Spin Master Reports Strong Q1 2017 Financial Results

41% Revenue Growth Highlights Continued Execution of Growth Strategies

TORONTO, May 11, 2017 /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, 2017. The Company's full Management's Discussion and Analysis and Unaudited Interim Consolidated Financial Statements for the three months ended March 31, 2017 are available on SEDAR (www.sedar.com) and posted on the Company's web site at www.spinmaster.com/financial-info.php.

"We saw a strong performance in the first quarter of 2017, which is seasonally the smallest quarter of our year," said Anton Rabie, Chairman and Co-Chief Executive Officer of Spin Master. "Our Q1 revenue increased by 41%, despite Easter falling into Q2 2017, unlike 2016. Growth was driven primarily by the Outdoor business segment following our 2016 acquisition of Swimways Corporation (www.swimways.com; "Swimways"), and continued growth in the Remote Control & Interactive Characters and Pre-School & Girls business segments. "

Q1 2017 Financial Highlights as compared to the same period in 20161

  • Revenue of US$227.7 million increased 40.8% from US$161.7 million. Excluding revenue from Swimways, which was acquired in Q3 2016, Q1 revenue grew 19.8%
  • In Constant Currency2 terms, revenue increased by 42.6%
  • Gross Product Sales2 increased 31.8% to US$229.1 million, compared to US$173.8 million, driven by sales of PAW Patrol and Hatchimals, as well as Swimways, which more than offset declines in Air Hogs and Kinetic Sand. Excluding Swimways, Gross Product Sales2 grew 11.2%
  • Gross Product Sales2 increased 32.9% in North America, 39.2% in Europe and 13.6% in the Rest of World. International Gross Product Sales2 on a combined basis represented 33% of total Gross Product Sales2 in Q1 2017, the same as the comparable period in 2016
  • Other Revenue, which primarily reflects merchandising royalty and television distribution income from products marketed by third parties using Spin Master's owned intellectual property, as well as app revenue from Toca Boca and Sago Mini (acquired in Q2 2016), more than tripled to US$20.5 million from US$6.0 million. The increase was primarily driven by licensing & merchandising and app revenue
  • Gross profit increased 32.7% to US$113.3 million, representing 49.8% of revenue, compared with US$85.4 million, or 52.8% of revenue in Q1 2016. Gross margin declined due to shifts in our product mix, including the impact of acquisitions, the fair market value inventory amortization adjustments related to Swimways and foreign exchange, partially offset by increased Other Revenue. Excluding Swimways, gross margin grew to 53.3% of revenue
  • Selling, general and administrative expenses ("SG&A"), excluding share-based compensation expenses, represented 41.6% of revenue in Q1 2017 compared to 41.7%. SG&A included supply chain related investment spend to position Spin Master for future growth
  • Net income was US$10.1 million, or US$0.10 per share, compared with US$9.9 million, or US$0.10 per share in Q1 2016
  • Adjusted Net Income2 was US$13.6 million, or US$0.13 per share, compared to US$11.6 million, or US$0.12 per share in Q1 2016
  • Adjusted EBITDA2 was US$30.8 million in Q1 2017 compared with US$24.0 million in Q1 2016; Adjusted EBITDA Margins2 decreased to 13.5% in Q1 2017 compared to 14.8% in Q1 2016, primarily due to lower gross margins
  • Free Cash Flow2 was US$5.0 million compared to US$16.4 million in Q1 2016 primarily due to increased investments in content development for TV shows and apps
  • On April 28, 2017, Spin Master acquired certain assets of Marbles, a leader in brain-building and high-quality games, for cash consideration of approximately $6 million, of which $4.7 million was paid in Q1 2017 and included in Receivables. The cash consideration was funded from existing cash resources. Marbles will be included in the Activities, Games & Puzzles and Fun Furniture business segment

1

The financial highlights in this release are presented in US$ millions, whereas the financial information in the MD&A (Management's Discussion and Analysis) is presented in US$ thousands. This may result in immaterial differences in the calculated percentages reflected between the two documents.

2

Non-IFRS financial measure. See "Non-IFRS Financial Measures" below.

 

"Spin Master continues to generate solid financial results," said Ben Gadbois, President & COO of Spin Master. "Q1 2017 was characterized by the continued execution of our four key growth strategies and included some investment spending that will position us well for future growth. Gross Product Sales2 growth over last year of nearly 40% in Europe and 33% in North America, despite the later timing of Easter, exceeded our expectations and highlights our strategy to grow our global sales. We are managing our inventory well and POS results continue to indicate strong consumer engagement with our brands and products."

"The strong momentum we saw in 2016 is continuing in 2017. Our entertainment properties including PAW Patrol and the recently launched Rusty Rivets are resonating very well with children globally and the ongoing success of the Hatchimals line including the just released Hatchimals Colleggtibles, is a testament to our ability to innovate," said Ronnen Harary, Spin Master's Co-Chief Executive Officer.

Q1 2017 Gross Product Sales2 by Business Segment (US$ millions)


Q1 2017

Q1 2016

% Change

Activities, Games & Puzzles and Fun Furniture

$48.0

$49.7

(3.5%)

Remote Control and Interactive Characters

$46.5

$21.6

115.4%

Boys Action and High-Tech Construction

$13.2

$23.0

(42.8%)

Pre-School and Girls

$84.7

$79.5

6.6%

Outdoor

$36.7

-

    n/a

Gross Product Sales2

$229.1

$173.8

31.8%

Other Revenue

$20.5

$6.0

241.7%

Sales Allowances2

($21.8)

($18.1)

(20.4%)

Revenue

$227.7

$161.7

40.8%

 

Q1 2017 Business Segment Gross Product Sales2 as Compared to the Same Period in 2016
Gross Product Sales2 in the Activities, Games & Puzzles and Fun Furniture segment decreased 3.5%, primarily due to a decline in Kinetic Sand, offset by new brands including Rube Goldberg and Kinetic Rock as well as steady growth in Cardinal and Bunchems. Gross Product Sales2 in the Remote Control and Interactive Characters segment increased 115.4% in Q1, primarily due to sales of Hatchimals, which offset a decline in Air Hogs. Gross Product Sales2 in the Boys Action and High-Tech Construction segment decreased 42.8%, primarily due to the decline in shipments of movie related products. The expected declines in Angry Birds and Secret Life of Pets, which were both launched in Q1 2016, were partially offset by the initial sales of Pirates of the Caribbean licensed products and Tech Deck. Gross Product Sales2 in the Pre-School and Girls segment increased 6.6% in Q1, driven by PAW Patrol and PowerPuff Girls, offset by declines in Chubby Puppies and Little Charmers. Gross Product Sales2 in the new Outdoor segment reflected a ramp-up of Swimways, Kelysius and Coop pool and outdoor products ahead of the summer season.

Outlook
The Company re-affirmed its outlook for 2017 provided in March 2017. Excluding Swimways, Spin Master expects organic Gross Product Sales2 growth to be at the upper end of the Company's mid to high single digit long term organic Gross Product Sales2 growth target range. Including Swimways, Spin Master expects Gross Product Sales2 growth in the low teens compared to 2016. From a seasonality perspective, excluding Swimways, Spin Master expects Gross Product Sales2 in the first half of 2017 to be in line with the Company's historical seasonality of approximately 30% in the first half of the year and 70% in the second half of the year. Including Swimways, Gross Product Sales2 are expected to be in the 31%-33% range in the first half of 2017 due to the seasonality of Swimways' Gross Product Sales2 profile. Adjusted EBITDA Margins2 for 2017, excluding Swimways and Toca Boca, are expected to be slightly higher than 2016. Including Swimways and Toca Boca, Adjusted EBITDA Margins2 are expected to be consistent with 2016.

Conference call
Ronnen Harary, Co-Chief Executive Officer, Ben Gadbois, Global President & Chief Operating Officer, and Mark Segal, Executive Vice President and Chief Financial Officer will host a conference call to discuss Q1 2017 results on Friday, May 12, 2017 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®, Meccano®, and 2017 Toys of the Year, Hatchimals®, Air Hogs® and PAW Patrol®. Since 2005, Spin Master has received 82 TIA Toy of The Year (TOTY) nominations with 21 wins across a variety of product categories, including 13 TOTY nominations for Innovative Toy of the Year, more than any of its competitors. To date, Spin Master has produced six television series, including 2007 success Bakugan Battle Brawlers and current hit PAW Patrol, which is broadcast in over 160 countries and territories globally. Spin Master employs over 1,500 people globally with offices in Canada, United States, Mexico, France, Italy, United Kingdom, Slovakia, Poland, Germany, Sweden, the Netherlands, China, Hong Kong, Japan and Australia.

Non-IFRS Financial 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", "Constant Currency" and "Sales Allowances", 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.

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 share based compensation expenses, 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.

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.

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 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 product category and geographical segment 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 financial 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, 2017 and 2016. All references to $ refer to US$:

(All amounts in US$ 000's)






Fiscal Three Months Ended, March 31


2017

2016

$ Change

% Change

Net income (loss)

$

10,087

$

9,937

150

1.5%


Income tax expense (recovery)

$

3,856

$

4,505

(649)

-14.4%


Finance costs

$

2,864

$

1,760

1,104

62.7%


Depreciation and amortization

$

9,214

$

5,371

3,843

71.6%

EBITDA (1)

$

26,021

$

21,573

4,448

20.6%

Normalization Adjustments:






Restructuring (2)

$

752

$

656

96

14.6%


Foreign exchange loss (gain) (3)

$

(1,699)

$

(5,040)

3,341

-66.3%


Stock Based Compensation (4)

$

2,724

$

6,784

(4,060)

-59.8%


Impairment of Intangible Asset (5) 

$

385

$

-

385

100.0%


Amortization of fair market value adjustments (6)

$

2,355

$

-

2,355

100.0%


Acquisition Related Incentive Compensation (7)

$

280

$

-

280

100.0%

Adjusted EBITDA (1)

$

30,818

$

23,973

6,845

28.6%


Income tax expense (recovery) (8)

$

3,856

$

4,505

(649)

-14.4%


Finance costs (8)

$

2,864

$

1,760

1,104

62.7%


Depreciation and amortization

$

9,214

$

5,371

3,843

71.6%


Tax effect of normalization adjustments (9)

$

1,327

$

749

578

77.2%

Adjusted Net Income (1)

$

13,557

$

11,588

1,969

17.0%






Cash from (used in) operations

$

24,869

$

4,161

20,708

497.7%

Plus:





Changes in working capital

$

(3,438)

$

20,054

(23,492)

-117.1%

Cash from (used in) operations before working capital changes

$

21,431

$

24,215

(2,784)

-11.5%

Less:





Cash from (used in) investing

$

(16,433)

$

(19,845)

3,412

-17.2%

Plus:





Cash used for license, brand and business acquisitions

$

-

$

11,989

(11,989)

-100.0%

Free Cash Flow (1)

$

4,998

$

16,359

(11,361)

-69.4%

Footnotes:

1)

See "Non-IFRS Financial Measures".                                                    

2)

2017 and 2016 restructuring primarily related to organizational changes in the normal course of business.                                                                                                               

3)

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.

4)

Share 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 IPO and share option expense.

5)

Impairment of Intangible asset related to Content Development.

6)

Amortization of Fair Market Value adjustments relating to acquisition of Swimways in the third quarter of 2016 and Cardinal Industries Inc. in the fourth quarter of 2015.

7)

Remuneration expense associated with contingent consideration for the Swimways acquisition.

8)

Income tax expense /(recovery) and Finance Costs have been adjusted for 2015 to exclude Financial Impacts related to the settlement of certain tax matters as they are not reflective of on ongoing costs of the business.

9)

Tax effect of normalization adjustments (Footnotes 2-7). Normalization adjustments 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 outlook for 2017 (see "Outlook"); future growth expectations; the expected benefits of the Company's investment spend; 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 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 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 and Swimways' 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 continuous disclosure documents filed under the Company's profile on SEDAR (www.sedar.com) including the Company's Management Discussion and Analysis and Annual Information Form. 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; Karoline Hunter, Senior Director, Investor Relations & Associate General Counsel, karolineh@spinmaster.com

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