalcompanies,we’veleftthemtofocusonthecorestrengths,whichisdevelopment

ofnewcontentforappsandstrengtheningtheirbrandswithconsumers.

TocaBoca’scontinuedtoperformwellasthenumberonepaidmobiledigitalkidsbrand.

Ourbiggest success is theToca Life series,whereweare seeing stronggrowthandengagement.

We’renowbuildingandexpandingthesuccessacrosscategoriestocreatemoreintegrateddigital

experiences.

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Lastly,strategicacquisitionshavebeenandwillcontinuetobeafundamentalcoretoour

growth.Ourmostrecentacquisition,GUND,closedonApril2,2018.

ThroughtheacquisitionofGUND,we’vegaineddeepexpertiseinplush,whichaccording

toNPDwas the second-fastest growth category, up 8 percent in theUS year over year in 2017.

GUNDhasaniconicstatusandaloyalbrandfollowing,andisinastrongpositiontodrivegrowth.

As with Cardinal and Swimways, we see an opportunity to use our global sales and

distribution structure to scale the GUND business globally. We also plan to capitalize on strong

licensing opportunities to leverage GUND’s core competencies of plush design, sourcing, and

manufacturing.

We now have access to a well-established specialty retail network that we plan on

selectively leveragingforSpinMaster’sbrands.Benwillprovideyouwitha furtherupdateonthe

GUNDintegrationlaterinthecall.

During the quarter, I travelled to Iraq alongwith a few colleagues of ours here at Spin

MasterfortheSpinMasterToyMovement.Wedeliveredover90,000toystoSyrianrefugeesinthe

ErbilregionofKurdistan,Iraq.Itwasheartwarmingtobeabletobeabletobringsomejoytothe

childrenwhohavesufferedsomuchtraumafromthecivilwarintheirhomeland.Ourgoalthisyear

istodelivermoretoysthroughtheToyMovementthanwehaveeverdonebeforeindifferentparts

aroundtheworld.

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I’llnowhanditovertoMarkSegal,ChiefFinancialOfficer,toreviewourfinancialresultsin

moredetail.

MarkSegal—ChiefFinancialOfficer,SpinMasterCorp.

Thanks, Ronnen. Overall, our first quarter revenue increased 25.5 percent from 2017,

drivenbyHatchimals,Luvabella,andourgamesportfolio,includingCardinal.

Foreignexchangetailwindsincreasedoverallrevenueby8.1million.Inconstantcurrency

terms,revenueincreasedby23.5percentrelativetolastyear.

Grossproductsalesincreased25.7percentinthefirstquarter.Onageographicbasis,Spin

Master’sglobalplatformdrovegrossproductsalesincreasesof19.5percentinNorthAmerica,33.4

percentinEurope,and49.8percentintherestoftheworld.

Overall, international gross product sales comprised 35.9 percent of sales in the first

quarter,increasingfrom32.5percentlastyear,andcontinuingtheprogresswehavemadeoverthe

lastfewyearsingrowingourinternationalbusiness.

IncomparingourQ1 ‘18results toQ1 ‘17,oneof thekeydifferencesbetweenthisyear

andlastwasthetimingofEaster.In2017,EasteroccurredinthemiddleofApril.Thisyear,Easter

fellonAprilthe1st,resultinginalargeproportionofEastersalesvolumefallingintoQ1.

The largest impact on our financial results in the quarter was the US liquidation

announcementbyToys “R”UsonMarch15, 2018.After a verydisappointingUSholiday season,

TRU announced it was preparing to liquidate its US operation. TRU’s weak 2017 holiday

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performance was known in the industry in Q1, and we took steps to manage receivables and

inventoryexposureaheadofanticipatedfurtherrestructurings.

However, the extent of the weakness was not fully known, and the decision by their

lenderstoimmediatelybeginliquidatingallstoresintheUScameasasurprisetousandtherestof

thevendorcommunity.

InadditiontotheUSmarketweakness,TRUUKperformedverypoorly,andduringQ1TRU

closedandliquidatedmostofitsUKbusinessafterfailingtofindabuyer.

At the end of the quarter, we recorded a bad debt expense of $15.2million, primarily

relatedtoTRUUSandUKaccountsreceivable.Thisbaddebtexpansionisincludedinadministrative

expenses in the P&L. In calculating this charge, we’ve assumed no recoveries from any of the

liquidatedTRUentities.Totheextentthereareanyrecoveries,wewillreflectthesewhenwehave

morecertaintyastotheirpotentialrecoveryvalue.

WearecontinuingtodobusinesswithcertainTRUentitiesthatwerenotdirectlyaffected

bytheUSorUK liquidationprocess.Currentreports indicatethatTRUCanadahasbeensoldasa

goingconcerntoFairfaxFinancial.WeareshippingtoTRUCanadaonconservativetermsuntilall

thedetailsoftheFairfaxtransactionareknown.

On April the 21, 2018, Smyths Toys announced an agreement to acquire the German,

Austrian,andSwissbusinessofToys“R”Us,whichwebelieve isgoodnewsfor theEuropeantoy

industry.Weare currently shipping toTRUGermany, and still have credit insurance inplace.We

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continue toship toTRUFrance,andhavecredit insurance inplaceaswell.Wearealsocurrently

shippingtootherentities,suchasTRUAustralia,Asia,andJapanonacase-by-casebasis.

Salesallowancesforthequarterasapercentageofgrossproductsaleswere11.2percent.

The increaseover last year ismainly attributable to themanagementof channel inventories and

promotional activities due to the volatility of themarketplace in Q1. Asmentioned before, Spin

Master’sexpectedsalesallowancerangeisbetween10and12percent.

Otherrevenue,whichprimarilyreflectsmerchandising,royalty,andtelevisiondistribution

incomefromproductsmarketedbythirdpartiesusingSpinMaster’sintellectualproperty,aswellas

app revenue from Toca Boca and Sago Mini, rose 45.5 percent. As I mentioned in March, app

revenuefromQ4‘17onwardsisnowreflectedonagrossbasis,andAppleandGoogle’scommission

is reflectedaspartofCOGS.Accounting forapp revenueonanetbasis,other revenue increased

approximately39percentinQ1.

Ourgrossmarginforthequarterrepresented52.1percentofrevenuecomparedto49.8

percentlastyear.Iftheaccountingchangeforapprevenueisadjustedtoanetbasis,grossmargin

forthequarterwouldhavebeen20basispointshigherat52.3percent.

As a reminder, in Q1 2017 we took a charge to COGS of 2.3 million related to the

Swimwaysfairmarketvalueinventoryadjustment.

Onanapples-to-applesbasis,grossmargininQ1‘18was52.3percentcomparedto50.8

percent lastyear,an increaseof150basispoints.The increase ingrossmarginwasdrivenbythe

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increaseinotherrevenue,favourableforeignexchange,mostnotablythestrengtheningoftheeuro

andthepound,partiallyoffsetbyincreasedsalesallowances.

Total SG&A, excluding share-based compensation arising from the equity participation

awards at the time of the IPO, increased 38.6million. The increasewas driven by the bad debt

expenserelatedtoToys“R”Usof15.2million,aswellasbyinvestmentsinmarketinginitiativesin

the quarter due to Easter timing, partially offset by reduced product development, selling, and

distributionexpenses.

[audio gap] revenue compared with 5.2 percent last year, due to several new product

launches in the quarter, as well as the global marketing initiatives in support of Easter. As I

mentioned,in2018EasterfellintoQ1,whereasin2017EasterfellintoQ2.

Productdevelopmentexpenseswere2percentofrevenuecomparedwith2.8percentin

Q1 ‘17, primarily due to the timing of our development needs within the 36-month brand

innovationpipeline.

Sellingexpenses represented5.5percentof revenuecompared to6.5percent last year,

duetothird-partylicensedproductsmakingupalowerproportionofoursalesmix.Inrecentyears,

asRonnenmentioned,wehaveremainedveryselectiveaboutwhich licenceswechoosetoenter

into.

Distributionexpenseswere4percentofrevenuecomparedwith4.6percentlastyear.In

2017,wemade investments inupgradingour supply chain infrastructure to supportCardinal and

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ourpredominantlydomesticbusinessinEurope.Theinvestmentswehavemadeinoursupplychain

in theUS and Europe have placed us in a better position to service our customers and enhance

margins,andwearenowstartingtoseethebenefitoftheseinvestmentsinourtop-linegrowthand

reduced distribution costs. We continue to look at ways to refine our supply chain to optimize

customerserviceinbothNorthAmericaandEuropeinacost-effectivemanner.

Admin expenses represented 26.9 percent of revenue from 23.7 percent last year. The

increase was driven primarily by the TRU bad debt expense and the impact of share-based

compensationarisingfromequityparticipationagreementsattheIPO.

ExcludingtheTRUbaddebtexpenseandshare-basedcompensationcost,adminexpenses

were20.9percentof revenue,down1.6percentagepointsover lastyear.Thisall resulted innet

incomeof$8.7million,or$0.09persharecompared tonet incomeforQ1 ‘17of10.1million,or

$0.10pershare.NetincomewasreducedprimarilybytheimpactoftheTRUbaddebtexpense.

Adjustednetincomeforthequarterwas$22million,or$0.22pershare,anincreaseof62

percentcomparedto13.6million,or$0.13persharelastyear.

AdjustedEBITDAforthequarter increased40.4percentto43.3millionfrom30.8million

lastyear.AdjustedEBITDAmarginincreasedto15.1percentcomparedwith13.5percentlastyear.

TheincreaseinadjustedEBITDAmarginresultedprimarilyfromhighergrossmargins.

Lookingatourbusiness segments forQ1,grossproduct sales in theActivities,Games&

PuzzlesandFunFurnituresegmentincreased20percentto$57.6million,primarilyduetoincreased

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salesof theCoolMakerbrandofproducts,KineticSand,andtheGamesportfolio,which includes

Cardinal.

IntheRemoteControlandInteractiveCharactersegment,grossproductsalesmaintained

strong growth, increasing 95.9 percent to $91.2 million, driven by Hatchimals Colleggtibles and

Luvabella.

GrossproductsalesintheBoysActionandHigh-TechConstructionsegmentincreased27.1

percentto16.7million,primarilyduetoincreasedsalesofTechDeckandtheinitiallaunchofFlush

Force.

In thePre-SchoolandGirls segment,grossproducts salesdecreased2.5percent to82.6

million.PAWPatrolsalesgrewyearoveryear,butthisgrowthwasmorethanoffsetbyadeclinein

salesofTeletubbiesandPowerpuffGirlslicensedproducts.

In theOutdoor segment,grossproduct sales increased8.9percent to$40million in the

quarter despite the TRU bankruptcy, which occurred during the seasonal ramp up of Swimways

products.

Freecashflowwasnegative28.3millioninQ1comparedto5milliongeneratedlastyear.

Thedeclineinfreecashflowinattributabletohighercashtaxespaidinthequarterrelatedto2017

profitability,andnonrecurringcapitalexpendituresrelatedtoournewcorporateofficebuildout.

Networkingcapitalasapercentageofrevenuedecreasedby3.4percentagepointsto6.1

percentofLTMrevenue.

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Asmentioned,weclosedtheGUNDacquisition.ItwasourninthacquisitionsincetheIPO.

Thefinalpurchasepriceof$76millionaftera$3millionfavourablenetworkingcapitaladjustment

waspaidutilizinginternallygeneratedcashresourcesandourcreditfacility.

GUNDsalesin2017wereintherangeof$60million,witharound20percentattributable

to international sales.GUND’sEBITDA is in themid-teens.WewillbeconsolidatingGUNDresults

fromQ2onwards,and theywillbe included in theActivities,Games&PuzzlesandFunFurniture

businesssegment.

Iwillconcludewithouroutlookfor2018.Asyouknow,theTRUliquidationintheUShas

createdadegreeofuncertaintyforallindustryparticipants,includingSpinMaster.Weexpectthat

most of the negative impact to the liquidation in theUSwill be felt inQ2 2018.We expect the

overall impacttobecontainedto2018,andthatmostofthesalesthatTRUhistoricallygenerated

willshifttoexistingornewentrantstothetoyindustryin2019.

Given the uncertainty generated by the US liquidation in Q2, we are maintaining a

conservativetoneforouroutlookforthebalanceof2018,despiteourstrongQ1results.Forthefull

year2018,excludingGUND,wenowexpectorganicgrossproductsales togrow inthemid-single

digitrangerelativeto2017ascomparedtothemid-tohigh-singledigitgrowthrateannouncedin

connectionwiththereleaseofourQ4‘17resultsinMarch.

Including GUND, we expect gross product sales growth in the mid- to high-single digit

rangecomparedto2017.Thisisinlinewithourlong-termtargetofmid-tohigh-singledigitgrowth.

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Seasonalityforgrossproductsalesin2018isexpectedtobeapproximately31to33percentinH1

comparedtotheseasonalitypreviouslyannouncedof32to35percentinH1.

TheTRUliquidationintheUSisexpectedtohaveanimpactonoursecondquartergross

productsales,whichresultsnotonlyinthelowergrowthratesoverallfortheyear,butalsolessofa

shiftingrossproductsalesfromthesecondhalftofirsthalfthanwehadpreviouslyexpected.

AdjustedEBITDAmargins,bothincludingandexcludingGUND,areexpectedtobeinline

withpriorguidance,whichisflatto2017.

Tobeclear,adjustedEBITDAmargins,whicharecalculatedasapercentageofrevenueand

notgrossproductsales,were18.8percentin2017.

I’dnowliketoturnitovertoBenGadbois.

Ben?

BenGadbois—GlobalPresidentandChiefOperatingOfficer,SpinMasterCorp.

Thankyou,Mark.Weareverypleasedwithourfinancialandoperatingresultsinthefirst

quarterof2018,whichdemonstratedtheunderlyingstrengthofourproductsandbrands.

AccordingtoNDP,inQ12018intheUS,SpinMasterwasthenumberfourmanufacturer

andwasalsothenumberthreeabsolutedollargrowthmanufacturer.

Asweoutlinedonour lastcall,weended2017withourbest inventoryatretailposition

since going public. OurQ1 results reflect this, aswewere in a better position to refill customer

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inventories.Wemeasurebeginninginventory,shipment-in,POS,andendinginventoryregularlyas

aneffectivecontrolonourbusiness.

IntheUSandonaglobalbasis,ourPOSgrowthsignificantlyoutpacedinventorygrowth.

ThestrongPOSgrowthonourproductsisshowingcustomerengagementwithourbrands.Weare

seeingahealthymixofinventoryflowingintoandoutofretailerswithnewbrandscontributingto

anyincreaseinretailinventory.

AsMarkdiscussed,EastertimingwasalsoadriverforbothUSandglobalPOSgrowthyear

overyear.

Therewereseveral factors that influencedourperformance thisquarter, someofwhich

willaffectthebalanceof2018.LetmewalkyouthroughthesebrieflybeforeIreviewourfourkey

growth strategies and some of the initiatives we are undertaking to execute them in 2018 and

beyond.

AlthoughtheTRUliquidationannouncementlookplaceoverendofthequarter,wewere

already experiencing channel disruption inQ1 in anticipation of previously announced TRU store

closures.Asareminder,TRUwas12percentoftheindustryin2017andapproximately12percent

ofSpinMastersales.

For2018,weproactivelyplannedandexpectedthatnumbertobeinthehigh-singledigits.

Sincetheannouncement,wehaveseenveryhighinterestlevelsfromotherretailerstocapturethe

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lost TRU volume, including putting formal plans in place.We are working closely with all these

retailerstorecoupasmuchvolumeaspossibleandensurestrongsell-through.

Someofthis interest iscomingfromnontraditionaltoyretailers lookingtoincreasetheir

toyofferingfor2018,mainlyinthesecondhalfoftheyear.In2018,weexpectthatbetween80to

90percentoftheTRUUSvolumewillshifttoexistingandnewcustomersin2018.Thisimpliesan

approximatelynegative2percentimpacttotheUStoyindustry.By2019,weexpectthemarketto

normalize.

Currently, our overall retail inventory at TRU is downover 20 percent compared to the

same time lastyear.Weexpect this inventory to selloffatanaccelerated rateas the liquidation

salesproceedduringQ2andfortheUSliquidationtobecompletebytheendofJuly,leavingaclean

marketforthesecondhalfoftheyear.

IntheUK,TRUliquidatedmostofitsstoresduringQ1.EvenwiththeTRUclosures,ourUK

businessgrewverystronglyinQ1.ThisisatestamenttothestrengthofourproductlineandourUK

team.

WhilemuchofthecurrentfocushasbeenonTRU,it isalsoveryimportanttoknowthat

wewereawardedWalmart’sVendoroftheYearawardfor2017.

Overall,wefeelconfident thatSpinMasterwillweather thestormwell in2018,andwe

seesomeM&Aopportunitiesarisingoutofthissituationin2019andbeyond.

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Wecontinuetofocusheavilyontheonlinechannel.Theinternale-commercestrategywe

putinplacethreeyearsagoisworking.Toyslendsthemselveswelltoonlinesales.Onlinechannels

haveunlimitedshelf space;wewant tomakesureourentire toy line isavailableonline,whether

thatisthroughourownD2Cortoourretailpartners.

We expect that the liquidation of TRU will only further increase the growth of online

channels.Inresponsetogrowingonlineshoppingbehaviour,wehavethroughcarefulanalysisbeen

allocatingagreaterportionofourmarketingspendandinternalresourcestoourdigitalandsocial

media.

A recentexampleofouronline strategy is theMoonlite launchonAmazon. It hasbeen

very successful, with Amazon’s full year’s plan already increasing over initial expectation.When

doneright,thiskindofonlinelaunchcanbemarginaccretiveforbothouronlineretailpartnersand

us.

I’d now like to briefly review our four key growth strategies, and provide you with an

update on someof our current initiatives.Our first growth strategy, to continue to innovate the

core product portfolio, relies on our ability to consistently infuse innovation into our branded

products.

Our internal 36-month brand innovation process facilitate the identification of market

opportunitiesthatwecapitalizeontoaproductdevelopmentoracquisitions.Weviewthisprocess

asanintegralpartofourbusinessforsustainableprofitability.

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Letmerunthroughafewhighlightsofour2018productlinenow,andhowweseethings

trending based on our early reads. Our 2018 toy lineup was very well received at the major

international toy fairsheld inQ1.HongKongwas in January, followedbyNewYork, London,and

NuremberginFebruary.Wehadtremendouscoverageatthisyear’sNewYorkToyFair,wherewe

hostedover130mediaandinfluentialthetoursofourbooth.

In theActivities,Games&PuzzlesandFunFurnituresegment,we’regettingvery strong

contribution from our games portfolio, including Cardinal. Titles such as Soggy Doggy, Santorini,

Perplexus,Hedbanz,andCardinalbasicpuzzlesareallperformingverywell.

KineticSandhashadaresurgencefollowingourdecisiontolaunchanopeningpricepoint

at$2.99inaninnovativecontainerthatdoublesasamold.

OurinnovationinEtchASketch,whichweacquiredin2016,hasbeensuccessful,asPOS

growthisbeingdrivenbythenewEtchASketchFreestyle.

OurJoJoSiwalicencefortheactivitiesareaisdoingwellsofarwithboththeBowMaker

andJoJoGlitterNailsdeliveringgrowth.

InRemoteControlandInteractiveCharacters,accordingtoNPD,Hatchimalswasnumber

10intotaltoys,number2intheplushsuper-category,andnumber3inthedoll-supercategoryin

theUS.

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HatchimalsColleggtiblesdroveasignificantamountofgrowththisquarter,asitwasnotin

themarketinQ12017.Colleggtibles(unintelligible)andapopularEastergiftthisyear.Accordingto

NPD,3ofthetop15EasteritemwereHatchimalsColleggtibles.

Harnessingthismomentum,wewillbelaunchingalmost200newcharacterstocollectin

2018.WeexpectthedemandforthehighpricepointeggstopickuparoundourthirdHatchimals

Day launch inOctober.We have now developed great brand awareness for Hatchimals, and are

capitalizing on this by building a global licensing and merchandising program. Core top-line

categories such as apparel, hosiery, bedding, backpack are performing very well, with retailers

reportingbackthatHatchimalsisoneoftheirtoplicences.

Zoomer is largelyabrand that sells in the secondhalfof theyear.Althoughwedidnot

launchanynewitemsinQ12018,werefreshedthelowpricepointZuppslinetoponies,andsold

moreunitsthisquarteroverQ12017.Weareexcitedaboutourfall2018Zoomer line.Zoomer is

entering in its sixth year as a brand, andwe are continuing to introduce new play patterns and

interactivityatbothhighandlowerpricepoints.

AsyourecallfromNewYork,thePlayfulPupsisourmostrealisticplayfulandexpressive

robotic dog yet, delivering all new interactivity. Hungry Bunnies is a line of cute rabbits that eat

paperfoods,andispricedinbetweenourlow-andhigh-priceitemsintheZoomerline.

Moonlite also represents some diversification with Remote Control and Interactive

Characters. As I mentioned earlier, it is doing very well on Amazon. We are now expanding

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distributiontotheUK,Australia,andFrancethisyearandthenexpandinggloballyin2019.Moonlite

ispatentedandcouldbedisruptivetothechildren’sbookcategory.

InPre-SchoolandGirls,PAWPatrolcontinuetogrowglobally,andPOSwasstronginthe

quarter. According to NPD, PAW Patrol was the number one property in the infant, toddler,

preschooltoysuper-categoryintheUS,UK,andAustraliaforQ1.ProductsfeaturingtheSeaPatrol

themefirstintroducedinthesecondhalfofseason4andairingnowinseason5aredrivingsales.

ThePAWPatrolbasicvehicleandpupassortmentmaintainsaspotinthetoptenitemin

theUS,demonstratingconsumerscontinuetobehighlyengagedwiththebrand.

OurtwonewexcitingGirlsproductsplanonlaunchinglaterthisyear,andwewillprovide

anupdateontheminournextquarterlycall.

InBoysActionandHigh-TechConstruction,TechDeckwasatopperformer.Wearenow

selling Tech Deck globally, and we are pleased to see that consumers have reengaged with the

brandverystrongly.WearedisappointedwithFlushForce, theboycollectible linewe introduced

this year.With hindsight, therewere toomany players splitting the pie for an itemwith narrow

appeal.

In theConstruction segment, in theUS,weare relaunching theErectorbrandname for

MeccanoproducttoreconnecttheUSconsumerwiththisheritagebrand.In2018,weareshifting

focustobasicbuildingconceptsawayfromhigh-techroboticsprogramming.Althoughwedelivered

stronginnovation,pricepointsweretoohighformostconsumers,deliveringmixedresultsforus.

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InourOutdoorsegment,wewereupforthequarter;however,theimpactofTRUwasfelt

disproportionately in the outdoor space, as the disruption arose during the peak season for the

outdoorarea.

Wewill provide further segment performance updates as we usually do in August and

November.

During Q1, in addition to three TOTY awards, we received several additional

acknowledgement,includingbestwearabletoyfromParentsMagazineforTwistyPetz,Techlicious

andToyBuzzeachrecognizedBoxer,andtwoNPDU.S.ToyIndustryAwardsfortop-sellingtoyby

super-categoryforPAWPatrolbasicvehicleandpupassortmentandHatchimalsPenguala.

Overall,we remain veryoptimistic for our newproducts launched in the secondhalf of

2018.

Oursecondgrowthstrategyistosignificantlyincreaseourinternationalsales.Werevised

ourmedium-termgoalsfollowingour2017resultsattheupperendofourprevioustargetof35to

40percentofoursalesinternationally.

Ourinternationalgrowthcontinuesanupwardtrajectoryforthefirstquarterof2018.Key

establishedmarketssuchasGermany,Mexico,andUKperformexceptionallywell,andournewer

marketssuchasAustraliaandCentral-EasternEurope,arecontinuingtoshowstronggrowth.

In China, our brands and products are resonatingwith consumers, and sales,while still

small,areexceedingourexpectations.

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PAW Patrol recently received the Most Popular Store award from e-commerce giant

JD.com,oneofthe largestonlineretailers inChina.TheawardrepresentsPAWPatrol’ssuccess in

theCompany’smaternityandchildren’sdivisionthrough2017.PAWPatrolwasoneofonlytwotoy

brandsacknowledgedchosenfrommorethan100,000brandsparticipatingintheselection.

PAWPatrolalsoreceivedtheFastandFuriousAwardfromAlibabaTmallinthematernity

andchildren’ssection,recognizingthesuccessofthebrandonTmall in2017.PAWPatrolwasthe

onlytoybrandtoreceivethisaward.

Following these successes, we are in the process of planning for additional brand and

product launches in China in 2018, including Air Hogs, Meccano, Luvabella, KumiKreator, and

selectedmarblegames.

Third,we continue to develop evergreen global entertainment properties. Ronnen gave

youadetailedoverviewofourcurrent slateofproperties,aswellas thenewcontentwewillbe

deliveringin2019.

Iwanttohighlightforyousomethingthatisworkingparticularlywellinourentertainment

strategy.Ourentertainmentandbrandteamsworkcloselytogether integratingtheshowandthe

toylinetodeliverinnovativetoyideasthattranslateonscreen,onshelf,andathome.

PAW Patrol is a great example of the fusion of storytelling and toy design. We are

introducingthemeseachseasonthataretimedtothedeliveryofourfallproductline.Thisensures

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FINAL TRANSCRIPT


thatduringourlargestsellingquarter,thenewproductsonretailers’shelvesandthenewepisodes

onairarecloselylinkedinboththemeandcontent.

Thewaywethinkaboutentertainmentandphysicaltoyasconvergingcontentisastrategy

wefeelwillbesuccessfulforourcomingentertainmentpropertylaunches,includingAbbyHatcher

FuzzlyCatcherandBakugan.

Fourth,we intendtogrowthroughstrategicacquisition.Wehavethebalancesheetand

financialflexibilitytodoso,andweareactivelyseekingopportunitieswiththerightstrategicfit.

We are swiftlymoving aheadwith the integration of GUND.We have kept the current

GUNDstrongleadershipteaminplace.

To position GUND for future growth, we are working on several integration initiative,

including hiring resources to support GUND; aligning the business with internal Spin Master

processes; preparing GUND to move onto SAP; and transitioning the warehousing, order

management,andinventorycontrolprocesses.

Overall,theintegrationisgoingverywellsofar.Itisstillearly,buteverythingisontrack.

Andwearefullyexpectingtohavethebusinessintegratedbytheendoftheyear.

I want to conclude a comment about the balance of 2018. As Mark described in his

outlook,weexpectouroverallgrowthratefor2018tomoderatecomparedtothepastfewyears.

WhileourresultsinQ12018wereveryencouraging,weexpectthesecondquartertobe

morechallengingaswemanagethroughtheTRUUSliquidation.Aswehavedescribedbefore,we

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FINAL TRANSCRIPT


prefer to look at the business in halves and not quarters, due to the holiday timing and normal

supplychainmovements.

Ourcoreproductsareresonatingwell,andweareconfidentforthesecondhalfof2018

buildingonthestrongandfocusedplatformwehaveestablishedoverthelastfiveyears.

Overall,weareincrediblyproudoftheeffortandresultthatouremployeeshavedelivered

by executing on our four key growth pillars, despite the short-term headwind created by TRU

closureintheUSandtheUK.

Weremainveryfocusedonexecutingourfourkeygrowthstrategiesateverylevelofthe

business globally, andwe’ll be using our results-driven, high-performance culture to continue to

drivevalue.

That concludes our formal remarks now. Ronnen, Mark, and I will now be pleased to

answeryourquestions.

Operator,pleasebeginthequestionperiod.

Q&A

Operator

Thankyou.Atthistime,I’dliketoremindeverybodyifyoudowanttoaskaquestion,just

press*,thenthenumber1onyourtelephonekeypad.

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AndourfirstquestioncomesfromSabahatKhanfromRBCCapitalMarkets.Sabahat,your

line’sopen.

SabahatKhan—RBCCapitalMarkets

Thanks,andgoodmorning.JustontheToys“R”Ussituation,youprovidedsomecolouron

theresponsethatyou’reseeingfromotherretailersintheindustry.Canyoumaybetalkalittlebit

aboutaretheyallocatingadditionalshelfspace?Isitmorepromotions?Andmaybewhatsomeof

thenontraditionalguysaredoing?I’massumingyoumaybearereferringtodepartmentstores,et

cetera.Somaybesomecolourthere.

BenGadbois

Goodmorning,Sabahat.Sowhatisactuallyhappeningis,asyouguysknow,Toys“R”Us

hadasignificantmarketshareintheUS.Andwiththeirliquidation,itleavesthatmarketsharewide

open.Soyouhaveallthetraditionalretailersthatyouwouldexpectthatarealreadysignificantin

thecategoryaggressivelywanting thatmarketshare, so there’sa lotofmeetings, there’sa lotof

reviews,there’salotofdiscussionwiththem.Andwhatthey’relookingatdoingistoaddspaceto

theirstoresanddoalotofout-of-aislepromotion,sothere’salotofactivitiesforthemtobeableto

accommodatetheexpectedextravolumecomingintotheirstores,tryingtodrivenewpromotions

withtheirstores.

Andthenwhatwe’realsoseeingisintherestofthemarketthere’salotofplayersthat—

notsurewewanttonamethem,giventhatthey’reworkingontheirownplans—butthere’salotof

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nontraditionalplayersthatareveryeagertoalsoenterthetoycategorysales,justbecausetheysee

thatnowasatremendousopportunityforthemtoalsodrivetheircompsandgrow.

Andthenthelastthing,butnotleast,isthere’salotofvariablesatplaynowwiththeToys

“R”Usliquidation,asMarkandIdiscussed,andRonnen,andeveryoneisreally,reallyhardatwork

to partner upwith the retailers just tomake sure that fromanoperational standpoint it all gets

executed.

SabahatKhan

All right.Thanks.Andthen just ifwecouldshiftover to theHatchimalsplatform. I think

early last year at somepoint itwasmentioned that youwere looking at potentially a three-year

pipelineofproducts.Giventheprogressthatyou’vemadewiththatplatform,Iguessisyourview

changedonthelifespanorwhereyoumightbewiththatplatform?Orcanyoumaybetalkalittle

bitaboutyouroutlookforthatfranchise?

BenGadbois

Yeah.I’mhappytoanswerthat.SoHatchimalscontinuestodoverywellonaglobalbasis

atthevariouspricepoints,whichmeantheoriginalbigeggs,aswellasthecollectiblelines.Sowe

alsohave—youguysarefamiliaratthispointwithour36-monthbrandinnovationpipeline,sowe

feelvery,veryconfidentwiththeamountofinnovationnowthatweseeforthenextseveralyears.

Andfurthermore,wealsowillcontinuetoinvestinthebrands.

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And as a reference, if you guys remember just a few years back, we launched Zoomer

whena lotof theconversation internallywascanZoomerbemorethanaone-ortwo-year item,

and now we’re in year six because we’ve fostered the brand and we’ve continued to drive

innovation that really fascinated the consumer. So we’re going to do the same thing with

Hatchimals.

Sothere’salotofrunwayleftinHatchimals,andwe’refocusedonittomakesurethatit

hasalonglifecycle.

RonnenHarary

Yeah.And justtoaddtoBen’spoint,ourentertainmentteamhasbecomeveryengaged

nowtocreatealotofshort-formcontentthatyou’llseecomingoutinthefourthquarterandthen

throughoutthebalanceof2019andbeyond.

SabahatKhan

Allright.Thanks.Andjust—

RonnenHarary

Predominantlytosupportthecollectiblepartoftheline.

SabahatKhan

All right. Great. And then just one kind of housekeeping one. On the CapEx on the

traditionalPP&E,canyoumaybetalkabouthowmuchofthatwasrelatedtoyourheadofficeand

howweshouldthinkaboutfullyearCapExwithoutthatheadofficespend?

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FINAL TRANSCRIPT


MarkSegal

Thanks,Sabah.Yeah.SotraditionallyI’vegivenyousomeguidancearoundCapExrunning

ataround4.5,5percentofsales.Ithinkjustgiventheexpenditurethisyear,thisonetimeexpense

ontheheadoffice,that’llprobablygoupapercentagepoint.

We had around $10 million of CapEx in the first quarter going through, and there’ll

probablybeasimilaramountinthesecondquarter.

SabahatKhan

Thankyou.

Operator

AndyournextquestioncomesfromKenricTyghefromRaymondJames.Kenric,yourline’s

open.

KenricTyghe—RaymondJames

—firstandthenyouhadthebenefitofmoreEasterinthisfirstquarter.Couldyoujusthelp

usunderstandhowthefranchiseperformedandthelevelofgrowthinthefirstquarternetofthose

differencesrelativetoyourexpectations?

MarkSegal

Sorry, Kenric, we lost you for the first part of your question there. Would you mind

repeatingthatquestion,please?

KenricTyghe

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FINAL TRANSCRIPT


Sure.Sorry,Mark.I’llswitchoverhere.Thequestionwas,wesawgreatoutlookonPAW

Patrol;wehaveobviouslyastrongperformancein-quarter.WhatI’dliketotryandhandicapisthe

performanceinquarternetofthevarioustimingshifts,fourthquarterintofirst,Easterintothefirst

quarter versus the second, and try get to how that growth performed orwhat that growthwas

relativetoyourexpectations?

BenGadbois

Okay.Kenric,happytoanswerthisquestion.SoPAWPatrolcontinuestoaddverystrong

POS on a global basis. It’s a bit different by different countries and regions around the world.

Nonetheless,thePOSgloballywasuplow-doubledigits,sothefranchisecontinuedtodoextremely

well.

Andjustasareminder,severalpartsoftheworldareonetothreeseasonsbehindNorth

America,andactuallywecontinuetobeextremelypositivewiththeresultswe’reseeingwithPAW

Patrol. Ronnenmentioned earlier that later this yearwe’re launching a one-hour TV special, the

MightyPups,whichisverymuchontrendwithwhatcaptureskidsthesedays.We’rehavingseason

5 launchingsoon.Andwe’reexcitedforournewproduct launch, includingultimatefiretruckand

thenewvehicles,too,thatRonnenmentionedearlier.

Soweremainvery,verypositivewiththeperformanceofthefranchise.

KenricTyghe

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Great.Thankyou,Ben.Andcertainlythefiretruckwasimpressiveatthetoyfair.IfIcould

switchgears,Ronnen,onRustyRivetsperhaps…you’resoundingperhapsa littlemoreconfident

withrespecttothefranchise;performanceperhapsbetterexpected;supportingthetoylaunchora

fullertoylaunchthanperhapswehadsortofbeenlookingforinthisyear.Couldyoujustspeakto

that Rusty Rivets performancewhat’s either changed in terms of the opportunity or changed in

termsofyourconfidence?

RonnenHarary

I thinkwe’regoing toputRustyon thenext call for the thirdquarter.That’sa shot. It’s

interesting, television shows they’re kind of like children. They all kind of develop at a different

pace.AndIthinkthatthefirstseasonofRustyRivets,eventhoughitratedreallywell,I’dprobably

giveita7outof10.Andseason2,theteamhasjustdoneanexceptionaljobreallytighteningup

the storytellingand thepacingof the show,and I’dprobablygive it a9outof10asa television

show. And they’ve also done an incredible job to focus in onwhat the kidswere gravitating to,

whichwerethesespecialbotsliketheElephantbotandtheTigerbotandtheGorillabot,andbrought

in a nemesis toRusty andRuby,which creates for great storytelling. So I think the show itself is

muchtighter,andIencourageallyouguystoactuallywatchseason2.

Andthen the teamdidasmart thing,whichwas theygave thepropertymoregestation

timewith theconsumer to really start toget into thecharactersand toget into the show.And I

thinkwemadeagoodstrategicdecisionbypushingoffthetoylaunchtothefourthquarterofthis

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year,andalsotakingsomeofthelearningsthatwehadfromToys“R”Uslastyearandmodifyinga

line to what were the higher-selling feature products versus the other ones that were

underperforming.

Socautiouslyoptimistic,andwe’llsee inthefourthquarterhowthetoysresonate.But I

cantellyouthattheshowisalotstronger,andtheratingsareproofthatthekidsareengagingand

watchingtheshow.

KenricTyghe

Great.Thankyou.Andaquickfinaloneforme.Mark,thetimingshiftfirsthalfversusthe

secondhalf,isthatsimplyreflectiveoftheToys“R”UsUSwindupperhapsproceedingquickerthan

expectedorsomecombinationofthatandhowaggressivelyotherentrantsarelookingtogoafter

theToys“R”Usshare?

MarkSegal

It’s primarily, Kenric, a functionof the volatility in the secondquarter in the sense that

therewillnotbereplenishmentsales,obviously,asaresultoftheUSToys“R”Usliquidation.And

thatkindofshiftssometoysalesoutofQ2thatwewereexpectingtomake,andthatchangedthe

seasonalityalittlebit.

KenricTyghe

Great.That’sitforme.Thankyou.

Operator

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And your next question comes from StephanieWissink from Jaffrays. Steph, your line’s

open.

StephanieWissink—PiperJaffray

Thanks. Good morning, everyone. I want to unpack a couple of things. First, just

congratulations, guys, on the success of the licensing program. Curious if you can dig a little bit

deeper and sharewith uswhere some of that is coming from, if that’s PAW Patrol, or if you’re

starting to see some success with some of your other franchises? And then also I know the

advancement in internationalhasbeenakeystrategicpillarforyou,soI’mcurious ifyoucanjust

breakdownabitofwhereyou’reseeingsomemarketpenetrationopportunityandgrowth?And

howweshouldthinkaboutthatcadencemovingbeyondkindof35percentoftotalsalesoverthe

nextcoupleofyears?Thankyou.

MarkSegal

Okay. Steph, I’ll take the first piece of that question, and thenmaybe Ronnenwill add

some comments and thenBenwill dealwith the international piece.Wehave seen some strong

growthinotherrevenue.Wedon’tbreakdownallthecomponentsofotherrevenue,butthereare

two—therearethreeprimarydriversofthat.

Youhaveyour licensingandmerchandisingprogram,youhaveyourdistributionsalesof

the TV shows, and thenwe also have app revenue.We’re actually seeing growth in all of them.

We’reactuallystarting toseesomeofourown licensingoutdoingnicelyaswell.TheHatchimals

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programwestartedlastyearisstartingtogetsometractionasthatbrandhasgrown.Andsothat’s

becominganelementofourotherrevenuestreamsaswell,andthat’saprogramthatwe’regoing

tocontinuetobuild.

Aswell,we’realsoseeingstrengthintheTocaBocaandSagoMiniappsales.Bothofthose

companiesarecontinuingtodowellandbuildtheirfranchises,andsoallofthosearereallydriving

growthintheotherrevenueline.

Doyouwanttoaddanything,Ronnen,tothat?

RonnenHarary

Yes.JusttobuildonyourcommentonHatchimals,there’sinterestingthingshappeningin

the industry nowwhere you have toy properties that are driving L&M, such as Hatchimals, LOL,

Shopkins.Andwhenyouaddthemup,it’squitealargeshareoftheindustrythat’sbeingdrivenby

toys.

And I think potentially a large factor of that is the ability for kids towatch the content

basedonthosetoypropertiesonYouTube,whichisdrivingalotofgrowthandreallyopeningupa

lotofopportunitiesforcompaniesinourspace.

So forus,we’re takingavery focusedeffort in termsofexpandingoutwhatHatchimals

means,andexpandingoutwhatthatmeansfromacharacterperspectivewiththecontentthatwe

haveindevelopmentnow.AndIthinktheteam’sdoneanincrediblejobbycreatinganin-house—

reactingveryquicklybysigningupover50licensors,andthey’renotonlygettingouttheproduct,

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butgettingoutareallyincredibleproductthat’stailoredandthatisinkeepingwiththemeaningof

whatHatchimalsisallabout.Andthatproduct’sreallyresonatingwiththeconsumer,andsuddenly

wehavean incredible in-house licensingteamwherethistimearoundwecapture100percentof

therevenuecomingin.

BenGadbois

On international, Steph, wewere actually very pleasedwith our performance at pretty

muchallofourindividualcountries.WetrackthePOSineachoneofthesecountries,andinalmost

allofourcountrieswherewehavedirectofficesourPOSisamultipleofthemarket.

Andwhat is so positive for us is it shows that not only the POS is very strong, but the

portfolioasawholeisdoingwell,whichisveryencouragingforus.Andasfaraschangingourtarget

fromthat35percentthatwe’veinitiallysettothe40percentiswe’llgofrom35to40,andthenext

step before we change to 40, but we’re always studying new markets; we’re preparing more

countries.

Andasareminder,wedon’tliketolaunchcountriesandlosemoneyforthreeyearsjust

for the sake of entering new countries. So we like to be very calculated and measured in our

internationalapproach,andasweenterweliketobeprofitableveryfastinourentry.Soyouwill

continueusto…youwillcontinuetoseeusstepupourinternationaleffort,butwe’reverypleased

asacompanyintermsofhowourinternationalofficesaredoingbecauseit’snotafunctionofone

ortwocountriesleadingalltheotherones.We’vedonereallywellinQ1acrosstheboard.

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StephanieWissink

Thankyou.Veryhelpful.

Operator

AndyournextquestioncomesfromAdamShinefromNationalBankFinancial.Adam,your

line’sopen.

AdamShine—NationalBankFinancial

Thanksalot.Mark,I’dliketopushyoualittlebitontheguidanceupdatebecause—andI

don’tbegrudgeyoumaking themove in the contextof theuncertaintyaroundToys “R”Us—but

everything I’ve heard today was pretty consistent with the messaging sort of around the last

disclosures inMarch, and I think during the course of some of themarketing that you’ve done

subsequently.And Idon’t think I’veheardanythingparticularlynegative inregardstoa lotof the

themesthatcontinuetodrivesomeofyourhistoricaloutperformanceintheindustry.

AndsogiventhestartofaverygoodQ1thatblewawayStreetnumbers—andarguablyin

asmallquarter—acknowledgingadipthatIthinkisbeingsignalledheadingintoQ2,howshouldwe

bethinkingaboutthecontextofthisguidanceparticularlyasyouhistoricallytendtogetalotmore

visibilityastoyourH2outlookonceyougetthroughsomeofyoursummerplanninganddiscussions

withretailers?I’llleaveitthere,andperhapsmaybeyoucanelaborate.

MarkSegal

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FINAL TRANSCRIPT


Okay.Thanks,Adam. I thinkwithourguidancewe’rebeingprudent,Adam,becausewe

don’thaveallthefacts.WedoknowthattheToys“R”UsliquidationintheUSisgoingtohavean

impactonQ2.Wearealso—aswesaidearlier,wehadashiftofrevenuefromQ2intoQ1,which

willaffecttheQ2comps.

Wedon’tgivequarterlyguidance,butweare,Ithink,beingreasonableandprudenthere

byadjustingouroverallgrowthratefor2018downalittlebitasaresultoftheuncertainty,notonly

inQ2,butalsointhesecondhalfoftheyear.AsBendescribed,wedofeelconfident,butIthinkat

thispointintimegivenwherewe’reatwiththeinformationthatwehave,webelievethataslight

tweakoftheguidancewithamoreconservativetoneistherightthingtodofortheCompany.

Ben,wouldyouliketoadd?

BenGadbois

And—

AdamShine

Sorry,goahead.

BenGadbois

Yeah.Justonethingtoadd,Adam,isweareverypositivewithourproductlaunchthatare

upcomingforthesecondhalfoftheyear.Ithinkwefeelgreatabouttheportfoliofortherestofthe

year.

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YouguyshaveallseenitinNewYork,butwiththatsaid,therearemorevariablesinthe

marketandintheindustrythisyearthaninthetraditionalyears.Andit’sdifficulttomodelallthese

newvariableswithahighdegreeofaccuracy.Andasyouknow—asyouknowus,we tend tobe

moreconservativeandprudentandmeasuredinourapproach.

Withthatsaid,Ithinkoncewe—overthenextthreemonthswe’llhavealotmoreclarity.

Anduntilwehavethatclarity,wejustprefertobemoreprudent.

AdamShine

Okay.Sofairenough.SonotwithstandingtheQ2noisethatcouldbecoming,IguessIlook

forwardtoyouguysbeatingStreetnumbersagain.Allthebest.Thanks.

MarkSegal

Operator, I thinkwe’vegottimeforonemorequestionatmost.We’regoingtohaveto

cutitoffat10:30a.m.

Operator

Certainly.So that finalquestioncomes fromDerekDley fromCanaccordGenuity.Derek,

yourline’sopen.

DerekDley—CanaccordGenuity

Yeah.Hi,guys.Thanksforsqueezingmeinhere.Justaquestiononsomeofyourallocation

ofproductsoutsideofToys“R”Us.Canyoujustgiveusanupdateonperhapse-commerceandhow

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much of an impact e-commerce is having, both with your retail partners and your direct-to-

consumerbusiness?

BenGadbois

Yeah.Ithinkwhenyoulookat…ifyoulookatthechannelsplitintheUS,there’sa—mass

isobviously…themassretailersareobviouslythelargestchannel.Theonlineretailerscontinueto

grow.We don’t expect that to slow down, although the traditional retailers are also verymuch

focusedone-commerceaswellnow.

SoIthinkit’sgoingtobeafunctionofthepiere-splitting,I’mnotgoingtosayequally,but

probablyinafairlybalancedwayamongstallthedifferentretailers.Andagain,likewementioned

earlier,theonethingthatisinterestingforusisretailersthathavetypicallynotreallybeenintothe

toycategorieswantingtoalsotrytoparticipategoingforward.

ButIthink,look,Ithinke-commercewillcontinuetogrow;IthinknotasafunctionofToys

“R”Us,butIthinkasafunctionofhowconsumersliketoshop.

DerekDley

Okay. And do you experience a different margin profile when your products go e-

commerce?Orisitthesame?

MarkSegal

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No,we’re relatively neutral fromamargin perspective,Derek,when it comes tobricks-

and-mortar versus online. Obviously within our customer category there are different levels of

profitabilityoverall,butit’srelativelyneutralforus.

DerekDley

Okay.Great.Congratsonastrongstarttotheyear.

BenGadbois

Thanks,Derek.

Operator

Andatthistime,I’llturnthecallbackovertothepresentersforanyclosingremarks.

MarkSegal

Well, just to thankyou, all.Wewill be talking to youagain inearlyAugustwithourQ2

results.

Thanks,everyone.Muchappreciated.

BenGadbois

Thankyou.

Operator

Andthisconcludestoday’sconferencecall.Youmaynowdisconnect.

*****

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