Spin Master Corp. (TOY) Earnings Call Transcript & Summary

Ladies and gentlemen, Thank you for standing by and welcome to the Spin Master Executive Leadership Changes Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mark Segal, Chief Financial Officer. Thank you. You may begin.

Thank you, operator. Good morning, everybody, and thank you for joining us this morning. My name is Mark Segal, and I am Spin Master's Chief Financial Officer. I'm joined this morning by Ronnen Harary, Spin Master's Co-Founder and Co-CEO. Before we begin, please note that remarks on this conference call may contain forward-looking statements about Spin Master's current and future plans and expectations, intentions, goals or achievements or any other future events or developments. Forward-looking statements are based on information currently available to management. 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. I would now like to turn the conference call over to Ronnen.

Thanks, Mark. Good morning and thanks for joining us on short notice. Today, we announced plans for Spin Master's executive leadership succession. Since founding Spin Master, we have achieved significant growth, transforming our business from a single product toy company into a leading global diversified multi-platform and highly innovative children's entertainment company, with 3 creative centers in Toys, Entertainment and Digital Games. Throughout this period, we have remained focused on our long-term vision. It is this commitment to our growth strategy that we have now positioned us for our next phase of growth. With a well-defined strategy and a deep, capable executive management team in place, the time is now right to transition Spin Master beyond its founders at an operational level. Streamlining our leadership structure will enable us to accelerate the execution of our strategy. As you saw from our release this morning, Max Rangel has been appointed Global President starting in January 2021, and will assume the position of Global President and CEO in April. He will be responsible for Spin Master's day-to-day operations and the execution of our long-term strategy. Max is a seasoned executive who has successfully led global businesses across multiple consumer packaged goods categories. He brings extensive experience in leading consumer-focused and high-performing teams, developing innovative marketing and brand management programs and managing complex operations. He's an effective people leader with a unique ability to unlock the potential of teams to boost organizational capability. We believe he will champion our culture of collaboration, partnerships and innovation to successfully achieve our long-term goals. Anton and I will work closely with Max over the next several months to ensure a seamless transition while maintaining our roles as co-CEOs. Come April '21, Max will assume the position of Global President and CEO. And at that time, both Anton and I will transition to Board roles where we will continue to drive Spin Master's vision and strategy. In addition to our Board roles, I will continue to lead the growth of the Digital Games creative center and will be actively involved in the creative process for our Entertainment business. Anton will provide ongoing guidance on Spin Master talent and culture globally. We will continue to oversee Spin Master's long-term strategic vision, focused on charting the company's future growth. And we will both continue to drive all mergers and acquisition activity. Ben Varadi, Spin Master's third cofounder, will continue in his role as Chief Creative Officer, supporting all 3 creative centers and will remain on Spin Master's Board. In addition to Max's appointment, we are also further refine the leadership team for our 3 creative centers, Toys, Entertainment and Digital Games. To further solidify these creative centers and to provide each with dedicated executive leadership, we've created a president's role. Chris Beardall, who's been with us for over 20 years and is currently EVP, Global Sales, will be appointed President, Spin Master Toys. Jennifer Dodge, who's currently EVP, Entertainment, will be appointed President, Spin Master Entertainment. Jennifer will oversee all aspects of the Entertainment creative center, franchise growth, through to content development, production and distribution globally. Fredrik Loving, a digital games industry expert who recently joined Spin Master as EVP, Digital Studios, will be appointed President, Spin Master Digital Games. In this new role based in Sweden, Fredrik will oversee Spin Master Digital Games creative center from managing game development at Toca Boca's and Sago Mini's Stockholm and Toronto Studios through to sales and platform growth. To conclude, we remain very confident in our ability to create magic for children globally through the strength of our diversified portfolio of brands, entertainment franchises and digital games offerings. Our strategic direction, our solid financial foundation and diverse geographic platform, combined with the commitment of our global teams, position us to take advantage of many evolving opportunities. Although it's a big change for Anton and me, we're excited to take the next step in the evolution of Spin Master. And we are very confident in both our long-term growth strategy and the leadership team that will execute that plan. After all that we have achieved in 2020, we are now in a strong position heading into 2021. This leadership evolution positions us to be even stronger and more capable and ultimately deliver greater shareholder value. That concludes the formal part of the call. We're happy now to take any questions. Operator, can you please open the lines?

[Operator Instructions] Our first question comes from Steph Wissink with Jefferies.

We just would like to learn a little bit more about the process of vetting the CEO candidates, how you decided on this specific individual? And then what you anticipate would be the communication around any changes in strategy or plan over the course of the next 6 to 12 months?

The vetting process was very long. It was very extensive. It was very thorough and went through the Board, full Board approval, many interviews. It was very lengthy and very long. That's what I can tell you. And the nice thing is that there was no rush to do it. And we just felt that this was the right time in terms of putting together what we believe to be the optimal org design for the long-term to unlock what we believe to be tremendous horsepower in the company and expand and diversify and grow the company. So we took our time with the search. And Max is a person with incredible judgment, a long tenure in consumer packaged goods, great experience working for some of the best companies in the business, especially with his long tenure at Procter & Gamble. Started out his career as an engineer, which is always very positive for our business because there's a lot of engineering in the toy aspect of our business. Understands supply chain management very well. Understands marketing, he's an incredible marketer. And most important, really had a talent and a gift with people. And so for us, when you're managing a company now with 2,000 people around the world, the ability to unlock the potential and the talent within each individual, we believe Max has that gift and has that ability to bring that to the fore for the company. And in terms of the overall strategy, our strategy is set in place. We spent a lot of time working on it over the years, and especially in the last couple of years, really harnessing with these 3 creative centers, how our company should [ op ] and be organized going forward. And so our strategy is not changing. We're just optimizing our org design to actually drive and get more horsepower into the company.

That's great. And Mark, just really quickly as a follow-up to that, any -- should we assume any restructuring of the company? Or is it purely just a realignment?

Steph, no restructuring. This is purely just an organizational design evolution. So there won't be any impact on the financials.

Our next question comes from Brian Morrison with TD Securities.

I think you've touched on a couple of these points, Ronnen, but maybe you can just go a bit deeper on why now from a timing perspective? And then just talk about how your and Anton's engagement in the company change at all? Or if it's more just a redirection of your time and resources?

Yes. I think it's -- I think I would say it like this. From why now, there is no rhyme or reason to why December. We took a long time to do the search, and it just happened to all come together at this juncture in time. But I'll say that for the future of a company of this size, the co-CEO model is not the ideal model. The best model is to have one CEO for better alignment, for clear direction, implementation on day-to-day strategy, driving results. So we felt that given where the company is and its station and its life, being around for close to 27 years, it is the right time and place for there to be a one-CEO model for the company. And to have a CEO specifically like Max, has -- when we were doing the search, to find someone like Max who has been -- worked with other founders before, was an important part of the mix, someone that has the ability to amplify the internal part of the business, while providing opportunity for Anton and I to play an external role in the business especially around mergers and acquisitions, which we believe is going to be a very important part to drive growth. So it really gives us the ability to spend time in those areas. And then, of course, Ben Varadi, who is going to stay on as Chief Creative Officer and continue to actually drive creative for the 3 creative centers. But it's a combination, Brian, of maximizing our abilities to be outwards-focused for the business and then having a person come in and be inwards-focused. And so when you have those things together side by side, we think it's very complementary to where the company is at this station.

Okay. And second question, Ronnen, historically you've operated with the 3 pillars of toys, entertainment and digital. Is the creation of the 3 creative centers, is this a formality and really recognition of Ben's strength? Or is there any directional change here at all?

No, it's a real recognition of Ben's strength. I will say like this is that it is -- it gives me great pleasure to solidify and promote these 3 individuals into these president roles. You have 3 individuals who truly, truly love their craft. Chris loves toys. He's been in our business for over 20 years. He was buying toys at Walmart before that for like 6. He understands the toy industry through and through, every machination of it. He was handling our sales for many, many years. He's worked side by side with Ben and product development. And his -- the ability for him to expand his role and his scope and bring it all together and bring alignment in the toy team, he's practically been operating as president now for 6 months without the formal title. And the -- what he's actually reached is incredible internally. And so the same thing with Jen. Her love of storytelling, being in the industry for over 20 years, 12 years at Spin Master. She's an incredible storyteller. She's incredible in creating characters. And that part of the business is growing, and it's significant. It's at scale now. So to have a president to really continue and shepherd that growth. And the same thing with Fred Loving. He's incredible. I will be very -- working very closely with Fred. He's still going to report actually into me, which is one nuance to the org design because it's one of the newest parts of our business and still going to need a lot of focus and attention, and there's a lot of growth strategy there. But I think that promotion -- these promotions and creating the president roles is again, another optimization of the org design, and a real recognition of what's possible and what people could achieve at Spin Master.

Our next question comes from the line of Saba Khan with RBC Capital Markets.

Ronnen, you touched a little bit on it earlier, but just some commentary on the M&A, kind of the outlook and thought process behind sort of managing that process. So it's been a bit of a focus for investors in terms of -- and it's always been on the plate for Spin Master. So how are you thinking about maybe that strategy going forward? And maybe just the thought process behind getting a bit more involved there as you indicated?

Yes. Well traditionally, most of our M&A activities take place in the Toy part of the business. And now we really want to expand it out to Entertainment and to the Digital Games area. So we have a much larger universe of which to actually do the M&A activity. And it's going to need some serious focus, time and attention from myself and from Anton to really identify and pursue and actually execute on the various different acquisitions. But we believe that the universe is very large. We've never made any acquisitions in the entertainment area, and that's going to be a focus for us. Things are changing very, very quickly in terms of how content is being created. Not only how content is being created, but how content is actually being distributed and being seen by kids all around the world. And so we want to make sure that we're on the forefront of that. We're not being reactive. We're much on the forefront. And as a result being on the forefront, we're able to make investments earlier and buy them at better prices as a result of being earlier. So we really want to -- you'll see a lot more, what I call acquisitions that are future thinking, planting seeds. Similar to what we did with Toca Boca and Sago Mini, we bought things that really start to bear fruits 3 or 4 or 5 years later, but having a lot more of those in and around the business to complement the overall company. So it's going to take a lot of work, and we're very excited to actually do it. And it plays to my strengths and it plays to Anton's strengths. And the ability now for the company for us to make calls and get introduced to companies. The company is at a certain station where it's got great reputation and people are wanting to join the Spin Master organization because of everything that we've done. So it's the right time, Saba.

And I guess just on the comment around the amount of opportunities you indicated, and obviously you guys are more focused on it. But if you look at your pipeline, do you find that it's a bit more diversified pipeline now than it might have been a year ago in terms of -- across the 3 silos versus just toys.

Sorry, can you repeat the question?

Yes, in terms of the available opportunities out there for potential acquisitions, are you finding that the number of opportunities across entertainment and gaming has also increased over the recent years? Or is it just you're more focused on that area now versus toys previously?

I think it's a combination of both. I think the toy area is still the same. But I do believe that there is more activity in entertainment and more activity in gaming than there was in the past. Plus we weren't as focused on it as we are going to be going into the future.

[Operator Instructions] Our next question comes from Adam Shine with National Bank Financial.

Most of the questions were already asked in regards to the management changes. I guess last in the queue, just curious, do you want to touch at all on how the Q4 has been going? I know there'll be more of that to come in the new year. But just your comfort level on the backdrop and how things are evolving?

Yes, Adam, I don't think we want to get into any commentary on Q4 at this point. We'll just keep it focused on the leadership development that we've had. So...

Our next question comes from Gerrick Johnson with BMO Capital Markets.

So does Max get a seat on the Board? That's my first question. I have several follow-ups after that.

He does get a seat on the Board, Gerri.

He does. Okay. Okay. And you mentioned that Fred Loving reports to you. So then do you report to Max? How does that work?

No. Fred will have a dotted line going into Max, and I do not report into Max.

Okay. Does Anton remain Chairman of the Board?

Anton will remain Chairman of the Board till the May Board meeting. And then we're going to alternate, and I will take over the chair for the next following 3 years.

Okay. And how will Max be compensated? And will he be relocating? I assume he's in Wisconsin right now?

That's a great question. He's relocating. He is moving to Canada. That was part of the understanding, the deal. And so he will relocate. What was the other part of your question?

Compensation.

What specifically would you like to know about his compensation?

Well, I mean, well, going forward, will his compensation be aligned with the benefit of the shareholders? Will there be -- what will be the guideposts for bonuses? And just how will he be compensated going forward?

Yes. I can just tell you that we did a lot of benchmarking to make sure that Max's compensation is industry standard and aligned with a lot of other CEOs, comparable CEOs for that position. Mark, do you want to add anything?

No. I think that was it, Ronnen. I think Gerri, just take comfort that he was benchmarked and it's in line with Canadian CEO compensation very much so.

Okay. I might be unfamiliar with how it works in Canada being domiciled here in the U.S. But there would normally be a filing which would show the employment agreement and how he'd be compensated. So I don't know if we get a chance to see something like that. But then my last question, as you said strategy is not changing. But is that door closed? Could there be changes come April? Could there be a new strategic stream -- sorry, could there be a new strategic framework? Or is that door closed?

No, not at all. Not at all.

Ronnen, just to add to Gerrick's point earlier. Gerrick, there will be a filing. Won't be right now, but as part of our management circular, all the named executive officers, compensations, levels and structure is fully described in that management circular, and that will be happening in due course. So you will get an opportunity to understand the nature of how it works.

Our next question comes from Richard Tattersall with Heathbridge Capital.

With the promotion to 3 people as Presidents, how do you avoid the sort of siloing? Because one of the talks was sort of the cross-fertilization between the different groups as they overlap. So how do you avoid siloing and distinctions and working together, et cetera?

Yes. Well, first of all, collaboration is deep within our culture. And so the ability for people to collaborate is deep, and it's something we talk about all the time in our business. And just because there's a focus on the 3 creative centers doesn't mean -- if anything, it's an opportunity to be less siloed in a sense, because there is crossover and there is overlap between the departments. And the departments actually work very closely together. So if you look at PAW Patrol, we make the toys for the television show in Bakugan. We make the show for the toys. There's crossover that you guys will see in the future with entertainment and the digital gaming area of the business. So there's so much cross-fertilization that it's not like these 3 creative centers are working in vacuums. They're actually working together where it actually makes sense, and that creates a lot of stickiness between the groups. And there's also opportunities for people within the different groups to move over. If you work in toy, you can go into entertainment, entertainment into toy. And so there is deep relationships within the groups. And also the people that run the group, especially Jen and Chris, they've worked together for over 12 years. They know each other really well. Fredrik is new, but his personality is one of collaboration. So we look for that and the culture of the people that are leading those groups. We would never have anybody that would lead one of those groups that would be not collaborative in nature because that's really where we'd be able -- where we're able to amplify and do things that make our company special. So we would never want that to be siloed in any respect.

Ronnen, if I could just add to that, we were at pains to call the businesses creative centers and not divisions for that very reason. And so as Ronnen described, they're highly interactive and complementary to each other. Okay. Operator, are there any more questions at this point?

There are no further questions in queue at this time.

Okay. Well, thank you, everybody, for joining on short notice. It's much appreciated. And we look forward to talking to you again in March, on March 4 with our final year-end results for 2020. Thank you very much.

This concludes today's conference call. You may now disconnect.