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Edited Transcript of TOY.TO earnings conference call or presentation 1-Aug-19 1:30pm GMT

Q2 2019 Spin Master Corp Earnings Call

Toronto Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Spin Master Corp earnings conference call or presentation Thursday, August 1, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benoit J. Gadbois

Spin Master Corp. - Global President, COO & Director

* Mark L. Segal

Spin Master Corp. - CFO & Executive VP

* Ronnen Harary

Spin Master Corp. - Co-Founder, Chairman & Co-CEO

* Sophia Bisoukis

Spin Master Corp. - VP of IR

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Conference Call Participants

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* Brian Morrison

TD Securities Equity Research - Research Analyst

* David John McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Gerrick Luke Johnson

BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Sabahat Khan

RBC Capital Markets, LLC, Research Division - Analyst

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Adam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Spin Master Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

Thank you. Sophia Bisoukis, you may begin your conference.

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Sophia Bisoukis, Spin Master Corp. - VP of IR [2]

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Thank you, Adam. Good morning, everybody, and welcome to Spin Master's Second Quarter 2019 Financial Results Conference Call. I am joined this morning by Ronnen Harary, Co-Chief Executive Officer; Ben Gadbois, President and Chief Operating Officer; and Mark Segal, Chief Financial Officer of Spin Master.

For your convenience, the press release, MD&A and unaudited interim financial statements for the second quarter 2019 are available on the Investor Relations section of our website at spinmaster.com and on SEDAR.

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, levels of activity, performance, goals or achievements or any other further events or developments. Forward-looking statements are based on the 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 such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result, Spin Master cannot guarantee that any forward-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 information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information contained in the company's earnings release dated July 21, 2019.

Please note that Spin Master reports in U.S. dollars, and all dollars amounts to be expressed today are in U.S. currency.

I would now like to turn the conference call over to Ronnen Harary.

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Ronnen Harary, Spin Master Corp. - Co-Founder, Chairman & Co-CEO [3]

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Thank you, Sophia. Good morning. We're pleased with our performance this quarter. we are starting to see signs that the industry is stabilizing following the disruption of Toys"R"Us demise. Our results in the second quarter demonstrated the strength, diversity and depth of our innovative product portfolio. We reported growth across most key metrics including gross product sales, gross margin and adjusted EBITDA. Our sales performance was driven by growth in both our core products and new product introductions, which we will discuss in more detail later.

Our strategy is designed to achieve long-term success and our strong execution against the strategy has positioned Spin Master to succeed in the evolving retail and content landscape. It's now exactly 4 years since we went public in the summer of 2015. I think it is instructive to reflect on how Spin Master has evolved and what we have accomplished since our IPO in the context of our 4 growth strategies. We have shown significant growth with the compound annual gross product sales growth rate of over 20%, more than double our long-term organic growth rate target of mid- to high single digits. At the heart of our growth is our 36-month brand innovation pipeline, which remains robust. This pipeline is set by the multiple touch points we have with our consumers, including physical products, traditional and innovative entertainment content and mobile games. These various touch points strengthen consumers' attachment to our brands and franchises and are the engine of our long-term growth. We have innovated and diversified our portfolio of brands and products across all 11 categories of the toy industry, maintaining a healthy balance among our existing businesses, business segments and expanding into new segments exemplified by our entry into outdoor in 2016.

Secondly, we have expanded our international footprint. In 2014, the year before our IPO, our gross product sales outside of North America represented 28% of our total gross product sales. During the first half of this year, sales outside of North America were 38% of total gross product sales. We're making steady progress towards our goal of more than 40% of sales outside of North America. Our international platform is under leverage and provides us with a very meaningful growth opportunity.

Thirdly, we've grown our evergreen global entertainment properties with a number of new properties launched, including multiple seasons of PAW Patrol, Rusty Rivets, Abby Hatcher and Bakugan, with more in the pipeline. We continue to grow our presence in the entertainment through multiple avenues including our own proprietary brands and through partnerships with the best content creators to build a portfolio of diverse and complementary brands in the toy industry. Our strategy will see us continuing to expand into more content for traditional TV as well as more short-form and long-form content, including movies across a variety of distribution channels including traditional broadcasters such as Nickelodeon, SVOD, such as Netflix; AVOD, such as YouTube and on large screen formats. In addition, we'll be increasing focus on e-commerce and D2C initiatives as consumer pursuing habits in the retail landscape evolves.

Finally, since our IPO, we've made 9 acquisitions including Cardinal, Toca Boca, Gund and Swimways, that have allowed us to grow in the existing categories, enter new categories and acquire new capabilities in critical areas such as the digital and mobile space. At the same time, we have maintained a strong balance sheet that we can leverage as the foundation for further acquisitions and organic growth.

Turning to the quarter, in Q2, we launched a new season of PAW Patrol on products based on the Season 6 Mighty Pups theme. We're seeing significantly higher consumer engagement with the PAW Patrol content than we have before. This is a testament to our strategy of refreshing themes to keep the characters and stories relevant. An interesting development I wanted to share with you relates to the amount of user-generated content we are seeing for PAW Patrol on YouTube. There are legions and legions of PAW Patrol fans creating content, which is used and viewed globally. This is creating deeper engagement with the PAW Patrol franchise.

Progress continues for the first ever theatrical animated PAW Patrol film, which we are targeting for release in late 2021, and we believe PAW Patrol will set the foundation for other properties to follow on to the big screen.

We relaunched Bakugan in early Q1 in North America and in Australia. In early Q2, we launched Bakugan in Japan, and later in Q2, in the U.K. and Germany. We'll be launching Bakugan in rest of Europe and internationally during the balance of 2019. We're taking a long-term view on the Bakugan franchise. So far, we are very pleased with initial response especially given the fragmentation of the content landscape we have seen since 2008. In North America, the results are good and very good in Australia. We see the performance of Bakugan as strongly correlated to the strength of the broadcast platform the show is on. Since we first introduced Bakugan in 2007, the media landscape has undergone tremendous change, and we do not have as many eyeballs on the content as we did then.

Boys particularly within this age group are watching content across a number of a different platforms, including TV, SVOD and AVOD. We have worked so hard in the Cartoon Network to make content available not only on television and SVOD but also on YouTube. Cartoon Network launched Bakugan on YouTube with full-length episodes and original YouTube content in July. We're excited that Bakugan will also be launching on Netflix this fall. This multiple-channel approach between Cartoon Network, YouTube and Netflix will help us to reach the same number of kids as we did before. The strength of our global platform is the foundation for optimization of the Bakugan brand, and we will incorporate learnings from each market as we continue to roll out the franchise globally.

Following its launch in January, Abby Hatcher continues to delight both boys and girls. We look forward to the second season of Abby Hatcher in 2020, currently in production as well as the toy line is scheduled to launch in fall 2020. We want to make sure that our toy and licensing and merchandising programs are timed to launch at the time when awareness is peaking in order to maximize their potential. Every properties attending on the broadcast will need different amount of time to reach the appropriate awareness levels.

We want to be where the kids are and we know kids are connected to mobile devices both for the entertainment and gaming. This fall we are launching [Dragymon's] a new franchise that provides action adventure, excitement for kids with both short-form content and an integrated toy line that will debut on Amazon Prime. The new Dragymon's toy line and accompanying credit card games launching with the digital-first strategy that is built off of digital platform.

Similarly this fall we'll be launching Zo Zo Zombie, a reverence, humorous digital-first animated show adapted from the best-selling Japanese Manga or comic book. This show which incorporates approximately 103 3-minute episodes is produced together with our partners at ShoPro in Japan and will be launched on YouTube and Amazon via Prime Direct video. This will be our first digital-only content launch. Our content will leave the toy launch using digital and social platforms. The toy line will follow the shows launched together with a broader licensing and more exciting program.

As part of the company's focus on growth, Spin Master continues to build a strong portfolio of licensed products and invests in partnerships with licensee (inaudible). Supporting strong relationships with licensing partners has been another pillar of our success. While we continue to develop original ideas based on our own IP, major entertainment licensors also know that we are an excellent license partner who will continue to build new and broader licensing relationships. Because of our deep experience with creating and nurturing our own IP, we're are adept at working with global entertainment partners such as the Warner Brothers, Disney and Universal, to bring our IP consumers in a way that enhances the brand.

Earlier this week, we are excited to announce that we entered into a Global Master Toy license agreement with DreamWorks Animation for their new animated pre-school series, Gabby's Dollhouse, which is set to debut globally on Netflix in 2020. Beginning fall 2021, Spin Master will bring the characters from the show to life through new toy lines that will include play sets, figures, plush, games and puzzles. Along with the success of both PAW Patrol and Abby Hatcher, Gabby is an exciting addition to our growing footprint in the pre-school category. This partnership further strengthens our pre-school portfolio of both owned and licensed IP, leveraging our expertise and scale in the category. We're well on our way to becoming a leader in character-based pre-school category.

In addition to our 5 business segments, we also saw continued strength in Toca Boca and Sago Mini app sales. Both companies performed well this quarter with strong growth and engagement in both Toca Life and Sago World's subscription and paid app businesses. Sago World has over 100,000 subscribers globally. Since acquiring these 2 mobile digital companies, we have focused on their core strength, which is the development of new content for apps and strengthen their brand with consumers through different app delivery methods. We are very excited about the long-term potential for both Toca Boca and Sago Mini, and we're continuing to invest in leveraging their expertise in the digital mobile space, both as a stand-alone opportunity and across Spin Master's platform.

In conclusion, we remain very confident in our long-term platform for growth and are excited about the prospects for the second half and beyond. As we advance our strategic initiatives, we remain confident in our proven track record of innovation and in the extense of our global reach. We continue to demonstrate our ability to produce compelling entertainment content, magical toy experiences and to be a great partner for the licensed toy lines.

With that, I will now pass it over to Mark.

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [4]

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Thanks, Ronnen, and good morning. We delivered solid financial and operational results in the second quarter. Our strong diversified portfolio of innovative brands drove gross product sales growth of 6.9% compared to last year. In constant currency terms, gross product sales growth was 8%. Adjusted EBITDA grew 21%, while adjusted EBITDA margin was 17.2% compared to 14.6% last year. We are executing well against our strategy and the year is progressing as expected.

This was the first quarter that we and the rest of the toy industry had year-over-year comparisons without TRU from a shipping perspective. Keep in mind that TRU is liquidating in Q2 2018, so from a POS perspective, there is still year-over-year noise, which Ben will address later.

Gross product sales in the quarter benefited from the shift of Easter into the second quarter of 2019 compared to Q1 2018. Gross product sales growth was led by the strong performance of the Boys Action and High-Tech Construction segment. We continued to see positive momentum and success in our licensed brands in Q2. How to Train Your Dragon and Monster Jam and also from the relaunch of Bakugan, all of which were successfully introduced in Q1.

Our Pre-School and Girls business segment also performed well. In Q1, we explained that we had intentionally reduced our shipments of PAW Patrol to carefully manage the upcoming cutover of our TV seasons. We expected this to normalize in Q2, and it did. This quarter, we saw solid growth in PAW Patrol shipments in most key markets, as we delivered product to align with the new Season 6.

We continue to see declines in the Remote Control and Interactive Characters business segment, largely driven by Hatchimals. As we have said for some time, the decline in Hatchimals in 2019 has been expected and planned. Ben will go over this in a little more detail later.

In Activities, Games & Puzzles and Plush, we continue to be impressed by the performance of key brands such as Cool Maker, Kinetic Sand and Gund. Despite these increases, the segment showed a decline in overall sales due to lower sales in the Games & Puzzles portfolio. In Q2 last year, we had a number of large Games & Puzzles launches, which drove double-digit growth in the portfolio, whereas in 2019, most of our significant new product launches will be in Q3, timed with movie releases.

Geographically, gross product sales in North America and Europe increased 1.2% and 42.8%, respectively. In the rest of the world, gross product sales declined slightly by 1.7%. Growth in Europe was led by Germany, U.K., Central Eastern Europe and Russia. Some of the growth in Europe and the decline in the rest of the world is due to the fact that in 2019 we commenced direct sales operations in Russia, Switzerland, Greece and Austria. These markets were previously serviced by our third-party distribution network and sales were recorded in the rest of the world segment. Overall, international gross product sales represented 36% of total gross product sales in the second quarter, up from 32% last year. On a year-to-date basis, we are at 38%, and we continue to make meaningful progress on our goal of increasing international penetration to over 40% annually.

Sales allowances as a percentage of gross product sales were 8.3% for the quarter compared to 6%. As a reminder, sales allowances are typically between 10% and 12% of annual gross product sales and vary by quarter due to the timing of promotional and markdown spending.

Other revenue, which includes television distribution income, merchandise royalty income as well as app revenue from Toca Boca and Sago Mini, decreased by 8.2%, as positive contributions from television distribution income and app revenue were offset by lower licensing royalty income.

Gross profit for the quarter was $164 million, representing 51.2% of revenue compared with a $153 million, or 42.9% (sic) [49.2%] last year. The increase in gross profit was largely driven by higher volume and contributions from a favorable shift in product mix towards higher-margin brands. The net impact of TV show revenue and amortization on gross margin was also a positive driver in Q2. The improvements in gross margin were partially offset by higher freight and inland transportation costs. We are seeing higher costs arriving from the U.S.-China trade dispute due to a spike in demand for ocean freight and inland transportation capacity as imports are scrambled to bring goods earlier in Q2 to avoid the anticipated tariffs.

As we've discussed, as part of our risk management program, we've been diversifying our manufacturing footprint for several years. During the quarter, we increased our resources invested in this program to accelerate our plans further, and as a result, we saw additional startup costs from our efforts to accelerate supply diversification out of China into India and Vietnam.

SG&A expenses for the quarter increased $14.8 million or 11.3% compared to last year. The increase in SG&A comprises $6.6 million higher restructuring costs, and $1.8 million higher share-based compensation costs. Excluding these items, SG&A increased $6.4 million, and as a percentage of revenue, was 41.9% compared to 41.1%. The increase in SG&A was driven by higher distribution and selling expenses, partially offset by lower administrative and marketing expenses.

Regarding higher distribution costs, we continue to make investments and realign our distribution infrastructure to position us for future growth. Distribution expenses were $5.1 million higher than last year and represented 5.1% of revenue compared to 3.6% driven by the continued ramp-up of our new East Coast U.S. DC, a new DC in Hungary servicing our expanded Eastern European markets and a new DC in Moscow servicing Russia, Belarus and Kazakhstan. Once completed in the second half of 2019, our new supply chain infrastructure with advanced operational efficiencies, improved customer service levels and drive operating leverage.

Selling expenses increased slightly in the quarter as the mix of license products, including Monster Jam and How to Train Your Dragon, resulted in higher royalties. We continue to expect variable selling expenses to be slightly higher in 2019 compared to 2018 for this reason. Excluding the restructuring and share-based compensation costs I referred to earlier, admin costs improved slightly compared to the prior year in both dollars and rates, reflecting our disciplined focus on expense control. The decrease in our administration cost was primarily attributable to a charge last year for mark-to-market of our LTIP. As of August 21, '18, we began to equity settle our LTIP share-based comp, and as a result, we are no longer required to mark-to-market. This decrease was partially offset by higher depreciation for the leasehold improvements for our new head office. Also, please keep in mind that in the first half of 2019, we are carrying costs associated with the startup of Russia, Greece, Austria and Switzerland which will yield benefits later in 2019 and beyond. Also Gund admin costs are included in our 2019 results, but were not for most of H1 2018. In this respect, Q3 will be the first quarter where we will be fully comparable from a cost perspective.

Adjusted EBITDA for the quarter was $55 million compared to $45 million last year, primarily as a result of higher gross profit, partially offset by higher distribution and selling expenses. Our adjusted EPS margin was 72.1% compared to 14.6%. Please note that adjusted EBITDA for the second quarter of 2018 was not restated by IFRS 16. Impact of IFRS 16 for Q2 2018 would have been an increase of approximately $2.2 million.

Net income for the quarter declined to $10.2 million from $26.9 million. Please note that in -- that Q2 2018 included a $15.5 million nonrecurring favorable late legal settlement. Adjusted net income for the quarter increased by $2 million, driven primarily by higher gross profit offset by higher distribution and selling expenses, as discussed earlier.

Total net working capital as a percentage of revenue at the end of Q2 increased to 15.9% from 9.6%. This was primarily attributable to an increase in core working capital and a decrease in taxation and incentive compensation related accruals, partially offset by a decrease in other receivables, as we have now begun to collect our entertainment tax credits. Our core working capital, comprising trade receivables, inventory and trade payables, increased to 14.9% of revenue compared to 12.2%. Inventory on hand increased at the end of Q2 as we brought in finished goods earlier in anticipation of an increase in tariffs and a shift by retailers to more domestic orders, rather than FOB.

Receivables increased in line with our growth in Europe and Mexico, which are primarily domestic markets and where credit terms are longer. Overall, our cash conversion cycle increased by 7 days to 52 days. Free cash flow is $18.5 million, declining slightly from $19.5 million in the prior year.

Our balance sheet remains very strong, and we ended Q2 with $77 million in cash and no debt.

To conclude, our outlook for the full year 2019 remains unchanged. On a full year comparative basis, we expect our organic gross product sales growth to be low single digits over 2018. We remain committed to our long-term financial framework, which targets organic gross product sales growth of mid- to high single digits. We continue to be extremely focused on cost management and productivity initiatives. Consistent with our prior guidance, we expect our adjusted EBITDA margin in 2019 to be in line with the margin we achieved in '18, that implies if we include or exclude IFRS 16 in both [years].

With that, I will now turn it over to Ben.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [5]

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Thank you, Mark, and good morning, everyone. We are proud of our global team's dedication and commitment, as we remain focused on the successful execution of our growth strategies. The combination of our commitment to our brand innovation pipeline, which drives diversified portfolio management, our global scales and our growing global entertainment pipeline has resulted in our success to date and positions us to achieve long-term success.

Starting with the bankruptcy filing of Toys"R"Us in Q3 2017, the toy industry has entered one of its most destructive and challenging periods, culminating in the liquidation of TRU in several key markets in Q2 of 2018. At the same time, we have seen one of the most successful product launches in our history, Hatchimals, explode in popularity in 2017 and 2018 and then decline significantly in 2019. As we have discussed before, Hatchimals' strength in 2017 and 2018 and the decline in Hatchimals shipments for 2019 was anticipated and planned. Despite the decline of Hatchimals, global Spin Master POS, excluding TRU and Hatchimals, was up 25% in Q1 and that number accelerated to 32% in Q2. In the U.S., excluding TRU and Hatchimals, Q1 POS grew 19%, and in Q2 grew 24%, while the industry has still not fully recovered from the demise of TRU.

It is important to emphasize that we not only weathered this difficult period with the closure of TRU and the decline of Hatchimals, we strengthened the health of our entire portfolio. As you know, our outlook for 2019 has been and continues to be low single-digit organic growth and as we had anticipated, the decline of Hatchimals. We are carefully managing the Hatchimal brand even as we introduce new item in the line later this year. We believe that the magic of this toy pattern will endure, and we are managing shipments, product introduction and inventory levels with the expectation that Hatchimals will continue to be a solid brand but at a lower overall level than in the past.

Looking forward to 2020 and beyond, Spin Master will have a broad and deep portfolio of brands and products where comparison with 2019 will be much easier as Hatchimals will have had stabilized. We are innovating and creating toys which kids love. We have built a portfolio of diverse and complementary brands and it is working.

We entered 2019 with a clean channel and high-quality inventory. As a reminder, for all of our brands, we continue to apply a disciplined method of analysis to ensure optimal inventory management whereby we rigorously measure beginning inventory, shipment in POS and ending inventory. We remain diligent in our approach to our channel inventory management through the end of 2018 and the first quarter of 2019. This has positioned us to be success -- to successfully execute for the balance of 2019.

Our overall POS performance this quarter was excellent. It is important to note that the liquidations of Toys"R"Us U.S. business was largely completed during Q2 2018 with the majority of the inventory sold through by the end of June. From a POS perspective, the absence of TRU in 2019 resulted in noncomparable data. Despite this, our global POS, including TRU, still grew 3% for the quarter. Excluding TRU, but including Hatchimals, our global POS grew 21%, and in the U.S., POS grew 14%. We are very pleased with our performance and this is a clear indication of the health of our brands.

We continue to see positive momentum internationally and in many key markets. Our POS is outpacing the industry and the competition. In Europe, for example -- sorry for the background noise -- in Europe, for example, Germany, Central and Eastern Europe, France and the U.K. saw strong double-digit POS growth. In Germany, for example, we saw POS growth of 65%, and in the U.K., we saw POS growth of over 33% despite turbulence of the market due to Brexit. According to industry sources, the overall U.K. market was down low double digits, and we were the only toy manufacturer to grow during the second quarter. In Australia, we saw POS growth of 37%, and in Mexico, POS grew 10% in the quarter. We are confident in the momentum of our top line growth and in our POS performance. In addition, to ensure sustained growth and to continue to create value, we are consistently focused on generating operating leverage and gaining efficiencies in all areas of our business.

Let me update you on 3 initiative we have undertaken this year. The integration of Gund, Cardinal, LA Games and Swimways has now been executed and they have now been successfully consolidated into Spin Master East, in Long Island City, New York. This initiative will result in increased innovation, better communication and significant cost savings.

Secondly, as we discussed with you in our first quarter conference call, we began making investment to establish new distribution centers in the East Coast of the U.S., Hungary and Moscow. We continued taking steps in refining our supply chain efficiencies to accommodate speeds of delivery to consumer as well as mobile commerce. All these facilities are now running and contributing, in the case of Hungary and Moscow, to drive growth across Central and Eastern Europe and Russia. Although, we've seen increased costs in the initial ramp-up stage, we anticipate operating leverage in the back half of 2019 and beyond.

Thirdly, in the supply chain area, we accelerated our diversification out of China. Part of this was due to the tariff dispute and part to our normal diversification program, which we started several years ago. If you recall, in 2015 approximately 90% of our production was in China, and it is approximately 65% currently. China will always be an important region for the toy industry, but we want to be below 50% production in China by the end of 2020. We are moving production quickly into Vietnam and India and are looking at other areas as well. As Mark mentioned, we incurred some onetime setup costs in Q2 in Vietnam and India as we shifted some of our manufacturing out of China. The new factories will drive cost saving in the near future.

I would now like to briefly review our 4 key growth strategies and provide you with an update on some of our 2019 initiatives. Our first growth strategy, to continue to innovate the core product portfolio relies on our ability to consistently infuse innovation into our brands and products, whether it is our own IP or licensed brands. We successfully continued to do this, this year. A number of our items have been chosen as top toys for the holidays by our key large retail customers. Our internal and external R&D network and the proven internal 36 months brand innovation pipeline process facilitate the identification of market opportunities that we capitalize on through product development or acquisition. Our current 36 months pipeline is very strong, and we are excited about what is in store for 2020, 2021 and beyond.

The Activities, Games & Puzzles and Plush segment is a strong platform for Spin Master. Good examples of our commitment to innovation, driving results in the second quarter, are new products such as Twisty Petz and Candylocks, which offer truly original gameplay and our innovative Cool Maker, Go Glam nail painter, which has generated a lot of excitement so far. In the second half of the year, we are launching Games & Puzzles aligned with the release of Frozen 2, Toy Story 4, Black Panther and The Lion King.

One year after acquisition of Gund, we continue to generate solid growth and scale the business through our ability to use our global sales and distribution infrastructure and our ability to capitalize on strong licensing opportunities with key partners. This year, we added 2 strong license partnership to the Gund portfolio: Hilda, the award-winning animation series airing on Netflix, which we announced early this-year; and as Ronnen mentioned previously, the new animated pre-school series, Gabby's Dollhouse. Beginning fall 2021, we will bring the character from the show to life through a new toy line that will include play sets, figures, plush, games and puzzles.

We have some great innovations for 2019 in the Remote Control and Interactive Characters segment. This fall, we are launching Juno, My Elephant, our animated baby elephant; and Holly, an interactive flying pet. Retailers are very excited about these products and initial shipments and orders of both have been very positive. Juno and Holly are both a testament to our team's ability to continue to innovate in this high-tech space and merge technology with great play. We also seek to leverage innovation across product lines. For example, we deployed the hatching technology that made Hatchimal such a groundbreaking success into our How to Train Your Dragon line. This item was one of our top seller on the Amazon Prime day launch. We also are very happy with the performance of our Monster Jam, the remote control trucks, which had significant growth in the second quarter.

In Hatchimals, where we have over 90% brand awareness with U.S. moms and close to the same level with the kids, we are continuing to innovate and stretch the brand. The strength of the brand is allowing us to enter new categories such as small dolls. We just launched Hatchimals Pixies, which has allowed us to break into small doll category. Pixies is a cross between a collectible and a dollhouse in an egg and is selling extremely well. We will be launching Colleggtible Season 6, Secret Surprise and Hatchimals in the fall. We have more innovations for 2020 and beyond.

The Boys Action and High-Tech Construction category was our strongest performing segment as we continue to see momentum and solid contribution from 3 major launches this year. How to Train Your Dragon, Monster Jam and Bakugan led to the growth and are performing well from a POS perspective. Our relaunch of Bakugan is going according to plan. We have great placement in the fall category lineup and very strong positive brand feedback. In Australia, we're seeing exceptional performance as retailers are increasing their orders. The appetite and excitement for the brand in Europe is high with the majority of European markets launching products and content in the next few months. The innovative product line from Monster Jam was introduced in January of this year and continues to show very strong POS results globally, including Mexico and Australia. The Monster Jam license is an example of the success of combining our innovative brand development with our licensing portfolio giving us great opportunity for diversification and growth.

The strength and momentum of How to Train Your Dragon line continued in Q2. Universal's ability to create an exceptional film, outstanding distribution in the TV show combined with great marketing, has helped drive strong sales and demand for this franchise. We expect to see continued strong performance. We expect the momentum in growth in these properties to continue in the back half of 2019 and beyond.

Beginning spring 2020, we will be the new toy licensee for DC Entertainment Boys Action category, including remote control and robotic vehicles, water toys and games and puzzles. Our teams are already hard at work developing the line for 2020 and initial customer reaction has been very positive.

The Pre-Schools and Girls category saw a strong performance driven by fresh new themes in PAW Patrol and innovative new product lines. Later in the second quarter, we began shipping the new Mighty Pups line. We also launched PAW Patrol in Japan in partnership with [Cart Only] and the initial results have far exceeded our expectation. We remain very confident in PAW Patrol's prospect for this year and beyond based on upcoming content, new themes and innovative products. This fall we will introduce the Ready Race Rescue TV special and new toy items to bring the theme to life. Overall, we've seen very significant growth in views of our content. The Mighty Pups trailer was our top-performing PAW Patrol content ever, with 34 million views. Product tied to the Super Boss season began hitting the shelves late in Q2, and we are very excited by early customer engagement. Our retail partners are also very excited by the brand momentum with the strongest feature, support and product line engagement we have seen for the brand to date.

The momentum we saw in the first quarter for Twisty Petz continued into the second quarter. In addition to the growth of these existing brands, we introduce Candylocks, a new line of dolls with long, colorful, scented, cotton-candy inspired hair, which has performed very well so far. The Outdoor segment POS was down slightly this quarter. Weather-related issues in the first half of this year continuing through the first few months of the second quarter. That trend changed in the back half of the second quarter, and we have started to see good momentum build in this category as well.

Our second growth strategy is to grow our international sales. Currently, our international infrastructure is underleveraged, and we see tremendous opportunities to drive growth across our entire product line internationally. Our international infrastructure also represent a valuable assets when competing for new product, opportunities and licenses. Continuing to expand our geographic footprint is a catalyst of growth as it enables us to more successfully compete for major studio licenses and (inaudible) rights.

Similarly, our ability to make acquisition work improved, since we have more market into which we can take the acquired products and brands. Our key established European markets such as the U.K., Germany and France, are performing very well. The Central Eastern European region, which we opened in 2018 is also growing very nicely. At the beginning of this year, we opened our Russian office, and also began direct selling activities in Greece, Austria, Switzerland and the Balkans. Russia is exceeding our expectations so far, and we saw a good growth in many of our European markets. Outside of Europe, Australia, which we opened in 2017, and Mexico, also continue to grow.

Our third growth strategy is aimed at developing evergreen global entertainment property. Through the success of our brand, such as PAW Patrol, we have proven that creating compelling and engaging content with retail initiatives such as toys, helps optimize brand equity, and in turn drives higher growth rate and higher margins. We have a deep pipeline of new properties at various stages of development intended for global broadcast. In addition to these properties in the pipeline, we are pleased with the success of current entertainment property launch and are excited about the new content we have planned for 2020 and beyond. The entertainment team is very focused, keeping existing franchises fresh, while at the same time building new franchises for pre-school kids and kids between the age of 6 and 9 years old. Finally, acquisitions have been an important component of our successful growth over the years. We continue to be actively looking at potential targets and the success we have had with 9 acquisitions we have made since our IPO, clearly demonstrates our ability to successfully identify, integrate and grow these businesses.

The disruption in the retail landscape in recent years, including but not limited to Toys"R"Us, have put pressure on many companies. We have a healthy pipeline of opportunities and believe our global scale, strong balance sheet, and financial flexibility, positions us to capitalize on opportunities with the right strategic fit and valuation.

We have said this repeatedly, but we will remain patient, diligent and disciplined in our approach to acquisition. We will only acquire assets that fit our quality, financial and long-term strategic criteria, and are also able to generate the right value-creation opportunities for shareholders.

To conclude, we are excited for the back half of 2019 and are confident in our brands. We have built a strong and focused platform and are incredibly proud of the effort and results that our employees have delivered around the world. Ronnen, Mark and I are now pleased to take questions. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Sabahat Khan of RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Just maybe starting with PAW Patrol, I think last quarter you'd indicated that you expect sales to be a bit more H2 weighted this year. And I guess following the strength that you had in Q2, just want to get an idea of how you're thinking about the back half, especially with the cadence of the show just being launched and then, especially you have in the fall. So just want to get understanding of Q3 and 4.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [3]

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I can answer that. So I think we -- if you -- before we talk about Q3, Q4, I think if we just look in the rearview mirror for a couple of months, if you recall, we talked in Q1 about our changed approach this year in terms of how we're going to make the change over at retail from one segment to the other, which also impact the product line. And we're very pleased with how that's worked out. It created a little bit of noise between Q1, Q2. But in Q2, our global POS with PAW Patrol is up 12%, and we just launched a new product line in June and there's also more product coming in the fall such as the Mighty Tower, which is $99 item. And the market is very excited for -- not just that item but most of the new items we're launching in the product line. So the -- overall, the portfolio is doing very well, not just in the U.S. or in the traditional market that we've had, but we just launched in Japan, as we mentioned, it's doing very well. We are ahead of expectation. We're getting ready to launch more content in the fall, which is the Ready Race Rescue TV special. So the franchise is, overall, very healthy globally, it continues to do very well and not just the current market where we're in but also the new market where we -- that we just launched. So we're -- I think from an outlook standpoint, when we look at the great content still being launched in the franchise, paired up with the great product line, we feel very confident in the continued success of PAW Patrol on a global scale.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [4]

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And then just on Bakugan, you provided some color, but just want to get understanding of -- as you roll the product out, will you be in all or most of the markets that you want to be in, say before Christmas, or will you have product in most of those markets? Just want to get an understanding of when that rollout will be largely completed.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [5]

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Yes, Okay. So I can answer that as well, Sabahat. So on Bakugan, as everyone knows, we're taking a disciplined launch in 2019. So earlier this year, we launched Bakugan in North America, Australia, then U.K. and Germany -- actually Germany just a few weeks ago, which is doing really well. Most of Europe is launching now in upcoming weeks. So in the next -- between now and the next few months, we're launching in Nordic, Portugal, Spain, Turkey, France, Benelux, Russia, Greece, Central and Eastern Europe, Mexico, the Baltics. So we're really launching Bakugan, we're like right, we're just starting the rest of our international launches now. And the results are building very well right now across all markets. And I think Ronnen addressed some of the broadcasting activities and focus that we have now. So we expect to continue to steadily build a franchise in the second half. And I think we'll be in a very good position in 2020 on a global scale. So we're very positive about the franchise and the momentum is building everywhere. And the retailers are also -- where Bakugan has been launched so far, the retailers are very supportive.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Okay. And then, just a commentary earlier around may be decreasing your exposure to China because of tariffs, I guess that going below 50% in China, is that sort of your strategy regardless of what happens on the tariffs front? Or is that -- you want to get below 50% if tariffs are imminent? Just want to get an idea of the long-term view on the manufacturing footprint.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [7]

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Yes, I think, Sabahat, when we look at the diversification strategy, We have had our strategy 4, 5 years ago where most of the company exposure was over 90% in China. And there are more -- we decided to diversify out of China for several reasons, is one, obviously, having all your eggs in one country is not good business practice for the future, but it's also for cost savings and for diversification. So keep in mind in China, the labor, as always, increased like double digits every year, and you have other places in the world that are now cheaper than China. So we do like China, we see China as continuing to be really important for the toy industry but 50% is more or less where we will be comfortable. And as a reference, we're down to -- we went from 90% to approximately 65% this year and all the plans are in place working with all the right partners on a global scale to be below 50% next year. So it is part of our strategy regardless of what happens with tariffs.

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Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [8]

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Okay. And then just one last one from me, more on the just overall content side. And I think, Ronnen, you gave us a bit of a rundown on some of the new shows for later this year. Can you maybe recap for us, exiting 2019, how many of your own TV shows will be out in the market. Just want to get an idea of how much your own content you'll have out there.

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Ronnen Harary, Spin Master Corp. - Co-Founder, Chairman & Co-CEO [9]

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Well, I would say in the pre-school category, there would be 3 shows, which would be PAW Patrol, Rusty and Abby Hatcher. And then in the short form, YouTube Direct, you would have Zo Zo Zombie, which is coming on [20th of] September. And also Dragemons, so 2 short forms and 3 longer forms. And Bakugan, which is boys six to nine. So I think 3 in the pre-school category, and 3 in the boys five to nine category.

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Operator [10]

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And your next question comes from Derek Dley of Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [11]

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Can you just comment on what you're seeing in terms of some of the newer retailers that you're dealing with in terms of their purchase orders? Are the size of the orders increasing now? Or are you still seeing that sort of initial smaller order with the replenishment cycle coming afterwards?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [12]

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Derek, it's Mark. I don't think we've seen any major trends on the new retailers. We talked last year about a party city and some other retailers that were actually getting into the market. I think they're still there but not necessarily in any meaningful way. We continue to support them, we continue to nurture them. But they're not a huge factor one way or the other right now.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [13]

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Yes. The only thing I would add, Derek, to echo what Mark said is that we -- there's a lot of new players last year that came in and tried to take a -- call it a more meaningful position in the market. And I think we haven't seen anyone really emerge as being significant. So I think we'll see the same thing this year where they'll be a multitude of smaller retailers that will try to take toy offerings, but we don't see anything new versus what we saw last year.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [14]

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Okay. That's helpful. And just in terms of Europe, can you comment what you're seeing that's really driving the strong results out of Europe? Has the -- is it in part and also the shift to a direct distribution model in some of your key countries? And would you move to this model in some other regions, namely Asia?

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [15]

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Yes. So I think Europe is a mixed bag this year. Although our company is doing really well, as we just outlined a few minutes ago, there's a lot of noise right now in the European market. So in the U.K, for example, the market year-to-date is down 11%. And -- but yet, year-to-date we're up high-single -- I mean high-double digit. Germany is up 1%. So it's a fairly stable market. We're up -- I think we're up 65% in the second quarter; France is flat, we're up 9%; Australia is a down market, which is not necessarily Europe but it's an important region. So there's a lot of moving parts in Europe and a lot of the moving parts, obviously Brexit, has a significant impact in the U.K. but it also creates nervousness in different areas. And there's also been some bankruptcy in Europe this year. So you have -- Intertoys in Benelux, in Nordic last year we had Top-Toy, and in France, we see some small, mid-sized specialists going under as well. And I think all the volumes now is moving to different retailers. So this just -- there's a lot of noise but what we're seeing is our properties are resonating extremely well. And I think you're going back to what we discussed earlier, we're really pleased with the strength of our portfolio. And I think the -- our portfolio is working particularly well right now in Europe. Mark?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [16]

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Just to add to what Ben said, Derek. The vast majority of the growth that we saw in Europe in the second quarter was actually volume related, but a small part of it was due to the conversion of these territories that we're now directing from a third-party distribution model. But that -- it was not that significant. Most of it was actually organic growth.

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Operator [17]

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And your next question comes from Steph Wissink of Jefferies.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [18]

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Just a couple of housekeeping and then one question, Mark for you, on the realignment of distribution. So first is housekeeping wise, could you give us some sense of the costing as you move towards these alternative venues outside of China, any changes we should be thinking about in terms of cost of goods, particularly related to the logistic side? And then secondly, on housekeeping, just help us bridge the first half sales decline kind of down mid-single digits first half to your expectations for the year, in addition to the Games business, sounds like improving in the back half, anything else we should really be focused on to bridge that gap?

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [19]

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Okay, Steph. I'll take the first one, Mark and I will split it. So from a supply-chain standpoint in Asia, everything that we do is obviously to drive productivity and efficiency. So obviously, the tariff came along, which is -- now creates a diversification strategy that appears to be defensive while the origination of our diversification strategy is to drive productivity and cost savings. So that is still the goal. And we will continue to be very, very focused on our cost of goods while maintaining all the right quality and the right service level. So that's the expectation going forward. And then, from a Q1 into Q2 is, the decline in Q1, as you know, there was an impact on the Easter that we talked about and also the fact that we did the cutoff in PAW Patrol from Q1 to Q2, which also impacted Q1 as we have discussed. So from a -- the most important thing for us, Stephanie, is when we look at the momentum of our POS, is again -- I just want to go back to what we've talked about is -- if you actually peel the onions and you really try to understand our POS is -- maybe I can even -- I can address it on an even higher level, is that, when you -- if you start with Hatchimals, what's happening this year is Hatchimals is down approximately 60% this year. And it's very much in line with our forecast, which is why, if you recall several months ago, we guided this year to low single-digit growth for 2019. But there are 3 real positives here to point out despite this large Hatchimals franchise decline is that, one, the Hatchimals brand will continue to be a very nice business for us for years to come. And we continue to have great innovation this year like little Pixies and then [Hatchual], which will -- which, Pixies is in the market now doing great, and Hatchual is launching this year. So there's really good innovation that will continue in the Hatchimals brand. So that drives -- that will continue to go forward. And our 36-month brand innovation pipeline is allowing us to still grow our top line with a strong portfolio that ex-Hatchimals grew 32% year-over-year in Q2. And another interesting point to go back to Q1, Steph, as you ask is, that number was 25% POS growth, ex-Hatchimals, ex-TRU in Q1. And it's now -- the momentum has built 32% in Q2. And then, next year, as we -- like we project and we start planning next year, is we're going to have a world where there's -- where we're going to come to world where there is no TRU. There will be normalized Hatchimals sales because we believe it will level off this year. And we're very, very excited with not only our 2019 fall product that we're launching now but also our 2020 product roadmap, which has some amazing new innovation that you guys will see in February. Mark, do you want to add anything?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [20]

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Yes. So, Steph, just I think the second part of your question was in relation to H1 and the fact that we're actually still down year-over-year on gross product sales. So let me address that. I mean we overall, feel that low single digits for the U.S. is reasonable and appropriate. We're comfortable with that. We have -- as I said to you on -- in my script, Games & Puzzles, a lot of launches happening in the second half of the year -- please excuse the noise in the background -- we have a lot of fire engines going by today. Games & Puzzles include -- going in the second half of the year with all the movie launches, we have Go Glam and the whole activities area also launching some significant new products in the second half of the year. And then, very importantly, you have the continued rollout of PAW Patrol. You have the continued rollout of Bakugan. And the other major franchises going on in building momentum in the second half of the year. And we're very comfortable with the engagement levels that we're seeing. And so we think that LST for the year is a reasonable and appropriate gross product sales growth level.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [21]

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All right. That's very helpful. And then, I just want to -- and check the realignment of the distribution a bit more. I'm trying to synthesize whether that's a function of a post-TRU landscape, so just a wider network of retailers that you're working with? Is it a function of the globalization of your business? So as you open up DCs in Eastern Europe and Russia, are you gaining more territorial expansion? Or is it based on channel evolution? And then maybe -- or is it also based on your multi-brand portfolio strategy where you're replacing a big power brand like Hatchimals with a lot of other smaller brand initiatives? How should we think about the ranking of those elements to the realignment of your distribution, and where you're making some investments this year, which you'll earn out in the future years?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [22]

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Actually, Stephanie, you hit them all. So that's really what's happening. I think you pretty much nailed it. I think it's a mixed bag now, where obviously our international strategy is driving a lot of results and diversification. We also see -- e-commerce is continuing to grow. We also see emerging trends in the D2C going forward. We see our product portfolio mix is also evolving. So it's really all of the above. And I think it's very dynamic, right now, on a global scale. And I think it's really exciting time. And just the last -- the last thing that -- just one more thing I want to add, Stephanie, is that, we as a company are very long-term focused when we look at our distribution. But, as you know, we're very focused on product innovation. We're very focused on how we build our franchise and develop our franchise on the global scale. And we're also very focused and continuously improving and taking our business models forward on a global basis. And I think that impact like every single element of our distribution and channels that we go forward.

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Operator [23]

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Your next question comes from Brian Morrison of TD Securities.

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Brian Morrison, TD Securities Equity Research - Research Analyst [24]

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I'll keep this short for the sake of time. Mark, just in terms of the guidance -- EBITDA margin guidance, I assume that, that's -- EBITDA margin flat is 19.3% inclusive of IFRS 16, is that correct?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [25]

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For 2018, the actual results were around 18.6% ex-IFRS, including IFRS is 19.2%.

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Brian Morrison, TD Securities Equity Research - Research Analyst [26]

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Okay. Great. And then PAW Patrol, I'm trying to reconcile here, I understand the cutoff that took place and the reacceleration here. Just trying to understand the Rest of the World, as we enter new markets, why it seems to be down year-over-year in Q2?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [27]

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So the Rest of the World, specifically, I think you're picking this up from the MD&A where we break it down into North America, Europe and Rest of the World. Just keep in mind, when we talk about it on the call, we're talking about international, which is really a combination of those two. But specially, the Rest of the World is lagging a little behind in terms of the relaunch of some of the new product lines that we -- that Ben described in detail earlier. So nothing else other than slightly later launches of the new season, which you'll start seeing changing in the third quarter and fourth quarter. And then also -- yes, that's primarily it, Brian.

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Brian Morrison, TD Securities Equity Research - Research Analyst [28]

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Excellent. Then last question, maybe Ronnen or Ben here. It seems like you're winning a larger amount of license deals. And potentially they're more prolific than in prior years, I would say, it sounds like it's going to continue. Maybe just elaborate what you ascribe this to. And then in terms of the capacity to build out this footprint, what is required and do you have this in place?

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Ronnen Harary, Spin Master Corp. - Co-Founder, Chairman & Co-CEO [29]

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I think it's a fact of number of things. We've been developing relationships for 20 years now. And we've had a handful of licenses that we've done very good. We've shown incredible performance and innovation within licenses. And I think Spin Master has always been known as an innovative company, but we didn't have the global footprint. So we used to move that to our bigger competitors. But now that we've spent so many years building out our international footprint, we're a very ideal option for the various companies. And I think that they're really -- if you look at the landscape, there really is only 3 players that can provide a truly global international footprint, and we are 1 of the 3 now. And so that opens up a huge amount of opportunities for us. And then when you layer on top of that, here's a super innovative company and they understand entertainment and they understand storytelling, I think that gives a really nice competitive edge, because before everybody wanted to go with us because we are super innovative, but we didn't have the distribution. But now we have the distribution. So it's just opening up the opportunities.

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Operator [30]

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And your next question comes from Gerrick Johnson of BMO Capital Markets.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [31]

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I have two questions here. First, can you discuss the marketing and promo strategy for Bakugan this fall. And I'm talking exclusive content, what you're doing in stores, displays, promotions because Bakugan's really a toy line that can stand on its own. And just wondering what you're doing outside of content or are you just relying on the content to drive itself?

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [32]

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Well, yes, Gerrick, I can take this high-level. So Bakugan is a full integrated marketing plan where there is TV, there is digital, there -- Ronnen talked about what we're doing from a -- not just a traditional linear show broadcasting but also, what we're doing on YouTube and other platforms. There is also significant merchandising effort at the store, there's experiential tour in the U.S. So it is a fully immersed marketing plan. And it's -- we're not fully relying on the TV content, on the show content.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [33]

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Okay. So I should look out for the bus tour and maybe hit that when it comes by?

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [34]

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We'll save a seat for you on the bus, Gerrick. We might even have an extra costume for you.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [35]

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And my next question is on royalty income, actually your other income, you guys mentioned that there's a decrease in royalty income, so what are you seeing in terms of PAW Patrol out-licensing? You're seeing a decline in PAW Patrol out-licensing, and what are the trends there?

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [36]

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So, Gerrick, you're right. There has been a decline. I think it was around 8% for the second quarter. Most of that or a chunk of it at least, was actually related to Hatchimals because keep in mind we had a big Hatchimals licensing program as well. PAW Patrol L&M is stable but I would think overall for the year, it's probably going to be down relative to 2018 from a L&M perspective. We are seeing an offset, however, in relation to TV distribution income because that's not -- now started to pick up as we deliver more Bakugan, Abby Hatcher, Rusty and PAW Patrol episodes. And then also, we're seeing nice and strong growth from our app business. So there's kind of puts and takes in that area. But overall, I think -- overall, other revenues in some will be down year-over-year.

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Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [37]

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Okay. But I was just talking about -- just royalty income from PAW Patrol itself, is that planned to be down for the year?

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [38]

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It may be slightly down, Gerrick, but most of the decline will be from Hatchimals.

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Operator [39]

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And your next question comes from Linda Bolton-Weiser of D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [40]

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Just first, I think you alluded in your commentary, a little bit to the sales adjustments being up year-over-year quite a bit in the quarter? Can you just give a little more color on why that was? I know you mentioned timing issues. And then, for the full year, would you expect that ratio as a percent of gross sales to be flattish or up or down for the full year?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [41]

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Are you referring to sales allowances specifically there, Linda?

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [42]

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I'm referring to your -- the trade promotion sales adjustments as a reduction of gross to get to net sales.

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [43]

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Okay. So yes, you're right. There was an increase in the quarter from 8.3% to 6% -- from 6% last year, primarily related to the timing of promotional spending. As we've discussed previously, launching a lot of new stuff around the world and so that drove a little bit of promotional spending increases in the second quarter. I encourage you to look at sales allowances on an annualized basis. And we've consistently guided to between 10% and 12% on an annual basis. We're running in 11s right now. And I expect us to be in that zone for 2019 as well. But to look at sales allowances on a quarterly basis can be a little bit challenging just due to timing issues, quarterly. So annually, between 10% and 12% and in our case, in the 11% to 12% zone for 2019.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [44]

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Great. And then, the Abby Hatcher property sounds like it's going well. Can you give a little more color on what that toy product line will be like in 2020? How broad the line will be in terms of how many categories that you'll have in terms of products going out?

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [45]

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Yes. It's mostly going to focus on plush -- interactive plush, but not like the higher-end price point of interactive but a lower price point to bring out the funny, if any, aspects of the characters, especially, Fuzzlies, dolls for Abby, and then plastic figures and roleplay. So those will be the 4 categories that we'll be focused on.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [46]

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I think we're going to have time for one last question, please.

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Operator [47]

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And our final question today does comes from David McFadgen of Cormark Securities.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [48]

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Just a question on the Boys Action numbers, you highlighted a few products that drove these gross product sales, quite a significant increase there. I was just wondering, based on your commentary on Bakugan, it seems like it was probably driven by the other two, DreamWorks Dragons and Monster Jam, but if you could just provide any clarity on exactly what drove that increase would be helpful.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [49]

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David, yes, when you look at the portfolio in Boys and the very nice increase is it's -- actually we have 3 properties that are all working very well right now. One is Monster Jam, and the second one is How to Train Your Dragon, and the third one is Bakugan. And they're all actually performing very well right now. It's not one that's driving more than the others, it's actually very balanced.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [50]

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Okay. And I guess, given the continuing role of Bakugan for the balance of the year, is your expectation that Bakugan will really pick up in the back half of the year?

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [51]

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Yes. As we -- what we'll see starting in Q3 and especially in Q4, is all the international launch kicking in. So as we -- as I mentioned all the countries earlier, you see that most of our countries around the world are literally just about ready to launch now. So we will see a nice ramp up going forward into the back half of the year, especially in Q4.

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Operator [52]

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And that does conclude today's conference call. Thank you very much for your participation. You may now disconnect.

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Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [53]

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Thanks, everyone.

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Mark L. Segal, Spin Master Corp. - CFO & Executive VP [54]

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See you, everyone. Bye.