Spin Master Corp. - Third Quarter 2026 Results - DEFI TECHNOLOGIES INC

Financial Performance:

• Consolidated Q3 revenue was stable, with year-to-date (YTD) revenue flat and adjusted EBITDA up 7% YTD.
• Toy segment revenue declined $19 million due to a $40 million pull-forward of orders into Q2 and lapping movie-related sales from 2025.
• Digital Games revenue declined $3 million, impacted by the recognition of $12 million in licensing revenue in Q3 2025 that did not recur.
• Entertainment revenue increased $20 million driven by the delivery and distribution revenue from Paw Patrol: The Dino Movie.
• Gross profit before D&A remained stable on a dollar basis, while gross margin after D&A and adjusted operating margins both decreased by approximately 200 basis points (approx. $15 million) primarily due to $13 million in entertainment content amortization.
• IFRS operating income declined $24 million YTD due to non-cash portfolio impairments.
• Operating cash flow increased $40 million in Q3; YTD operating cash flow more than doubled.
• Net leverage stood at 0.8 turns (0.3 turns excluding leases) at quarter-end, down 0.4 turns year-over-year.
• Tariff headwinds were estimated at approximately $30 million for the current year.

Guidance and Future Outlook:

• Full-year 2026 guidance reiterated: stable to low single-digit revenue growth and mid-to-upper single-digit adjusted EBITDA growth.
• Q4 2026 outlook targets modest revenue and similar adjusted EBITDA growth, though specific full-year landing points remain uncertain due to the timing of holiday replenishment orders.
• 2027 outlook anticipates the roll-off of Q3/Q4 movie-specific tailwinds ($25M direct revenue/EBITDA impact) but expects offsetting growth from existing brands, new product launches, and the expansion of the HappyCo platform.
• Long-term strategic goals include scaling Toca Boca into new categories, growing the HappyCo "StickerBox" platform, and launching the "Hellbreak" trading card game in January 2027.
• Management expects the "StickerBox" install base to grow significantly in 2027 with wider distribution, driving recurring revenue.

Business Segments and Product Lines:

• Toys: Core owned brands drove double-digit growth; Paw Patrol sales up 26%, Melissa & Doug up 10%. Paw Patrol ranked #1 in infant, toddler, and preschool categories.
• Digital Games: Toca Boca World revenue up 13%; Picnic up 6%. Driven by expanded partnerships (Olivia Rodrigo, Adidas, Miniso) and improved player experience.
• Entertainment: Paw Patrol: The Dino Movie was a commercial success (top 10 on digital storefronts) and has been greenlit for a fourth installment (2029) in partnership with Nickelodeon/Paramount.
• New Products/Strategic Acquisitions: StickerBox (via HappyCo acquisition) has sold out three times; expanding distribution in 2027. Hellbreak trading card game launched pre-orders this quarter for a January 2027 consumer launch.
• Melissa & Doug: Expanded beyond toys into publishing (Penguin Random House books) and aims to become a holistic family brand across apparel and music.

Market and Competitive Landscape:

• Paw Patrol leveraged its franchise strength to achieve #1 rank across key age demographics.
• Toca Boca solidified its position as a leader in tween culture through cross-promotional events (K-Pop Demon Hunters, Miniso, Adidas).
• Geographic performance: U.S. POS up 4% YTD, while Europe lagged due to higher exposure to exiting licenses (e.g., Gabby's Dollhouse) and lower exposure to growth brands like Monster Jam.
• The company views the "digital-to-physical" loop and "creative play" (StickerBox) as key differentiators against competitors.
• Management maintains a dominant position as a "licensee of choice" with deepening partnerships (Universal, Hellbreak studios) despite industry shifts toward segment-specific licensing.

Risks and Challenges:

• Tariffs: Continued volatility in U.S.-China trade relations poses a risk, with $30M impact recorded for the current year; full visibility on 2027 is pending.
• Commodities: Managed via product design adjustments and cost reductions, with cost structures locked in for 2027 based on oil price assumptions from Q2 2026.
• License Transitions: Exiting certain licenses (e.g., Gabby's Dollhouse, How to Train Your Dragon) creates temporary headwinds that will roll off in 2027.
• Digital Impairments: Previous decisions resulted in non-cash impairment expenses in the current quarter, reflecting a portfolio review and focus on profitable growth.
• Seasonality: Heavy reliance on Q4 (50% of POS) creates timing uncertainty for full-year results.

Management Commentary and Tone:

• Management expressed confidence and a steady tone, highlighting the successful execution of the 2026 strategic priorities.
• Christina Miller emphasized the success of the "digital-to-physical" flywheel, particularly with Toca Boca and Melissa & Doug.
• Jonathan Reuter highlighted operational discipline, cost management, and improved cash flow as foundational for reinvesting in growth.
• The tone was optimistic about the long-term potential of HappyCo and the Paw Patrol franchise ecosystem, despite short-term headwinds.

Analyst Questions and Answers:

• Q (Adam Shine - National Bank): Asked about Q4 timing issues and replenishment signals. A: Q4 is DOM-focused with replenishment timing dependent on consumer behavior; difficult to pinpoint specifics before February 2027 guidance. HappyCo distribution widening is expected in the back half of 2027.
• Q (Brian Morrison - TD Cowen): Inquired about offsetting the Paw Patrol movie tailwind in 2027 and tariff views. A: Movie impact ($25M) is non-recurring; growth to be driven by Hellbreak, StickerBox, and core brands. Tariff timing is fluid; no update on final deal terms yet.
• Q (Drew McReynolds - RBC): Asked about HappyCo innovation and Melissa & Doug growth drivers. A: HappyCo leads "creative play" with proprietary voice OS; Melissa & Doug growth is fueled by product innovation and shelf space expansion.
• Q (Ty Collin - CIBC): Asked about commodity cost visibility and pricing strategy. A: 2027 costs are manageable via design and efficiency; pricing strategy remains steady with 50% of products under $19.99.
• Q (Luke Hannon - Canon Continuity): Inquired about license mix and digital growth strategy. A: License mix aligns with industry average (1/3 licensed, 2/3 owned); Digital growth strategy focuses on Toca Boca IP monetization, live services, and subscription models for Picnic.
• Q (Martin Landry - Staple): Asked about Black Friday shelf space and inventory levels. A: Strong retail alignment on promotions and shelf space for growth brands; inventory levels at both Spin Master and retailers are healthy post-FOB to DOM shift.

Other Key Points:

• Paw Patrol: The Dino Movie achieved the highest critical acclaim of the three films and grossed a combined $500M box office across the franchise.
• Toca Boca reached multi-year highs in player engagement and sentiment following content quality improvements and strategic partnerships.
• The company has simplified its operating model, winding down non-core entertainment projects to focus on scaled brands and internal IP.
• "StickerBox" has been named Time Magazine's Best Inventions of 2026 and nominated for industry awards.
• The company is actively managing a transition period involving exiting legacy licenses and onboarding new strategic partnerships.