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

Good morning, ladies and gentlemen. Welcome to the Spin Master Third Quarter 2026 Results Conference Call. [Operator Instructions] This call is being recorded today, Thursday, October 29, 2026. I would now like to turn the conference over to Tim Foran, VP, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining our call. With me here today are our CEO, Christina Miller; and our CFO, Jonathan Roiter. For your convenience, the press release, MD&A and consolidated financial statements 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 and any other future events or developments. Forward-looking statements are based on currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there could be no assurance that such assumptions will prove to be correct, and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult cautionary statements regarding forward-looking information in our earnings release dated October 29, 2026. Except as may be required by law, Spin Master disclaims any intention to update or revise any forward-looking statements whether because of new information, future events or otherwise. Please note that Spin Master reports in U.S. dollars and all dollar amounts today are expressed in U.S. currency unless otherwise noted. Also, unless otherwise noted, all percentage growth rates refer to the periods ending September 30, 2026, relative to the same period in 2025. Also, all industry data that we reference related to Toys is from Circana, LLC Retail Tracking Service and relates to data from our G11 markets, which are specified in our Q3 2026 supplementary presentation, which is available on our investors website. I would now like to turn the conference call over to Christina.

Thank you, Tim, and good morning to everyone who is joining us for our third quarter call. Our results demonstrate steady progress against our 2026 strategic priorities, and we again delivered on our stated financial expectations for the quarter. On a year-to-date basis, revenue is stable and adjusted EBITDA is up 7%, giving us confidence to reiterate guidance for the full year, which Jonathan will cover. Looking at the quarter specifically, both revenue and adjusted EBITDA were stable, driven by double-digit growth across core brands, PAW Patrol, Melissa & Doug and Toca Boca World. Within Toy, we recorded growth in our owned brands led by a 26% increase in PAW Patrol, 10% in Melissa & Doug and from new products and existing brands. Within Digital Games, Toca Boca World revenue increased 13% and Piknik revenue grew 6%, driven by an increased player base for both, a direct result of our investment in improving the player experience and expanding partnerships with key global brands. Finally, revenue in our entertainment center increased by $20 million, the result of distribution revenue we received upon delivery of the PAW Patrol: The Dino Movie. The movie has been a success. It received the highest critical acclaim of the 3 movies to date, delighted global audiences and increased the brand's relevance and franchise strength. I'm proud of the collaboration and execution around the movie across our entire company and with our partners at Paramount Skydance. By fully aligning our combined creative centers, we have engaged new and existing audiences and extended the movie momentum across the PAW Patrol ecosystem. This includes increasing viewership of our content universe, monetizing our PAW Patrol digital apps, activating the brand across consumer products, music and social platforms and driving toy sales. The latter achievement resulted in us ranking #1 in infant, toddler and preschool in this quarter. Building on the positive momentum, this week, we announced the green light of our fourth movie to be released in association with Nickelodeon Movies and distributed by Paramount, slated for 2029. The first 3 movies have instantly become family favorites, grossing the combined $0.5 billion in box office revenue. PAW Patrol's success is a great example of building and scaling franchise value across categories and platforms to provide multiple touch points for our fans. We are starting to see the benefits of this approach in other brands in our portfolio, including Melissa & Doug and Toca Boca. We delivered healthy sales growth for Melissa & Doug in the third quarter. The brand benefited from broader distribution in the U.S. and internationally, marketing innovation in core categories and expansion into new areas of play, including play sets with our new Cheery Lane launch. We are also building Melissa & Doug into a holistic family brand centered around its positioning as a leader in purposeful play. Like our current collaboration with Van Leeuwen, we are building a pipeline of partnerships and out-licensing opportunities that will lead to other toy collaborations and retail experiences, but also new categories, including publishing, apparel and music. Earlier this month, we began expansion of M&D outside the toy aisle with the launch of a line of branded books and partnerships with Penguin Random House. In the third quarter, we saw meaningful results of our strategy to fully realize the potential of Toca Boca by driving reach through a digital to physical loop that bridge the real-world and virtual interactions inside and outside the game. We expanded the brand to connect with audiences in new locations and increased social media and fan engagement. This successfully drove players and revenue back into Toca Boca World. It also amplified the brand's industry position as a leader in tween culture. Our Music Month partnership with artists like Olivia Rodrigo and TWICE broadened our reach and elevated our brand with this demographic. Our Toca Boca by MINISO partnership generated strong fan interest, record level of user-generated content and strong in-game engagement through a physical and digital crossover with exclusive merchandise in more than 400 stores as well as in-game gifts. And with Adidas, we established a first-of-its-kind lifestyle partnership with in-game style packs and in-store activations. But behind the scenes, we supported this engagement strategy with investments in content quality and technical stability to reduce friction for players. As a result, the game achieved multiyear highs in player engagement and sentiment. Moving into Q4, we are aiming to convert this engagement into increased monetization through more content drops, merchandising and improving live services. Beyond 2026, Toca Boca is one of our brands that we can scale by expanding into other categories, including content and toys. So we are excited about the momentum of our core brands. In toys, PAW Patrol Dino theme continues to resonate with fans and retailers. In digital games, we are excited about Toca Boca's new collab with KPop Demon Hunters that will bring the best of the movie's music, fashion and characters to life. And in entertainment, PAW Patrol: The Dino Movie has moved to streaming, where it has been in the top 10 across digital storefronts, both domestically and globally. We are also making progress on our long-term growth strategy, including expanding into high-growth categories. Our new strategic trading card game, Hellbreak has added more studio partners, and we will begin selling the first set of cards this quarter with the game going live to consumers in January. And with the close of the Hapiko acquisition, we head into the holiday season with one of the industry's leading new products, Stickerbox, a modern creative tool that brings children's ideas to life. Stickerbox has already seen strong results, engagement and momentum. It is on multiple top toy lists, has been nominated for awards and made TIME Magazine's Best Inventions of 2026, an honor it shares with our Rubik's Tetris Cube. Stickerbox has also sold out more than 3 times since we acquired it. Next year, we will expand distribution into wider channels and markets as part of our growth strategy. This will significantly increase the installed base across the world, which in turn drives reoccurring revenue. We also plan to evolve the offering with our IP, license partnerships and new creative play experiences. In short, we see a much bigger vision for Hapiko as a platform for modern creativity that will help us define the future of play. With that, I turn it over to Jonathan.

Thank you, Christina, and good morning, everyone. As Christina noted, our financial results in Q3 were in line with the expectations we outlined. Consolidated revenues were stable with underlying growth in our core brands offset by the impact of the timing issues noted on our last call. Specifically in toy, there was a pull forward of approximately $40 million in gross product sales from Q3 into Q2. And in Digital Games, we generated approximately $12 million in Q3 last year related to the licensing of certain games to partners, the accounting for which was required to be accrued upon delivery as opposed to across the length of the contract. Gross profit before depreciation and amortization was stable on a dollar and margin basis as the anticipated decline in toy and digital game margins was offset by higher entertainment revenues. Adjusted EBITDA was also stable on a dollar margin basis as operating expenses below gross profit remained flat because our guided increase in marketing expenses was offset by lower selling royalties, while higher product development costs related to internal growth initiatives was offset by lower admin costs. Both gross margin after D&A and adjusted operating margins decreased by about 200 basis points or in dollar terms around $15 million, due primarily to a $13 million increase in amortization of entertainment content driven by delivery of the PAW Patrol movie. IFRS operating income declined by a further $24 million related to noncash impairments. These reflected the continued review of our portfolio since we joined as we set the foundation for sustained, stronger profitable growth in the medium term by being more disciplined in our execution. Over the past 12 months or so, we have simplified our operating model, bringing greater focus on growth areas. In addition to organizing our digital investments across 2 core studios, Toca Boca and Sago Mini and 3 main revenue streams, including Toca Boca World, Piknik and strategic app distribution partnerships. We have wound down some entertainment projects in order to focus, as Christina noted on, content investments within our existing scaled brands. We've also accelerated manufacturing diversification and implemented cost reduction measures to create a more resilient and flexible platform. These savings have allowed us to reinvest in our long-term growth initiatives, such as advanced technology, both organically and through the recent acquisition of Hapiko as well as our upcoming expansion into high-growth categories such as strategic trading cards and collectibles. We've also been able to maintain stable marketing expenditures in 2026 by leaning into and enhancing our organic and social marketing capabilities and delivery. And lastly, we are in a transition period between some licenses we have exited and a number of new licenses we have entered into, many of which have been announced this year and still more to come. Our operating discipline has been reflected in our cash flows. Operating cash flow in the third quarter increased by $40 million. On a year-to-date basis, we have more than doubled operating cash flow through operational execution and working capital management improvements. This has provided us with resources to reinvest in multiple organic and inorganic growth initiatives across the business while returning capital to shareholders through our dividend and active share buyback program, all the while repaying debt. We ended the quarter with approximately 0.8 turns of net leverage or 0.3 turns when you exclude leases, both approximately 0.4 turns less than last year. Now turning to our individual creative centers performance. Toy revenues declined by $19 million due to the as noted pull forward of orders into the second quarter. On a year-to-date basis, both toy GPS and revenues are down about 1%, generally in line with POS as growth in PAW Patrol, Monster Jam and other products has been offset by lapping the How to Train Your Dragon and Gabby's Dollhouse movies last year as well as exiting certain licenses. These headwinds will continue in the fourth quarter but roll off in 2027. From a geographical perspective, positively GPS in the U.S., our largest market, increased 4% in the quarter and 4% year-to-date. Europe has offset this growth, however, as it has relatively higher exposure to Gabby's and significantly less exposure to Monster Jam and GUND, 2 important growth brands for us. Combined with Melissa & Doug, we see this underpenetration in Europe as a significant medium-term tailwind opportunity. Lastly, within toy, adjusted operating income and IFRS operating income decreased by $9 million as a decrease in gross profit was partly offset by lower operating expenses. Entertainment revenues increased by $20 million, driven by revenues received upon delivery of the PAW Patrol: The Dino Movie. Adjusted operating income increased by $11 million as the increase in revenues was partially offset by higher amortization. IFRS operating income declined slightly due to an impairment expense. Digital Games revenue declined modestly by $3 million and adjusted operating income decreased by $12 million due primarily to the previously noted large strategic distribution partnership revenues recorded last year. IFRS operating income was further impacted by an impairment expense. Now turning to our outlook. We reiterated our 2026 guidance today for stable to low single-digit growth in revenues and mid- to upper single-digit growth in adjusted EBITDA. For the fourth quarter specifically, we are targeting modest revenue and similar adjusted EBITDA growth. However, it is too soon for us to provide specifics on where we expect to land within our full year guidance range as 50% of our POS occurs in the fourth quarter, primarily in the holiday period and a healthy majority of our orders in the fourth quarter are domestic replenishment rather than direct import. With that, operator, please open the line for questions.

[Operator Instructions] First question from Adam Shine with National Bank of Canada.

So Jonathan, I'll just -- hand off from the guidance commentary. I'm not going to push you too much. Obviously, year-to-date results are coming in well, and you certainly beat on the Q3 in terms of Street expectations. Any timing issues worth noting as we go into Q4? Any slippage of costs from Q3 into Q4, for example? And in regards to the comment on replenishment, there's no doubt that could offer some upside subject to timing and most of that tends to come in December. Is there any line of sight potentially to any earlier replenishment that you might be getting signals from in terms of retailers? And then I'll follow up with 1 or 2 others.

Very kind that you're not going to push me. In terms of what can I say? So we did call out, and please do remember that last year in Digital Games, there was the partnership revenue that won't materialize again this year. So that is kind of one-off. You did ask about that. And look, as we head into the fourth quarter, we are certainly entering a quarter that is -- when I switch over to the DOM, to the toy side, certainly more of a DOM focused quarter, certainly more replenishment, as you called out. And ultimately, how consumers show up in the back half of the quarter will determine the amount of replenishments that we do, both within Melissa & Doug our legacy Spin business. And so with 50% of our POS still to come, if you will, there's a lot of baseball left, and it's really hard to be able to pinpoint down how that last quarter will shape up.

Okay. I'll pivot, Christina, to you on Hapiko. There's no doubt there's a lot of excitement in terms of what you're going to do with this brand going into next year. Is there any sort of potential different seasonality worth noting? Or is this going to be a similar heavily weighted skew to the second half of the year, maybe not necessarily related to usual toy seasonality, but maybe just in terms of how momentum and efforts around the brand that you'll deploy will sort of scale into the back half of this year. Anything around the growth potential and timing would be appreciated.

Good to hear from you this morning. You're asking about Hapiko, right, just to clarify.

Yes.

Great. Yes. I think if you're asking when we'll start to widen our distribution or get to sort of more mass channels, it will be back half of next year. I don't believe that it is necessarily seasonality related, if you mean, like I think the creativity, that category will continue to be an all year-round category. But like a lot of our other products, just the seasonality of the industry tends to be back half weighted. But yes, we will start to ship wider as we get deeper into 2027.

Yes. And Adam, when we talk in late February, we'll give obviously more details on our guidance, and we'll kind of clarify when we think we'll be shipping to the retailers.

Next question is from Brian Morrison with TD Cowen.

The question is when I look at the growth drivers following the PAW movie, can you just touch upon the tail from PAW or the anticipated change next year in contribution? And then the key drivers to more than offset that in 2027. I know you mentioned Europe in Hellbreak, Stickerbox, M&D, but I just want to get a level of confidence that we can offset the PAW benefit from this year.

Yes. So thank you for the question. So from a kind of direct benefit, if you will, on the movie, we expect about $25 million of revenue and EBITDA directly associated with the release of the movie this year. And for modeling purposes, I think you probably want assume that, that doesn't reoccur as we head into '27. You are right that if you look at our history from a bottom line perspective and EBITDA perspective, post movie releases, there's been stability or even some declines depending if you strip out M&A. That being said, so EBIT, in some ways, is a better metric post a movie. And then from a top line perspective, there's still a lot of growth drivers that we have next year that can offset the movie. So firstly, beginning with PAW, the PAW toys are doing incredibly well. We think there's long legs with the Dino theme, and we anticipate still being able to sell the product well into next year and consumers still buying well into next year as the movie goes into second window distribution. And then we have a continuation of growth within M&D. GUND continues to grow. Monster Jam as examples. We have Hellbreak, as you know, Supercell. We just talked about Stickerbox. So there's a breadth of products that we have that we're going to be not only continuing to grow year-over-year, but then introduce as we head into 2027.

Okay. And then maybe a follow-up. And then maybe, Christina, can you just talk about like where do we stand now on this potential tariff deal with China and U.S.? Like what is your view? And what are the levers you would pull if it is finalized? Would you let the benefits flow through the bottom line? Or would you invest in price to drive share?

Yes. Tariffs continues to be a very fluid topic and one that full visibility on continues -- we don't necessarily have. Ultimately, when we -- we don't really have any updates more to say because I mean, like you were waiting to see. We think most toys would qualify though, based on what we've heard. But right now, we don't know the timing when it happens. And so it's just all premature to kind of get into. And obviously, when we meet again in February, if we have more information, we'll certainly share that.

And it's about a $30 million tariff headwind this year, correct?

The tariffs that we paid was about -- yes, in that realm.

Next question from Drew McReynolds with RBC.

Maybe just a follow-up on the Stickerbox and Hapiko acquisition. Maybe for you, Christina. Certainly really interesting to kind of combine the physical and digital. And in your opening remarks, you highlighted that. Just wondering whether it's through innovation of yours or potential other tuck-in acquisitions? Like is this what you see as certainly kind of a growing kind of category here for the company?

I definitely think it's a growing category for the industry and an opportunity for us to lead in that category, both from a creative play standpoint and just a future of play standpoint, right? So Hapiko as a complete acquisition, I think will continue to grow their line. And with the proprietary voice operating system that can be used both on products to come as well as products in our portfolio or things we're unaware of yet. So I think it gives us a real sort of leading edge into that space with a great first product out of the gate for the company. We're seeing such success already since we've acquired, it sold out another 3 times. And we just see that momentum and buzz continue to build. They've won -- we won a lot of awards around that. It's a must-have item for this fall and think it has a pretty -- just lots more opportunity as we expand out. So I think from a category of play, from innovation standpoint, in all those cases, yes. And then we have a long history of acquisitions and really being able to both grow those acquisitions as well as integrate them into the company beyond where we started. So I think all of that is possible with Hapiko, and we're super excited about the first item being Stickerbox.

Yes. Fantastic. And just one more on Melissa & Doug, in your opening remarks and obviously, in the release, you talked about the key drivers. Nothing surprising here. This has been a focus for you, and you talked about these key drivers before, whether it's shelf space or your own innovation or global expansion. Is there one driver kind of across the flywheel here that's kind of returning it to growth particularly? And then I'm assuming you have confidence in sustaining that growth in Q4 and into 2027, but just maybe talk to the outlook here.