Spin Master Corp (TOY.TO), a leading children's entertainment company, reported its financial results for the fourth quarter and full year ended December 31, 2023. In Q4, the company saw revenue growth of nearly 8%, with strong performances in Toys, Entertainment, and Digital Games. Despite this, the full year experienced a revenue decline of 5.7%, mainly due to a decrease in the Toy segment.
The toy industry overall declined by 7% in 2023, but Spin Master outperformed the market with a 1% increase in global point of sale (POS) in Q4. The company remained the fourth-largest toy manufacturer and increased its market share in most tracked markets. Notably, PAW Patrol continued to be the top preschool property worldwide. The acquisition of Melissa & Doug was completed for $959 million, with the brand showing a 25% decrease in gross product sales but maintaining solid margins. Spin Master ended the year with strong cash reserves and anticipates a challenging 2024 due to economic pressures and a shortened holiday season.
Key Takeaways
- Q4 revenue growth of nearly 8% driven by Toys, Entertainment, and Digital Games.
- Full-year revenue down by 5.7%, with the toy industry declining by 7% in 2023.
- Global POS increased by 1% in Q4, outperforming the industry's 7% decline.
- Spin Master retained its position as the fourth-largest toy manufacturer.
- PAW Patrol remained the #1 preschool property globally.
- Entertainment revenue up by 60% and Digital Games revenue grew by 6.1%.
- Completed acquisition of Melissa & Doug for $959 million; brand's gross product sales declined by 25% but kept stable margins.
- Anticipates a challenging 2024 with continued economic pressure.
Company Outlook
- Launch of new toy initiatives and integration of Melissa & Doug.
- Launch of Unicorn Academy toys and a digital game in 2025.
- Plans to focus on margin preservation and cost control.
- Anticipates sales allowances to be around 13% of gross product sales.
- Marketing costs expected to be between 9% and 10% of revenue.
Bearish Highlights
- Full-year revenue decline of 5.7%.
- Toy industry facing continued pressure in 2024.
- Anticipates slower revenue growth in Entertainment Creative Center.
Bullish Highlights
- PAW Patrol and Gabby's Dollhouse performed well.
- Unicorn Academy series became a #1 kids show globally on Netflix (NASDAQ:NFLX).
- Digital Games segment expected to see higher revenue.
Misses
- Decline in full-year toy gross product sales due to economic pressures.
- Lower free cash flow in 2023 compared to the previous year.
Q&A Highlights
- Company expects flat Toy segment revenue in 2024.
- Confidence in achieving cost synergies from Melissa & Doug acquisition.
- Upcoming content releases for brands like Gabby's and Monster Jam.
- Retail inventory down globally.
Spin Master's financial performance in Q4 showed resilience in a challenging market, with the company's diverse portfolio in Toys, Entertainment, and Digital Games helping to offset broader industry downturns. The acquisition of Melissa & Doug aligns with Spin Master's long-term strategy to diversify and strengthen its offerings, despite the brand's recent revenue decline. With a focus on cost control and margin preservation, Spin Master is cautiously optimistic about its performance in the upcoming year, despite anticipating a challenging economic landscape. The company's next earnings call is scheduled for May 8th, where further updates on its performance and strategy will be provided.
InvestingPro Insights
Spin Master Corp's (Ticker: SNMSF) resilience in the face of an industry downturn has been reflected in several key financial metrics. The company's ability to hold more cash than debt and having liquid assets that exceed short-term obligations provides it with a solid financial foundation. These are both highlighted as InvestingPro Tips that underscore the company's strong balance sheet, which is especially crucial in navigating economic uncertainties.
InvestingPro Data also reveals that Spin Master is trading near its 52-week low, which may present an opportunity for investors considering the company's recent performance and market position. Additionally, analysts predict that the company will be profitable this year, which aligns with the company's profitability over the last twelve months as of Q4 2023.
Key InvestingPro Data points to consider:
- Market Cap (Adjusted): 2480M USD
- P/E Ratio (Adjusted) as of Q4 2023: 16.32
- Revenue Growth (Quarterly) for Q4 2023: 7.9 %
These data points, along with the InvestingPro Tips that Spin Master holds more cash than debt and has liquid assets that exceed short-term obligations, paint a picture of a company with durable financial health, despite the broader market challenges. For those interested in a deeper dive into Spin Master's financials, InvestingPro offers additional tips and insights. To explore these further and to take advantage of a special offer, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 5 more InvestingPro Tips available for Spin Master, providing a comprehensive understanding of the company's financial position and future outlook.
Full transcript - Spin Master PK (SNMSF) Q4 2023:
Operator: Welcome to the Spin Master Corp Fourth Quarter 2023 Results Conference Call. [Operator Instructions]. This call is being recorded on Thursday, February 29, 2024. I would now like to hand the conference over to Sophia Bisoukis. Please go ahead.
Sophia Bisoukis: Thank you, Mark, and good morning. Welcome to Spin Master's financial results conference call for the fourth quarter and year ended December 31, 2023. I'm joined this morning by Max Rangel, Spin Master's Global President and CEO; and Mark Segal, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A and interim and consolidated financial statements are available on the Investor Relations section of our website at spinmaster.com and on SEDAR plus. Before we begin, please note that remarks on this conference call may contain forward-looking statements about Spin Master's current and future plans, expectations, intentions, results, level of activity, performance, goals or achievements and any other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that certain estimates or assumptions will provide -- will prove to be correct. Many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, Spin Master cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Spin Master has no obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise. For additional info on these assumptions and risks, please consult our cautionary statements regarding forward-looking information in our earnings release dated February 28, 2024. Please note that Spin Master reports in U.S. dollars and all dollar amounts to be expressed today are U.S currency, unless otherwise noted. I would now like to turn the call over to Max.
Max Rangel: Thank you, and good morning. Thanks, everyone, for joining us today. Looking at our performance in 2023, we are pleased with how our team navigated the challenging retail environment and harness the power of our 3 creative centers, A combination of Toys, Entertainment and Digital Games, generated strong revenue growth of just under 8% in Q4. As expected, full year revenue was lower year-over-year, driven by a decline in the Toy segment. 2023 was a challenging global marketplace for toys with the industry declining 7% according to Circana as a result of the challenging macroeconomic environment and a shift towards services and experiences post COVID. The industry expected that Christmas would arrive late and restore category growth. However, the extra shopping days unfortunately did not bring about the expected surge. Retailers were cautious, bought less and consumption did not increase as expected despite deep discounting. Retailers, for the most part, prioritize profitability rather than growth and ended the year with cleaner retail inventory compared to 2022. Our total revenue declined 5.7% for 2023, primarily due to lower Toy revenue, which declined 11.3%. We experienced growth in both Entertainment and Digital Games. Entertainment had a strong year with a 60% increase in revenue driven by the delivery of new content, including the very successful second PAW Patrol Movie and Unicorn Academy. Digital Games saw revenue growth of 6.1% from continued strong engagement in Toca Life World and the launch of our new subscription service, Piknik. Let me now dive deeper into our Toy performance and provide further context regarding the macroeconomic environment. From 2020 to 2022, the toy industry experienced strong growth, especially in the U.S. and accelerated by the pandemic. Starting in late 2022 and into '23, we saw industry sales decline. A key factor in this decline was a shift in consumer shipping behavior due to increased pressure on consumers' wallets from inflation and rising interest rates as well as a post-COVID shift to services such as travel, restaurants, concerts and sporting events. Consumers spent less per child in the toy aisle and traded down from a price point perspective. Across multiple categories as they had to make more considered spending decisions. Consumers were very price sensitive during the holidays, often waiting to buy on promotion or at a lower price within the portfolio and buying less overall. In this context, we were very pleased with our Toy performance in Q4, with gross product sales growing 4.8%. Now from a retail point of sale perspective, our global POS increased 1% in Q4, well ahead of the industry, which saw a decline of 7% according to Circana. Our POS growth was the second fastest of the top 5 manufacturers globally for the quarter. In Europe, Spin Master was the fastest-growing toy company. On a full year basis, our global POS declined 4%, a lower decline than the industry, which declined by 6.5% per Circana. We retained our position as the fourth largest manufacturer, and we grew market share in 10 of 11 track markets with the U.S. finishing almost flat. Let me provide some color on our key Toy categories. In preschool, we have a robust offering with a combination of PAW Patrol and popular licensed properties such as Gabby's Dollhouse. PAW Patrol remained the #1 preschool property globally for Q4, and it has been since Q1 2020 according to Circana. In Q4, PAW Patrol's global POS grew just over 4% and grew in most countries. In the U.S. in Q4, PAW Patrol POS grew 12% and according to Circana in '23, we gained share in Infant/Toddler/Preschool with POS up 5.3% compared to the industry, which was down just under 8%. For 2023, PAW Patrol was a #9 property globally, up from #10 in 2022. This is an incredible feed and a testament to our investment in creating refresh teams introducing innovation into the line, expanding the PAW universe through feature films and broadening distribution to YouTube and digital apps. Gabby's Dollhouse Purrfect Playset was the #1 item in the Infant/Toddler/Preschool Super category for both Q4 and for 2023. And Gabby's was the fourth preschool toy property globally in Q4 for Circana. Gabby's Dollhouse POS grew triple digits in Q4 and in 2023 internationally. We have much more to come in '24 with a complementary offering from our acquisition of Melissa & Doug and the introduction of Ms. Rachel. We are known for creating breakthrough toys and a great example of this was the launch of Bitzee, the digital pet, you can touch. Its disruptive play pattern earned numerous awards for most innovative toward the year in several countries. In Dolls & Interactive, Bitzee was named by Circana as a top item within the U.S. electronics category and in Q4, Spin Master continue to gain share, growing POS 9.9 points. We have new Bitzee iterations planned for 2024 including a Disney license Bitzee, featuring story characters and also a magical version launching in the fall. Beyond Bitzee for 2024, we have several exciting launches within Hatchimals and the introduction of the Unicorn Academy Toy Line based on the TV show. Within Wilson Action, Monster Jam had another strong quarter, becoming the second property in vehicles from #4 last year with POS up 20% in Q4 and up 11% for 2023 per Circana. Monster Jam has been the #1 license within the vehicle super category for the 11th straight quarter globally. According to Circana. The combination of FELD Entertainment's live shows, combined with the innovative new toys, allows kids to relive the action from the stadium, and this drives consumer demand. Within Games & Puzzles, Rubik's had a very strong finish to 2023, becoming the stocking stuffer of choice for many parents, with very attractive price point, and Rubik's Cube was a 6 brand with engaged in puzzles for both Q4 and for 2023 with POS up 12% in Q4 and 18% in 2023 per Circana. This momentum sets up nicely to celebrate Rubik's 50th Anniversary in 2024, which will include new product launches and collaborations, global celebrations and the debut of our new digital game to Rubik's Match. Anticipating continued pressure on consumer discretionary spending, we will launch a new toy initiative in the second half of 2024 design and manufacture specifically for the value channel. As we believe there is a large opportunity to grow volume in this channel. As many of you saw in January at our Investor Day, our new value line leverages our strongest brands and licenses, including a PAW Patrol, Gabby's Dollhouse, Monster Jam and DC Comics, with price points as low as $1. Melissa & Doug will further strengthen our position in Preschool and allow us to develop a strong beachhead in early learning. According to Circana, the combination will make us the market leader in Infant, Toddler and Preschool Super category. Our teams are working hard on the integration, focused on building the platform for revenue growth across mass and specialty driving international growth and realizing cost synergies. I want to spend a moment talking about Melissa & Doug's financial performance in 2023, and Mark will provide additional detail. In 2023, Melissa & Doug's revenue declined approximately 25% from 2022. Their adjusted EBITDA margin remained comparable and it's a challenging second half and a decline in the Infant/Toddler/Preschool category. Melissa & Doug's previous owner made the choice to protect long-term profitability by prioritizing profit margin over volume. They did not discount or promote significantly in what was a highly promotional environment, and this led to Melissa & Doug experiencing greater decline in the revenue than the overall category. Our Entertainment creative center launched significant new content in 2023, including our second feature film for the PAW Patrol franchise, which has now surpassed $200 million in global box office revenue. PAW Patrol celebrated its 10th Anniversary in 2023 and the release of the second movie had a very positive impact on watch time across all PAW content, including the TV series, helping to fortify PAW's brand equity and health. Earlier in 2023, we launched our first spin-off series of PAW, Rubble & Crew, which has been renewed for a second season and continues to be 1 of the top 5 preschool shows on Nickelodeon in its age category. Building on our vast experience in developing preschool content, we recently launched our newest animated series Vida the Vet on BBC in the U.K. and Corus 3 House in Canada. We have launched our Vida on YouTube channel and have already surpassed 15 million views of our brand new content, and this is ahead of our U.S. Netflix debut on March 18 as we gear up for the toy launch in the fall. A new fantasy adventure series, Unicorn Academy, launched on Netflix November 2 and was an instant hit, debuting as a #1 kids show globally. With its characters and magical adventures, Unicorn Academy quickly captivated audiences globally and racked up over 40 million hours of watch time in November alone. Unicorn Academy is our first full franchise launch with phased branded offerings and experiences across each of our 3 creative centers. Unicorn Academy Toys will launch this fall and the digital game will launch in 2025. In addition to our content, Toys and the Digital Game, we have been working on our licensing program for a wide range of licensed consumer products in 2024 and beyond to meet demand from fans of the show for deeper engagement with the franchise. Turning now to Digital Games. 2023 saw the overall mobile digital games market declined by about 2%. However, our Digital Games creative center outperformed with revenue growth in both Q4 and '23 driven primarily by higher in-game purchases in Toca Life World and subscription growth from the newly launched Piknik bundle. Toca Life World ended 2023 at approximately 62 monthly active users, up 4.3 million compared to 2022. 2023 was the largest download year for Toca Life World ever with 98 million downloads compared to 92 million in 2022 and 90 million in 2021. This shows Toca Life World's ongoing popularity and engagement with kids. Introduced in Q3, Piknik is our subscription bundle that offers unlimited access to a variety of our Sago Mini and Toca Boca Digital Games. One subscription streamlines multiple apps into a simple and affordable service for parents and provides endless ways to play and learn for kids. The market reacted positively to the bundle when it was launched and including PAW Patrol and Originator -- from Originator, we ended 2023 at just under 400,000 subscribers in total, a growth of 68,000 subscribers, over 2022. The subscriber increase is impressive, and we are migrating users to Piknik as we harness the stickiness in the play experience with Sago World, Sago School, First Words, Toca Junior, Hair Salon and more. In 2024, we will integrate the originator apps into Piknik to increase bundle value even further. PAW Patrol Academy, which is our first in-house learning app for our powerhouse franchise is off to a great start. Due to its high quality and overall depth of play, it has been named Google (NASDAQ:GOOGL)'s Best App of 2023 for families and ended 2023 with 34,000 subscribers. The team is now in full service and continues to build the overall experience. We are excited to be launching several new Digital Games in Q2. This includes Toca Days, our first social multiplayer game that will seek to expand the existing player base of the Toca Universe. We are also launching Rubik's Match, our casual mobile game that will deliver a fresh take on the Match-3 game genre to coincide with the Rubik's 50th anniversary. Our teams are collaborating across creative centers to make these a special moment for Rubik's fans. As more kids are spending their time in the online wold and communities, we are expanding our player ecosystem and creating digital play experiences that cater to multiple interest in each levels. Now looking forward, we expect that '24 will be a challenging year due to the continued economic pressure on consumers and a shorter shopping period during the holiday season. We are developing toys that will spark imagination while also providing the consumer with a great value at very price points. We will focus on the integration of Melissa & Doug, where we have already made progress building our cross-functional team to integrate the business and identifying important work streams to accelerate synergy realization. We see many opportunities for growth by leveraging Melissa & Doug to grow our early childhood play capabilities. We will continue to drive performance for our core brands across our 3 creative centers, celebrating Rubik's 50th anniversary with new products in the new mobile digital game to capitalizing on the momentum from the PAW Patrol movie across Toy, Entertainment and Digital Games. We will expand our early childhood reach with the first toy offering for YouTube sensation Ms. Rachel. And beyond Toy, our Entertainment Creative Center has a robust late for '24 and is engaging new audiences with Unicorn Academy and Vida the Vet. Our Digital Games creative center has invested in designing new mobile digital games intended to expand our reach across a broader ecosystem. Now we know that newness and innovation win with customers, and we are investing in our disruptive innovation to reimagine everyday play. We're highly focused on executing our long-term growth strategy, and we continue to make significant progress by leveraging our deep expertise in play, well-established global network and innovation capability to unlock growth and inspire future generations. We're confident in the strength of our diversified portfolio and our ability to create long-term growth and shareholder value. I will now pass it over to our CFO, Mark Segal, to cover our financial performance in detail and discuss our 2024 financial outlook.
Mark Segal: Thank you, Max. We delivered a solid fourth quarter with year-over-year growth in both revenue and adjusted EBITDA despite the challenging macroeconomic backdrop. We generated Q4 revenue of $502.6 million, up 7.9% year-over-year and adjusted EBITDA of $64.9 million, up 423%. Our Toy gross product sales increased by 4.8% to $502.3 million in Q4. The increase was driven by a return to traditional seasonality after 2022, where retailers have brought inventory early in the year and were then focused on reducing inventory on hand in the fourth quarter. On a constant currency basis, gross product sales increased by 2.4%. The Wheels & Action product category had strong Q4 gross product sales growth, up 25.9%. Q4 Toy adjusted EBITDA was up $43.7 million to $19.3 million, with a margin of 4.7% compared to negative 6.2%. Higher adjusted EBITDA was driven by increased gross profit and lower SG&A. Looking at the full year, Toy gross product sales decreased by $191.6 million or 9.7% to $1.78 billion due to lower order volume across all product categories driven by the macroeconomic pressures on consumer discretionary spending. Constant currency toy gross product sales declined by $215.7 million or 10.9% to $1.76 billion. As we highlighted during the Q3 call, sales allowances were elevated for 2023 at 13.8% compared to our traditional range of 10% to 12% from higher markdowns, promotional activity and market mix. Toy adjusted EBITDA declined $32.2 million to $212.4 million. Toy adjusted EBITDA margin for 2023 was 13.8% compared to 14.1% in 2022. The lower adjusted EBITDA margin was due to toy revenues declining faster than marketing, distribution, product development and administrative expenses. In Q4, Entertainment revenue increased by $24 million or 77% to $55.2 million from higher distribution revenue from new content deliveries and from the PAW Patrol movie. Entertainment adjusted operating income was $10.9 million and adjusted operating margin was 19% compared to 66%. The decrease in adjusted operating margin was driven by the higher amortization of production costs due to content deliveries as well as marketing costs for the launch of Unicorn Academy. 2023 Entertainment revenue increased by $71.3 million or 60% from higher distribution revenue from new content deliveries through the year, including the PAW Patrol movie Unicorn Academy, Rubble & Crew and Vida the Vet. We also continue to receive distribution revenue from the PAW Patrol Series and the first PAW Patrol Movie. 2023 adjusted operating margin decreased to a still very healthy 42.5% from 66.6% due to the higher amortization of production costs from the additional content deliveries. Q4 revenue in Digital Games grew 7.1% or $2.7 million to $40.6 million due to higher in-game purchases in Toca Life World and subscription revenue from Piknik, our subscription bundle as well as PAW Patrol Academy. Adjusted operating margin in Q4 was 26.6%, down from 32.5% due to higher upfront marketing costs incurred to launch PAW Patrol Academy. Digital Games revenue increased by 6.1% for 2023 to $173.9 million driven by higher in-app purchases in Toca Life World. Adjusted operating margin of 33.4% was up slightly relative to 2022. On a consolidated basis for 2023, the decline in toy gross product sales and revenue was partially offset, as I just described, by strong performances in our Entertainment and Digital Games Creative Centers, leading to a full year revenue of just over $1.9 billion, a decline of 5.7%. This reinforces our belief in the value of our 3 creative centers and the diversification and leverage they provide. Gross margin in 2023 remained stable at 54.5% compared to 54.6% in 2022 despite the dilutive effect of higher amortization related to more entertainment content deliveries as gross margin was up in the Toy segment from lower ocean freight costs and favorable foreign exchange. We demonstrated strong cost control in 2023. Adjusted SG&A which excludes restructuring costs, share-based compensation and transaction costs declined $32.2 million to $726.4 million from lower administrative, selling, marketing and distribution expenses. Adjusted SG&A as a percentage of revenue increased slightly to 38.1% from 37.5%. Adjusted EBITDA for 2023 was $418.8 million compared to $389.4 million. Adjusted EBITDA margin was 22% compared to 19.3%. Excluding the PAW Patrol Movie distribution revenue, adjusted EBITDA was $403.2 million, an increase of $13.8 million from $389.4 million. Adjusted EBITDA margin, excluding the PAW movie distribution revenue was 21.3%, 200 basis points up compared to 19.3%. Adjusted EBITDA margin increased due to higher gross margin from Toys, partially offset by higher adjusted SG&A relative to revenue. Turning now to our balance sheet. We are very pleased with our inventory management this year. We ended 2023 with $98 million of inventory compared to $105 million in 2022. Our lowest year-end inventory position in 6 years. In 2023, we generated $227 million in operating cash flow and used $135 million in investing activities, mainly for Entertainment Content and Digital Games development. Free cash flow for 2023 was just under $123 million compared to just under $150 million, primarily from lower operating cash flow. Excluding transaction costs for the M&D acquisition and restructuring costs, including the Calais shutdown, we generated approximately $150 million in free cash flow. We ended 2023 with nearly $706 million in cash our highest during balance to date compared to just over $644 million at the end of 2022. On January 2, we closed the acquisition of Melissa & Doug for a preliminary purchase consideration of $959 million, which represented $950 million base consideration and an estimated $9 million of working capital adjustments. We funded the acquisition with $434 million in cash and $525 million of debt. Let me provide further details on Melissa & Doug's performance in 2023 in addition to what Max described. Please note that we plan to file our business acquisition report just prior to April 1, which will include Melissa & Doug's audited 2023 results, but we wanted to share the key numbers with you today in advance of that filing. In 2023, Melissa & Doug generated approximately $412 million in gross product sales and $364 million in net revenue, a 25% decline from 2022. Adjusted EBITDA margins remained solid at approximately 18.4%, in line with 2022. Melissa & Doug ended 2023 with significantly lower inventory on hand than 2022. Turning now to our outlook. 2024 is a more complex outlook statement because of the M&D acquisition. For better comparability, we have provided expectations for the base Spin Master business and then provided 2024 outlook for Melissa & Doug as well as identifying expected cost synergies. As Max described, heading into 2024, we expect the toy industry will continue to be under pressure, continuing to face macroeconomic headwinds and market volatility. And is expected to decline, although at a slower rate than 2023. We expect our Toy gross product sales for 2024, excluding Melissa & Doug, to be in line with 2023. We expect the seasonality of gross product sales to be 28% to 32% in H1. This outlook reflects our view that we have a strong, innovative, deep and value-focused line tempered by the reality that consumer behavior in 2024 is likely to continue to be volatile and that there are 5 fewer shopping days leading into Christmas in 2024. We expect our total revenue growth to be in line with 2023, excluding Melissa & Doug, with lower revenue from our Entertainment Creative Center, offset by higher Digital Games revenue. In 2024, we expect to deliver less entertainment content, but with a revenue mix skewed to higher margin licensing and merchandising revenue. In Digital Games, we expect an increase in revenue for 2024 from growth of Toca Life World and Piknik and new game launches for Toca Days and Rubik's Match. The new games, however, will be margin dilutive until they hurdle their development costs. Turning to profitability. We will continue to look at toy pricing selectively in relation to market and consumer factors, margin preservation and cost input levels. We expect sales allowances to be approximately 13% of gross product sales higher than our typical range, mostly due to market and customer mix. In general, inflation is moderating, and COGS input costs are expected to be in line with 2023. Lower entertainment content deliveries will have a positive impact on overall gross margin. We expect marketing costs to be between 9% and 10% of revenue, consistent with 2023. We are focused closely on cost control to ensure we can drive operating leverage. Taking all this into account, we expect 2024 adjusted EBITDA margin to be in line with 2023 excluding Melissa & Doug and net cost synergies. In 2024 for Melissa & Doug, we expect gross product sales of $420 million to $430 million and revenue of $370 million to $375 million. We expect the seasonality of Melissa & Doug's gross product sales to be 20% to 25% in H1. We expect Melissa & Doug to achieve adjusted EBITDA margins of approximately 19.5%, an increase over 2023 from supply chain and SG&A efficiencies. In addition, we expect to achieve incremental net SG&A cost synergies of approximately $6 million in 2024. Toward the target of approximately $25 million to $30 million in run rate net cost synergies by the end of 2026. Melissa & Doug will be accretive in 2024, as previously noted. To report Melissa & Doug gross product sales, effective January 1, 2024, we have modified our product categories. We have issued an addendum as part of the press release which shows our 2023 results by quarter in the format that we will present our gross product sales for 2024. Melissa & Doug will be part of a new category, Preschool, Infant & Toddler and Plush. The consistent cash flow we've generated gives us confidence in our ability to reduce debt, maintain our dividend and keep capacity for opportunistic M&A or share buybacks. We expect to end 2024 with a net debt to adjusted EBITDA ratio of approximately 0.5x. Spin Master depreciation and amortization is expected to be approximately $120 million in '24, down $10 million from '23 due to less deliveries of entertainment content. We expect $30 million in depreciation and amortization for Melissa & Doug. Cash interest paid will be between $20 million to $25 million in 2024. Our effective tax rate is expected to be approximately 20% -- 26% on a consolidated basis. Capital expenditures are forecast to be approximately 6% of revenue. Finally, we will renew our normal course issuer bid effective on March 24 until March 3, 2025. In conclusion, amidst the challenging macroeconomic environment, we remain well positioned strategically, financially and operationally. We also remain fully committed to continuing to execute our strategy for long-term growth and shareholder value creation. That concludes our prepared remarks. We will now be pleased to take questions. Operator, please open the line.
Operator: [Operator Instructions]. Our first question comes from the line of Brian Morrison at TD Securities.
Brian Morrison: Mark, on guidance, ex the PAW Patrol Movie on the base business, you're forecasting slight revenue growth and attractive margin improvement. Is that 22% now a sustainable level? It sounds like the forecast 65 basis point increase from 2023 is due to mix shift to digital and cost initiatives at Toy, and it did sound like you said, the Entertainment margin should be higher from licensing revenue, but revenue lower. Is that correct, the way to think about it? And then for Max, does the lower Melissa & Doug's forecast take anything away from the potential for synergies, international growth opportunity or ability to penetrate mass midterm. But do you see yourself getting back to 2022 is reasonable over the midterm?
Mark Segal: Brian, I'll take your first part, and then Max will pick up the second part of your question. So I think you pretty much got it accurate, the way you described it. If you actually take out the PAW distribution revenue in 2023, we were at 21.3%. And so we are guiding slightly up when you take that into accounts in terms of our guidance. And that's going to come from an increase in Toy adjusted EBITDA. It's going to come from entertainment going up slightly and potentially digital games going down a little bit because of the introduction of the new games. But I think the way you have calculated and the way you articulate it is accurate.
Max Rangel: Brian. On Melissa & Doug, we are incredibly excited about the midterm opportunity as you well stated it. And so I just want to state that for the record and just to get very clear upfront. Obviously, the numbers are at a starting lower point. And so we're working on synergy. We're working on international growth sooner than we would have anticipated. We're working on a lot of different things. To bring what we know is an incredible brand to as many children and families as we should. We have already begun to reinvest in the brands, we should invest on the brand and as we would invest in our brands as of start of this year, and we see immediately the response of what is an incredible strong equity with parents and retailers pretty broadly in the U.S. So we're excited.
Brian Morrison: Okay. And then I guess the second part of that is getting back to 2022 is reasonable midterm? And then I have one further question.
Max Rangel: We will get back to the mid-2022 in the midterm Reasonability is there. And I just think it might just be wise to just set the record straight. Because I think the question may still come up later. So why don't we just do that? Because I think you guys are going to continue to ask and I just might as well just address it. Remember, we signed at the end of early October, okay? And then we had the HSR period. And we weren't operating the brand and previous owners basically stopped investing in this brand in Q4, and therefore, the brand saw the decline that you have now seen in the numbers. Q4 -- the biggest consumption period in Melissa & Doug has a higher consumption period than Spin Master's portfolio in Q4. Great news is if there's the silver lining here, inventory positions are lower at the start of '24 we will begin already and have started to reinvest in the brand as you see our performance, right? You see our performance, you see our market share, you see how we operate. And that, in my opinion, is what we have already gotten to do with our integration team and the Melissa & Doug management, and we're very excited.
Brian Morrison: Okay. I appreciate you clarifying that. Max. The last question I had. You brought up the value chain in your prepared remarks, you're rendering 37,000 new stores. Can you maybe frame the top line potential? I mean you have to be relevant to gain shelf space. So if we just think of $2,500 per store or something like that. It's in the $100 million range. Can you frame maybe the top line potential there?
Max Rangel: Yes. I'm going to just frame the opportunity from our own penetration in that channel, and then I'm going to let Mark get into the numbers. So we have an incredible portfolio. And one of the things that we have an opportunity to do is to play with more items in the $0 to $5.99 and $5.99 to $9.99 segments. And that shopper is in that channel more prevalently, and we necessarily don't have the breadth of offering to meet their needs. And that is what our team is addressing. And you noticed in my remarks, we are addressing that opportunity with our biggest iconic brands brought to them with great value, including things that are going to be in the $0 to $5.99 price point. So, the opportunity is very, very obviously latent for us, and Mark will now give you some color on the numbers.
Mark Segal: Brian, it's an important point. And I think Doug Wadleigh did a great job kind of highlighting that when we had our Investor Day in L.A. in January, as you saw. I think your numbers are a little high. Just keep in mind, most of the activity in the value channel initiative is going to be in the second half of the year. These are low dollar price point items in the $1 to $5 range. And even though we're very excited about it for 2024, you should be thinking in the $30 million range. As opposed to anything over $100 million, as you described that would be exceptional. I mean, we'd be happy to be at the zone. But I think for your models and for planning, you should be thinking in the $30 million range for this year and then growing the next few years as we built the lineup.
Brian Morrison: And the margin equivalent to the consolidated average?
Mark Segal: Yes. We've actually designed the line in a way that it's consistent with our margins as opposed to dilutive or accretive.
Operator: Our next question comes from the line of Martin Landry at Stifel.
Martin Landry: I'd just like to get back to Melissa & Doug quickly. I understand that the previous owner maybe didn't invest a lot in the back half. That seems a little onetime in nature. And I'm wondering why can't we see a bigger jump back in '24? And I was wondering, did the brand lose doors? Did the brand lose shelf space relative to '22 levels?
Max Rangel: So Martin, it's a great question, and I appreciate your enthusiasm for a quicker recovery. So are we, by the way. So here's a scoop. The brand, if you think about the U.S., has a great presence and revenue in e-commerce, right? And so in e-commerce and omnichannel broadly. So that is the first place where you're going to see the return to obviously growth. But that's not to say that at Walmart (NYSE:WMT), which was a new distribution opportunity for the brand, they've done incredibly well. So it's beyond that. But you have to step back and also look at the fact that the segment had declined closer to 8% to 10%. So we're playing from a segment that was basically below and a lack of investment against that backdrop. And so if you add to the fact that they had to consume inventory from the prior year throughout the year, then you kind of get to the math that leads you to where we ended up. You're not wrong that we can recover, and that is our intent. But that is what, if you will, point of departure is. And I just wanted to paint the picture for you so that you understand that it's not about lack of trying to get back to the levels we know that it's going to get to, but just the hurdles we have to get through between now and get into the numbers you guys want. So do we, by the way.
Martin Landry: I'm sure you are. Wondering, Mark, if you can break down a little bit of the assumptions you've used in terms of revenue growth for your segment? If that's possible, that would be super helpful.
Mark Segal: You mean the Toy, Entertainment, Digital Games?
Martin Landry: Yes, yes.
Mark Segal: Yes. So look, we're not going to give individual creative center guidance numbers. But what I can tell you directionally, Martin, is that we see Toy in line. Margins slightly up in the Toy area. Entertainment in 2023 had very strong distribution revenue growth. But as you saw, margins actually came down as a result of that because it's low margin revenue for the most part. In 2024, we see Entertainment revenue declining because there's less content deliveries, but the mix of revenue will skew more towards licensing and merchandising revenue, which is much higher margin. So we'll see Entertainment margins going up in that area. In Digital Games, we actually see top line growth from a continued growth in Toca Life World and in Piknik, in particular, which are already out in the market, plus the introduction of new games in Q2. Rubik's Match first and then Toca Days later in Q2. And those will drive revenue growth. But as we start launching those games in the live market, we have to start amortizing the development costs that have been capitalized up until this point. So until those games hurdle, those development costs, depending on the success, then we'll actually see margin dilution in Digital Games in the overall creative center. Does that help you, Martin?
Martin Landry: Yes. No, it's super. That's exactly what I was looking for. And then maybe my last question is on M&A. Your balance sheet is still in good shape post Melissa & Doug. And I was wondering, are you still looking to beef up your Digital Games capabilities. In the past, you've talked about Digital Games as a percentage of revenues going all the way up to maybe 20%. I mean, I realize Melissa & Doug, that may be a longer time frame than before. But like is this still a big focus of yours from an M&A standpoint?
Max Rangel: The short answer is, Yes. As you can imagine, we are incredibly excited to integrate Melissa & Doug successfully. That's priority #1. But we are obviously always working with our three different M&A groups, each of which is led by an individual leader for that area in basically hunting and gathering great targets. And we have not basically walked away from our desire to have more diversification and continue to build out our Digital Games on creative center and Entertainment as well. So you can expect that we will continue to be very active. We have a great balance sheet and an incredible team, honestly, gathering and hunting for great targets and our Board is very supportive. So that's where we stand.
Operator: Our next question comes from the line of Adam Shine at National Bank Financial.
Adam Shine: Max, I got to go back to Melissa & Doug for a couple of questions. So, just elaborating earlier, you said the segment declined 8% to 10% last year. Melissa & Doug, obviously, as you alluded to, down about 25%. So was the differential or specifically related to the lack of investment and support in the Q4? Or were there other elements in terms of Melissa & Doug actions, for example, reducing the number of SKUs as a priority and/or other elements related to the incremental delta to the industry dynamic? We'll start there, please.
Max Rangel: Of course. How are you Adam?
Adam Shine: Good, How are you?
Max Rangel: Really well. Let's get into this. Melissa & Doug my favorite topic this morning. So I'd tell you, if you think about Q4 and you think about a brand that has all the consumption focused on that one period. Now we're going to unpack the fact that we did not support the brand as we should have as well. The previous owner did not support the brand as the previous owner should have supported the brand in our judgment, okay? And therefore, when no advertising and significantly less promotional spending in excess of 2/3 less than the prior year, was applied to the brand in a very competitive environment where consumers remember in our remarks, we're basically flogging to specific shopping days and seeking for the best deal. They, of course, couldn't basically perform as they should have performed. When you don't have that performance, it's really difficult for a retailer to get excited to reorder or to order to begin with. Because consumption is not leading to an inventory decline in that brand. And therefore, they suffer from both a lack of investment with the consumer and POS not given retailers the confidence to bring more cases because they also had inventory to have to manage, right? And even though Melissa & Doug ultimately on the strength of the brand ended the year with lower inventory. Obviously, they could have sold more revenue to more consumers. So I'm going to pause here for a second because I hope that helps answer the question for you, but I just want to make sure that was clear.
Adam Shine: Yes, I guess, the net-net, not to get overly enthusiastic about things, but going back to Martin's question and the context of with a little bit of support presumably and seasonally important Q4 later this year. One would assume that there would be some degree of pickup more meaningfully on the back of what was delivered in Q4 this year or 2023. The other thing, I guess, which I guess I have to ask is we saw with the January '22 press release that the earn-out was eliminated and the presumption tends to be when an earnout gets eliminated, the sort of look ahead sort of dynamic becomes a bit less exciting. But as we reflect now on everything that you've talked about vis-a-vis the 2023 performance what wonders why more meaningful recutting of the purchase price to materialize? I imagine that's a bit of a naive question and a fact completely the [indiscernible] things of a contract. But nevertheless, any additional commentary related to that?
Max Rangel: Yes, I'll start and then I'll let Mark finish. Listen, we were at that time a strategic buyer. We were and continue to be in the category. So we saw the numbers, but we were completely not in control of the brand, and we were in an HSR quiet period. And so as soon as we have the chance to get involved and understand what was happening we knew that the results would be lower without getting into owning the brand at the time that we actually made the decision to remove the earn-out because we knew that the starting point would be lower. Mark?
Mark Segal: Yes. I mean just similar to what you just said there, Max, obviously, Adam, there were multiple reasons for moving the earnout, one of which was the performance in the late quarter of 2023, which we've discussed. Also, as you know, earnouts can be complicated in terms of managing the business during the earnout period and there's usually legal structures that, to some extent, minimize -- sorry, impact on your ability to maximize integration. And so for those reasons, we wanted were not removed. Our investment base case is still intact. The business is still accretive in 2024. The long-term thesis is very strong, and we're as excited about the acquisition as we ever were. But we have to get over the performance step in Q4 2023. We have to get it back on track, and we will.
Operator: Our next question comes from the line of David McFadgen of Cormark.
David McFadgen: A couple of questions. So just looking at the EBITDA margin and the guidance. So you're forecasting EBITDA margin. I mean, you finished last year with a strong EBITDA margin forecast for EBITDA margin to be equally strong in '24. When we look at the past, the history of the company has never been at that level sort of sustain that level. So just kind of wondering if you could provide any commentary about maintaining that level of EBITDA margin in '25? and beyond.
Mark Segal: So David, if you go back in time and you've covered us for many years, when the business was largely a Toy business, the EBITDA margins were in the 18%, 19% zone, and that was really always where we were. But as we've grown and evolved our creative center strategy, we've talked about growing not only diversifying the top line but also enhancing the bottom line. And both the Entertainment and Digital Games Creative Centers are margin accretive. And so we're comfortable to guide to where we have. And we've actually delivered in '23, these margins. So this is not a theoretical exercise. And we continue to believe that as we grow our Digital Games and Entertainment Creative Centers we'll keep margins in the low 20s up. And our Toy business margins have also done very, very well. From a supply chain efficiency perspective, we've increased our gross margins. We continually from a cost control perspective, are looking at operating leverage. So overall, the business, I would say, is running more efficiently. And so the margins that we are guiding to, I believe, are sustainable. And if we are successful with our new Digital Games launches and continue to grow that business, then we could potentially even get them higher.
David McFadgen: Okay. And then just on the Toy revenue. So it looks like for '24, the expectations, more or less flat. Can you give us some sort of an idea on direction, where do you expect Gabby's to do in Monster Jam and PAW Patrol and in '24? I would imagine Gabby's and Monster Jam will continue to be up and just a confirmation on that and what you think PAW might get in '24?
Mark Segal: Well, we don't give specific guidance on individual lines as you know. But I'm going to let Max give you some color as to what's happening with the brands once the Jam and Gabby's in particular, there's content coming. Max, why don't you pick that one up?
Max Rangel: I would tell you that the market and the reason for why we're guiding to the revenue growth in Toy as we are is because the toy market continues to be in a similar position as it was last year. And the outlook for the year from a market growth perspective, either it will be slightly down versus what it would have been in 2023. So that's the starting point. There are differences between Toy segments. We have a pretty strong program for our Infant/Preschool obviously segment. We are, even though lapping the Toy movie for PAW Patrol. We have other things happening in PAW Patrol that are quite exciting. And so Rubble is leaving the U.S. and getting over to Europe, for example. And you know that we have historically been a stronger PAW Patrol franchise from a toy perspective in Europe. And so that gives us a lot of wins in our sales. And so we're excited about that. You are -- on Gabby's asking specifically, and Gabby's from a life cycle moment in time getting to year 3 in the U.S. year 2 internationally. And so you see some moderation, but we're still having a very strong outlook for Gabby's in 2024 before we get to 2025. A year in which Gabby's will have a movie. And so we're very excited about that. And so we will continue to invest and basically drive the Gabby's franchise very, very strongly. But separate from that, we have other things in Infant/Preschool that we're excited about. So we have obviously, Rachel coming towards Q4. And Ms. Rachel is going to be an amazing , in my opinion, opportunity for the company because we bring to parents something they truly love already. And we're going to bring that love to them through both our Spin Master execution but also through Melissa & Doug. And so we're not going to wait and do that later. We're going to do it this year. And I can tell you we're incredibly excited. By the way, so is Ms. Rachel. Besides that, we have Vida the Vet, we talked about that property. We're very excited about that property, and that property comes in Q4 as well. So Infant/Preschool for us, should be obviously a very good business unit this year. Monster Jam is doing incredibly well. I was speaking with Founder, CEO of FELD Entertainment over the weekend. And just last weekend, we had over 100 million attendance on Monster Jam. Our innovation on Monster Jam is incredible. And so we have nothing but continued opportunities ahead. and we will continue to seize those opportunities. So you asked specifically at Monster Jam, we're very excited. By the way, they're getting stronger acceptance in Europe, and we have an incredible European team, which just told you we were the fastest-growing European company. So we see a lot of opportunity there as well. At the risk of not going through each one of them and monopolizing the time for others who may want to ask, I'll just leave you with that. But Happy to follow up with you and get into more details.
Operator: [Operator Instructions]. The next question comes from the line of John Zamparo of CIBC.
John Zamparo: My question is around the broader guide, and you have a great deal going on. I won't go through all the initiatives as well. But I can understand you're very excited about a lot of plans for this year. But, but given all that, the guide organically is still basically flat year-over-year. So understanding the backdrop of a slight decline in the industry, I'm trying to reconcile that, what are the areas of the businesses that you expect to slow in '24 versus '23?
Mark Segal: Yes. So John, as I described earlier, we see Entertainment coming down on the top line, Digital Games going up and Toy largely flat. So that's the mix that leads to the Spin Master specific guide. We gave the details on the Melissa & Doug guide, so you have that. And then in addition, we gave the guide on the cost synergies that are on top of the Melissa & Doug guide. So I think when you put that all together, that kind of explains how we actually guided overall for the year.
John Zamparo: Okay. And then just a couple of housekeeping questions. Can you talk about the cadence of synergies at Melissa & Doug beyond 2024? Is it fairly linear through '26? Or is it more of it in '25? And can you talk about your inventory positions at your retail partners to understand your own inventory is at quite low levels, but how does it look at your retail partners?
Max Rangel: I can deal with the retail inventory. Retail inventory was down mid-single digits globally and high single digits in the U.S. So I think we're in decent shape on retail channel level. And also, as you correctly pointed out, our on-hand inventory is actually at record low levels. So I think we've managed our inventory very, very well. What was the first part of your question, John, that you wanted, in addition to that, sorry?
John Zamparo: Yes, the cadence of synergies that Melissa & Doug through 2026, please.
Mark Segal: Look, we've built the integration team. I would say that the integration team is doing exceptionally well. We're ahead of our plan in terms of cost synergies for 2024. And I think you're going to start seeing it accelerate in 2025 and 2026. We're still very comfortable with our target of $25 million to $30 million run rate exiting 2026. So I think you'll start seeing an increasing cadence in '25 and '26. As the momentum build and as we get to know the business better. But I will tell you that the teams are working exceptionally well together, and I think Max and I are very pleased with the way the integration is going so far. I think we are pretty much at time. Operator, are there any more questions?
Operator: No, no further questions in the queue.
Max Rangel: Okay. Well, that's good timing. Thank you, everyone, for attending today. And we look forward to talking to you on May 7 and 8. Our earnings call will be on May 8 for Q1, and we'll be releasing our results on the evening of May 7. So thank you again, and we look forward to talking to you in a few weeks for Q1. Thanks.
Operator: Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.
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