Spin Master Reports Robust Q1 2016 Financial Results

Adjusted EBITDA more than doubles on 52% revenue increase

TORONTO, May 11, 2016 /CNW/ - Spin Master Corp. ("Spin Master" or the "Company") (TSX: TOY), a leading global children's entertainment company, today announced robust financial results for the first quarter ended March 31, 2016. The Company's full Management's Discussion and Analysis and Unaudited Interim Consolidated Financial Statements for the three months ended March 31, 2016 are available on SEDAR (www.sedar.com) and on the Company's web site at www.spinmaster.com/financial-info.php. Comparative Q1 2015 financial results presented in this news release reflect Spin Master's results as a private company, prepared to conform to the Company's financial reporting standards under International Financial Reporting Standards as a public company.

"We are very pleased with our operating and financial results for Q1 2016, which demonstrated strong revenue and profitability growth," said Anton Rabie, Chairman and Co-Chief Executive Officer of Spin Master. "The acquisition of Cardinal in late 2015 drove strong growth the quarter in our Activities, Games & Puzzles and Fun Furniture segment, while the continuing strength of Paw Patrol led to similar growth in the Pre-School and Girls segment. We were also active on the acquisition front in the first quarter of 2016, completing two acquisitions. We acquired the iconic Etch A Sketch and Doodle Sketch brands, including all brand-related patents, trademarks, tooling and inventory. Etch A Sketch and Doodle Sketch are iconic brands, and are ideally positioned for the development of value-added initiatives through our proven innovation model. We also completed the purchase of the library of board games owned by Editrice Giochi SRL, known for quality game products in the Italian market for more than 70 years."

Q1 2016 Financial Highlights

  • Revenue of US$161.7 million increased 51.9% from US$106.5 million in Q1 2015
  • In constant currency terms revenue increased by 53.8% in Q1 2016 relative to the comparable period in 2015
  • Gross Product Sales (see "Non-IFRS Measures" below) increased 49.0% to US$173.8 million, compared to US$116.6 million in Q1 2015
  • Q1 2016 featured strong contributions from Paw Patrol, Air Hogs Batmobile, products associated with the upcoming Angry Birds and Secret Life of Pets movies as well as Bunchems, the 2015 Activity Toy of the Year. Games and puzzles from the acquisition of Cardinal Industries Inc. "Cardinal" in Q4 2015 also contributed strongly to Q1 2016 results.
  • On a geographic basis, Spin Master's strong global platform drove Gross Product Sales increases of 58.3% in North America, 53.1% in the Rest of World and 23.6% in Europe
  • Other revenue, which primarily reflects merchandising royalty and television distribution income from products marketed by third parties using Spin Master's owned intellectual property, increased 68.4% from US$3.6 million in Q1 2015 to US$6.0 million in Q1 2016
  • Gross profit increased 50.6% in Q1 2016 to US$85.4 million, representing 52.8% of revenue, compared with US$56.7 million, or 53.3% of revenue in Q1 2015; the reduction in gross margin was primarily attributable to the impact of Cardinal, partially offset by increased merchandising royalty income from sales of products under owned brands and on-going productivity initiatives
  • Selling, general and administrative expenses for the first quarter of 2016 represented 45.9% of revenue compared to 49.2% in Q1 2015, reflecting the Company's strong operating leverage, partially offset by increased marketing spend, primarily to support new product launches
  • Net income of US$9.9 million, or US$0.10 per share, increased substantially from US$1.7 million in the comparable period in 2015
  • Adjusted Net Income (see "Non-IFRS Measures" below) was US$11.6 million, or US$0.12 per share, significantly above the Q1 2015 level of US$3.4 million
  • Adjusted EBITDA (see "Non-IFRS Measures" below) increased 135.2% to US$24.0 million in Q1 2016 compared with US$10.2 million in Q1 2015; Adjusted EBITDA Margins (see "Non-IFRS Measures" below) increased to 14.8% in Q1 2016 from 9.6% in Q1 2015
  • Free Cash Flow (see "Non-IFRS Measures" below) was US$16.4 million in Q1 2016 compared to US$(8.2) million for the same period in 2015
  • The acquisitions of Editrice Giochi SRL ("EG") and the Etch A Sketch and Doodle Sketch brands were completed in the quarter
  • Subsequent to the end of the quarter, Spin Master announced the acquisition of the Toca Boca and Sago Mini companies from the Bonnier Group of Sweden. The Company also announced the formation of an Australian subsidiary Spin Master Australia (Pty) Ltd., which will begin activities in 2017 and will assume distribution of the majority of Spin Master's brands for Australia.

"The strong momentum we demonstrated in 2015 continued in the first quarter of 2016," said Ben Gadbois, President and Chief Operating Officer of Spin Master. "The improvement in our operational efficiencies, which accelerated shipments into Q3 2015 that were historically shipped in the fourth quarter generated significant benefits. Not only did this improvement reduce year-end retail inventory levels, it also increased Q1 2016 sales through the increased re-fill of customer inventories. Overall, our four growth strategies are continuing to drive positive momentum. Our product line for 2016 looks strong, our entertainment strategy is continuing to yield results, international sales penetration is continuing to accelerate and our acquisition pipeline has created a number of exciting opportunities," he added.

"Looking forward to the balance of 2016 and beyond, we are excited about the potential from the integration of our recent acquisitions," said Ronnen Harary, Spin Master's Co-Chief Executive Officer. "In particular, our recent acquisition of Toca Boca and Sago Mini puts us in a leadership position in the digital mobile app space for kids. The acquisition of these two leading game development studios rounds out our ability to entertain kids in both the physical and digital world. Older kids content consumption patterns have shifted to mobile devices and we want to be where kids are. The Toca Boca brand, which is trusted by parents together with its network of millions of users, gives us a strong platform to continue to build on. We look forward to linking these mobile apps, which emphasize fun and creativity, with Spin Master's global capabilities across our toy and TV show businesses," he added.

Q1 Gross Product Sales by Business Segment (US$ millions)




Q1 2016      


Q1 2015      


% Change

Activities, Games & Puzzles and Fun Furniture

$49.7


$28.3


75.5%

Remote Control and Interactive Characters

$21.6


$17.5


23.2%

Boys Action and High-Tech Construction

$23.0


$26.8


(14.2)%

Pre-School and Girls

$79.5


$43.9


80.9%

Gross Product Sales

$173.8


$116.6


49.0%

Other Revenue

$6.0


$3.6


68.4%

Sales Allowances

($18.1)


($13.7)


32.0%

Revenue

$161.7


$106.5


51.9%

 

Q1 2016 Business Segment Gross Product Sales
First quarter 2016 Gross Product Sales in the Activities, Games & Puzzles and Fun Furniture segment increased 75.5% from Q1 2015, primarily reflecting the acquisition of Cardinal. Excluding Cardinal, Gross Product Sales in the Activities, Games & Puzzles and Fun Furniture segment grew 12.6% driven by growth in Bunchems, the 2015 Activity Toy of the Year, and Marshmallow Fun Furniture. In the Remote Control and Interactive Characters segment, Gross Product Sales increased by 23.2% compared to Q1 2015. Growth was primarily driven by strength in the Air Hogs brand, including the Millennium Falcon, highlighting the continued momentum of the Star Wars License, the Batmobile, which was tied to the recent launch of the Batman v Superman movie, and the 360 Hoverblade. In the Boys Action and High-Tech Construction segment, Gross Product Sales decreased 14.2% compared to Q1 2015, reflecting lower sales of toys from How to Train Your Dragon and Teenage Mutant Ninja Turtles, partially offset by the initial shipments of toys related to the upcoming Angry Birds and Secret Life of Pets movies. In the Pre-School and Girls segment, continuing strength in Spin Master's owned Paw Patrol franchise, and growth in Chubby Puppies, drove an 80.9% sales increase over Q1 2015.

2016 Outlook
For the full year, Spin Master now expects organic Gross Product Sales growth to be above the previous guidance provided in connection with the release of fiscal 2015 results in March 2016, which was at the upper end of the Company's long term growth target range of mid to high single digits. The Company now expects Gross Product Sales to grow in the mid-teens, relative to 2015. From a seasonality perspective, Spin Master also expects Gross Product Sales for the first half of 2016 to vary from historic seasonality patterns and previous guidance, which was at the high end of the typical seasonality range of 25%-30% of total Gross Product Sales. The Company now expects Gross Product Sales for the first half of 2016 to represent between 30% and 35% of total Gross Product Sales. Adjusted EBITDA margins for 2016 are expected to be consistent with prior guidance and comparable to 2015. 

Subsequent Events

  • On May 2, 2016, Spin Master completed the acquisition of the Toca Boca and Sago Mini companies from the Bonnier Group of Sweden. With offices in Stockholm, San Francisco and New York and over 80 employees, Toca Boca is a studio that makes apps for children aged 3-9. Since its first product launch in 2011, Toca Boca has released 32 apps that have been downloaded in 215 countries worldwide. With over 140 million total downloads to date and growing, Toca Boca apps focus on stimulating kids' imagination so that they can play and have fun in a safe digital environment with no in-app purchases or external advertising. Located in Toronto, Sago Mini creates mobile apps for kids aged 2-5 that focus on the pre-school segment. With over 25 employees, Sago Mini has released 16 apps which have been downloaded over 13 million times. Toca Boca and Sago Mini both emphasize children's natural sense of curiosity, experimentation and self-expression. Combined, Toca Boca and Sago Mini have over 15 million monthly active users globally.
  • Spin Master completed the formation of an Australian subsidiary Spin Master Australia (Pty) Ltd., which will begin trading activities in 2017 and will assume distribution of the majority of the Company's brands for Australia. 

Conference call
Ronnen Harary, Co-Chief Executive Officer, Ben Gadbois, President & Chief Operating Officer and Mark Segal, Chief Financial Officer will hold an investor conference call to discuss 2016 first quarter results at 9:30 am Eastern Time on Thursday May 12, 2016. Investors and the public may participate in the conference call as per below:

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-presentations.php. A replay of the call will be available until Thursday, May 26, 2016. To access the replay, dial (416) 849-0833 or (855) 859-2056 (Passcode: 98313831). A transcript of the webcast will be archived on Spin Master's website.

About Spin Master
Spin Master is a leading global children's entertainment company that creates, designs, manufactures and markets a diversified portfolio of innovative toys, games, products and entertainment properties. Spin Master is best known for award-winning brands including Zoomer™ Dino, Bakugan Battle Brawlers™, Air Hogs®, and 2015 Toys of The Year, Bunchems and Meccanoid G15. Since 2005, Spin Master has received 63 TIA Toy of The Year (TOTY) nominations with 16 wins across a variety of product categories. Spin Master has been recognized with 12 TOTY nominations for Innovative Toy of the Year, more than any of its competitors. Spin Master is among a limited number of companies that not only develop and produce global entertainment properties, characters and content, but also monetize that content through the creation, sale and licensing of products. To date, Spin Master has produced five television series, including 2007 hit series Bakugan Battle Brawlers and its current hit Paw Patrol, which is broadcast in over 160 countries and territories globally. Spin Master employs over 1,000 people globally with offices in Canada, United States, Mexico, France, Italy, United Kingdom, Slovakia, Germany, Sweden, the Netherlands, China, Hong Kong, Japan, and Australia.

Non-IFRS Measures
In addition to using financial measures prescribed under IFRS, references are made in this press release to "Adjusted EBITDA", "Adjusted EBITDA Margin", "Adjusted Net Income", "Free Cash Flow", "Gross Product Sales" and "Sales Allowances", which are non-IFRS financial measures. Non-IFRS financial measure do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.

Adjusted EBITDA is calculated as EBITDA (i.e., net earnings before borrowing costs, taxes and depreciation and amortization) excluding one time or other non-recurring items that do not necessarily reflect the Company's underlying financial performance, including foreign exchange gains or losses, restructuring costs, public offering costs and write downs, among other items. Adjusted EBITDA is used internally as the key benchmark for incentive compensation and by management as a measure of the Company's profitability and its ability to fund working capital requirements, investment in property, plant and equipment, and make debt repayments.

Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by revenue. Management uses Adjusted EBITDA Margin to evaluate the Company's performance compared to internal targets and to benchmark its performance against key competitors. 

Adjusted Net Income is calculated as net income excluding one time or other items that do not necessarily reflect the Company's underlying financial performance including foreign exchange gains or losses, restructuring costs, IPO costs, the accounting effect of the phantom equity expense and write downs, among other items and the corresponding impact these items have on income tax expense. Management uses Adjusted Net Income to understand the underlying financial performance of the business on a consistent basis over time.

Free Cash Flow is calculated as cash from operations before changes in working capital less capital expenditures plus any cash used in brand or business acquisitions. Capital expenditures include expenditures on assets such as property, plant, equipment (primarily expenditures of tooling) and the production of television properties. 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 marketing, incentive and Sales Allowance adjustments. Changes in Gross Product Sales are discussed because, while Spin Master records the details of such Sales Allowances (in its financial accounting systems at the time of sale in order to calculate revenue, such Sales Allowances are generally not associated with individual products, making revenue less meaningful when comparing its segments and geographical results to highlight trends in Spin Master's business.

Sales Allowances represent marketing and sales credits requested by customers relating to factors such as co-operative advertising, contractual discounts, negotiated discounts, customer audits, volume rebates, defective products, and costs incurred by customers to sell the Company's products and are booked 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.

Management believes that Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Free Cash Flow and Gross Product Sales 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 Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Free Cash Flow, Gross Product Sales and Sales Allowances 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 measures in the evaluation of issuers.

The following table presents a reconciliation of Net Income to EBITDA, Adjusted EBITDA and Adjusted Net Income, and Cash from (used in) Operations to Free Cash Flow for three months ended March 31, 2016. All references to $ refer to US$:

(All amounts in US$ 000's , except percentages)


Three Months Ended March 31















2016

2015

$ Change

% Change

Net Income after Tax


$

9,937

$

1,669

$

8,268

495.4%











Finance Costs


$

1,760

$

269

$

1,491

554.2%


Depreciation and Amortization


$

5,371

$

5,116

$

255

5.0%


Income Tax


$

4,505

$

709

$

3,795

535.3%

EBITDA


$

21,573

$

7,763

$

13,811

177.9%

Normaliztion Adjustments










Restructuring

(1)

$

656

$

361

$

295

81.7%


Foreign exchange loss /(gain)

(2)

$

(5,040)

$

1,627

$

(6,667)



Offering Costs

(3)

$

-

$

442

$

(442)

-100.0%


Stock Based Compenstion

(4)

$

6,784

$

-

$

6,784


Adjusted EBITDA


$

23,973

$

10,193

$

13,780

135.2%










Adjusted EBITDA


$

23,973

$

10,193

$

13,780

135.2%


Finance Costs


$

1,760

$

269

$

1,491

554.2%


Depreciation and Amortization


$

5,371

$

5,116

$

255

5.0%


Income Tax


$

4,505

$

709

$

3,796

535.4%


Tax Effect of Normalization Adjustments

(5)

$

749

$

726

$

23

3.1%

Adjusted Net Income


$

11,588

$

3,373

$

8,215

243.5%










Free Cash Flow









Net cash flows generated  by (used in)  operating activities


$

4,161

$

(63,562)

$

67,723


Plus:









Changes in Working Capital


$

20,054

$

63,093

$

(43,039)


Net cash flows generated  by (used in)  operating activities
before working capital changes


$

24,215

$

(469)

$

24,684


Less:









Net cash flows used in investing activities 


$

(19,845)

$

(7,740)

$

(12,105)


Plus:









Cash used for Licence, Brand and Business Acquisitons


$

11,989

$

-

$

11,989


Free Cash Flow 


$

16,359

$

(8,209)

$

24,568




1)

2016 Restructuring related to changes to headcount that occurred primarily in the US. 2015 restructuring primarily related to a change to the Company's executive team. 

2)

Transaction gains and losses generated by the effect of foreign exchange recorded on assets and liabilities denominated in a currency that differs front the functional currency of the applicable entity are recorded as foreign exchange gain or loss in the period which they occur.

3)

Offering Costs are considered a one-time expense and are not reflective of ongoing costs of the business.

4)

Stock based compensation is related to expenses associated with subordinate voting shares granted to equity participants and restricted stock units granted to employees at the time of the offering.

5)

Tax effect of normalization adjustments (notes 1-4). Normalization adjustments tax effected at effective tax rate of 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 launching of new products, brands and entertainment properties; the Company's outlook for 2016; the Company's owned intellectual property and license agreements; the Company's expectations concerning growth of Cardinal in Europe and other international markets; the Company's expectations concerning growth from Editrice Giochi, Etch A Sketch or Toca Boca and Sago Mini; the Company's operating momentum, financial position, cash flows and financial performance; the Company's future growth, drivers for such growth, and the successful execution of its strategies for growth; the likelihood of avoiding early season out-of-stocks; the seasonality of Gross Product Sales and forecasted organic Gross Product Sales and Adjusted EBITDA Margins.

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 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 Cardinal's sales; 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 founders will continue to be involved in the Company and that the risk factors noted below, 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 factors discussed under "Risk Factors" in the Company's Management Discussion and Analysis for the period ended March 31, 2016 and the Company's Annual Information Form dated March 30, 2016. 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.

SOURCE Spin Master Corp.

For further information: Mark Segal, Executive Vice President and Chief Financial Officer, marks@spinmaster.com

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