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Good day, and welcome to the Spin Master Corp. Fourth Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sophia Bisoukis. Please go ahead.
Thank you, John. Good morning, and welcome to Spin Master's financial results conference call for the fourth quarter and full year ended December 31, 2021. I am 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 audited consolidated financial statements are available on the Investor Relations section of our website.
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, or 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 reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct.
Many factors could cause actual results to differ materially from those expressed 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 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 information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the company's earning release dated February 28, 2022. Please note that Spin Master reports in US dollars and all dollar amounts to be expressed today are in US currency.
I would now like to turn the conference call over to Max Rangel.
Good morning and thanks for joining us today. In 2021, we delivered very strong performance for the fourth quarter and full year, showcasing the power of our three creative centers comprising Toys, Entertainment and Digital Games. We've continued to build on both the legacy that our founders created and our demonstrated leadership within children's entertainment.
Our creative centers structure allowed us to remain focused on being where children are, ensuring our presence in their lives is in ever-connected world with an ever-expanding options. The most significant element of our excellent performance in 2021 was the broad, diversified way we achieved it across all our creative centers and all our geographies. The efforts we've made to grow our global footprint, develop our entertainment capability, as well as the early investment we made in digital games through the acquisition of Toca Boca and Sago Mini are paying off.
Gross product sales grew over 20%, highlighting the strength of our brands on a global scale. Total revenue grew 30%, exceeding $2 billion for the first time. Approximately 15% of our total revenue in 2021 resulted from digital games and entertainment. EBITDA exceeded historical levels in both dollars and margin.
Against the backdrop of our strong financial and operational performance, we've demonstrated our commitment to creating engaging play experiences. We provided magical experiences for kids and their families at home, in playrooms, on small and big screens and in digital playgrounds around the world. We are very proud of Spin Master's performance and I want to commend our global team for delivering these exceptional results.
I now want to touch on each of our creative centers, beginning with Toys. Toy gross product sales growth was driven by the global success of new and innovative items, and enthusiastic fandom for our newest licensed story properties. Our commercial teams navigated a complex supply chain environment to deliver on time throughout the year to meet customer demand, providing the foundation to grow share in key markets. These teams work diligently to bring forward production earlier in the season to ensure inventory was available for the key shopping period.
We saw the effects of these in improved POS in the backup of the year. As we discussed in November, we observed a meaningful turnaround in POS trends where we regained share through their combination of improved inventory [ph] flows (00:04:35), the introduction of new innovative items and strength in our core brands compared to the POS deficit we saw in the early part of 2021, when our inventory levels hamper our POS results. We were pleased to see this momentum continue to the whole fourth quarter, resulting in meaningful share gains for Spin Master.
According to NPD, in Q4, our global POS grew 9% compared to 5% for the industry. In North America, we outperformed the industry in Q4, growing by 12% compared to the industry at 8%. Internationally, in Q4, we grew POS 6%, while the industry was flat. In Q4, according to NPD, Spin Master was the fastest-growing toy manufacturer globally among the top five. We were particularly pleased with the diversified nature of our POS growth in Q4, with share growth in 5 out of the 11 categories measured by NPD compared to 2 out of 11 in Q2.
The success of PAW Patrol: The Movie, continue to have a positive impact on the performance of our PAW Patrol toy line, which outperformed the Preschool category, finishing as a number one Preschool property globally in 2021. POS in Q4 was up 28% over the prior year, per NPD. PAW Patrol ended the year ranked as the eighth largest toy property globally, according to NPD. We have continued to keep the franchise fresh with new themes and worlds for preschoolers to explore.
In Activities, Kinetic Sand, which experienced tremendous growth during the pandemic, continued its upward trajectory in 2021 with 44% POS growth in Q4, gaining greater international brand awareness and increasing share in the Activities category. Per NPD, Kinetic Sand is now the number two reusable compound property and has become a staple creative toy for kids and kids at heart. With new innovative product introductions and always-on marketing for Kinetic Sand, we expect to continue to grow the brand and we feel there is more growth potential within the category internationally.
Our Games & Puzzles product category saw mixed results in Q4. Our core game brands outperformed while Cardinal was down compared to 2020, driven by strong pandemic-led demand last year. Within Wheels & Action, we saw strong performance from many of our core brands including Bakugan, which beat the industry in the battling toy class for 2021.
Gearing up for 2022, we're continuing to lean into marketing platforms that deliver the strongest conversion for Bakugan, which includes stacking new entertainment content on Netflix with engaging integrations and experiences within Roblox to reach fans of the franchise within the platforms they interact with every day.
In Q4, our Toy license for Monster Jam ended the year as the number four property in vehicles and number one license in vehicles per NPD. With more international experiential events and live Monster Jam shows ramping up in 2022, we expect more kids will be inspired to recreate real Monster Jam action in their homes and backyards.
In addition to our evergreen brands, our design teams are also constantly reimagining, inventing and bringing new toys to market. For NPD in 2021, we had two of the top five new toy properties in North America. The first is Purse Pets, a line of interactive fashion purses. This item was introduced in August 2021 and quickly rose to the top of toy lists. According to NPD, Purse Pets was the number one selling toy in the fashion, role-play and dress-up class in the US. We're continuing to evolve this brand in 2022 with new characters, retailer exclusive and micro versions for fans to wear and collect.
The second was Gabby's Dollhouse, building off the success of DreamWorks popular Netflix series. We debuted the Gabby's Dollhouse toy line in Q3, and it quickly became one of the most sought after toys this past holiday season. In 2022, we will launch a toy line in Europe and elsewhere internationally and will introduce new themes that complement the ongoing storyline and adventures of Gabby.
In 2021, we saw great results from new and existing license partnerships, including Gabby. POS in our total license portfolio grew over 20% in Q4 according to NPD. We revealed an epic second year of Batman and DC toys, making Spin Master, the number one toy licensee for the DC Universe, per NPD in 2021. Just yesterday, we were thrilled to announce that we have renewed our initial contract with Warner Brothers that will see Spin Master retain the DC franchise globally for toy rights of the boys category, as well as games, outdoor and seasonal and vehicles, including films for a further four-year term beginning 2023 through 2026.
2022 is a blockbuster year for the DC franchise, with four feature films hitting the big screen. We will have innovative custom toy collections launching in conjunction with the Batman movie coming to theaters on March 4, followed by Black Adam, THE FLASH and Aquaman later in the year. Also with Warner Brothers, we launched the first of our innovative toys inspired by the Wizarding World stories and characters from the Harry Potter and Fantastic Beast films. The performance of these products from an innovative playset to an interactive Hedwig, exceeded our expectations and demonstrated that a strong following of these stories and characters have. Spin Master is now the two licensee for Wizarding World globally, per NPD.
Between our strong showings for Purse Pet, and Wizarding World and Gabby's, Spin Master outperformed the US Dolls category for 2021, with POS growth of 21% compared to 4% for the industry, per NPD. This is an area that Spin Master has been under-represented in for the last few years. It's encouraging to see results like this in one of the most competitive categories of the Toy business.
Industry e-commerce growth is moderating as COVID eases, but has become a significant larger portion of the overall industry POS when compared to just a few years ago. We are continuing to invest in our e-commerce business to ensure we grow our share in this important retail channel. With some sales shifting back to bricks and mortar, we believe we are having definitely opportunities to elevate our in-store displays in partnership with our retail customers and are taking a moderate approach to pricing and promotions, investing where it makes sense to remain competitive while also preserving our profitability.
Now turning to Entertainment. We continue to take a multi-pronged approach to our Entertainment content creation led by exceptional storytelling that will resonate with kids globally. Our Entertainment Creative Center achieved a historical milestone in August with our first ever feature film for our leading Preschool franchise, PAW Patrol in partnership with Paramount Pictures and Nickelodeon. The film success had a halo effect on the franchise overall, significantly raising PAW Patrol awareness around the world.
Franchise penetration increased 15 points among kids, following the movie release, deepening engagement with existing fans, evidenced by increased viewing minutes and also attracting new fans, particularly on streaming platforms such as Paramount+. We currently have 10 regional shows and multiple short-form series airing or streaming in more than 190 countries in 30 languages. While PAW Patrol: The Movie was our first feature film, it will not be the last, with other film concepts in development, including a second PAW Patrol movie to debut in fall 2023.
PAW Patrol will also get a spin-off series in 2023, which has been green lit by Nickelodeon. And Entertainment has a rich development slate currently in production, including several new properties, which will launch in 2022 and 2023 with multiple broadcast networks and streaming services. We're excited to build a diversified offering appealing to different audiences and age groups.
We continue to experience record growth in 2021 in our Digital Games Creative Center, primarily driven by Toca Life World with revenue growth of over 127% and culminating in Toca Life World being recognized as the App Store's 2021 iPhone App of the Year, an amazing achievement for Toca Boca studio as it celebrates its 10th anniversary. Digital Games continues to create expansive digital play experiences for our kids. If you have children, you know how integral Digital Games have become to their lives. Digital Games have now become digital playgrounds, where kids explore and engage with their friends and favorite characters, new content releases, and tools that allow them to create, connect, share and express themselves, are driving strong global engagement. Monthly active users for Toca Life World more than doubled in 2021, increasing from 25 million in January to 56 million in December. The entire Toca Boca ecosystem now has over 74 million monthly active users compared to 45 million in Q4 2020.
In Q4, the team introduced their first in-app licensing integration, welcoming global lifestyle brand Sanrio and its Hello Kitty & Friends franchise into the digital playground with great results. In 2022, the team has more exciting branded partnerships in the works and new content releases, which will keep kids engaged and give them more options for customization and creativity.
Sago Mini, which focuses on the younger demographic where play-to-learn is a key driver for parents, has helped fuel our Digital Games growth as well, with an expanding subscription base that saw a 29% increase in 2021 to 311,000 subscribers compared to 2020. Sago is working closely with the originator which we acquired in Q2 to expand our comprehensive play-to-learn subscription-based Digital Games offering, building on existing platforms and with new product launches in 2022 and 2023.
We are continuing to make progress building [ph] Nørd (00:14:54), our new studio in Stockholm. [ph] Nørd (00:14:56) is focused on developing Digital Games using Spin Master's own IP. Our first game will launch in 2023 and we are very excited about the growth possibilities for Digital Games that are emerging from this initiative.
Now turning to our outlook for the year, there are several macroeconomic and geopolitical variables we are monitoring closely and which we built into our outlook and Mark will discuss shortly. From a consumer perspective, the removal of stimulus payments combined with rising interest rates and inflation, could put pressure on families' disposable incomes. As we know from history, the Toy category is somewhat insulated from periods of economic downturn, but it is something we need to consider, especially for higher price point products.
We expect there will continue to be challenges and disruptions in the global supply chain in 2022 ranging from transportation bottlenecks to cost inflation. COVID remains an unknown variable in Asia, and we will continue to implement advanced planning techniques and seek to remain responsive, collaborative and agile in both production and logistics.
Now, having said all this, with our clear vision for the future, a strong global operating platform and firm financial foundation, we are optimistic about our growth opportunities in 2022. We believe we are well-positioned to capitalize on the momentum from 2021. We will continue to seek opportunities to harness the potential of our three creative centers. And as we continue to grow the business, we are seeing the power of our operating model where each creative center acts independently, but also in concert with each other when it makes sense, to exploit the full potential of our creating talent, innovation and intellectual property.
Let me conclude by thanking our global team members for their outstanding contributions in 2021. The management team at Spin Master remains inspired and encouraged by the passion, knowledge, competitive drive and commitment to innovation that each of our team members embodies. As we begin 2022, we see even greater potential to connect, engage and reach even more kids and families with magical and memorable Toy, Entertainment, and Digital Games experiences.
I will now turn it over to Mark.
Thank you, Max. In the fourth quarter, we delivered very strong financial and operational results, representing significant year-over-year improvements. We entered the year acutely aware of our needs to address the global supply chain challenges brought on by COVID. We maintained strict cost management discipline, leveraged our diversified third-party manufacturing footprint to optimize production and worked with our logistics partners to gain access to additional ports and shipping lines.
We were able to methodically execute our plan, as evidenced by a full-year 2021 adjusted EBITDA of $414 million, an increase of $234 million, 130% over 2020.
Looking at Q4, we were able to build on the momentum established through the first three quarters and deliver significantly stronger results compared to last year. Q4 revenue climbed 26.5%, driven by double-digit growth across all three of our creative centers and product categories. The combination of higher gross product sales in all geographies, improvements in sales allowances, higher Entertainment and Licensing Revenue, and the strength and momentum of our Digital Games business combined with our operational execution, produced record profitability levels.
Gross product sales rose approximately $116 million, or 22.6%, to $627 million. On a constant currency basis, gross product sales were up 22.9%. Geographically, we delivered solid growth across all markets, especially in North America, which was up nearly 33%. Europe saw growth in gross product sales of nearly 12%, and the rest of the world was up just under 10%. International gross product sales declined to 42.4% of total gross product sales, down from 46.8% last year, driven by strong growth in North America.
The growth in gross product sales for the fourth quarter was primarily driven by customer demand and our ability to successfully manage through the supply chain disruptions, which ensured steady inventory flow and availability both on shelf and online. We did this by implementing safety stock and safety lead time programs using innovative transportation methods and close collaboration between customer-focused teams and sales team to prioritize orders and drive the best possible Q4 results.
Turning to category performance, I want to call out that we renamed certain Toy product categories. What we used to call Preschool and Girls has now been renamed Preschool and Dolls & Interactive. And what we used to call Boys, we now call Wheels & Action. Our Preschool and Dolls & Interactive product category grew by $51.6 million, or 25.8%, to $251.8 million in Q4.
PAW Patrol continued to perform exceptionally, contributing significantly to the growth of the product category, together with the success of new product launches for Wizarding World, Gabby's Dollhouse and Purse Pets. Gross product sales in Activities, Games, Puzzles and Plush category rose by 18.7% to $206.5 million. Sales of Kinetic Sand, as well as Orbeez and Rubik's, both of which were recent acquisitions, positively contributed to growth.
In Wheels & Action, gross product sales were up nearly 20% to $146.1 million, driven by higher sales of DC licensed products in advance of the Batman movie in theaters on March the 4th. And continued momentum for Tech Deck. Q4 sales allowances were 13.6% of gross product sales, down from 15.1% last year, driven primarily by low and non-compliance charges and reduced markdowns and promotions due to strong inventory sell through. In addition, we saw a higher proportion of sales in North America in Q4 compared to Europe. North America has a lower overall sales allowance rate than the global average.
We've now seen eight consecutive quarters of strong revenue growth in Digital Games. In Q4, Digital Games revenue increased 57.2% to $50 million, driven primarily by growth in Toca Life World in app purchases.
Entertainment and Licensing revenue grew 16% to $28.5 million, primarily from licensing and merchandising revenue from the PAW Patrol movie release. Gross profit for the quarter was $323.3 million, or 52.1% of total revenue, compared to $241 million, or 49.1%. Toys had the most significant positive improvement in gross margin due to lower close-out sales, favorable changes in product mix and cost reductions resulting from productivity initiatives. These improvements were offset in part by inflationary pressures on product costs and ocean freight, partially mitigated by the price increases. For the quarter, the net negative impact of inflation partially offset by pricing, was around 290 basis points.
In both Digital Games and Entertainment, we achieved higher revenue, which was accretive to gross margin by approximately 70 basis points and 60 basis points, respectively. Selling, general and admin expenses were $55.6 million higher due to increased marketing and administrative expenses. Marketing increased due to higher media and commercial production spend. Administrative expenses increased over last year by $27.1 million to $103.8 million. The increase was primarily from personnel and incentive
compensation related accruals due to higher profitability in 2021. However, SG&A, as a percentage of total revenue remained consistent at 43.1% compared to 43.2% last year. Adjusted SG&A declined to 41.9% from 42.2%.
In Q4, we recorded net income of $26.5 million, or $0.25 per diluted share, compared to net income of $300,000, or essentially breakeven per diluted share, last year. Adjusted net income in the quarter was $38.7 million, or $0.37 per diluted share, an improvement of $24.1 million compared to $14.6 million, or $0.14 per diluted share, last year. Adjusted EBITDA was $78.3 million compared to $51.5 million, an improvement of $26.8 million, or 52%.
Adjusted EBITDA margin was 12.6%, up from 10.5%. The increase in adjusted EBITDA was driven by higher gross profit and lower distribution costs, partially offset by higher selling, marketing and administrative expenses.
From a tax perspective, we had an income tax expense of $9.5 million in the quarter compared to an income tax recovery of $4.7 million last year. Our effective tax rate for Q4 was 24.2%.
Turning now briefly to full-year 2021, I will call out a few items of note. Sales allowances as a percentage of gross product sales were 11.8%, down 100 basis points from 12.8%. This highlights our strong sell through an improved operational performance, which drove lower markdowns on non-compliance charges, as well as geographic mix which favored North America.
Digital Games revenue increased 127.6% to $174.8 million from $76.8 million. Entertainment and Licensing revenue increased 73.7% to $135.8 million from $78.2 million.
Gross margin represented 51.7% for 2021 compared to 46.3%. The increase in gross margin was a function of cost reductions resulting from operational improvements and productivity initiatives, favorable product mix, lower close-out sales and lower sales allowances. These improvements were offset in part by inflation on product costs and ocean freight, which were partially mitigated by price increases implemented in Q3. In addition, the higher revenue in both Digital Games and Entertainment was accretive to gross margin in 2021 by approximately 90 basis points and 70 basis points, respectively.
SG&A decreased by 390 basis points as a percentage of revenue as we continue to generate operating leverage through increased volume, cost management and productivity. Higher selling, marketing and administrative expenses, largely driven by increased incentive compensation were more than offset by leverage from higher volume and lower distribution costs.
Adjusted net income for 2021 was $221.3 million compared with $53.4 million last year, with adjusted diluted EPS of $2.10 compared to $0.51. Adjusted EBITDA for 2021 was $414.1 million compared to $180.6 million, an increase of $233.5 million, or 129.3%, over 2020. Adjusted EBITDA margin was 20.3% compared to 11.5%. As a reminder, included in adjusted EBITDA was $26 million of distribution revenue and the box office bonus from the PAW Patrol movie. If we were to deduct the $26 million, adjusted EBITDA and adjusted EBITDA margin would be $388 million and 19.2%, respectively.
Inventory ended the year at $137 million compared to $102 million last year, up $35 million. At the end of Q4, because of the global supply chain disruption and in anticipation of growth in Q1, we had approximately $45 million of in-transit inventory, representing 32% of total inventory compared to $19 million, or 19%, at the end of 2020.
Trade receivables ended 2021 at $327.9 million compared to $277 million at the end of 2020, an increase of 18%, which is below revenue growth. Net operating working capital as a percentage of LTM revenue was 9.3% compared to 13.1% last year. We lead the industry in our working capital management by a significant margin.
Q4 free cash flow was $211.3 million, $87.6 million up compared to $123.7 million a year ago, driven by improved profitability and lower net working capital. For the year, free cash flow was $339.6 million, up 46% compared to $232.1 million in 2020, driven by higher net income and lower working capital.
From a liquidity perspective, we continue to build on our strong position. We ended the year with $563 million in cash, up $242 million from $321 million last year, despite investing over $70 million on acquisitions during the year. Given our cash position going into 2022 and the capacity on our credit facility, we are in by far the strongest liquidity position we've ever been in, with immediately available liquidity of over $1 billion.
Let's now turn to our outlook for 2022. As a reminder, in your guidance statements are based in line with our quarterly reporting cycle March, May, July, and November. At each stage, we revisit our annual guidance with increasingly solid data based on shipments and the flow of orders.
Our 2021 performance allowed us to achieve our best sell through and the cleanest retail inventory levels in many years in most key markets. This allowed us to exit the year with strong demand and brand momentum, which positions us well for 2022. So far this year, we continue to see robust demand for our deep and innovative Toy lineup. We have actually never carried so much strong momentum going into the first quarter. However, we do need to be mindful of macroeconomic and other risk factors. The removal of stimulus payments in the US, rising interest rates and inflation, may put pressure on disposable incomes. We are carefully watching the situation between Ukraine and Russia.
For context, though, please note that less than 2% of our gross product sales is derived from Russia and we are credit-insured. Whilst demand in the toy industry is relatively inelastic, we need to be prudent this early in the year. Taking this all into account for 2022, we expect our growth rate for gross product sales to be in the mid-to high single-digits compared to 2021. As a result of the increases in gross product sales and continued strength in Digital Games, we also expect growth in our total revenue to increase mid-to-high single-digits over 2021, when one excludes the $26 million distribution revenue directly related to the PAW Patrol movie, which will not be repeated in 2022.
Turning to profitability, in 2021, we saw increases in input costs, particularly ocean freight accelerates significantly in the latter part of 2021 and remain elevated through Q4 and into 2022. We implemented productivity initiatives and price increases to help us partially offset these inflationary pressures. For 2022, we expect to see some costs remain at elevated levels and other costs rising, although not at the same rate as 2021.
We will continue to take pricing selectively and implement other measures to allow us to remain neutral from a margin perspective in our Toy business. These actions include ongoing collaboration with our suppliers in Asia, pre-buying electronic components, evaluating part substitutions, facilitating inventory prebuilds strategically to reduce the impact of COVID lockdowns and finally, increasing multi-carrier ocean freight sourcing for cost and predictability.
Through a commitment to operational excellence and focus on finding value within the supply chain, we expect to hold adjusted EBITDA margin consistent with 2021, excluding the $26 million benefit from the PAW movie distribution revenue. In addition, we expect depreciation and amortization to be down slightly compared to 2021 to approximately $100 million. Of that, $30 million results from deliveries of Entertainment content.
We expect marketing cost to be between 9% to 10% of revenue. And for SG&A as a percentage of revenue, to be slightly higher than 2021 as we invest in growth for 2023 and beyond.
Finally, we expect our effective tax rate to be between 25% and 26% and capital expenditures are expected to be between 5% and 6% of total revenue.
To conclude, as we look to the balance of 2022, our team is fully aligned. We remain deeply committed to growth with disciplined cost management, operational efficiency, and productivity. We will continue the momentum we developed in 2021, leveraging the significant improvements we achieved to propel us forward. We continue to believe in our long-term financial framework and that at its core, our formula for innovation and growth across Toys, Entertainment, and Digital Games is stronger than ever.
That concludes our prepared remarks. We will now be pleased to take questions. Operator, please open the line.
Thank you. [Operator Instructions] We will take our first question from Sabahat Khan. Please go ahead, your line is open.
Right. Great. Thanks. I guess just on the outlook for 2022 and some of the commentary around the movie releases expected for this year, can you maybe share some color on maybe quarterly seasonality that we can expect for this year?
So, Sabahat, we're going to tighten up our outlook on seasonality in May when we release our Q1 results. But what I can tell you is that we expect to see strong momentum going into Q1 and Q2. So strong H1 and we will actually give you formal guidance for the actual balance of the year when we go out in May with our Q1 results – with our Q1 results, yes, in May.
Okay. Great. And then, with the digital platform, quite a bit of growth over the course of 2021, how should we think about the growth in that platform relative to kind of the overall guidance. Total guidance looks like it's from mid-to-high-single digits year-over-year on revenue, but just wondering how that line item is expected to do this year?
So, Saba, Digital Games is part of our overall growth outlook, as we said. We do expect Digital Games to continue to grow, and it's actually going to be interesting in Q1 when we actually break that out further. But certainly, Digital Games' growth is an important component of our total revenue growth of mid-to-high-single digits in total revenue for this year. Max, is there anything you want to add on Digital Games?
Well, it's just early days for us, Sabahat. And so Digital Games are becoming even now a more important social destination for gamers and for kids alike. And so, I think you can expect that our properties, Toca Life World or even our subscription properties, will continue to attract new users, and we will be able to keep them engaged with new contents that we're dropping. And so we're seeing momentum going into Q1.
Okay, great. And then just last one from me, I was looking at your cash balance here, in the $560 million range, any updated thoughts on capital allocation, whether it's M&A or return on capital, anything you can share on that front?
Yeah. So we do have strong liquidity. We have a very clean and strong balance sheet, Sabahat, as you call out. Our primary focus is to use our cash for acquisitions and we're very active on that front, both in terms of traditional acquisitions but also in terms of venture activity. Our pipeline is strong and full. We don't have any plans at this point to return any capital. We continue to believe in our growth story and our ability to use the cash. If at some point that changes in the future, we'll certainly talk about either a dividend or a share buyback or something of that nature. But at this point, nothing to report on that front.
Okay, great. Thank you.
We will now take our next question from Jamie Katz. Please go ahead, your line is open.
Hi. Good morning. Nice quarter. I hope you can help us think about e-commerce going forward. It sounds like that channel has slowed, but can you fill us in on maybe what that was as a percentage of total sales for the year? And then, I know you guys mentioned you had only 2% of sales in Russia, but I think you have maybe a distribution center there. And so, is there any impact to distribution in Eastern Europe that might be of a greater magnitude? Thanks.
So, Jamie, e-commerce for the year was around 27% of our sales. But in the fourth quarter it was as much as 40%. Max, I'm going to pass to you to talk about e-commerce just in terms of what's going on with that and then I'll take Russia.
Sure. So, Jamie, our growth in e-commerce was pretty broad-based. We beat the market in Q4 as Mark suggested and in 2021 as well, we beat every competitor. We did so because we put a lot of effort in different tech stocks and ways in which we're working. And honestly, we are the biggest pure play player, we were the runaway winners for the year. So we have a lot of effort that has gone into that space. And for us this has been a great source of growth and it has been a source of great, more profitable growth. So we've made a lot of interventions to make sure that profitability is in line with our overall portfolio
And in terms of your question around Russia, as you pointed out and as I mentioned in my script, less than 2% of our sales in Russia, just a couple of million dollars in Ukraine through a third-party distributor. In terms of our distribution mechanisms, we do have a small warehouse in Moscow that actually services our Russian business, but our primary distribution centers are actually in Central Europe and in northern Europe, so not that connected to Russia directly.
Okay. And then if you have any color on the profit profile on that digital business versus the above the line or above other revenue business, the delta between the two would be really helpful to understand.
Yeah. So, let me just make one macro comment, and then I'll point you to our upcoming Q1 results where we're excited to actually break out our creative centers in more detail. So, you're going to have to wait to see P&Ls for Toys, Entertainment and Digital Games until Q1 results are out, and we'll be doing that going forward. But what I can tell you in macro terms is that Digital Games is accretive to both gross margins and EBITDA margins. And so, it's certainly an area of growth for us and we want to continue to drive that business, because it is accretive to margins for us. Stay tuned for more details.
Excellent. Looking forward to the data. Thanks.
We will now take our next question from Adam Shine. Please go ahead, your line is open.
Thanks a lot. Yeah, good strong results, frankly. Max, maybe one for you, on the marketing side, it was telegraphed that this would track to about 10%, I think, of revenues. And obviously, you came in below that in the Q4. Also Mark, in the outlook, talking about sort of 9% to 10%, so just curious, are the – is the product just flying off the shelves on its own, or are there some lessons learned obviously, as you get a better feel for the landscape and some of the efforts you're putting into the marketing side of the equation? And then I've got a couple more for Mark after.
So, Adam, punch line number one is the strength of our brands improved materially, so we invested a great majority of our marketing in those core brands and franchises. We truly want to drive into evergreens and push our revenue into more predictable revenue going forward, that's number one. And number two, it was really more about being digitally first and spend optimization. That's punch lines number two and three. On the digital first, we basically were able to get a lot of money into, basically the premium online TV and also in CTV and OTT, which are basically all basically streaming platforms and we were able to do that very efficiently.
In fact, what I can tell you, is that basically, we were able to get about 33% higher reach with less than 12% less cost per reach point. So, when you combine the higher reach and lower, obviously, cost per reach point, you kind of get that really playing in our favor. And then third, let's not obviously forget that with the supply chain constraints that we had, when we had items that were not available and we would have had marketing, we actually flowed that money to other places where we were getting significantly more consumption. So that also helped. But as we enter quarter one with the strength that we have in our brands, we're basically putting marketing investments against our core and franchises, and we're very excited to do so. Lots of learnings and efficiency.
That's great. Thanks, Max. That's helpful. Two other things. We obviously, none of us had the benefit of seeing some of the new products at a toy fair that didn't happen. And I guess, we'll hear more perhaps heading into the May Q1 disclosures. But just out of curiosity and over and above some of the licensed products that are obviously coming around the Batman movie, et cetera, anything to highlight in terms of key new products that you'll lean on this year? Number one.
And number two, given some of the pandemic dynamics, where are we exactly in sort of the re-launch cycle of Bakugan, in the context of what was expected to have been maybe a four to five year re-launch? Thanks.
Yeah. So, the good news as Mark and I both have commented on is that the growth in 2021 was really more broad scale. And so, I just would want to comment on that. Second, the impact of our new innovation also played a key role. So, as we enter spring 2022 and fall 2022, what you can expect is the following and things that we're very excited about.
Let's start with PAW Patrol. So PAW Patrol was an incredibly important contributor in 2021. And we have significant more support for PAW Patrol in 2022. We have new series, we have toys for the new series. We have a number of things that we're very excited about both in the spring and in the fall. And so, that's basically the starting point.
Second and something that I'm very excited about as well, is the fact that Gabby's Dollhouse has now become an incredible contributor in the segment, and we have significant follow-up innovation behind Gabby's Dollhouse. So basically, that strengthened our position in Preschool. And we're super excited Preschool and Dolls. So that to me is another place where I'm very excited.
Let's not forget the fact that we also have a lot of activity in Wheels & Actions though it's following 2021, so that is coming with a lot of innovation both in the spring and also in the fall.
And then last but not least, with all the licenses, we have significant amount of toy collections for each of the movies that are coming out, whether it's on the – obviously, on the DC or Wizarding World. So those are some of the things that I wanted to comment on.
On Bakugan, we are basically going into a Bakugan content reboot and we're very excited about that. And that will basically continue to propel the brand content for the people that we have attracted, coupled with a lot of the work we've done with Roblox and Netflix, to basically use our combination as we bring more fans into the franchise. So you can expect a lot more of that and stay tuned for future interventions in Bakugan that we are incredibly excited about.
Okay. That's great. Thank you very much.
We will now take our next question from George Doumet. Please go ahead, your line is open.
Yeah. Guys, good morning and congrats on a good quarter. Max, thanks for the information on the share gain. Just following up on that, do you think that's going to continue? Maybe just maybe, I guess your general outlook on where you see the industry growing or to what extent you see growing in 2022?
Yeah. As you know, it was a combination of two things. One is being in stock. And second, basically putting marketing activation, so we can actually lift the brands that we wanted to lift. And so that continues into quarter one. And so far, I can tell you without getting into too much details that that continues to be a proven model for us. So we're continuing to do very well. I expect that as we go into the spring point of sale, we're going to continue to see the effect of the new innovation helping lift our boats.
And as we go into the fall of 2022, we have a great slate of new innovation coming and as was commented earlier, while we have not been able to see that broadly doing toy shows, we're going to be able to see it in May when we have our conference with you guys. So, I expect that we will continue to basically grow in line with what Mark described as our guidance for GPS, and we expect that we will be growing share within the context of that guidance.
That's helpful. Thanks. And just a follow-up on Gaming, if we keep our, I guess, Entertainment and allowances kind of constant, we get an implied kind of growth of about 20% or 25% or so, for that category. Is that the right way of looking at it? And just a follow-up to that, can you talk a little bit about some of the drivers there? Is it – are we going to push price? Is it active users? I mean, you can to maybe that level of growth?
Yeah. So, first and foremost, the actual category for Digital Games is actually growing faster than our Toys are growing, so that's really one point. It's actually a larger category as well in which we play. And therefore, you can basically do the math and understand quickly that as we are getting a lot more focus put in that segment, our growth rates will basically be commensurate with that. That's number one.
Number two on our properties that are basically driving our growth. And let me start with the Toca Life World, we have great organic plans to continue to drive more users, but also to actually drive the engagement of the users in the ecosystem. So, those are the two components that we're actually very focused on. And in this, obviously, game-as-a-service environment, where you're actually creating, providing creator tools for people to then obviously purchase, we find that to be very, very attractive.
Last but not least, within Toca Life World, we actually are looking to extend that line into Toca Days, which is basically our introduction into multiplayer ecosystems and we're very excited about that too. So, you can expect that we have a tremendous slate of growth opportunities with Toca Life World and that is our focus.
On Sago Mini, we are incredibly excited about the subscriber base that we have actually been able to grow over the last year, and we have great initiatives coming up, starting really soon with [ph] First Words (00:49:33) being one of them that we're very excited about. And so we have a lot of other organic and extension initiatives for Sago Mini to expand our consumer and subscriber base. And we're working pretty closely between Sago Mini and Originator, which we acquired in Q2 to have more options with Originator, basically leveraging what we know has really worked in this space. And so, we are very excited about the combination of that. And then last but not least, and this is more kind of headed into the future, we have [ph] Nørdlight (00:50:02), which is our digital studio in Stockholm.
And remember, that is really all about taking our Spin Master IP and making Digital Games with that, and there's a few things we're working on that we're super excited. Stay tuned. We'll be able to tell you more in an upcoming call.
Yeah, thanks for that. So, one last one, maybe for Mark on working capital. It's obviously been pretty volatile. If you look at free cash flow for 2022, can you maybe help us kind of think about that working capital line, maybe as well as CapEx, just to get a picture of I guess, overall free cash flow for the year?
Yeah. So, free cash flow in 2021 was really a very impressive $340 million at 82% free cash to EBITDA conversion ratio, which is really outstanding. That's going to moderate in 2022. We had some timing issues in 2021 that boosted free cash flow, that will unwind a little bit in the first quarter of 2022. We're also going to see larger CapEx spend overall in the Entertainment business in 2022 in relation to 2021. And then finally, in anticipation of further growth in 2022 and 2023, we'll be investing in working capital. So we will see free cash flow come down in 2022, but still at very healthy levels.
Okay. Thanks, guys.
We will now take our next question from Brian Morrison. Please go ahead, your line is open.
Yeah. Thanks very much. Good morning. The first question is for Max. I just want to elaborate on the digital question so far. I want to know what you think your total addressable market is in the children's sub-10 age group in the Digital category. And then maybe just elaborate how [ph] Nørdlight (00:51:50) is going to be integrated into your active user base, will it be through Toca Boca, Sago Mini, all of the above? And do you have plans or any agreements in place that you can add third-party licensed characters to the digital world?
Wonderful. So, what excites us a lot about this space is, obviously the addressable market is in excess of $90 billion. So it is incredibly large as I'm sure you've seen in other presentations. Within that of course, you think about where we play today, which is just a fraction of that and the opportunities with [ph] Nørdlight (00:52:29) really kind of go beyond that, because it basically gets us into casual puzzles. It gets us into a lot of segments we don't participate today. But you can do the math and think about our own Toy IP and then basically do the permutations to where we can go with that. And that is the way we're approaching this.
So we see the world expanding for us in terms of audience. Most of our space today is for Sago Mini and Originator in the two to five year old space and Toca Boca ages up that audience and basically gets into the 5 to 10 years old, if you will. But imagine what we can do beyond that, and that is the way we're approaching the addressable market. Does that answer your question?
Well, it does. But I also want to know if you have the ability to add third-party licensed characters through digital world or any... [indiscernible]
(00:53:18)
Yeah, we do, right. We do, and our first expression of that was Sanrio with Hello Kitty. And given the success of what happened with Hello Kitty, there's interest to continue to do that, not just from us but other others as well. And so you can expect that we'll continue to do that.
Okay. And then I just have a follow up question for Mark. Mark, why did the digital revenue down sequentially in Q3 when there's a substantial increase in active users?
Yeah. So, it actually was a timing of content and also, Brian, to do with the way that the holidays played out in 2021. So, we had a very large Q3. July and August were very big months, while kids were actually on vacation. And then really, we didn't have any major content drops going through all the way through until December. And so, sequentially, our quarterly revenue came down a little bit but we had an extremely large December. We had a record month in December in Digital Games in relation to the content that Max was talking about with Sanrio and Hello Kitty. So, it really was a little bit of a function of kids going – being on vacation, going back to school, moderating a little bit and then a large content drop in in December.
Okay. [indiscernible]
(00:54:37)
Sorry, go ahead.
Sorry, Brian. I was just going to say, in general, you don't see the same seasonality in Digital Games that you do in Toys. Thing is, is roughly a 50/50 seasonality in H1 and H2, but it can also depend on when you drop new content and when new tools become available, for example. So, there is some variability associated with that.
Okay. Thank you for that. And then final question, I just want to confirm your message, we talk about this quite routinely now. But it sounds like you feel you can deploy this $0.50 billion of cash on your balance sheet. I guess just outside of Spin Master Ventures, are there any large opportunities? Like is there opportunities to deploy a big chunk of this cash at one time?
So, Brian, I mean, yes, we do believe we can. We firmly believe that we have opportunities. But obviously, we approach things in a very disciplined way. And so, just given that discipline, we have to look at large acquisitions very carefully. But certainly as we've expanded our creative centers and grown our creative center businesses, and we start looking now to Entertainment and we start looking more to Digital Games in particular, there are tremendous opportunities that open up there and we feel comfortable and confident that we can deploy that cash in a accretive way.
Thank you,
We will now take our next question from Martin Landry. Please go ahead, your line is open.
Hi. Good morning. Just – you do a really good job brushing out some of the risks that are embedded in your guidance for 2022. I'd love to hear about some of the potential upsides that lie in your assumptions for both revenue and margins for 2022?
So, Martin, when you look at our guidance, we think at this point, just given where we are in the year, we've taken a measured approach. Obviously, there are the macro and geopolitical issues that Max discussed and I also discussed in the script. We're taking a view on cost inflation. We're taking a view on pricing. So there could be some changes on that front as well. In particular, Digital Games growth is an area where we see, which we've built into our revenue outlook, but there could be upside there, as well as on the licensing and merchandising front, because keep in mind we're carrying some momentum from the PAW movie into H1 as well. So there could be some upside on licensing and merchandising.
And then that's all offset by slightly higher SG&A as we have a higher proportion of licensed properties in our 2022 mix. So that equates to high selling costs as well as some investments in people in anticipation of growth in 2023 and beyond. So there are lots of puts and takes there. And to the extent that there's upside, it's likely going to come from Digital Games or gross product sales growth in excess of expectations.
Okay. That's helpful. And then maybe just touching on your inventory levels, you did allude to the fact that your inventory levels are lean heading into 2022. Anything you can quantify for us? And I'm more interested that your inventory levels at retail, trying to see what we should expect in terms of close-out sales for Q1. Just any metrics you can share on your inventory at retail would be helpful.
So, we actually had a very strong sell through in Q4. As Max discussed earlier, we really actually were clean at retail. And so, we're seeing strong refill of the inventory at retail currently as we speak, which bodes well for a strong Q1, compounded by the release of the DC movie as well, the Batman movie. So actually, Q1 is looking pretty good.
There's really no risk in our owned inventory. We ended very clean. We had a fair amount in transit in anticipation of the growth in Q1. But overall, channel retail inventories were actually in very good shape and in fact quite low, which is why retailers are leaning in now.
Perfect. Okay. That's it for me. Thank you.
Okay. We've got a couple of minutes left. So we're going to unfortunately have to make this last question.
We'll take our last question from Luke Hannan. Please go ahead. Your line is open.
Yeah. Thanks. Good morning. Thanks for squeezing me in here. I just had one on Toca Boca. I think it was discussed last quarter about how property as it stood then skewed more towards a North American audience, although it was beginning to gain traction on a global basis. I'm just curious to know how that's progressed throughout Q4 and into Q1, and maybe if we can compare that to some other similar global properties to get a sense of a better context as to where potentially the brand can go? Thanks
Yeah. Absolutely. So, the composition of our audience for Toca Boca is well beyond North America. And while the US is the number one country of users, that has actually increased. But what has truly happened is that the saliency of the property has truly exploded in other markets, including emerging markets, to be honest with you. And as you can imagine, kids with access to phones actually have now access to the games, and TikTok has democratized how basically people know about the brand, not just TikTok, but other forms as well.
And so children are basically now with phones and the ability to actually connect to the brand, able to do that no matter where they are. The appeal of the content is universal and we've learned that as well. And so we're basically seeing anywhere from India to Brazil to Mexico to places in Eastern Europe and everywhere. And so we are very excited and therefore very optimistic as well. And while this is a game-as-a-service and it's free-to-play, we also see the engagement and the monetization happening not just in the US, but more broadly.
Okay. Thank you, very much.
So, John, I think we're going to wrap it up at this point. I just wanted to thank everybody for attending the call. We are really looking forward to our release on May the 4th, which is our Q1 release, and particularly on May the 5th, where we will be providing updated outlook, as well as our an enhanced disclosure around Toy, Entertainment and Digital Games, as well as our Investor Day. We will be actually showcasing some of our new products and technologies. You'll have an opportunity to hear from Chris Beardall and Jennifer Dodge and Fredrik Loving, who lead our creative centers as well. And so, we're looking forward to May the 5th and we thank you for your participation today and we'll talk to you again soon. Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.