Operational Initiatives Show Progress Amidst
Continued Cost Pressures from 2019
TORONTO, May 6, 2020 /CNW/ - Spin Master Corp. ("Spin
Master" or the "Company") (TSX: TOY; www.spinmaster.com), a leading
global children's entertainment company, today announced its
financial results for the first quarter ended March 31, 2020.
The Company's Management's Discussion and Analysis ("MD&A") for
the three months ended March 31, 2020 is available on SEDAR
(www.sedar.com) and posted on the Company's web site at
www.spinmaster.com/financial-info.php.
"Q1 2020 was a challenging quarter for Spin Master, as we dealt
with both the evolving COVID-19 situation and the carryover
effects from the operational challenges we experienced in the
second half of 2019. COVID-19 first affected our Asian supply chain
early in Q1 and we worked extremely hard to stabilize it by the end
of the quarter. As the virus spread to customer markets, we adapted
quickly and implemented measures to minimize the potential impact
to our people and to Spin Master as a whole," said Ronnen
Harary, Spin Master's Co-Chief Executive Officer. "Our POS in
the quarter was up significantly over last year, particularly for
categories such as games, puzzles, activities and arts and crafts
as well as demand for our entertainment content and digital gaming,
as consumers looked to occupy their children whilst at home. We
have made significant progress in resolving the operational
challenges we faced in 2019 and are well positioned for the second
half of 2020. We are focused on keeping our team safe and
productive, keeping costs down and managing our cash flow prudently
whilst continuing to invest for the long term. We believe in the
underlying resilience of the toy industry and our diversified
portfolio of brands, entertainment properties and digital toys. Our
commitment to our strategy and our strong financial base,
positions us for long term success."
"Q1 profitability was significantly affected by the carryover of
operational challenges from the second half of 2019,"
said Mark Segal, Spin Master's Chief Financial Officer.
"During the quarter we undertook intensive initiatives to address
these issues. We have made meaningful progress through a
combination of structural supply chain changes, improved
cross-functional collaboration and cost management initiatives that
we expect will yield improved operating efficiencies as we enter
our seasonal sales peak in the second half of 2020. Our liquidity
position remains strong and we are operating from a solid financial
position with substantial liquidity available. During
the quarter we drew down $350.0
million on our committed credit facility and our total cash
position increased to $424.0 million at the end of the
quarter. As the year progresses, we will continue
to focus on strengthening our core in order to build and maintain
an efficient, high margin and sustainable global platform for long
term growth."
Q1 2020 Financial Highlights as compared to the same period
in 2019
- Revenue of US$227.3 million
decreased 4.9% from US$239.0 million.
In Constant Currency1 terms, revenue decreased by
1.4%.
- Gross Product Sales1 increased 0.7% to US$242.3 million from US$240.5 million. In Constant
Currency1 terms, Gross Product Sales1
increased 4.0%. The increase was driven primarily by the
Activities, Games, Puzzles & Plush and Boys Action &
Construction business segments.
- Gross Product Sales1 increased 13.6% in Europe, 2.2% in North America and decreased 29.4% in Rest of
World. International Gross Product Sales1 on a combined
basis were 40.3% of total Gross Product Sales1, compared
with 41.2%.
- Other revenue decreased by 24.2% to US$21.9 million, driven by lower royalty income
from products marketed by third parties using Spin Master's owned
intellectual property and television distribution revenue, offset
in part by app revenue from Toca
Boca and Sago Mini.
- Sales Allowances1 increased by US$6.5 million to US$36.9
million, primarily driven by markdowns, non-compliance
charges, and growth in Europe
which has higher Sales Allowance rates. As a percentage of Gross
Product Sales1, Sales Allowances1 increased
to 15.2% from 12.6%.
- Gross profit was US$90.8 million,
representing 39.9% of revenue, compared to US$107.7 million or 45.1% of revenue. The
decrease in gross margin was primarily due to higher freight,
reconfiguration expenses, inventory provisions, Sales Allowances
and lower other revenue, partially offset by favourable changes in
product mix.
- Selling, general and administrative expenses
(SG&A)2 increased 21.9%. As a percentage of revenue
SG&A2 expenses were 64.5%, compared to 50.3%. The
increase was driven by higher distribution, marketing and
administrative costs. Distribution costs increased due to storage
costs from higher domestic inventory levels carried forward from
2019, outbound transportation expenses and a shift towards domestic
sales from direct import sales. Marketing costs increased primarily
as a result of media, trade show and in-store merchandising
initiatives. The increase in administrative costs relates to
restructuring expenses from senior leadership changes announced in
February 2020.
- Net loss was US$26.7 million or
loss per share of US$0.26, compared
to net loss of US$20.9 million or
loss per share of US$0.21.
- Adjusted Net Loss1 was US$46.8 million or loss per share of US$0.45, compared to Adjusted Net
Loss1 of US$12.5 million
or loss per share of US$0.12.
- Adjusted EBITDA1 was negative US$32.3 million compared to US$7.0 million.
- Free Cash Flow1 was negative US$74.9 million compared to negative US$39.9 million.
- As at March 31, 2020, Spin Master
borrowed US$350.0 million under its
Credit Facility. The Company had cash on hand of US$424.0 million at the end of the quarter.
Q1 2020 Gross
Product Sales1 by Business Segment
(US$ millions)
|
|
Q1
2020
|
Q1
2019
|
$
Change
|
%
Change
|
Activities, Games
& Puzzles and Plush
|
$78.1
|
$63.0
|
15.1
|
24.0
|
%
|
Remote Control and
Interactive Characters
|
$20.2
|
$31.1
|
(10.9)
|
(35.0)
|
%
|
Boys Action and
Construction
|
$59.1
|
$49.4
|
9.7
|
19.6
|
%
|
Pre-School and
Girls
|
$56.5
|
$63.4
|
(6.9)
|
(10.9)
|
%
|
Outdoor
|
$28.4
|
$33.6
|
(5.2)
|
(15.5)
|
%
|
Gross Product
Sales1
|
$242.3
|
$240.5
|
1.8
|
0.7
|
%
|
Sales
Allowances1
|
$(36.9)
|
$(30.4)
|
(6.5)
|
21.4
|
%
|
Total Net
Sales1
|
$205.4
|
$210.1
|
(4.7)
|
(2.2)
|
%
|
Other
Revenue
|
$21.9
|
$28.9
|
(7.0)
|
(24.2)
|
%
|
Revenue
|
$227.3
|
$239.0
|
(11.7)
|
(4.9)
|
%
|
Q1 2020 Business Segment Gross Product Sales1 as
compared to the same period in 2019
Gross Product Sales1 were US$242.3 million, an increase of US$1.8 million or 0.7%, with an unfavourable
foreign exchange impact of $7.9
million or 3.3%. Excluding the impact of foreign
exchange, Gross Product Sales increased by US$9.7 million or 4.0%. The increase was
primarily driven by Activities, Games & Puzzles and Plush, and
Boys Action and Construction, offset by declines in other business
segments.
Gross Product Sales1 in Activities, Games
& Puzzles and Plush increased by US$15.1 million or 24.0% to US$78.1 million,
driven primarily by Kinetic Sand and Games &
Puzzles, partially offset by Gund.
Gross Product Sales1 in Remote Control and
Interactive Characters decreased by US$10.9
million or 35.0% to US$20.2
million, primarily due to Hatchimals, partially
offset by PAW Patrol RC.
Gross Product Sales1 in Boys Action and Construction
increased by US$9.7 million or 19.6%
to US$59.1 million. The increase was
primarily driven by sales of DC licensed
products, Bakugan and Tech Deck, partially
offset by DreamWorks Dragons.
Gross Product Sales1 in Pre‑School and Girls
decreased by US$6.9 million or 10.9%
to US$56.5 million. The
decrease was primarily driven by PAW Patrol, Twisty
Petz and Off the Hook, partially offset by higher sales
of Candylocks.
Gross Product Sales1 in Outdoor decreased by
US$5.2 million or 15.5% to
US$28.4 million.
Outlook
Spin Master continues to focus on driving long-term growth. Its
principle strategies include:
- Innovate using our global internal and external research and
development network;
- Developing evergreen global entertainment and digital toys
properties;
- Increasing international sales in developed and emerging
markets; and
- Leveraging the Company's global platform through strategic
acquisitions.
On March 19, 2020 Spin Master
withdrew its 2020 outlook, which was previously provided
on March 4, 2020. Given the uncertain environment associated
with COVID-19, the company has elected to suspend providing
guidance until circumstances warrant.
Conference call
Ronnen Harary, Chairman and
Co-Chief Executive Officer and Mark
Segal, Executive Vice President and Chief Financial Officer
will host a conference call to discuss these results on
Thursday, May 7 2020 at 9:30
a.m. (ET).
The call-in numbers for participants are (647) 427-7450 or (888)
231-8191. A live webcast of the call will be accessible via Spin
Master's website at: http://www.spinmaster.com/events.php.
Following the call, both an audio recording and transcript of the
call will be archived on the same website page.
About Spin Master
Spin Master (TSX:TOY; www.spinmaster.com) is a leading global
children's entertainment company that creates, designs,
manufactures, licenses and markets a diversified portfolio of
innovative toys, games, products and entertainment properties. Spin
Master is best known for award-winning brands including Zoomer®,
Bakugan®, Erector® by Meccano®, Hatchimals®, Air Hogs® and PAW
Patrol®. Since 2000, Spin Master has received 110 TIA Toy of The
Year (TOTY) nominations with 30 wins across a variety of product
categories, including 13 TOTY nominations for Innovative Toy of the
Year. To date, Spin Master has produced eleven television
series, including the relaunched Bakugan: Battle Planet and current
hit PAW Patrol, which is broadcast in over 160 countries and
territories globally. Spin Master employs over 1,800 people
in countries around the world including Canada, United
States, Mexico,
France, Italy, United
Kingdom, Russia,
Slovakia, Poland, Germany, Sweden, the
Netherlands, China,
Hong Kong, Japan, Vietnam and Australia.
Non-IFRS Financial Measures
In addition to using financial measures prescribed under IFRS,
references are made in this Press Release to "EBITDA", "Adjusted
EBITDA", "Adjusted EBITDA Margin", "Adjusted Net (Loss) Income",
"Free Cash Flow", "Gross Product Sales", "Constant Currency",
"Sales Allowances" and "Total Net Sales" which are non-IFRS
financial measures. Non-IFRS financial measures do not have any
standardized meaning prescribed by IFRS and are therefore unlikely
to be comparable to similar measures presented by other
issuers.
EBITDA is calculated as net (loss) earnings before finance
costs, income tax expense and depreciation and amortization.
Adjusted EBITDA is calculated as EBITDA excluding adjustments-
items that do not necessarily reflect the Company's underlying
financial performance. These adjustments include restructuring
expenses, foreign exchange gains or losses, and equity-settled
share based compensation expenses. Adjusted EBITDA is used by
management as a measure of the Company's profitability.
Adjusted Net (Loss) Income is calculated as net (loss) income
excluding adjustments, as defined above, in addition to a one-time
income tax recovery and the corresponding impact these items have
on income tax expense. Management uses Adjusted Net (Loss) Income
to measure the underlying financial performance of the business on
a consistent basis over time.
Constant Currency represents Revenue and Gross Product Sales
results that are presented excluding the impact from changes in
foreign currency exchange rates. The current period and prior
period results for entities reporting in currencies other than the
US dollar are translated using consistent exchange rates, rather
than using the actual exchange rate in effect during the respective
periods. The difference between the current period and prior period
results using the consistent exchange rates reflects the changes in
the underlying performance results, excluding the impact from
fluctuations in foreign currency exchange rates.
Free Cash Flow is calculated as cash flows provided by/used in
operating activities before changes in net working capital and
after cash flows used in investing activities before cash used in
license, brand and business acquisitions. Management uses the Free
Cash Flow metric to analyze the cash flow being generated by the
Company's business.
Gross Product Sales represent sales of the Company's products to
customers, excluding the impact of Sales Allowances. As Sales
Allowances are generally not associated with individual products,
the Company uses changes in Gross Product Sales to provide
meaningful comparisons across product category and geographical
segment results to highlight trends in Spin Master's business. For
a reconciliation of Gross Product Sales to Revenue, please see the
revenue table "Q1 2020 Gross Product Sales by Business Segment" in
this Press Release.
Sales Allowances represent marketing and sales credits requested
by customers relating to factors such as cooperative advertising,
contractual discounts, negotiated discounts, customer audits,
volume rebates, defective products and costs incurred by customers
to sell the Company's products and are recorded as a reduction to
Gross Product Sales. Management uses Sales Allowances to identify
and compare the cost of doing business with individual retailers,
different geographic markets and amongst various distribution
channels.
Total Net Sales represents Gross Product Sales less Sales
Allowances. Management uses Total Net Sales to evaluate the
Company's total net revenue generating capacity compared to
internal targets and as a measure of Company performance.
Management believes the non-IFRS measures defined above are
important supplemental measures of operating performance and
highlight trends in the core business that may not otherwise be
apparent when relying solely on IFRS financial measures. Management
believes that these measures allow for assessment of the Company's
operating performance and financial condition on a basis that is
more consistent and comparable between reporting periods. The
Company believes that lenders, securities analysts, investors and
other interested parties frequently use these non-IFRS financial
measures in the evaluation of issuers.
|
|
Three Months Ended
Mar 31
|
(All amounts in
US$ millions)
|
2020
|
2019
|
$
Change
|
%
Change
|
|
Reconciliation of
Non-IFRS Financial Measures
|
|
|
|
|
|
Net loss
|
(26.7)
|
(20.9)
|
(5.8)
|
27.8
|
%
|
|
Income tax
recovery
|
(48.2)
|
(7.6)
|
(40.6)
|
534.2
|
%
|
|
Finance
costs
|
2.8
|
2.7
|
0.1
|
3.7
|
%
|
|
Depreciation and
amortization
|
23.3
|
21.4
|
1.9
|
8.9
|
%
|
EBITDA1
|
(48.8)
|
(4.4)
|
(44.4)
|
1,009.1
|
%
|
Adjustments:
|
|
|
|
|
|
Restructuring
expense2
|
4.4
|
0.7
|
3.7
|
528.6
|
%
|
|
Foreign exchange
loss3
|
8.5
|
6.3
|
2.2
|
34.9
|
%
|
|
Share based
compensation4
|
3.6
|
4.4
|
(0.8)
|
(18.2)
|
%
|
Adjusted
EBITDA1
|
(32.3)
|
7.0
|
(39.3)
|
(561.4)
|
%
|
|
Income tax
recovery
|
(48.2)
|
(7.6)
|
(40.6)
|
534.2
|
%
|
|
Finance
costs
|
2.8
|
2.7
|
0.1
|
3.7
|
%
|
|
Depreciation and
amortization
|
23.3
|
21.4
|
1.9
|
8.9
|
%
|
|
One-time tax
recovery5
|
33.3
|
—
|
33.3
|
n.m.
|
|
|
Tax effect of
normalization adjustments6
|
3.3
|
3.0
|
0.3
|
10.0
|
%
|
Adjusted Net
Loss1
|
(46.8)
|
(12.5)
|
(34.3)
|
274.4
|
%
|
|
|
|
|
|
|
Cash used in
operating activities
|
(8.8)
|
(6.2)
|
(2.6)
|
41.9
|
%
|
Changes in net
working capital
|
(47.1)
|
(12.1)
|
(35.0)
|
289.3
|
%
|
Cash used in
operating activities before net working capital
changes
|
(55.9)
|
(18.3)
|
(37.6)
|
205.5
|
%
|
Cash used in
investing activities
|
(19.0)
|
(21.6)
|
2.6
|
(12.0)
|
%
|
Free Cash
Flow1
|
(74.9)
|
(39.9)
|
(35.0)
|
87.7
|
%
|
|
|
|
|
|
|
1) See "Non-IFRS
Financial Measures".
|
2) Restructuring
expense primarily relates to personnel related costs. Restructuring
expense in the current period includes costs related to changes in
senior leadership.
|
3) Includes foreign
exchange losses generated by the translation of monetary
assets/liabilities denominated in a currency other than the
functional currency of the applicable entity and losses related to
the Company's hedging programs.
|
4) Related to
expenses associated with subordinate voting shares granted to
equity participants at the time of the IPO, share option expense
and LTIP expense.
|
5) One-time tax
recovery relates to internal transfer of intangible property of
$33.3 million.
|
6) Tax effect of
adjustments (Footnotes 2-4). Adjustments are tax effected at the
effective tax rate of the given period.
|
Forward-Looking Statements
Certain statements, other than statements of historical fact,
contained in this Press Release constitute "forward-looking
information" within the meaning of certain securities laws,
including the Securities Act (Ontario), and are based on expectations,
estimates and projections as of the date on which the statements
are made in this Press Release. The words "plans", "expects",
"projected", "estimated", "forecasts", "anticipates", "indicative",
"intend", "guidance", "outlook", "potential", "prospects", "seek",
"strategy", "targets" or "believes", or variations of such words
and phrases or statements that certain future conditions, actions,
events or results "will", "may", "could", "would", "should",
"might" or "can", or negative versions thereof, "be taken",
"occur", "continue" or "be achieved", and other similar
expressions, identify statements containing forward-looking
information. Statements of forward-looking information in this
Press Release include, without limitation, statements with respect
to: the Company's intentions to issue guidance in the future;
future growth expectations; financial position, cash flows and
financial performance; drivers for such growth; the resolution of
logistics problems; the program to achieve operational
efficiencies; the successful execution of its strategies for
growth; the impacts of the COVID-19 pandemic on the Company;
and the seasonality of financial results and performance.
Forward-looking statements are necessarily based upon
management's perceptions of historical trends, current conditions
and expected future developments, as well as a number of specific
factors and assumptions that, while considered reasonable by
management as of the date on which the statements are made in this
Press Release, are inherently subject to significant business,
economic and competitive uncertainties and contingencies which
could result in the forward-looking statements ultimately being
incorrect. In addition to any factors and assumptions set forth
above in this Press Release, the material factors and assumptions
used to develop the forward-looking information include, but are
not limited to: the ability of factories to manufacture products,
including labour size and allocation, tooling, raw material and
component availability, ability to shift between product mix, and
customer acceptance of delayed delivery dates; that the program
designed to gain operational efficiencies will achieve the desired
results; the expanded use of advanced technology, robotics and
innovation the Company applies to its products will have a level of
success consistent with its past experiences; the Company will
continue to successfully secure broader licenses from third parties
for major entertainment properties consistent with past practices;
the expansion of sales and marketing offices in new markets will
increase the sales of products in that territory; the Company will
be able to successfully identify and integrate strategic
acquisition opportunities; the Company will be able to maintain its
distribution capabilities; the Company will be able to leverage its
global platform to grow sales from acquired brands; the Company
will be able to recognize and capitalize on opportunities earlier
than its competitors; the Company will be able to continue to
build and maintain strong, collaborative relationships; the Company
will maintain its status as a preferred collaborator; the culture
and business structure of the Company will support its growth; the
current business strategies of the Company will continue to be
desirable on an international platform; the Company will be
able to expand its portfolio of owned branded intellectual
property and successfully license it to third parties; use of
advanced technology and robotics in the Company's products will
expand; access of entertainment content on mobile platforms will
expand; fragmentation of the market will continue to create
acquisition opportunities; the Company will be able to maintain its
relationships with its employees, suppliers and retailers; the
Company will continue to attract qualified personnel to support its
development requirements; and the Company's key personnel will
continue to be involved in the Company products and entertainment
properties will be launched as scheduled and that the risk factors
noted in this Press Release, collectively, do not have a material
impact on the Company.
By its nature, forward-looking information is subject to
inherent risks and uncertainties that may be general or specific
and which give rise to the possibility that expectations,
forecasts, predictions, projections or conclusions will not prove
to be accurate, that assumptions may not be correct and that
objectives, strategic goals and priorities will not be achieved.
Known and unknown risk factors, many of which are beyond the
control of the Company, could cause actual results to differ
materially from the forward-looking information in this Press
Release. Such risks and uncertainties include, without limitation,
the magnitude and length of economic disruption as a result of the
COVID-19 pandemic, and the factors discussed in the Company's
disclosure materials, including the Annual MD&A and the
Company's most recent Annual Information Form, filed with the
securities regulatory authorities in Canada and available under the Company's
profile on SEDAR (www.sedar.com) These risk factors are not
intended to represent a complete list of the factors that could
affect the Company and investors are cautioned to consider these
and other factors, uncertainties and potential events carefully and
not to put undue reliance on forward-looking statements.
There can be no assurance that forward-looking statements will
prove to be accurate, as actual results and future events could
differ materially from those anticipated in such statements.
Forward-looking statements are provided for the purpose of
providing information about management's expectations and plans
relating to the future. The Company disclaims any intention or
obligation to update or revise any forward-looking statements
whether as a result of new information, future events or otherwise,
or to explain any material difference between subsequent actual
events and such forward-looking statements, except to the extent
required by applicable law.
|
|
|
1Non-IFRS
Financial Measure. See "Non-IFRS Financial Measures" of this press
release
|
2 SG&A expenses include selling,
marketing, distribution, product development and administrative
expenses.
|
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SOURCE Spin Master Corp.