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Good day, and welcome to the Spin Master Corporation First Quarter 2023 Results Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Sophia Bisoukis. Please go ahead ma'am.
Thank you, and good morning. Welcome to Spin Master's Financial Results Conference Call for the First Quarter ended March 31, 2023. I'm joined this morning by Max Rangel, Spin Master's Global President and CEO, and Mark Segal, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A and interim consolidated financial statements are available on the Investor Relations section of our website and spinmaster.com and on SEDAR.
Before we begin, please note that remarks on this conference call may contain forward-looking statements about Spin Master's current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements and any other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made, based on factors that management believes are appropriate and are reasonable in the circumstances.
However, there can be no assurance that certain estimates and/or assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, Spin Master cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on these forward-looking statements.
Except that, as may be required by law, Spin Master has no obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise. For additional info on these assumptions and risks, please consult our cautionary statements regarding forward-looking information in our earnings release dated May 3 2023. Please note that Spin Master reports in US dollars and all dollar amounts to be expressed today are in US currency unless otherwise noted.
I would now like to turn the call over to Max.
Good morning. Thank you for joining us today. Our first quarter performance was ahead of our expectations and reflects both, encouraging entertainment and digital games performance, as well as expected toy performance despite tough comparables against 2022. Our three creative centers provide us with a strong integrated platform to create holistic play experiences for kids and families, and help to enact our strategy to reimagine everyday play.
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In Q1, as expected, we experienced pressure on toy gross product sales, resulting from excess inventories at retail, carried over from Q4 2022. These in turn, caused retailers to slow orders for the front half of '23. We are also lapping an initially strong Q1 '22, characterized by shipments from both our first Paw movie and the Batman movie. As a result, our total revenue in the quarter declined 46.9% year-over-year in line with expectations. We see the industry's retail inventory situation improving steadily.
From a Spin Master's perspective, our US retail inventory at the end of 2022 was up $117 million compared to $21 million. However, at the end of Q1 2023, our US retail inventory was flat compared to 2022. Since the end of Q1, both industry and our retail inventory continues to decline and we expect any remaining '22 related retail inventory overhang to unwind by the end of Q2, positioning us for a strong second half.
While historically, the toy industry has been resilient amidst economic downturns, the start to '23 for the industry has been soft from a POS perspective. According to Circana, previously known as NPD in Q1 '23, consumers globally bought fewer toys and spent slightly less on the toys that they purchased. Global toy POS declined 3.1%, while our global POS was down 4.8% per Circana.
In the US, our POS declined 9.2% compared to a decline of 4.7% for the industry. Conversely, our international POS performance served better -- and in Q1, POS was growing 3.9% compared to the industry which was flat. We grew POS in seven of the 11 countries measured by Circana, outperforming the industry in most countries. It's important to remind you that the first quarter of any year is our seasonally lowest quarter and this was exacerbated in Q1 '23 for the reasons we have discussed.
We believe that Q1 POS data, particularly in the US may not be representative of full year performance. As we look to the fall, we have a strong toy lineup, with breakthrough innovation and impressive launches within our core and licensed brand portfolios, coupled with exciting content releases. Our commercial teams are focused on working closely with our retail partners to deliver on the second half. Execution on shelf will be supported by measured investment in fully integrated marketing plans with digital campaigns and portfolio led initiatives to incent and convert consumers.
We have built an industry-leading preschool business, driven by globally acclaimed entertainment series and toy lines with deep character affinity. PAW Patrol, which is celebrating its 10th anniversary this year, continues to lead the way as the number one preschool toy property globally in Q1 2023.
According to Sircana, Global POS for POC declined by 7.1% in Q1 2023, mainly from declines in Europe. We expected this decline as we were lapping the continued consumption from the PAW movie in Q1 2022 and Europe had not yet benefited from the distribution of our Aqua Pups theme or the Rubble & Crew product launch. While overall POS was down, the availability of the strong theme and Rubble distribution drove POS gains in some key markets including the US.
In the broader infant toddler preschool toy super category, as defined by Sircana, we had three of the top 10 items in the US including some of the new items for 2023. This demonstrates our ability to win by innovating our core brands. Another example of winning with innovation is Bakugan, within our Wheels & Actions category. Bakugan was relaunched in 2019 after its first rein as a global phenomenon from 2007 to 2010 and has proven to be an evergreen brand with a strong following.
In Q1, we introduced Bakugan Legends and the brand reached number one in the battling toys and playsets class globally, up from number two in 2022 per Circana. We are excited to launch a whole new way to battle with Bakugan this fall, supported by new content. Speaking to all their successful IP, Hatchimals was a global breakthrough toy when it launched in 2016, creating a new play pattern with a toy that on box itself, generating over $1 billion in gross product sales from 2016 to 2018.
Over time, we have evolved the brand beyond the initial big egg extending it to a successful line of collectibles. As many of you saw in our L.A. showroom in January, we are launching a new way to hatch characters this fall with the launch of Hatchimals Alive, using water to unveil the characters inside. We continue to explore infusing innovation into the Hatchimals line with exciting new product innovations in 2024 and beyond. We have invested in our ability to secure top licenses and over time we have steadily grown our reputation as an innovative and collaborative global partner.
Licensed products now comprise just under 30% of our POS per Circana. Gabby's Dollhouse in partnership with Universal DreamWorks Animation continues to win the hearts of children everywhere. In Q1 2023 Gabby was the number five preschool toys property compared to number 10 in Q1 2022 and was the largest dollar global growth property in the super category per Circana.
Sales for the DC line softened in Q1, as we lapped the Batman movie toy line launched last year. However, we regained our #1 manufacturer position in Q1 for DC Universe globally. With four new films in the DC Universe planned for 2023, we are excited about our lineup of action figures, vehicles and role play items to enable kids and collectors to bring their action and adventure from the big screen into their homes.
Warner Bros. is committed to investing in these franchises with more theatrical releases and content extensions launching over the next several years. Our design teams are looking forward to working with the toy lines, which will accompany the upcoming Batman and Superman movies in 2025.
The last major license I want to comment on is Monster Jam in partnership with Feld Entertainment. Monster Jam based category globally in Q1 and remained the number two property in the vehicles category and the number one licensed branding vehicles. Within games, category growth is being led by the trading card games and adult party games. Many of these games are inspired by social media trends and viral concepts. We are leaning into the popularity of these types of games in 2023 with several new titles including, If You Know You Know! and Dumb Ways to Die. The catchy song for Dumb Ways to Die was originally created to promote railway safety in Australia and has become a viral sensation on social media. Our Dumb Ways to Die: card game will launch this summer.
We're also leaning into giant games, which are also becoming increasingly popular with the license of monopoly and we will launch Giant Monopoly late this fall. We have always been a disruptor in the toy industry known for our innovation. We expect to deliver exciting innovations for the holiday season as retailers look to differentiate themselves on shelf and in the hearts of kids and families around the globe.
Looking forward, we are doubling down on innovation by starting a new internal group that will be solely focused on developing breakthrough innovation. Our most innovative and creative talents will be working in this group with a sharp focus to deliver significant disruptive breakthrough toys for the future.
Entertainment had a very strong quarter with revenue increasing 69.4% driven by higher distribution and licensing and merchandising revenue primarily related to the Paw Patrol universe. Our strategy to invest in the creation of multi-platform content will result in the releases in 2023 and 2024 of our most diverse entertainment slate in our history. Part of that success can be attributed to Paw Patrol a franchise, which continues to expand its reach, attracting new audiences in connection to these heroic pups. This fandom has allowed us to grow the Paw universe with the launch of the Rubble & Crew series, which debuted on Nickelodeon in February.
Rubble & Crew delivered top-performing ratings with the premier ranked as the number one show on cable with kids two to five in its time slot, pacing double digits ahead of competition. Rubble & Crew also posted the strongest share for a preschool series launch since 2019, capturing viewership with over 20% of kids two to five in the US.
Paw continues to perform well across on both linear and streaming platforms. We have strong momentum heading into our movie launch and are looking forward to entertaining preschoolers and their families with another epic big screen adventure. We remain on track to deliver the second Paw Patrol movie, which is set to debut September 29th.
We are launching two brand-new properties in 2023 Vida the Vet, our new preschool series is set to debut on BBC’s CBeebies in the UK and on Corus Treehouse in Canada this fall. In addition to these initial broadcasters, we are pleased to share that Netflix has acquired streaming rights for Vida for the US market. The team is also closing a raft of other international distribution deals, which should be announced soon.
We are also very excited for the launch of Unicorn Academy. Our fantasy adventure series, which is launching in Netflix in November is amazing. We are putting our full franchise development and management support behind Unicorn Academy, which will cross over from entertainment into both toys and digital games in 2024. We are building an expansive licensed consumer products program that will span apparel, publishing, accessories and many other categories. We can't wait to show you Unicorn Academy. It is unlike any other property that we've created and is for sure to enchant kids and families.
Turning to our Digital Games Creative Center. In March, we indicated we were seeing some positive momentum. The industry new baseline is lower than it was during the COVID years, but has stabilized at a much higher plateau than in pre-pandemic years. We are seeing a similar pattern in our own digital games business. We are actively expanding our digital games portfolio with several new digital games launching this year.
We will be entering new and large mobile gaming categories that will increase our addressable market and broaden our audience base. Our anchor games including Toca Life World and Sago Mini have been created for children, but we are thinking more broadly in designing digital games that will attract kids of all ages and spawn a growing player network anchored in safe and fun play.
In Toca Life World, player engagement remains high. In early April, we hit a new record of 12.5 million daily active users in Toca Life World, beating our previous record in early 2022. This reflects the success of the games as a service model where fresh and relevant content drives player satisfaction and engagement. We have more exciting content drops planned throughout 2023, including an exciting collaboration to be announced in June as well as enhancements to our creator tools, which will allow players to express themselves creatively and share their stories. We've talked to you in the past about Toca Days our first 3D multiplayer game setting the same universe as Toca Life World.
At its core, the game is about social interactions between players, but also within a broader community. Toca Days is currently in early soft launch and we are testing cross-promotion between Toca Life World and Toca Days to drive traffic across the Toca Universe. Player sentiment has been high so far. And based on the initial feedback and learnings we are fixing bugs and prioritizing features. We continue to roll out sub-launch to additional markets in 2023, with a full go-live plan for 2024.
In Sago Mini, we are also focusing on new content and late in Q1 we saw indications of growth in subscriptions and downloads. We are launching our Sago Mini subscription bundle in Q3 to give families more access to content at a better value. Between Sago and Originator, we currently have around 330,000 subscribers and the bundle will allow parents to make one streamlined purchase that will provide access to hundreds of games and activities, including all the Sago World, Sago School, Sago First Words and Originator developed endless learning and MathTango apps, as well as the Toca Junior app library content with six titles growing to nine by the end of 2023.
The leveraging Speed Master IP is a key priority for our Digital Games Creative Center. Our new casual mobile game developed leveraging the iconic Rubik's cube will soft launch this summer. We will also appeal to the deep global fan base for Paw Patrol to the creation of our first in-house developed digital game PAW Patrol Academy.
The app combines hundreds of show clips that are unlocked through play creating a seamless and immersive experience between our entertainment and game playing content. There are also exciting missions and educational content that will keep preschoolers engage in fun and emotional learning.
Paw Patrol Academy will launch in tandem with a movie in October and will also be available as part of the Saga subscription bundle. In 2024, we will be launching the Unicorn Academy digital game, which will bring the Magic Island into the digital world with an action adventure game designed for mobile devices.
We have an exciting 2023 and 2024 plan for digital games and we look forward to sharing more details and live demos with you at our Analyst and Investor Day in Stockholm in late August.
While we are investing for growth we are also closely managing our costs. Our prudency management has put us in a strong financial position, and allow us to invest in acquisition opportunities within each greater center. We remain confident in our strategy to reimagine everyday play leveraging the power of our three creative and integrated creative centers to capture market share, deliver profitable growth, and create long-term shareholder value.
I am now going to pass it over to our CFO, Mark Segal to provide further commentary on our performance in the quarter and our outlook. Mark?
Thank you, Max, and good morning. Against challenging comps, we delivered $271.4 million in revenue in Q1 2023 across all creative centers, down 36% from 2022. The year-over-year decline is primarily reflected in shift in order timing in the toy creative center offset by an increase in revenue and entertainment.
In March, we discussed how the toy industry felt the impact of retailers entering Q1 2023 with significant carryover inventory from Q4 2022. Comparisons to Q1 2022 look especially unfavorable since we had an unusually high sales as retailers brought inventory in early to avoid anticipated supply chain disruptions as well as some large entertainment-related shipments.
Thanks to the hard work of our commercial teams, we ended Q4 2022 with very clean on-hand inventory reducing the need for aggressive clearance activity in Q1, which together with higher entertainment and digital games revenue led to solid gross margins and a better-than-expected adjusted EBITDA margin.
Looking at Q1 performance by creative center Toy gross product sales were $216.3 million, down 45.6%. Foreign exchange did not have a material impact. And on a constant currency basis, gross product sales declined 44.7%.
In 2022, 45% of our gross product sales occurred in H1 compared to 30% to 35% typically, which creates a tough H1 comparator for us. Difficult Q1 2023 comps against last year are exacerbated further by the large volume of toys we shipped in Q1 2022 for the Batman movie, as well as toys for the first PAW movie from 2021 for which demand continued into Q1 2022. We also had $11 million of sales in Russia in Q1 of 2022.
Geographically, in Q1, North America saw the biggest decline, both in dollars and percentage terms as the trends discussed earlier were more pronounced in this region. Revenue declined $133.1 million or 56% to $105.5 million and accounted for 48.7% of Q1 GPS, down from 60%. International sales, comprising Europe and the rest of the world, declined $48.1 million or 30% to $110.8 million, comprising 51.2% of Q1 GPS.
Preschool and Dolls & Interactive declined 44.7%, primarily from a drop in sales of PAW Patrol, Hatchimals, Wizarding World and Purse Pets, partially offset by an increase in Gabby's Doll House and Rubble & Crew.
Activities, Games & Puzzles and Plush were down 40%, mainly due to a decrease in the Games & Puzzles portfolio and Kinetic Sand. Wheels & Action dropped 56.1%, driven by a decline in DC, especially Batman, as well as Bakugan and Monster Jam. Outdoor was down 37.9%.
Q1 sales allowances were 13.9% as a percentage of gross product sales compared to 11.7%. Whilst higher than 2022, it was a good result considering the broader retail environment we were operating in. We continue to expect sales allowances of approximately 12% for 2023.
Q1 adjusted EBITDA for toys was a loss of $21.4 million compared to adjusted EBITDA of $58.9 million, a margin of negative 11.5% compared to 16.8%. The lower volumes driving deleveraging was the main driver of the EBITDA margin differential.
In Q1, entertainment revenue increased $15.4 million or 69.4% to $37.6 million from higher distribution and L&M revenue. Adjusted operating income was $29.9 million, up 162.3% and adjusted operating margin was 79.5% compared to 51.4%. The increase in entertainment profitability was driven by higher distribution and L&M revenue and lower costs from fewer content deliveries.
Q1 revenue in Digital Games was down 7% to $47.5 million compared to last year from lower in-app revenue in Toca Life World, but sequentially was up 25.3% compared to Q4 2022 from higher engagement and in-app revenue in Toca Life World.
Over the last three years, our Digital Games revenue has gone significantly and we have increased revenue by over 575% since Q1 of 2020. Digital Games adjusted operating margin in Q1 was 40%, down from 42.3% due to higher development costs related to investments in future games.
The Q1 consolidated gross margin was 58.4% compared to 55.9%, an outstanding result. The 250 basis point increase arose primarily from high-margin entertainment revenue and lower ocean freight, partially offset by higher sales allowances. The deleveraging I referred to earlier was evident in our SG&A of $149.3 million, representing 55% of consolidated revenue compared to $158.6 million or 37.4%.
Marketing costs were down $2.9 million at 9% of revenue compared to 6.4%. Administrative expenses were up due to higher personnel and travel expenses offset by lower incentive comp.
During the quarter, we implemented a global workforce reduction program and booked a restructuring charge of $3.8 million, included in administrative costs.
Adjusted SG&A was $139.5 million or 51.4% of consolidated revenue compared to $153.8 million or 36.3%. On the topic of restructuring, we are making good progress on our Calais France facility shutdown project, and will account for the onetime restructuring cost in Q2. Combined, our two restructuring projects will when completed result in run rate savings of approximately $15 million in 2024 and beyond.
In Q1, our net loss was $1.9 million or a loss of $0.02 per diluted share compared to net income of $45.6 million or $0.43 per diluted share. Adjusted net income on EBITDA was $12.3 million or $0.12 per diluted share compared to $57.5 million or $0.55 per diluted share. Adjusted EBITDA was $30.6 million compared to $95.7 million. Adjusted EBITDA margin was 11.3%, down from 22.6% in Q1 2022 from lower operating leverage partially offset by higher gross margin.
Turning to our balance sheet. Our on-hand inventory at the end of Q1, was in very good shape. At just under $110 million, inventory was essentially flat to year-end, but approximately $38 million lower than Q1 2022. Free cash flow in Q1 was $34.4 million negative compared to negative $79.4 million primarily from changes in noncash working capital. We ended Q1 with $569.3 million in cash down $75 million from the year-end of $644 million and which is in line with normal seasonality.
In Q1, we deployed $26.5 million for the acquisition of 4D brands and Hexbug. We also invested $23.4 million in intangible assets for entertainment and digital games content. ,We continue to be in an extremely strong liquidity position, with available liquidity of over $1 billion.
From a capital allocation perspective, investments in innovation content and M&A remain our priorities. In addition to our dividend, regarding which we will introduce a dividend reinvestment program in Q2. We initiated a share buyback program. The program has been executed through a normal course issuer bid, which was approved by the TSX in early Q1. We repurchased 241,500 shares in Q1 for $6.3 million.
In April, we repurchased a further 156,200 shares for $4.2 million. Repurchasing shares at current market prices, represents an attractive investment opportunity for us, given our strong liquidity position and growth prospects. We will continue to opportunistically use the NCIB and believe that it together with the dividend represents a prudent use of capital, and an important part of our efforts to create value for shareholders.
Turning to our outlook. There remains a long way to go for 2023, but current trends in our business on matching the expectations for 2023, we communicated in March. We continue to expect the 2023 toy gross product sales to be flat, to slightly down compared to 2022. We expect H1 2023 Toy gross product sales, to be towards the low to midpoint of the seasonality range of 30% to 35% in H1, we guided to in March.
We are maintaining our expectations for revenue to be in line with 2022 excluding the $17 million PAW Patrol movie distribution revenue expected in Q3. Foreign currency translation is expected to have a neutral impact on revenue based on current rates. We discussed the primary revenue and cost drivers in detail in March, and there have been no major changes. We are maintaining 23% adjusted EBITDA margin expectations, which should be flat to slightly above 2022 excluding the $17 million PAW Patrol movie distribution revenue.
To remind you total depreciation and amortization for 2023 is expected to increase from $68 million in 2022 to just under $150 million in 2023, primarily from more deliveries of entertainment content. From a phasing perspective, D&A will be approximately $33 million in Q2, $53 million in Q3, and $44 million in Q4.
To conclude, we continue to execute on our growth strategies and build our integrated creative center platform to generate above industry growth in the medium to long-term. We have the scale and talent across our creative centers combined with a strong balance sheet to capitalize on both organic and acquisition opportunities and in doing so, build long-term shareholder value.
That concludes our prepared remarks. We will now be pleased to take questions. Operator please open the line.
Thank you, sir. [Operator Instructions] We'll take our first question from Martin Landry from Stifel. Please go ahead.
Hi, good morning. I was wondering if you can touch a little bit on your entertainment segment. It had a really strong quarter; operating income was up almost 3x versus last year. You did touch on some of the reasons, but I was wondering if you can expand a little bit as to what explains this nice profitability uptick here?
Hi, good morning Martin. Thanks. I'll take that one. Entertainment is an interesting segment for us and is quite sensitive to revenue mix. In the quarter in the first quarter we had a really strong increase in high-margin licensing and merchandising revenue and also distribution revenue which is actually characterized as part of the income we get -- the rev income we get from the first PAW movie in 2021 which was still flowing through in the first quarter of this year.
So, that is very high margin accretive revenue and essentially flow straight down to the bottom-line. And that's what you saw. It impacts gross margin and adjusted EBITDA margin and EBIT in a very positive way.
I do want to call out Martin that it's going to be hard to replicate that kind of performance every quarter, although I would love to. And we are all going to see some amortization flowing through in Q2 to Q4, which is going to lower that margin because that distribution revenue and the associated amortization from it is actually lower margin revenue for us. And that's why in our outlook section we called out those amortization numbers so you know how to model that.
Yes. Okay, that's helpful. You also talked in your opening remarks about Gabby's Dollhouse. It continues to perform extremely well. I was wondering how long is that license going to be ongoing with you guys? When does it expire? And is there a likelihood of renewal?
Yes. So, good morning Martin. Gabby's Dollhouse has been with us. It started in 2021. We basically have another couple of year and a half ago with it. And we're in a really great place with Universal DreamWorks with regards to Gabby's. And if you think about it so far the success of Gabby's from a toy perspective has been mostly in the US and we're just now beginning to get that going internationally.
So, as Universal expands Gabby beyond the US for obviously the content, we are also expanding that. So, you can expect we're in a great place with them and we will continue to reap the benefits of this relationship into the future.
Okay. And then maybe last question for me. Just broader outlook. Wondering if you can talk a little bit about the discussions you're having with retail buyers right now. How are they approaching the summer in the back-to-school season, I would expect at some point with retail inventories being rightsized. Is there a potential for replenishment in the back half? Just trying to get a sense as to how they're approaching the coming months and all the way up into the holiday season?
Sure. I think Mark has in his remarks referenced a return to historical weightings between the quarters and the halves. And so retailers are, just to answer your question, planning for that exact condition. And therefore, quite a bit of the shells are being set in the summer, which coincides with what Mark and I have said, again, regarding retail inventory, it should be down by the end of the summer.
So as you think about back-to-school and people resetting shelves and a few theatrical releases including ours on PAW correct, September 29, you're going to begin to see that activity. And yes, when things begin to do well, there's an opportunity for replenishment. And this year, unlike last, and it only dates back to 2016, 2017, Christmas falls on a Monday and it has basically therefore two previous weekends of purchasing. And that last weekend is really important. So retailers are also planning accordingly.
Okay. That’s helpful. That’s it for me. Thank you.
Thanks Martin.
Thank you. We'll take our next question from Adam Shine from National Financial.
Hi. Good morning. So Mark, I don't want to push you on guidance. I heard your comments certainly very early in the year, but maybe just in the context of digital games and entertainment and then maybe perhaps one more for you later Max.
But specifically, digital games, we had seen three prior quarters of a step-down and the step down in Q1 wasn't to the same extent as you alluded to and there's sort of more product flowing into the back half of the year let alone this summer. So can you talk about some of your expectations starting with digital games? Is this a revenue line that frankly, should see some degree of growth as compared to what perhaps some people might have assumed would be a decline for the year?
So Adam, we're encouraged by what we saw in Q1 for digital games. Even though we own relative to Q1 last year, we are more than 25% up sequentially relative to Q4. And so, we're actually encouraged by that and we saw some of that flow through into our performance in Q1 in terms of that segment's EBIT.
Now obviously, we would love to see that trend continue. We're not calling that out specifically. It is to some extent built into our outlook for the year but there may be some upside. Hopefully, we'll be able to give you more views on that as the year progresses. But certainly, we're excited about what we're seeing in digital games.
We've got a lot of new content in Toca Life World. We're excited about the one sub bundle in Sago. There's a number of products in soft launch. The new products Rubik's and the others Toca Days are not going to have an impact on revenue in 2023. Those will really be 2024 and beyond. But overall, it's a good new story so far but it is early days. Max, would you like to add anything to that?
Yes, Adam. We're super thrilled about the start of the year. I won't go into what Mark said. I'd just like to add some color. We kept the engagement, correct? And so the kids were in the ecosystem. What changed for all of you is that we are monetizing now better. So now the kids are earning more while in the app and that's a reflection of the quality of the content being released and the engagement it drives with social channels.
We saw TikTok we saw a number of things that gives us quite a bit of confidence that the content is resonating. And vis-à-vis last year's base we now have content every month going forward, including in the summer month, which is one key period for this property. So we're encouraged and we are aggressively looking forward to carry the year ahead.
Perfect. Thanks for that Max. And just Mark, next on entertainment. I mean I think you alluded to it and you addressed some of the margin questions specific to that. But clearly, there's going to be some lumpiness inherent in entertainment, sometimes for episodic deliveries and sometimes for the L&M dynamic. But L&M should arguably continue to build through the year in the context of a lead-up to the movie. Can you speak a little bit more to, how you see entertainment progressing, acknowledging the lumpiness and the upside called down for the movie distribution revenue in Q3? How should we be thinking about entertainment overall for the year?
So Adam, it's a great question. And entertainment is a -- is essentially a nexus point in 2023, because we're actually still dealing and getting the benefit of content that we've delivered in the past, which represents a lot of poor and other content that we've released and that's actually flowing through the P&L.
At the same time, we've built and are launching a lot of new content in 2023. Now that content including the movie in the latter part of the year we have Vida the Vet, we have Unicorn Academy. That is really not going to be generating much licensing and merchandising or toy revenue until 2024 and 2025.
So you have the impact of the distribution revenue and the amortization associated with that flowing through in the latter part of the year which is actually margin dilutive. And then as that content builds in the marketplace both toy and licensing and merchandising for Vida the Vet and Unicorn and the PAW movie actually kicking in 2024 and beyond. So that's the dynamic that I've been talking to quite extensively now for some time in entertainment. And so we're going to see that really starting to shift a little bit in Q2 and Q3 and Q4 relative to what you saw in Q1.
Okay. And just I'd be remiss not to ask a quick question of Max on toy. I mean you're very clear in regards to your positioning in terms of inventory and the nature of stocking, which we obviously heard from your peers last week in terms of working its way through the Q2. But keep you talk at all about some early signs of any replenishment activity from retailers? Because it does sound like you guys – maybe I'm being presumptuous, it sounds like you guys might have been a bit ahead of the game than your two peers in the context of the destocking exercise?
Yes. I think we were the prettiest housing and not so good looking neighborhood. And so you know what I mean? So I think as we've gone into the year, we have benefited from that but the neighborhood is still pretty flooded. So I think as they work through that, we just have to continue to chug along and do our best. But I think the retailers have done a nice job of clearing the industry. And as that happens we benefit. So that's where we are.
Recall that there is a second component of the inventory, which is our own inventory. And I think we would have told you last time we were together that we did a terrific job managing that, so that we can be in a position to then attack. And as we actually end the Q1, we are still in a great position to do that. So it's getting now very sophisticated as we go into the second half because we just have to basically get our show in the road but I think we're in good shape.
Okay. I’ll leave it there. Thank you very much.
Our next question comes from Luke Hannan from Canaccord Genuity. Please go ahead.
I just want to get a better sense of – I appreciate that there was a lot of cost inflation in Q1 in the toy business. I'm just curious to know how much of a headwind that acted as in the quarter and how you see it progressing thus far in Q2? Specifically, any color on resins or other input costs as well as freight?
Yes. So Luke, we actually provided a lot of color on that in March. And I would say to you not a large change on that front. The one call out was actually on ocean freight, we did see some tailwinds on ocean freight. Ocean freight rates came down from where they were in Q4. And we continue to see that trend for the balance of 2023. So we will get some tailwinds from that. I think not a lot of news on resin or electronic components on paper and packaging. That was pretty much in line with what we said in March. And for the most part we see tailwinds in our COGS not headwinds in terms of increases.
Understood. And then switching gears here to Hatchimals, Max, you called out that we are going to be seeing some innovation towards the end of the year and beyond. So I'm just curious to know, how you guys are going to be approaching the sort of life cycle management of this brand going forward maybe areas where you're going to be a little bit deeper in relative to the last time where the brand was very successful?
Yes. So, as we said in the prepared remarks, and let me go deeper for your question, we have now – we went through collectibles, right? And we're now getting ready to reset the shelf ahead of the Hatchimals Alive launch. And that's a really important launch for us and that precedes us, once again disrupting play with that brand in 2024 and beyond. So we are basically going back to what the brand did so well and the magic that it brought to the category including creating new play.
And that's what you can expect from us without me, unfortunately not being able to tell you a lot more in terms of what those innovations are and hopefully, you'll get to see those next time you come to the in 2024. But I apologize that I cannot go further but you can expect that you'll see something potentially bigger than what you're seeing this coming fall.
Understood. Last one for me, and then I'll pass the line, Max, again for you. You've given a bit of color in the past about performance by price point when it comes to your SKUs on shelf. I think you've called out those toys costing less than $10 those above $100 is that big happy metal. You did also mention that for Circana there is a bit of softness when it comes to the amount of toys in the basket and the amount spent per toy. Curious to know how to reconcile all that together. Are you still seeing softness on either side of the spectrum or any trends to call out there?
Yes. It's a great area. And there has been some change. So the $70-plus bracket has declined. It has likely had the longer or the largest decline. The price compression on the zero to 10 continues to be the case. What's happened differently is that we've seen more middle of the pack price points that have actually compressed this time. And we've seen for example toys that would have been $99 basically dipping, because people are trying to get the inventories flushed.
And those are now coming into the $59 to $79 and then that's driving a little bit of growth in that area or toys that would have been between $50 and $79 have been promoted deeply so have gone into another. And so that's what you're seeing. But by and large there's an interplay in those middle price points some declining and some increasing. And I will tell you that the noise in those results is strictly driven by promotions not by new items that are doing super well. I hope that's clear.
It is. I appreciate it. Thank you.
Thank you. And our next question comes from John Zamparo from CIBC.
Thanks. Good morning. I wanted to get back to the inventory reduction process of retail partners and I appreciate the color on what you've given so far. I think you'd said you're flat year-over-year at retail partners. I wonder where does that have to get to by the end of Q2, or where do your retail partners want it to get to on a year-over-year basis? And really the goal here is just to try to get a sense of how much more progress needs to be done in an attempt to destock?
Sure. I think it varies by channel and it varies by customer and we obviously won't get into what each customer wants to do. But I think there's a combination of customers wanting to get maybe a weaker supply out of their system others trying to get the fact that shipping lanes have gotten more efficient and getting working capital obviously shorten as well. And so when it all basically gets summarized people are trying to get maybe a week or so out of the inventory. And so you have to by virtue of that be flat or lower. And that's what we're trying to get to.
I would tell you that if I were to say, two out of three -- in two out of three places we see really positive signs already. So we're actually incredibly encouraged. And maybe one or two pockets of issues that are basically working themselves out and we can see clearly that they will be done by the end of the summer. And that's where we are.
And it's a combination of continued promotions, the combination of basically people moving items into other places. The whole omni commerce and omni-channel play has deepened. There's a lot more people coming to stores. So a lot of more out-of-aisle placement for toys. So everyone is doing their job to try to get these things sorted. So that's what we're seeing.
Okay. That's helpful. Thank you for that. On the international business Spin Master performed the industry on POS pretty meaningfully here. But you also mentioned that Europe hasn't seen the benefit from some of your PAW Patrol releases. So can you add some more color on what's driving the international performance?
International is a really strong market for us. The market channel structure is a little bit different. You don't have concentration as you might in the U.S. And so we have a really experienced team in Europe, that's doing a terrific job with our core brands. And we are gaining in the majority of the categories and brands where we play.
So it's a bit of execution and I just don't want to leave you with a -- what does that mean. But there's a lot of blocking and tackling with our brands in Europe that doesn't just get determined by one or two large players. And so that's really encouraging. It allows for our know-how to be brought to the market and express into share gains. That's number one.
Number two, we have been able to take our global properties and market them locally in a relevant way for that child and each of her family. So that's also working well for us. And last, but not least, we do our inventory management and our -- and how we handle Europe differently than we do in the US and that has also helped us. So we have a really good thing going in Europe.
What I mentioned earlier about PAW Patrol specifically is just to demystify that in -- when we actually did the movie, two years ago precisely, that movie would have actually launched. And in Europe, depending on the market might have happened a little bit later. And so the toys trail what it would have happened in the US, remember, August 2021 was the movie year in the US. And so in Europe, the remaining stock that we had to clear in '22 basically push into '23. So Aqua Pups and/or Rubble would have not gotten to Europe on time. And those two things have done really well. So that's really what we're seeing. But we've seen a sequential improvement in Europe on PAW Patrol, just to not leave a concern on PAW in Europe.
All right. That's great. And then one last one back to the industry. The POS in Q1 was pretty soft overall industry-wide most of that from the US. And I think you've made a comment, Max, that you don't expect that to be indicative of the full year. Correct me, but I think that was referring to the industry, rather than solely Spin Master. So, if that's the case, I wonder, if you can elaborate a bit on that and what you attribute it to? Is it just an assumption of economic recovery and healthier spending among consumers, or is there something more in depth on that?
No, I think the comments stand on parents bought less, spent less per purchase and so that's a fact. And they spend less per purchase is also driven by the ASP, the average selling price and all the inventory glut and how that has to get consumed. But I just want to give you some confidence that when you extract the two or three big things that drove whatever growth was in the market, right, whether it was squishmallows or strategic trading cards, the US POS is in line with obviously Spin Masters' POS. So that's one fact.
And so, when you -- then take a look at that and then get into our properties, PAW Patrol in the US did well. We've talked about it. It grew more than mid-single digit which is positive. We actually have some really good things going. Gabby's Dollhouse is on fire still. So we're talking about double-digit growth. We're talking about strong double-digit growth Gabby's Dollhouse and Rubik's Cube, so we have that property on fire. We're talking about Monster Jam growing high single digit in the US, which is incredibly positive. So we have some of our core brands doing well, which give us confidence. Those lines have innovation in the back half too. And that's not to say that we have one or two pockets of opportunities that we're working through. But that's the color I want to just give you beyond what's on the remarks, so that you understand from our position as we look to the fall, that's where the game is won or lost and we are standing to gain and we want to win.
All right. I’ll leave it there. I appreciate the color. Thank you, very much.
Thank you. And our next question comes from Brian Morrison from TD Securities. Please go ahead.
Thank you, Max. Just a follow up on that POS question. So the relative POS, the way that I think of it is, this is just really who had more hangover to clear rather than real market share gains. Is that correct? And then, you would expect Spin Master from a relative perspective to have a material reversion in the second half?
Yes. I think, that's a very fair way to put it, Brian. So, I can comment further, but you've nailed it. So you just look at the gross margins by players and how hard to invest more to clean up more and they basically bought share, but they really bought share because they had to clean up, right? So, if you look at our book margin and our profitability then and we entered the year better, then we didn't have to do that. So, that's a very logical conclusion on your part.
Okay. I want to go back to digital, because of the opportunity there. But you mentioned the PAW Patrol app within the Sago subscription model if I understood it correctly. So how should we think about this? Is it a monthly fee for parents? What is the price? You must -- and probably putting in a spot, but from a high level what's the impact this could happen on your subscriber base? And can you confirm that it's a global movie launch for September 29?
It is a global movie launch for September 29. It's different than last movie, because obviously, we don't have knock on wood and we expect that to be the case. In September, the lockdown conditions. So we are in a bit of a different place. And so that's just to set the record clear is different. Second, from an eyeball and getting this property exposed to more kids outside of network TV or streaming TV, it is right as many parents are logically in digital spaces. So we would actually have the property brought to kids digitally as well. And we're basically utilizing the content of PAW Patrol property to basically immerse kids emissions and what the actual property is really all about and then having the kids experience getting in a car or doing -- also doing that and also providing education as we go along. So it will be more about engagement. And there's obviously an opportunity to monetize. So there's all that going on.
I think beyond that what I would say is that PAW Patrol the app as it belongs in our sub bundle is an opportunity for those families to be exposed with one monthly fee to great content beyond PAW Patrol and thus were Sago mini, Endless Learning Academy MathTango and the list goes on offer families this variety of play in a very convenient way and we are very excited about that in PAW because of its notoriety and awareness has the ability to bring new subscribers to our model.
So the combination of all those things give what I hope is Mark expressed on our subscription business for the back half. And those two coincide, the subscription bundle will kick off in September and the PAW movie September 29 and the PAW game will be in early October. So I think everything is converging around that time. I hope that answers your question.
Yeah. That’s very good. Thanks very much guys.
We'll take our next question from Sabahat Khan from RBC. Please go ahead.
Great. Thanks and good morning. I think Max earlier you mentioned there's a number of DC movies that are probably being released or that are being released later this year. Maybe can you talk about your expectation for those and any ones that you think could be maybe a more of a meaningful contributor than others?
Sure. So we have the Flash coming up in June. That's the earlier one. We have one later in the summer which is Blue Beetle that's basically late summer early fall. And then we have Aquaman 2 which will be for Christmas. So December -- late December. And as you know we have all those story rights. The Flash is a huge push from Warner Bros. and has two strong Batman characters. So we actually have a lot of hope for the Flash and so we're excited about that. And then Aquaman 2 is a sequel to the biggest DC movie ever. So there's a lot of strong toyatic appeal for that movie and connection to our toys. And so we're excited about everything but those two to your question hold the largest opportunity for us.
And would the -- I guess would that be part of sort of your Q3 shipments?
Yeah. So some of it is going to be shipping here in a month or so and the other one will be shipping in Q3. And let's not forget, I think we as we do that also draft and then get Batman put into that bundle and that's always going to be the biggest by far property we have from D.C. So you can imagine that Batman will be a play as we do those two other properties. And we have great innovation on Batman for the back half recall. You may have seen that in L.A. So think of D.C. as that effort by us dropping on those two movies.
Okay. Great. And then just one quick one maybe for Mark. Over the last year I think you've indicated maybe a greater focus on M&A there establishing sort of division leads for M&A. Just maybe any sort of progress update there, how the pipeline is looking and your willingness to transact just given all that's happening in the backdrop right now?
Good morning, Sabahat. I would say our willingness to transact is high. We're actually seeing a fair bit of activity in all of our creative centers from an M&A perspective. The teams are working well generating a lot of leads. We have not done any M&A in entertainment yet, but I suspect that we will at some point in the future. And then in the toy area, we'll continue to look at both tuck-ins and larger deals as well. These activities ongoing activity across all of these areas. And we have seen valuations become a little bit more reasonable a little more moderate than they were in the past particularly as interest rates have gone up and stayed high. So we are confident in our strategy and our team is working very well, Sabahat.
Great. Thanks very much for that.
Thank you very much. And our next question comes from Gerrick Johnson from BMO Capital Markets. Please go ahead.
Hi, good morning. Thank you. I wanted to get back to the subject that Adam was talking about lumpiness in entertainment, in the quarter you beat us by a significant amount of entertainment as the majority of the beat. I mean, you beat us on a lot of metrics, but that was the biggest beat. And honestly, it's -- how do we know how to manage our expectations?
Or I should say, how do we know to what we should build in for things like Rubble & Crew, the distribution revenue? What kind of tail does it have? So maybe just some sort of help in, how we look at these entertainment properties like Vida the Vet when it comes on, what kind of upfront distribution revenue do you get? And then, what kind of tail do you get? And how do we account for that?
So, Gerrick again, this is a conversation that we can continue in more detail off-line, in terms of how it all works from an accounting perspective. But in general, the way it works in entertainment is that, when the show is developed and we launched it, we actually recognized distribution revenue that we get from our distribution partners. That's our initial partners and then our second window distribution as we extend distribution around the world. That is what gets recognized, upon delivery.
And then, the amortization is essentially the cost of goods sold against that distribution revenue. And we've actually provided the amortization on that and Sophia, can actually give you more insights into how that hits COGS and SG&A, because amortization does hit different pieces of the P&L. So, we're happy to explain that more.
But in general, Gerrick, the thesis is that you have relatively low margin distribution revenue as you launch the property. And then as the property becomes more established, you launched a toy line, you'd launch your licensing and merchandising program typically within 12 months of the entertainment launch. And then you start developing that creative center revenue, across the board.
With Unicorn Academy, for the first time, we're actually doing a digital game as well. So we'll have distribution revenue when we launch Unicorn in 2023. We'll have toy revenue in 2024 and we'll have digital games revenue in 2024, because we're doing that across all three creative standards, which we're very excited about. But that's generally, the thesis of how it works. And we're happy to spend more time offline with you on that. It is a big part of our financing model.
Yes. I guess, you're suggesting, we can back into what the revenue is based on the amortization that you guys just provided?
Yes, you got it.
Okay. All right. Thank you.
Thanks, Gerrick.
We'll go to our last question from David McFadgen from Cormark Securities. Please go ahead.
[Technical Difficulty] grown quite a bit. And I'm just kind of wondering on the magnitude. I know you don't like to give out revenue on a per property basis, but I was just wondering if you can give us sort of relative size, how would it compare to PAW Patrol, right now?
Sorry, David, we heard -- you kind of cut out at the beginning. What property were you referring to in the first part of your question. Can you just repeat that?
Yes. Sorry, I'm sorry about that. Gabby's Dollhouse, that property has experienced quite large growth. And I'm just wondering, how that property would compare in terms of revenue if you compare it with Paw Patrol?
Well, look we can't give specific revenue. We don't, typically do that. I mean we have in the past talked about Paw Patrol being around 20% to 25% of our sales, with the number one property in the whole company. But look Gabby's is meaningful, and it's certainly growing as Max alluded to with the international launch, which we're very excited about as well. But we can't be specific. All I will say to you is that, it's meaningful and it's high margin for us, and it's great content as well. So, it's driving some good business for us in the pre-school area.
Okay. I mean, you can't give any indication as to 25%, apart 50% apart just anything like that?
Typically, since we've been public, we've never given out individual product line revenue. So we can't slide with that, fortunately.
Okay. Thank you.
Thank you. And I'll now turn it back to our speakers, for any closing remarks.
Well, thank you, everyone. I appreciate your attendance and interest in Spin Master and we look forward to talking to you again, for our Q2 results in early August. Thanks and have a good day.
Ladies and gentlemen, that does conclude today's conference. We appreciate your participation and have a wonderful day.