Spin Master Reports Strong Third Quarter Financial Results

Q3 Revenue increases 31.7% and Adjusted EBITDA up 47.7%

TORONTO, Nov. 10, 2015 /CNW/ - Spin Master Corp. ("Spin Master" or the "Company") (TSX: TOY), a leading global children's entertainment company, today announced strong financial results for the third quarter and nine months ended September 30, 2015. The Company's full Management's Discussion and Analysis and Unaudited Interim Consolidated Financial Statements for the three months and nine months ended September 30, 2015 are available on SEDAR (www.sedar.com) and on the Company's web site at www.spinmaster.com/financial-info.php.

On July 30, 2015, the Company completed its initial public offering ("IPO") of approximately 12.2 million subordinate voting shares for total gross proceeds of approximately C$220 million. Subsequently, on August 26, 2015, the Company issued approximately 1.8 million subordinate voting shares pursuant to the exercise of the underwriters' over-allotment option, generating additional gross proceeds of approximately C$33 million, for a total of approximately C$253 million. Comparative 2014 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.

Q3 2015 Financial Highlights

  • Revenue of US$386.8 million increased 31.7% from US$293.8 million in Q3 2014.
  • Revenue growth was driven by strong contributions from Paw Patrol and Star Wars licensed products, as well as product launches including Meccanoid, Bunchems, Chubby Puppies and Little Charmers. This was offset in part by declines in sales of the Zoomer, Digi Bird and Flutterbye Fairy lines, in addition to products associated with the How to Train Your Dragon movie
  • Revenue was favorably impacted in part by operational efficiencies that allowed the Company to ship product in Q3 that may have historically been shipped in Q4
  • In constant currency terms revenue increased by 34.3% in Q3 2015 relative to the comparable period in 2014
  • On a geographic basis, Spin Master's strong global platform drove Gross Product Sales (see "Non-IFRS Measures" below) increases of 35.1% in North America, 45.4% in Europe and 10.3% in the Rest of World
  • Total gross profit was US$205.2 million, representing 53.1% of revenue, compared with US$149.8 million, or 51.0% of revenue in Q3 2014; the improvement in gross margin was primarily attributable to increased sales of products under owned brands and ongoing productivity initiatives
  • Selling, general and administrative expenses for the quarter, excluding one-time costs associated with the IPO and the related issuance of stock-based compensation, represented 23.9% of revenue compared to 25.0% in Q3 2014.
  • Net income of US$51.1 million, or $0.52 per share, was 7.3% below the comparable period in 2014, reflecting the effects of IPO-related expenses, including US$43.4 million of stock-based compensation expense
  • Adjusted Net Income (see "Non-IFRS Measures" below) of US$74.1 million, or $0.79 per share, representing an increase of 32.3% over US$56 million in the same period the previous year
  • Adjusted EBITDA (see "Non-IFRS Measures" below) increased 47.7% to US$118.7 million in Q3 2015 compared with US$80.4 million in Q3 2014
  • Adjusted EBITDA Margins (see "Non-IFRS Measures" below) increased to 30.7% in Q3 2015 from 27.4% in Q3 2014
  • Free Cash Flow (see "Non-IFRS Measures" below) was US$75.8 million in Q3 2015 compared to US$72.6 million for the same period in 2014

"The momentum we demonstrated in the first half of 2015 continued in the third quarter," said Anton Rabie, Co-CEO and Chairman of Spin Master. "We experienced particularly strong results from both the Pre-School and Girls segment as well as the Boys Action and High-Tech Construction segment, reflecting the continued success of our Paw Patrol brand, the launch of Meccanoid and licensed products associated with the upcoming Star Wars movie."

"Our performance in the third quarter of 2015 was enhanced by a significant improvement in operational efficiency. This allowed us to ship product in Q3 that would normally be shipped in Q4," said Ben Gadbois, President and COO of Spin Master. "This will provide our retail customers with additional time for sell-through to consumers in the critical Christmas season, while also setting us up for a strong first half in 2016 as we refill the retail pipeline."

"Looking ahead to the fourth quarter, we are very excited about the expected consumer reaction to our products," said Ronnen Harary, Co-CEO of the Company. "Preliminary sell-through is encouraging, with strong demand from our owned entertainment franchises and for the Star Wars line, including our Air Hogs Millennium Falcon. We are continuing to focus on developing our entertainment properties into evergreen franchises, which will expand our margins and diversify our revenue streams."

Q3 Gross Product Sales by Business Segment (US$ millions)


Q3 2015      

Q3 2014    

% Change

Activities, Games & Puzzles and Fun Furniture    

$74.6

$59.5

25.4%

Remote Control and Interactive Characters      

$137.8

$130.0

6.0%

Boys Action and High-Tech Construction             

$95.3

$62.7

52.0%

Pre-School and Girls                                      

$131.9

$76.8

71.7%

Gross Product Sales                                   

$439.6

$329.0

33.6%

Other Revenue                                                 

$4.5

$1.8

150.0%

Sales Allowances                                                 

($57.3)

($37.0)

54.9%

Revenue                                                    

$386.8

$293.8

31.7%

September 30, 2015 Year to Date ("YTD") Results

For the nine months ended September 30, 2015, Spin Master generated revenue of US$621.0 million, an increase of 29.9% from US$478.0 million for the nine months ended September 30, 2014. In constant currency terms revenue increased by 33.3% for the nine months ended September 30, 2015 relative to the comparable period in 2014. Gross profit in the first nine months of 2015 increased to US$327.3 million, or 52.7% of revenue, compared with US$240.1 million, or 50.2% of revenue in the first nine months of 2014.

Selling, general and administrative expenses for the nine months ended September 30, 2015 represented 39.1% of revenue compared to 33.9% of revenue for the same period in 2014, reflecting the IPO-related expenses in the third quarter of 2015. Excluding IPO-related expenses selling, general and administrative expenses for the nine months ended September 30, 2015 represented 32.0% of revenue. Net income for the nine months ended September 30, 2015 was US$60.4 million, or $0.64 per share, an increase of 6.9% from US$56.5 million in the first nine months of the previous year. Adjusted Net Income for the nine months ended September 30, 2015 was US$85.9 million, or $0.97 per share, up 51.2% from US$56.8 million in the first nine months of 2014.

Adjusted EBITDA for the nine months ended September 30, 2015 increased to US$147.7 million, up 63.9% from US$90.1 million for the same period in the previous year. Adjusted EBITDA Margins increased to 23.8% from 18.8% in the first nine months of 2014, reflecting margin expansion and continued positive operating leverage.

Free Cash Flow for the nine months ended September 30, 2015 was US$73.4 million compared to US$63.6 million for the same period in 2014.

Q3 YTD Gross Product Sales by Business Segment (US$ millions)


Q3 YTD 2015 

Q3 YTD 2014 

% Change

Activities, Games & Puzzles and Fun Furniture       

$131.2

$105.5

24.4%

Remote Control and Interactive Characters         

$183.3

$171.4

6.9%

Boys Action and High-Tech Construction           

$144.2

$141.6

1.8%

Pre-School and Girls                                 

$236.5

$115.8

104.2%

Gross Product Sales                                 

$695.2

$534.3

30.1%

Other Revenue                                                   

$11.2

$3.9

187.1%

Sales Allowances                                         

($85.4)

($60.2)

41.9%

Revenue                                             

$621.0

$478.0

29.9%

Q3 2015 and Q3 YTD Business Segment Gross Product Sales

Third quarter 2015 Gross Product Sales in the Activities, Games & Puzzles and Fun Furniture segment were 25.4% above 2014 levels, slightly above the YTD increase. Increases were attributable to the launch of Bunchems, Text Cool and Knit Cool as well as increased sales in Marshmallow furniture. In the Remote Control and Interactive Characters segment, Gross Product Sales increased by 6.0% compared to Q3 2014, and by 6.9% on a YTD basis. Q3 growth was primarily driven by sales of Star Wars licensed Air Hogs, partially offset by lower sales of Zoomer and Digi Bird products, although Zoomer was up for the YTD period.  In the Boys Action and High-Tech Construction segment, Gross Product Sales increased 52.0% in Q3 2015, with a small YTD increase recorded. The quarter was primarily driven by the launch of Meccanoid and Star Wars licensed products offset by lower sales of other licensed products, which also affected the YTD amounts. In the Pre-School and Girls segment, Paw Patrol and the launches of Little Charmers and Chubby Puppies drove a 71.7% sales increase on a quarter over quarter basis and a 104.2% increase in the YTD period.

Outlook

On October 2, 2015, subsequent to the quarter-end, the Company successfully completed the previously announced acquisition of Cardinal Industries Inc. ("Cardinal"), whose 2014 North American revenue exceeded US$50 million. The acquisition moved Spin Master into the #2 market share position in the US games sub-segment. Spin Master expects to grow Cardinal's sales in Europe and other international markets by leveraging the Company's strong global platform.

Given changes in the timing of shipments in the current year versus the prior year, it is important to consider the second half of 2015 in aggregate. Shipments in the third quarter of 2015 were enhanced relative to the prior year due to a significant improvement in operational efficiency. This improvement allowed the Company to ship product in Q3 that, in previous years, was not available for shipment until Q4. Shipping earlier provides retail customers with additional time for sell-through to consumers and avoids early season out-of-stocks on popular items. Due to the accelerated shipments in the current year, the Company expects organic Gross Product Sales in Q4 2015 to be slightly below Q4 2014. For the second half of the year, Spin Master expects organic Gross Product Sales growth to be at the mid to upper end of the previously stated range of 8% to 12% compared to the second half of 2014, with full year 2015 organic Gross Product Sales growth at the upper end of the previously stated 12% to 15% target level compared to 2014.  

From a profitability perspective, a significant portion of the Company's annual marketing expenses are incurred in Q4 in order to maximize their impact on consumer purchases and the return on investment. This causes a misalignment of sales and spending between Q3 and Q4, resulting in Adjusted EBITDA margins in Q4 typically significantly below those in Q3. Given that the adjusted timing of shipments discussed above will magnify this effect when comparing to 2014, it is important to consider the second half of 2015 in the aggregate.  Adjusted EBITDA Margins for the second half of 2015 are expected to be consistent with the comparable period in 2014. The Company continues to expect full year 2015 Adjusted EBITDA Margins to be higher than 2014, demonstrating the continued improvement in annual profitability.

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 2015 third quarter results at 11:00 am Eastern Time on Wednesday November 11, 2015.   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 Wednesday, November 25, 2015. To access the replay, dial (416) 849-0833 or (855) 859-2056 (Passcode: 55730652). 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 Bakugan ™, Air Hogs®, Spin Master Games™ and the 2015 Toy of the Year, Zoomer™ Dino. Since 2005, Spin Master has received 58 TIA Toy of The Year ("TOTY") nominations with 14 wins across a variety of product categories. Spin Master has been recognized with 11 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. Spin Master employs over 850 people globally with 15 offices in Canada, US, France, Italy, United Kingdom, Slovakia, Germany, the Netherlands, Mexico, China, Hong Kong and Japan.

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 and nine months ended September 30, 2015 and September 30, 2014:



Three Months Ended September 30


Nine Months Ended September 30

(in $ millions, except percentages)


2015

2014


2015

2014

Net Income after Tax


51.1

55.1


60.4

56.5









Finance Costs


1.1

1.0


1.6

2.3


Depreciation and Amortization


5.2

4.0


17.0

11.3


Income Tax


26.4

19.1


29.7

19.6

EBITDA


83.8

79.2


108.7

89.7


Normaliztion Adjustment








Restructuring

(1)

1.7

0.1


2.7

0.6


IPO Costs

(2)

0.1

0.2


0.7

0.2


Stock Based Compenstion

(3)

43.3

0.0


43.3

0.0


One time income from Transfer of Non Business Related Assets

(4)

(9.6)

0.0


(9.6)

0.0


One time Service Fee income.

(5)

(5.0)

0.0


(5.0)

0.0


Foreign exchange (gains)/losses

(6)

4.4

0.9


5.9

(0.4)

Adjusted EBITDA


118.7

80.4


146.7

90.1


Finance Costs


1.1

1.0


1.6

2.3


Depreciation and Amortization


5.2

4.0


17.0

11.3


Income Tax


26.4

19.1


29.7

19.6


Tax Effect of Normalization Adjustments

(7)

11.9

0.3


12.5

0.1

Adjusted Net Income


74.1

56.0


85.9

56.8



(1)

Corporate restructuring charges in Q3 2015 and Q3 year-to-date related to changes in executive management.

(2)

IPO Costs are considered a one‑time expense and are not reflective of on‑going costs of the business.

(3)

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 IPO. Stock based compensation expense at date of Offering (Q3 2015) $37,913,386; First year

following Offering (2015/16) $18,022,347; Second year following Offering (2016/17) $10,517,047; Third year following Offering (2017/18)

$6,764,397; Fourth year following Offering (2018/19) $4,262,630; Fifth year following Offering (2019/20) $2,386,305; Sixth year following

Offering (2020/21) $885,245

(4)

One of the predecessor corporations to the Company owned assets which are non‑income producing and do not relate to the business of

the Company. Accordingly, the assets were transferred to the principal shareholders prior to the closing of the IPO through dividends‑in‑kind

at their current fair market value.

(5)

One time service fee income is in connection with the acquisition of Cardinal and services provided to Cardinal prior to the closing of the transaction.

(6)

Transaction gains and losses generated by the effect of foreign exchange recorded on assets and liabilities denominated in a currency that

differs from the functional currency of the applicable entity are recorded as a foreign exchange gain or loss in the period in which they occur.

(7)

Tax effect of normalization adjustments (Footnotes 1-6). 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 launching of new products, brands and entertainment properties; the Company's outlook for Q4 2015, the second half of 2015 and full year 2015; the Company's expectations concerning growth of Cardinal in Europe and other international markets; 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 likelihood of a stronger first half of 2016 due to improved inventory sell through at retail customers; and 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 ability of the Company to maintain its distribution capabilities; the Company's ability to leverage its global platform to grow Cardinal's sales; the Company's ability to continue to build and maintain strong, collaborative relationships; the Company's status as a preferred collaborator; the culture and business structure of the Company will support its growth; the ability to expand the Company's portfolio of owned branded intellectual property and successfully license it to third parties; the expanded use of advanced technology and robotics in the Company's products; the increased access of entertainment content on mobile platforms; fragmentation of the market creates acquisition opportunities; maintenance of the Company's  relationships with its employees; and the continued involvement of the Company's founders 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 3 month and 9 month period ended September 30, 2015 and the Company's supplemented PREP prospectus dated July 22, 2015. 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, 416-364-6002, ext 2333, marks@spinmaster.com

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