Toronto, Canada —  Spin Master Corp. announced its financial results for the three months ended March 31, 2024.

The Company’s full Management’s Discussion and Analysis (“MD&A”) for the three months ended March 31, 2024 is available under the Company’s profile on SEDAR+ (www.sedarplus.com) and posted on the Company’s web site at www.spinmaster.com. All financial information is presented in United States dollars (“$”, “dollars” and “US$”) and has been rounded to the nearest hundred thousand, except per share amounts and where otherwise indicated.

“As we approach the 30th anniversary of Spin Master’s founding, I wanted to reflect on our growth and evolution,” said Max Rangel, Global President & CEO. “Over the past 30 years, we have grown from an innovative start-up toy company to become a global, fully-imagined children’s entertainment company. We’ve continued to build on our leadership position in toys through disruptive innovation and have diversified our robust portfolio through incremental licensed partnerships, international expansion, the development of entertainment content, digital games capabilities and compelling acquisitions. Our Toy Gross Product Sales growth in the first quarter reflects the addition of Melissa & Doug’s trusted line of open-ended and developmental play to our toy business.

In 2024, we will bring breakthrough innovation to the toy aisle, alongside impressive launches within our core and licensed brand portfolios. Our investment in the creation of multiplatform content including our two new original series Unicorn Academy and Vida the Vet, are expected to drive incremental toy and licensing and merchandising opportunities later in 2024. We will continue to expand our digital games ecosystem with the launch of Toca Boca Days and Rubik’s Match in the coming months. These digital games are designed to deepen and broaden our audience base, attracting kids of all ages and spawning new fans and player communities. Given our financial framework for value creation, the power of our three creative centres and our strong financial position, we are well-positioned to execute against our strategy of reimagining everyday play and investing in innovation, content, geographic expansion and acquisitions to drive long-term profitable growth and shareholder value.”

“As expected, Toy Gross Product Sales in Q1 2024, excluding Melissa & Doug, were in line with 2023 in what is typically the lowest quarter seasonally for the toy industry” said Mark Segal, Spin Master’s EVP & Chief Financial Officer. “Much of our focus was centered around Melissa & Doug and our consolidated results now include their business. Our integration efforts are well underway, and we’ve already begun to capitalize on cost synergies and identify revenue growth opportunities. Our capital allocation strategy for 2024 is focused on innovative IP-driven revenue and profitability growth, investment in entertainment content and digital games, and enhancing total shareholder returns. We are maintaining our outlook for 2024. During Q1, we began executing share purchases under our recently approved Normal Course Issuer Bid. We are pleased to increase our dividend from CA$0.06 to CA$0.12 per share. We will continue to focus on strategic M&A and venture investments, particularly in the Digital Games and Entertainment segments, as we integrate Melissa & Doug into the Toys segment.”

Consolidated Financial Highlights for Q1 2024 as compared to the same period in 2023

• Revenue was $316.2 million, an increase of 16.5% from $271.4 million, which includes Melissa & Doug Revenue of $40.4 million. Revenue, excluding Melissa & Doug1 was $275.8 million, an increase of 1.6% from $271.4 million.
• Constant Currency Revenue1 was $314.7 million, an increase of 16.0%, from $271.4 million.
• Revenue by operating segment reflected increases of 21.5% in Toys, 16.5% in Entertainment, and a decrease of 3.2% in Digital Games.
• Toy Gross Product Sales1 was $264.1 million, an increase of $47.8 million or 22.1% from $216.3 million, including Melissa & Doug Toy Gross Product Sales1 of $46.7 million. Toy Gross Product Sales, excluding Melissa & Doug1 was $217.4 million, an increase of $1.1 million or 0.5% from $216.3 million.
• Operating Loss was $61.8 million compared to Operating Loss of $6.1 million.
• Operating Margin2 was (19.5)% compared to (2.2)%.
• Adjusted Operating Loss1 was $14.5 million compared to Adjusted Operating Income1 of $12.7 million.
• Adjusted Operating Margin1 was (4.6)% compared to 4.7%.
• Net Loss was $54.8 million or $(0.53) per share compared to $1.9 million or $(0.02) per share.
• Adjusted Net Loss1 was $19.5 million or $(0.19) per share compared to Adjusted Net income1 of $12.3 million or $0.12 per share.
• Adjusted EBITDA1 was $18.6 million compared to $30.6 million, a decrease of $12.0 million or 39.2%.
• Adjusted EBITDA, excluding Melissa & Doug1 was $27.8 million compared to $30.6 million, a decrease of $2.8 million or 9.2%.
• Adjusted EBITDA Margin1 was 5.9% compared to 11.3%.
• Adjusted EBITDA Margin, excluding Melissa & Doug1 was 10.1% compared to 11.3%.
• Cash provided by operating activities was $24.3 million compared to cash used of $4.3 million.
• Free Cash Flow3 was $(0.6) million compared to $(34.4) million.
• During the three months ended March 31, 2024, the Company repurchased and cancelled 333,300 subordinate voting shares through the Company’s Normal Course Issuer Bid (the “NCIB”) program for $8.4 million. Subsequent to March 31, 2024, the Company repurchased a further 255,621 subordinate voting shares for cancellation at a cost of $6.3 million.
• Subsequent to March 31, 2024, the Company declared a quarterly dividend of CA$0.12 per outstanding subordinate voting share and multiple voting share, payable on July 12, 2024.

Acquisition of Melissa & Doug

• On January 2, 2024, the Company completed its previously announced acquisition of MND Holdings I Corp (“Melissa & Doug”) by acquiring all issued and outstanding capital stock. Melissa & Doug is a leading brand in early childhood play with offerings of open-ended, creative, and developmental toys. The acquisition is reported in the Toys segment within the Preschool, Infant & Toddler and Plush product category.
• The first quarter results for 2024 include the operating results of Melissa & Doug. A summary of key Melissa & Doug’s operating results for the three months ended March 31, 2024 is included below.
• On January 2, 2024, cash consideration paid was $991.7 million, which includes $36.2 million in cash acquired, resulting in net purchase consideration of $955.5 million.
• The Company funded the $991.7 million purchase price with $466.7 million in cash and $525.0 million in debt from its credit facilities to finance the acquisition.
• During the three months ended March 31, 2024, the Company repaid $50.0 million towards its credit facilities (refer to the Liquidity section for more details).
• The Company incurred $9.5 million in transaction related costs for the three months ended March 31, 2024.
• During the three months ended March 31, 2024, the Company recognized $0.2 million in Net Cost Synergies3 and continues to expect to achieve approximately $6 million in Net Cost Synergies3 in 2024 towards the target of approximately $25 million to $30 million in Run-rate Net Cost Synergies4 by the end of 2026.

The following summarizes the impact of Melissa & Doug’s operating results on the first quarter consolidated results:

Consolidated Financial Results as compared to the same period in 2023

Segmented Financial Results as compared to the same period in 2023

Toys Segment Results

The following table provides a summary of the Toys segment operating results, for the three months ended March 31, 2024 and 2023:

• Effective January 1, 2024, the Company has changed its product categories to align with the Company’s product offerings going forward: (1) Preschool, Infant & Toddler and Plush; (2) Activities, Games & Puzzles and Dolls & Interactive; (3) Wheels & Action; and (4) Outdoor. (Refer to Addendum section for more details).
• Toy Revenue increased by $39.6 million or 21.3% to $225.9 million due to the inclusion of Melissa & Doug Toy revenue1 of $40.4 million.
• Toy Gross Product Sales1 was $264.1 million, increase of $47.8 million or 22.1% from $216.3 million, including Melissa & Doug Toy Gross Product Sales1 of $46.7 million. Toy Gross Product Sales, excluding Melissa & Doug1 was $217.4 million, an increase of $1.1 million or 0.5% from $216.3 million. The Toy industry continues to be challenged by the macroeconomic environment causing reduced consumer discretionary spending.
• Sales Allowances increased by $8.2 million to $38.2 million. As a percentage of Toy Gross Product Sales1, Sales Allowances increased to 14.5% from 13.9%, primarily driven by geographic market mix and continued pressure on consumer discretionary spending, driving promotional activity.
• Toys Operating Loss increased by $49.0 million to $90.8 million compared to $41.8 million.
• Toys Operating Margin was (40.1)% compared to (22.4)%.
• Toys Adjusted EBITDA Margin1 was (14.4)% compared to (11.5)%. Toys Adjusted EBITDA Margin1, excluding Melissa & Doug1 was (12.5)% compared to (11.5)%.
• The decrease in Toys Operating Margin and Toys Adjusted EBITDA Margin1 was driven by an increase in administrative expenses with the inclusion of Melissa & Doug resulting in lower operating leverage achieved due to higher relative seasonality impact in the first quarter, a change in market and customer mix and an increase in sales allowances partially offset by a decrease in selling expenses due to a lower proportion of sales of partner licensed brands resulting from the inclusion of Melissa & Doug.

Entertainment Segment Results

The following table provides a summary of Entertainment segment operating results, for the three months ended March 31, 2024 and 2023:

• Entertainment revenue increased by $6.2 million or 16.5% to $43.8 million, from higher distribution revenue associated with on-going distribution of PAW Patrol series and PAW Patrol: The Mighty Movie, partially offset by lower licensing and merchandising revenue. Constant Currency Entertainment Revenue1 increased by $6.2 million or 16.5% to $43.8 million, from $37.6 million.
• Entertainment Operating Income decreased by $0.7 million or 2.4% to $28.6 million. Entertainment Adjusted Operating Income1 decreased by $0.8 million or 2.7% to $29.1 million from $29.9 million, from higher amortization of production costs and promotion costs for Entertainment content, partially offset by distribution revenue.
• Entertainment Operating Margin decreased to 65.3% from 77.9% and Entertainment Adjusted Operating Margin1 decreased to 66.4% from 79.5%, from lower licensing and merchandising revenue and the dilutive effect of Entertainment content deliveries, partially offset by higher distribution revenue.

Digital Games Segment Results

The following table provides a summary of Digital Games segment operating results, for the three months ended March 31, 2024 and 2023:

• Digital Games revenue declined by $1.5 million or 3.2% to $46.0 million due to lower in-game purchases in Toca Life World, partially offset by higher subscription revenue from both Piknik and PAW Patrol Academy. Constant Currency Digital Games Revenue1 decreased by $1.6 million or 3.4% to $45.9 million, down from $47.5 million.
• Digital Games Operating Income decreased by $3.0 million or 18.5% to $13.2 million. Digital Games Adjusted Operating Income1 decreased by $3.8 million or 20.0% to $15.2 million from $19.0 million. Digital Games Operating Margin decreased from 34.1% to 28.7% and Digital Games Adjusted Operating Margin1 decreased from 40.0% to 33.0%.
• The decrease in Digital Games Operating Income, Digital Games Adjusted Operating Income1, Digital Games Operating Margin and Digital Games Adjusted Operating Margin1 was due to a decline in revenue and higher marketing costs related to Piknik and PAW Patrol Academy.

Liquidity

The Company has an unsecured revolving credit facility (the “Facility”) with a borrowing capacity of $510.0 million which matures on September 28, 2026, and contains certain financial covenants.

The Company has a non-revolving credit facility (the “Acquisition Facility”) for the acquisition of Melissa & Doug, with a borrowing capacity of $225.0 million which matures on November 19, 2024, and contains certain financial covenants.

As at March 31, 2024, there was $250.0 million drawn (December 31, 2023 – $nil) under the Facility and $225.0 million drawn (December 31, 2023 – $nil) under the Acquisition Facility. For the three months ended March 31, 2024, the weighted average interest rate on the Facility and the Acquisition Facility were both 6.6% (2023 – 0%).

The Company’s Facility and Acquisition Facility bear interest at variable rates. As a result, the Company is exposed to interest rate cash flow risk due to fluctuations in lenders’ base rates. The Company manages its interest rate risk by using a variable to fixed interest rate swap, where the Company pays the fixed interest rate. On March 27, 2024, the Company entered into four interest rate swaps with an aggregate notional principal of $140.0 million, effective on April 1, 2024, maturing in four tranches until December 31, 2025.

As at March 31, 2024, the Company had unutilized liquidity of $464.0 million, comprised of $205.5 million in Cash and $258.5 million under the Company’s credit facilities.

Cash Flows

For the three months ended March 31, 2024, cash flow provided by operating activities was $24.3 million, compared to cash flow used of $4.3 million. The increase was driven by the change in non-cash working capital offset by lower Adjusted Operating Income1. Change in non-cash working capital increased by $70.1 million, due to increases of $115.5 million in trade receivables, $7.8 million in inventories and $3.8 million in other receivables, partially offset by an decrease of $75.0 million in trade payables and accrued liabilities.

For the three months ended March 31, 2024, cash flow provided by financing activities was $457.2 million, compared to cash flow used of $14.8 million. The increase is primarily driven by the proceeds from loans and borrowings of $525.0 million, partially offset by repayments of $50.0 million.

For the three months ended March 31, 2024, Free Cash Flow1 was $(0.6) million compared to $(34.4) million, due to higher cash flow provided by operating activities and lower cash flow used in investing activities.

Capitalization

The Company’s Board of Directors declared a dividend of C$0.12 per outstanding subordinate voting share and multiple voting share, payable on July 12, 2024 to shareholders of record at the close of business on June 28, 2024.  The dividend is designated to be an eligible dividend for purposes of section 89(1) of the Income Tax Act (Canada).

The weighted average basic and diluted shares outstanding as at March 31, 2024 were 104.2 million and 106.3 million, compared to 103.0 million and 106.6 million in the prior year, respectively.

During the three months ended March 31, 2024, the Company repurchased and cancelled 333,300 subordinate voting shares through the Company’s NCIB program for $8.4  million, of which $3.3 million was paid subsequent to March 31, 2024. Subsequent to March 31, 2024, the Company repurchased a further 255,621 subordinate voting shares for cancellation at a cost of $6.3 million. In 2023, the Company repurchased and cancelled 397,700 subordinate voting shares at a cost of $10.5 million.

Subsequent to March 31, 2024, the Company filed a short form base shelf prospectus dated April 12, 2024, pursuant to which, for a period of 25 months thereafter, the Company (and shareholders of the Company) may sell subordinate voting shares, preferred shares, debt securities, subscription receipts, warrants or any combination thereof as a unit. This filing provides the Company with the flexibility to access debt and equity markets on a timely basis.

2024 Outlook

The Company reiterated its previous guidance issued on February 28, 2024. The Company expects for 2024:

• Toy Gross Product Sales, excluding Melissa & Doug1 to be in line with 2023.
• Toy Gross Product Sales, excluding Melissa & Doug1 seasonality to be approximately 28% to 32% in the first half.
• Revenue, excluding Melissa & Doug1, to be in line with 2023.
• Adjusted EBITDA Margin, excluding Melissa & Doug1 and Net Cost Synergies3 realized to be in line with 2023.

The Company also reiterated its previous guidance issued on February 28, 2024. Incrementally, the Company expects for 2024:

• Melissa & Doug Toy Gross Product Sales1 to contribute between $420 million to $430 million.
• Melissa & Doug Toy Gross Product Sales1 seasonality to be approximately 20% to 25% in the first half.
• Melissa & Doug Revenue to contribute between $370 million to $375 million.
• Melissa & Doug Adjusted EBITDA Margin1 of approximately 19.5%.
• To achieve in addition approximately $6 million in Net Cost Synergies3 towards the target of approximately $25 million to $30 million in Run-rate Net Cost Synergies4 by the end of 2026.

Non-GAAP Financial Measures and Ratios

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