Spin Master Corp-sub Vtg Shr Aktie

Hello, and welcome to the Annual Meeting of Shareholders of Spin Master Corp. Please note that today's meeting is being recorded.

If you participate in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use of same. If you disclose personal information of another person in today's meeting, you will be deemed to represent and warrant to Computershare and the company that you first obtained all required consents for the disclosure, recording, transfer and use of such personal information from all appropriate persons before your disclosure.

It is now my pleasure to turn today's meeting over to the Chair of the meeting, Ms. Christina Miller. Ms. Miller, the floor is yours.

Good morning, ladies and gentlemen. Welcome to the Annual Meeting of Shareholders of Spin Master Corp. I am Christina Miller, a Director and the CEO of the company. Before proceeding with the formal business of the meeting, I would like to welcome our new independent director standing for election, Ms. Yael Vizel, who will bring her experience and expertise in technology, retail innovation and digital commerce to the company.

I will now turn the meeting -- I will now turn to Ms. Alison Desipio, Corporate Secretary of the company, to review some formalities.

Thank you. This year, as was last year, the meeting is being held as a virtual meeting. This allows registered shareholders and duly appointed proxy holders to be able to attend the meeting, ask questions and vote regardless of their geographic location as well as being a more cost-efficient and environmentally friendly arrangement for the company and shareholders. Holding our meeting virtually means there are some differences from the way an in-person meeting is usually conducted. However, our goal is to replicate as best we can the experience you would have if you were meeting in person.

We request that shareholders or duly appointed proxy holders who have specific comments or questions on a formal item of business to make such written submissions now, clearly identifying the item of formal business. During the course of the meeting, at the appropriate time, such submissions will be addressed prior to voting on the applicable motions.

Following the formal business of the meeting, we will have a question-and-answer session. Members of management are in attendance at the meeting and can address your questions. If you have any questions not specifically related to an item of formal business to be discussed at today's meeting, please feel free to submit those questions at any time, and we will do our best to ensure that the questions are addressed following the conclusion of the meeting. If for any reason, we are unable to answer your questions during the Q&A, we will endeavor to follow up with you after the meeting. You can submit questions by clicking on the Q&A icon, typing them in and submitting your questions.

We have four matters of formal business to conduct today: one, the election of directors; two, the presentation of our 2025 financial statements; three, the reappointment of the company's auditors for the coming year and authorization of the directors of the company to fix such auditor's remuneration; and four, the approval of a nonbinding advisory resolution on the company's approach to executive compensation.

While in practice generally adopted at shareholder meetings is for a motion to be made by one person and seconded by another, such a process is not necessary in all cases. Accordingly, for this virtual meeting, we will forgo having seconders for the formal business specified in the notice of this meeting.

I will now turn to the Chair to commence the meeting.

This meeting is now called to order. I will preside as Chair of this meeting and Ms. Alison Desipio, Corporate Secretary of the company, will act as Secretary of the meeting. With the consent of the meeting, I hereby appoint Computershare Investor Services, Inc. through its representatives to act as the scrutineer for the meeting.

I would now ask Ms. Desipio to report on certain procedural matters.

The notice calling this meeting together with the form of proxy and management information circular and annual report containing the financial statements of Spin Master Corp. for the financial year ended December 31, 2025 and the auditor's report thereon have been properly sent to the requisite recipients. Additional copies of these materials are also available online on the company's SEDAR+ profile at www.sedarplus.com.

I will dispense with the reading of the notice of the meeting. The scrutineer has provided me with its preliminary report on attendance at this meeting, and I confirm that the requisite quorum of shareholders is present in person or represented by proxy.

Given this is a virtual meeting, the voting at today's meeting will be conducted by online ballot for all matters. If, as a registered shareholder or duly appointed proxy holder, you have used your control number to log into the meeting and accepted the terms and conditions, you will be provided the opportunity to vote by online ballot. If you have already voted by proxy and you vote again by ballot during the meeting, your online vote will revoke your previously submitted proxy. If you have already voted by proxy and do not wish to revoke your previously submitted proxy, do not vote again during the online ballot.

The polls are currently open, allowing you to vote on each item immediately or if you prefer, you may wait until the conclusion of discussion on each item prior to casting your vote. The items of business to be voted on and your available voting options will be visible on the voting panel on your screen. To submit a vote, please click on the voting choice displayed on your screen. Once discussion has concluded on all items of business, we will provide a few additional moments for you to enter your votes.

Thank you, Ms. Desipio. I declare that the meeting is duly and properly constituted for the transaction of business. I direct that confirmation -- I direct the confirmation of mailing of the notice of the meeting received from Computershare Investor Services, Inc. and the scrutineers' complete report on attendance, the annex to the meetings -- the minutes of the meeting.

The first item of business is the election of directors. The number of directors to be elected at this meeting has been set by the company's Board of Directors at 10. May I please have the management's nomination of candidates for election to the Board?

Madam Chair, I nominate each of the persons specified in the Management Information Circular delivered with the Notice of Meeting being Jeffrey Cohen, Kevin Glass, Ronnen Harary, Christina Miller, Anton Rabie, Christi Strauss, Ben Varadi, Gary Vaynerchuk, Yael Vizel, Charles Winograd, serve as directors of the company, to hold office until the close of the next Annual Meeting of Shareholders or until their successors are duly elected or appointed in accordance with the articles and bylaws of the company.

As the company did not previously receive timely notice of any further nominations of persons for election as directors of the company as required by the advance notice provisions of the company's bylaws, I declare the nominations closed.

Mr. Foran, can you please advise whether any questions have been received on this matter from participants of this meeting?

Madam Chair, I will pause for a moment to allow for questions to be submitted.

I can confirm that we have not received any questions from shareholders specifically on this item.

Thank you. We will now conduct the vote by way of online ballot, and registered shareholders or their duly appointed proxy holders can vote by online ballot by selecting the applicable voting option on the voting panel displayed on their screens. If you have previously submitted a complete proxy, you have voted, and it is not necessary to vote again.

[Voting]

The next item of business is the presentation of the company's consolidated financial statements and the auditor's report thereon. We will dispense with the reading of the auditor's report.

The next item of business is the reappointment of the auditors of the company. May I have a motion on this matter?

Madam Chair, I move that Deloitte LLP, chartered professional accountants, chartered accountants, licensed public accountants be reappointed as auditors of the company until the close of the next Annual Meeting of Shareholders or until a successor is appointed and that the Board of Directors be authorized to fix the auditor's remuneration.

Mr. Foran, can you please advise whether any questions have been received on this matter from the participants of this meeting?

Madam Chair, I'll pause for a moment to allow for questions to be submitted.

I can confirm that we have not received any questions from shareholders specifically on this item.

Thank you. We will now conduct the vote by way of online ballot.

[Voting]

The next item of business is an advisory vote on the company's approach to executive compensation, also known as say-on-pay advisory vote. As this is an advisory vote, the results will not be binding upon the Board. However, the Board will take the results of the vote into account as appropriate when considering future compensation decisions. The text of the resolution is set forth in the Management Information Circular dated March 9, 2026. We will dispense with the reading of the resolution to the meeting.

May I have a motion on this matter?

Madam Chair, I move that a resolution in the form of the resolution on Page 45 of the Management Information Circular sent to the shareholders with the notice of this meeting approving the company's approach to executive compensation be passed as a nonbinding resolution of the company.

Mr. Foran, can you please advise whether any questions have been received on this matter from the participants of the meeting?

Madam Chair, I'll pause for a moment to allow for questions to be submitted.

I can confirm that we have not received any questions from shareholders specifically on this item.

Thank you. We will now conduct the vote by way of online ballot.

[Voting]

We will now proceed with the process of completing the vote on the items of the business of the meeting. Mr. Foran, have any further questions come in from shareholders specifically on any of the matters of formal business?

No, I can confirm that we have not received any questions from shareholders specifically on the matters of formal business.

Thank you. The polls on all items of business will remain open for a few more moments.

[Voting]

I confirm the polls are now closed, and the scrutineer has tabulated the results. I am pleased to confirm that the scrutineer has reported to me that all matters put to a ballot have been passed with the requisite level of shareholder approval. Accordingly, as a result, I hereby declare the nominated directors elected, the auditors reappointed with the Board being authorized to fix such auditor's remuneration and the nonbinding advisory vote on the company's approach to executive compensation approved.

I can also report that further to our majority voting policy, each nominated director received more votes in favor of their election than votes withheld. A report disclosing the number of votes cast in favor of, withheld from voting or voted against as applicable each item of business at this meeting will be reported as part of the report of voting results to be filed on SEDAR+ and disclosed in a press release promptly following this meeting.

As there is no other business that may properly come before the meeting, I declare the meeting terminated. Thank you.

We would now like to invite any supplemental questions from any shareholders or proxy holders present. As with the physical meeting, we will observe the same protocols of appropriateness and relevance to the meeting. As previously noted, to the extent we are unable to respond to a submitted question, we will endeavor to follow up with you. If you wish to ask a question, please click on the Q&A icon and submit now.

On behalf of the Board and management of the company, I would like to thank all our shareholders as well as others who have joined us today for your support and attendance. Thank you.

This concludes the meeting. You may now disconnect.

Good morning, ladies and gentlemen. Welcome to the Spin Master First Quarter 2026 Results Conference Call. [Operator Instructions] This call is being recorded today, Thursday, April 30, 2026.

I would now like to turn the conference over to Tim Foran, VP, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our call. With me here today are our CEO, Christina Miller; and our CFO, Jonathan Roiter. For your convenience, the press release, MD&A and consolidated financial statements are available on the Investor Relations section of our website 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 currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such assumptions will prove to be correct and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements.

As a result, you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult cautionary statements regarding forward-looking information in our earnings release dated April 30, 2026. Except as may be required by law, Spin Master disclaims any intention to update or revise any forward-looking statements, whether because of new information, future events or otherwise. Please note that Spin Master reports in U.S. dollars, and all dollar amounts today are expressed in U.S. currency, unless otherwise noted. Also, all industry data that we reference related to toys is from Circana, LLC retail tracking service and relates to data from our G11 markets, which are specified in our Q1 2026 supplementary presentation also available on our website. Unless noted otherwise, all percentage growth rates refer to the period ending March 31, 2026, relative to the same period in 2025.

I would now like to turn the call over to Christina.

Thank you, Tim, and good morning to everyone who is joining us today for our first quarter call. We delivered a solid start to the year, which is a direct result of our disciplined execution against our core strategic priorities. Our financial results were ahead of our expectations. More importantly, our underlying operational performance this year gives us confidence that while there is near-term macro uncertainty, we are successfully positioning the company to return to sustainable growth.

Our focus on product innovation, the expansion of evergreen properties like Monster Jam and the stabilization of Melissa & Doug is yielding positive results. And we are strategically managing our portfolio by investing in our creative capabilities, reimagining how fans engage with our brands in both the physical and digital worlds and expanding our audiences, laying the groundwork for future growth.

In terms of Q1, our POS in toy was up, driven by healthy consumer demand for many of our items, including Primal Hatch, DreamWorks Dragons, Monster Jam, Melissa & Doug and GUND. We recently announced the extension of our partnership with Feld Entertainment for more than another decade. Since 2019, together, we have grown Monster Jam for 7 consecutive years, driving it to the #2 brand in vehicles, and we have more exciting innovation and category expansion planned for the future.

We stabilized Melissa & Doug and achieved POS growth in March. The team is executing well on our return to growth strategy. One, reclaiming market share through innovation, competitive pricing on certain evergreen SKUs and strategic partnerships; two, by expanding both internationally and outside the toy aisle. We continue to see growth in GUND, our premium Plush brand. We have improved the brand's health and awareness, reconnecting it with young parents by crystallizing GUND's core positioning, streamlining the portfolio to 3 segments: core, baby, top-tier licenses and applying our signature innovation.

We have also significantly enhanced our online content and experience, which has driven e-commerce into GUND's largest channel. During the quarter, our team continued to execute on our long-term growth strategy by: one, investing in innovation; two, expanding into high-growth categories; and three, accelerating collaboration across the business to unlock the full potential of our portfolio. Why this matters? Creativity, storytelling and innovation are core to Spin Master. By investing in our creative capabilities and improving collaboration among our team across the globe, we are improving our ability to sustain a strong pipeline of innovation.

This year, consumers will see exciting new products with our KPop Demon Hunters line, extensions to our award-winning Primal Hatch, new iterations of CrystaLynx and our Surprise Collectible Plush Magic Jellykins. And we are seeing an overwhelming response to Hatchin' Yoshi tied to the Super Mario Galaxy movie. The movie is the highest grossing film of the year, and our Hatchin' Yoshi has sold out numerous times already, and replenishments are on the way.

We are infusing innovation into Melissa & Doug, expanding our WOW tech to other items, including our Easter egg decorating stack, which sold out this spring as well as launching new concepts in pretend play. Last quarter, we outlined our strategic expansion into the high-growth category of trading cards. Italian Brainrot and collectible cards will be available in May, and we've seen tremendous enthusiasm from retailers, both mass and specialty.

The team also continues to drive towards the launch of Hellbreak this fall, and we'll be announcing the addition of new partners to the game joining our cornerstone partner, Universal. We are continuing to accelerate our collaboration to maximize the value of brands by bringing them to kids and families wherever they are. Our top priority for 2026 is capturing the PAW Patrol movie moment across our creative centers. We've been building excitement for the August release of PAW Patrol: The Dino Movie, with the initial teaser released on March 30, which hit 10 million viewers online in the first 24 hours.

The movie will feature a new song from the Backstreet Boys, their first since 2019. On a related note, we recently hit a major milestone as PAW Patrol's theme song officially reached Platinum status, driven by more than 150 million streams, placing it in the top 1% of all TV-related music on streaming platforms. This achievement reflects the Pup's global reach, their staying power and the incredible engagement we continue to see across touch points. Beyond entertainment, this month, we unveiled our PAW Patrol toy line inspired by the movie's Epic Dino Charged Adventures.

The collection will be available in July and features towering dinosaurs, heroic vehicles and interactive play experiences. And we are on track to release our new PAW Patrol digital game later this year. We are leveraging the power of our creative centers with licensed partners as well. We are teaming up with Hidden Pigeon Company to bring Mo Willems popular characters to life across Melissa & Doug, GUND, Piknik and Sago Mini, reaching new audiences across physical and digital play. In a similar fashion, we are broadening our digital reading offering by expanding Lylli's e-book library with notable Spin Master IP, starting with an exclusive title from Melissa & Doug.

Beyond leveraging our extensive IP to grow Lylli's catalog, we will be launching it in new markets, beginning with North America later this year. Finally, we're building on Toca Boca's fan base of close to 60 million active users, bringing this powerful digital brand to the real world with Toca Boca Collectibles launching at MINISO this summer. This is one of the many ways we are extending its reach in meaningful new ways across physical products, license partnerships and content to further unlock value.

With that, I turn it over to Jonathan.

Thank you, Christina, and good morning, everyone. As Christina noted, our financial results in Q1 came in ahead of the expectations we outlined. Consolidated revenues decreased 9% or [indiscernible] million due to the significant pull forward of retail orders into the first quarter of last year, as noted on our last call. In that period, direct import orders increased 75% as retailers try to secure inventory ahead of the implementation of tariffs. This resulted in toy revenue increasing in Q1 2025 by 21%, thus making it a challenging comp.

Conversely, due to the shift in retail ordering patterns, Q2 and Q3 are therefore anticipated to have easier comps for us to lap. Revenues and adjusted EBITDA in Q1 2026 actually came in better than expected, primarily driven by the pull forward of some toy orders in Q1, the earlier Easter timing and some FX benefits. Adjusted EBITDA declined by approximately $4 million as the revenue decline was partially offset by a reduction in cost of sales and operating expenses. Adjusted operating loss increased by approximately $18 million due to a $4 million decline in adjusted EBITDA and a $14 million increase in depreciation and amortization expense.

This was primarily related to an increase in entertainment amortization and cost of sales stemming from the delivery of new content. IFRS operating loss increased by $12 million, also due to the increase in depreciation and amortization. Our operating cash flows increased significantly to $103 million due to effective working capital management, the reception of some tax refunds and lower cash operating expenses. The working capital inflow is partly timing related and while we, therefore, expect outflows in Q2 and Q3, we are pleased with the results of our enhanced execution and are now targeting a reduced overall outflow on a full year basis.

In the current macro environment, we maintain a balanced approach to capital allocation between CapEx, dividends and share buybacks. We used the remainder, a little over $40 million to reduce our debt, so this may revert in Q2 as we anticipate the quarter may be a cash outflow period as it has been in prior years. We ended the quarter with approximately 0.9 turns on net leverage, including leases.

Now turning to our individual creative centers performance. Both toy GPS and revenues decreased by 12% for the reasons I noted. Despite this, adjusted EBITDA loss actually decreased by $2 million due to a reduction in cost of sales and operating expenses. Operating loss also decreased by $2 million for the same reason. Entertainment revenues increased by 8% or $3 million, primarily due to the delivery of new content, including Unicorn Academy and higher music revenues. However, operating income declined due to the $12 million increase in amortization expense, stemming from the dilutive impact that occurs when delivering new content as well as an increase in marketing expense behind the upcoming PAW Patrol movie.

Digital revenues declined 2% or $1 million due to lower in-game purchases of Toca Boca World, partially offset by increased strategic distribution partnerships and Piknik revenues. Operating income declined due to the decrease in revenues and an increase in amortization expense. Toca Boca World revenues were below our expectations. However, player engagement remains strong, and the app is routinely listed at the top of the chart for kids in major markets on both Android and iOS per Sensor Tower. Additionally, our efforts to improve the user experience has resulted in improved ratings over the past year.

So to improve our monetization, we are tweaking the ecosystem with multiple initiatives, including increased proportion of paid content, more content with high-profile licenses and are aiming to see the benefits of that in the second half of this year. Within Piknik, we continue to see the benefits of our strategy to showcase the value proposition of the full bundle to users of the individual apps to encourage annual versus monthly subscriptions and to make the bundle more accessible to subscribers. While that impacted our year-over-year subscribers, it was more than offset through improved ARPU, retention and LTV.

Turning to our outlook. We reiterated our 2026 guidance today for stable to low single-digit growth in revenues and mid- to upper single-digit growth in adjusted EBITDA. The top end of our range reflects the growth drivers I outlined on our last call with the downside reflecting conservatism due to the uncertain economy and geopolitical situation, including the conflict in the Middle East. The blockage of the Straits has resulted in a significant increase in oil prices, which ultimately has an impact on our freight, resin and packaging costs.

To date, the impact has been de minimis due to the lag that occurs from us having contracted costs in place, and it takes some months for increased input costs to be reflected in new inventory. This situation is not unusual for us, though. We have experienced similar prices in '21, 2012 and 2014. In the past, we've utilized pricing and other measures to mitigate the impact. As it relates to Q2, we are targeting stable to low single-digit revenue and adjusted EBITDA growth on a consolidated basis in the quarter, driven by toy as a lap, an easier comp with approximate stability in our other revenues. In terms of cadence, toy revenue seasonality is now expected to be just under 1/3, 2/3 split between H1 and H2.

And with that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Adam Shine from National Bank.

Obviously, great efficient rundown to kick things off. Jonathan and Christina, can you talk maybe in terms of how Q2 might be pacing? I know, Jonathan, you just touched on a few metrics for Q2. But just any additional color. We heard Mattel, of course, yesterday talking about North American net sales potentially growing in Q2. Actually, they said they expect them to grow and that U.S. retailer ordering patterns appear to be stabilizing. So maybe we can start there.

Thank you for the question. Yes. So when we look at Q2, we -- in our prepared remarks, we called out that the -- we saw from a consolidated perspective, we saw that stable to low single-digit revenue and bottom line growth year-over-year. And when you bifurcate that down to just component parts, we like the progression we're seeing on toy. We obviously have some easier comps this year than last year based on -- as you know, there were some very high tariffs early in the second quarter in 2025.

So toy ultimately will be the driver of it. We are seeing -- we're very pleased with our sell-through as we started the year. We obviously benefit from an earlier Easter than last year, but we certainly are pleased with that. We're pleased with the new innovation, new products that are being launched throughout the year. And so specifically in the second quarter, Tinkerbell and Toy Story with really stable entertainment. And as we talked about in our initial guidance in digital, we said modest growth, but that was really in the back half of the year.

Okay. I think somewhere in the financials, Note 3, I think it was, there was about $10.8 million recognized in terms of previously deferred revs. Can you just talk about that and where it came in because it was a bit higher than prior quarters.

So deferred rev, I'll have to circle back with you on that one.

Okay. No problem. And just lastly, as we go back to Melissa & Doug and Christina has been talking about this, I think, ever since she got into the seat in terms of really trying to turn that around. I think she highlighted a few things at the outset of the call. But anything else to elaborate further? Maybe we can also touch while we're at it on some of the other discount channels as well, how that's progressing?

Yes, you're right. I have definitely been consistent with my comments and messaging around M&D. And I think that you see our POS began to improve in the fourth quarter, then we've seen improvements each month of the first quarter and reaching growth in March. So there's -- we benefited a bit from an early Easter, but also from some great product.

We had the viral success in the Easter egg decorating kit that's sold out, and we have big plans to expand that in -- next year as well. But overall, we're optimistic about the POS that we're seeing. We believe that it leads to GPS growth this year, which is our core priority to really build the underlying health and to expand both in international, continue to expand there as well as our retail shelf space.

Your next question comes from the line of Kylie Cohu with Jefferies.

First one, I guess, is on just the stabilization that we're seeing in Melissa & Doug. Curious kind of what's driving this March improvement? Is it distribution, velocity or promotional cadence? Any color there would be helpful.

It's Christina here. I'm going to take this one. I think it's a little bit of building on what I was saying to Adam just a minute ago, really that it's one, it is just product development and really starting to see the innovation extending into a lot of our lines like growing in infant and places leveraging the trusted brand across really compelling products and just thinking about the ability to add more play value to what already is some great toys.

And I think you're seeing all of that start to roll its way out. We've said for at least the last few calls that I've been part of that, we're driving innovation that we're looking to expand in international, that we're looking to expand on shelf. And I think you're seeing that. You're seeing the return of health to the brand and that it's always been an incredibly high-quality product line and the trademark Spin Master innovation. I think those two coming together really have put us on a path to growth.

Got you. No, that's super helpful context. And then just a little bit on the timing of costs and flow-through. You highlighted that higher freight resin and packaging costs take some months to show up into inventory. How should we think about that risk as a lot of your product is skewed to second half? Could we begin to see this pressure results in Q3? Just any type of additional color there would be helpful.

For sure. Thanks, Kylie, for the question. And you pretty much have -- gave the answer. So really, when we look at what's happening in the Middle East, there's obviously been an increase in oil that started early March. We benefit. We work with our suppliers. We have hedging programs, collaboration with them. And so the actual cash that we have to start paying out, depending whether it's going to be on freight or on resin, it's going to be sequenced between, say, now, throughout the summer and late summer. And then we have to then turn our inventory.

And the average turns on our inventory through the full year is probably around that 3 to 4 turns. And so you're thinking -- like you're looking at really more of a Q3 and Q4 impact. And one data point that could be maybe helpful as you're thinking through this is and why we're comfortable with reiterating our guidance is that the impact that we see this coming year because of higher input costs related to oil is in that $15 million mark. And it's certainly H2 is where we would see that impact.

Your next question comes from the line of Drew McReynolds from RBC.

Yes. Maybe just shifting here. On the Digital Games side, just in the opening remarks, you alluded to performance coming in below expectations. Just wondering if you can unpack that a little bit more. Is it -- was it an execution issue or just more broadly an industry issue? And then just second, Jonathan, just on 2026 guidance and macro assumptions that's embedded perhaps to the lower end of the range. Like is there -- I guess, said it a different way, a scenario here where there is kind of material downside specifically related to the Middle East? Or it sounds by your opening remarks that you have a relatively high degree of confidence that you can navigate this as we go forward.

Thanks for the question. I think I'll start with the last -- second half of your question because it does tie in a little bit to what Kylie was asking, and I didn't fully answer. So I did reference how we're -- the value that we're putting if you use $100 a barrel throughout the rest of the year. And that being that $15 million, we have mitigating plans, and we're implementing those actions proactively to address that $15 million.

So we're comfortable with our guidance based on the kind of current rates that we're seeing. Obviously, we have to monitor and I'd be very conscious that the situation can change very quickly. And so -- but based on what we're seeing today and based on the mitigating plans that we have started to enact, we're comfortable with our guidance. On the higher end, we've talked on the initial guidance call on the drivers. It starts with entertainment, followed by digital and then ultimately on toy.

And so we think we have a balance -- we think we're quite balanced. We think we have upside, and we think we can properly mitigate the risk that we're seeing right now in the Middle East. So that hopefully answers the second question. And then turning to -- I'll start off, just continue talking, and then I'll let Christina jump in. But with regards to Digital Games -- like we entered the year expecting modest growth. We certainly said it was more back half loaded. I would call this quarter kind of stable, right, negative 2%. So it's roughly in line with our expectations.

We certainly were focused this quarter and a little bit as we entered into the quarter, so a little bit last year, on driving more engagement with the brand in a worldwide basis. There are a phenomenal amount of activities that are coming as part of bringing Toca outside of the digital world and bringing into the physical world and expanding into our 2 other creative centers. And so we consciously made that effort to continue on expanding the reach and the broad reach, and that's through free content. Now we're going to start dialing that in and start managing that to work on the monetization lever as I walked through in the -- on my prepared remarks. So that's -- Toca is performing as we essentially expected, and it's really a back half story.

Yes. Just adding a little bit more context to that. I would just say the headline there is user experience across the board on our digital, both Piknik and Toca Boca. So what I would say is you see us consistently improving the user experience in the app and driving now. And then what we need to focus on, I think, the remainder of the year is conversion. And we have a lot of programming plans and partnerships and drops of content in Toca Boca that I think you'll start to notice and then we will see the lift from there.

But really, we're trying to make sure that the underlying health of the community is the focus at the moment, right? Growing, making sure the tech stack is working, making sure that user experience is really strong and then layering on the content drops partnerships through the rest of the year. And Piknik, we released a -- we had a very active quarter in releases. And the biggest thing would be the hub, so that you can really see the value of the product and that we can drive retention. So I'd say first quarter was really about setting those 2 things up to drive the balance of the year.

I'm just going to jump in here. My mom when I was growing up said I mumbled and now Tim is telling me I mumbled as well. So when I was saying the impact of oil, it's 1-5, $15, not $50 million, so 1-5.

Your next question comes from the line of Catherine Sung from TD Cowen.

Can you please provide some color on how we should think about the cadence of D&A throughout the remainder of the year? I know [indiscernible] has a big lift in Q3, but just how to think about total for the year and by quarter if you have?

Yes. So depreciation and amortization really two components, right? There's the what I'll call the normal that we run our business and as we amortize and depreciate our fixed assets. What's different this year is the release -- there was 2 releases, the release of Unicorn Academy in Q1. And so that had an impact on our amortization this quarter.

And the next big increase that we're going to see will be in Q3 when we release the PAW movie. So the way I would think about it is there's some -- a little bit of decline as we head into Q2 spiking back up in -- or going higher in Q3 as we release the movie, higher than Q1. And then ultimately falling back probably in Q4 closer to the second quarter that we're going to come into right now. So a total of about $160 million, $150 million.

And just a follow-up. Can you also elaborate on the strength of your Q1 free cash flow? Clearly, benefited from working capital, but just wondering.

Yes. Thank you for the question. I couldn't be prouder of the efforts of the team, and it really shows how the teams are coming together because it's not a finance, it's not -- it's finance, supply chain and sales. It's everyone coming together and recognizing the power of capital and cash. And so you see the strength of our inventory. We're really, really incredibly healthy inventory levels.

In fact, so healthy that when we look at opportunities for the rest of the year, we collectively can say, hey, we're comfortable going a bit longer on some of these growth and runners. Because our inventory position is so healthy. And then when we look at the AR and AP, the team is doing a phenomenal job of collecting capital -- collecting our receivables. And we're working with our suppliers on what the right cadence of timing of payments are. And so you put all that together, and it just continues to increase now 2 quarters in a row that we're increasing high single digit, the cash conversion cycle.

Your next question comes from the line of Gerrick Johnson from Seaport Global.

I kind of want to go back to Kylie's question, maybe a little bit more detail on the dynamics of how it all works. You're buying finished goods, so you don't have direct exposure to resin per se. I assume you're locked in from a price perspective early in the year? Or do those prices change?

Yes, I think you do -- I mean, every contract will be different. So we'll talk in generalities, but you pretty much hit it, which is we make -- we enter into agreements with our suppliers, and that locks in a certain price for the product. And so we -- that's why we have visibility for a longer period of time on the resin front than freight, where, as you know, in freight, you ultimately will have fuel surcharges that start getting charged through.

Okay. So when you do buy from third-party manufacturers, were those prices set before February 28 or after?

Yes, Gerrick, I mean, every contract -- we're a fluid business, right? So it's not like the business begins to stop. There's certainly a large amount of our contracts that were set before the increase in oil. And as we start thinking about 2027, you would imagine that would be contracts that would be based on current oil pricing. So it's a constantly fluid environment.

But I go back to what I said before, that the impact at current rates, if this continues for the full year is $15, so I don't mumble. We've gone through this multiple years in the past where we had -- I think 2012, 2014 and 2021, the organization -- our supply chain team is incredible here. And so we've gone through this multiple times. We're able to have mitigating plans. We've already started to action those. And we think the net impact on our cost after mitigation is going to be de minimis as we act against the plans that we set out.

Okay. That was very clear. And I just want to ask one more on retail POS. What was it in the quarter? It was up -- was it up mid-single digit? I kind of missed that. But more importantly, what is it year-to-date to include that Easter shift?

Yes. I'll start off and sorry, Christina can jump right in. From a POS perspective, it's LSD, we are growing. We're certainly in certain categories taking share. So Wheels & Action will be an example. And we're pleased that we started the year on a positive swing, including M&D.

For the year -- year-to-date?

Well, obviously, April Easter swung and but -- so there's going to be a shift. But overall for our whole business, we continue to be in the positive category.

There are no further questions. I'll turn the call back over to Christina. Please continue.

Thank you all for being with us today. We look forward to talking to you again on our Q2 call later this summer. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Good morning, ladies and gentlemen. Welcome to the Spin Master Fourth Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded today, Thursday, March 5, 2026.

I would now like to turn the conference over to Tim Foran, VP of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our call. With me here today are our CEO, Christina Miller; and our CFO, Jonathan Roiter. For your convenience, the press release, MD&A and consolidated financial statements are available on the Investor Relations section of our website at 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 currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such assumptions will prove to be correct and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, you are cautioned not to place undue reliance on these forward-looking statements.

For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information in our earnings release dated March 5, 2026. Except as may be required by law, Spin Master disclaims any intention to update or revise any forward-looking statements, whether because of new information, future events or otherwise.

Please note that Spin Master reports in U.S. dollars, and all dollar amounts today are expressed in U.S. currency, unless otherwise noted. Also, all industry data that we referenced related to toys is from Circana LLC retail tracking service and relates to data from our G11 markets, which are specified in our Q4 2025 supplementary presentation. And unless noted otherwise, all percentage growth rates refer to the period ending December 31, 2025, relative to the same period in 2024.

In terms of an agenda for the call, Christina will start with a review of the year 2025 and then an overview of our strategy and priorities for 2026 and beyond. Jonathan will then provide a financial review of the year, Q4 and our financial outlook for 2026.

I would now like to turn the conference call over to Christina.

Thank you, Tim, and good morning to everyone who is joining us today. 2025 was a challenging year for our U.S. toy sales as we navigated a difficult tariff macro environment. And while we achieved many of our goals, our results did not meet our expectations we wet at the beginning of the year. However, I'm pleased with how the team responded and made adjustments to set us up for a return to profitable growth in 2026. Most notably, we focused on execution, investing where it matters most and making clear choices to drive growth.

In Digital Games, we focused our investments on improvements to our 2 core platforms, Toca Boca World and Piknik by optimizing the user experience and increasing content releases. We also expanded the reach of our brands through exposure on third-party platforms. This strategy led to more than 20% growth in revenues and adjusted operating income in 2025. In entertainment, expanding the reach of PAW Patrol was our top priority. We introduced new tent-pole specials to build towards the summer release of the third PAW Patrol movie, and we invested in a broader content slate and new IP development. In Toys, we increased our POS driven by consumer demand across our key categories, products and licenses. We invested in strengthening our core brands, driving innovation and expanding into higher growth categories. And we have diversified our supply chain responding to the evolving tariffs.

At the corporate level, we've been investing in material IT improvements to enable efficient, scalable and future-ready business operations. It has been a significant amount of change, and I'm proud of the team's commitment and resilience. Now in terms of specific results for our creative centers. In Toys, we started 2025 strong with a solid first quarter, reflecting momentum in our core brands, innovation and licensed brands. However, driven by economic uncertainty following the introduction of tariffs, the remainder of 2025 was challenging, notably in the U.S. As I noted, our POS was up in 2025. However, our sales to retailers were negatively impacted as they reduced their inventory levels. But this does set us up well for 2026. Melissa & Doug was the most impacted by these shifts, given almost all of the sales entering 2025 were in the U.S. and manufacturing for the brand was primarily in China.

As I outlined on our last call, we are executing on a plan to stabilize M&D and return it to growth. We had a solid start to the international expansion and the team successfully optimized inventory levels for 2026, a year in which we aim to gain more retail space in the U.S. and in Europe. In 2025, we deepened our position with partners. Jurassic World Primal Hatch was the top selling in youth electronics, Ms. Rachel was the #1 absolute growth license in infant, toddler and preschool category and Monster Jam continued to take market share in vehicles, remaining the #2 property in the category.

Quality innovation also helped drive growth in our core brands, Hex Bots Wall Crawler was the #1 item in remote control vehicles. Cool Maker Heishi Bracelet was a top-selling new item in arts and crafts in the U.S. and Europe and our new Melissa & Doug WOW products helped the brand become #1 in craft kits. We remain a preschool leader and gained market [indiscernible] which moved us up to the #1 manufacturer in our infant, toddler, preschool and plush category. PAW Patrol was #1 here.

Looking ahead to 2026. We've had very positive feedback from retailers on our toy line. Our PAW Patrol movie line is filled with exciting new transformation for preschoolers. Grounded in our mission of purposeful play with Melissa & Doug, we are introducing new pretend play experiences and adding infant and play sets. Primal Hatch won the Toy of the Year and Action Figures Toy of the Year in 2025. Now we are extending the line with new iterations across multiple price points. We continue to launch new innovation-driven concepts, including Magic Jellykins and [indiscernible]. Gund had strong POS growth in 2025. And in 2026, we will continue to broaden its appeal with great new licenses and a unique brand promise Forever Friends, plush that can last the lifetime.

And we have a portfolio of exciting new products for popular licenses, including Monster Jam, Ms. Rachel, Gabby's Dollhouse, as well as KPop Demon Hunter, Hello Kitty and a key item for the upcoming Super Mario Brothers movie with Hatchin' Yoshi. We also recently announced our expansion into strategic trading card games, a category that nearly doubled in size in 2025. We are taking a two-pronged approach here. The first is a distribution partnership in North America, Australia and other markets with Italian brainrot, a series of collectible trading cards that has successfully tapped into this wonderfully weird viral trend. And this fall, we are launching Hellbreak, a fast, competitive and highly collectible game for an older demographic. This is a multiyear initiative to build out a one-of-a-kind horror crossover universe that will include characters from across the horror genre from Universal and other major studios.

In summary, our focus on toy going forward is to expand our leadership position in our major categories, create new categories from white space through our innovation and enter and compete in high-growth categories where we have the right to win with compelling products.

Moving to Entertainment. We have an exciting year ahead with the global release of the PAW Patrol movie in August and we are investing ahead of that. We continue to build the PAW Patrol universe with new content and expanded distribution to ensure the pups remain a global preschool leader with the next generation of children and their parents. We've been reaching new audiences by adding previous seasons and movies on Netflix, which have driven strong engagement. In 2025, hours viewed on Netflix of PAW Patrol increased by 10% to almost 1 billion hours, a testament to the relevance of the brand.

In 2026, we have new seasons of PAW Patrol and Rubble & Crew being released on Nickelodeon and Paramount+ and other global channels with future seasons in development. In addition to PAW, we are continuing to create new IP including the development of our animated 4-quadrant movie. The release of the new season of Unicorn Academy also begins globally on Netflix this month. In Digital Games, our focus on Toca Boca and Sago Mini Piknik subscription bundle is paying off. We have created value in the Toca Boca community by increasing the frequency of free and paid features, content releases and collabs, including Universal's Wicked: For Good and Hello Kitty, enhanced our Piknik subscription offering, including through the addition of Crayon Club and extended the reach of our brands by licensing to third-party platforms.

In 2026, we plan to put the Toca Boca user experience first by continuing to invest in improving the tech platform to support faster production, more content and live service and we will be bringing this playful world to fans with Miniso this summer, and we have a pipeline of other partnerships coming.

With Piknik, our strategy is to drive growth in subscribers and increase retention by showcasing the value proposition of the deep bundle of titles included. As part of this, we have a content pipeline to fuel subscriptions, including the first quarter release of the new reading app Superfonik. We also have a new UX launch planned in the coming months that will make it easier for parents to access the full Piknik offering within their subscription, a key driver of higher retention. And we are continuing to expand our partnerships.

In the first quarter, we launched Jinja's Garden, Sago Mini's first-ever immersive 3D game on Apple Arcade. Finally, the integration of Lylli s going well, and it is an example of how we can drive value across our creative centers. We are utilizing Lylli as a platform to make reading part of our brands, including PAW Patrol and Melissa & Doug.

In summary, we have clear priorities for 2026, as I outlined in detail on our last call. The first is capturing the movie moment for PAW Patrol across all creative centers. The second is fully realizing the potential of Toca Boca digitally in the physical world and through content. And the third is returning Melissa & Doug to growth. Beyond 2026, we are setting the stage to reignite a new growth cycle by investing in innovation in our toy portfolio and digital platforms, expanding into high-growth categories and accelerating collaboration across our creative centers to unlock the full potential of our portfolio and brands.

With that, I turn it over to Jonathan.

Thank you, Christina, and good morning, everyone. As Christina noted, the 8% decline in our Toy gross product sales in 2025 and was driven by an approximate 12% reduction in retailer inventory levels. And because we don't expect significant more reductions, we believe we have a healthy setup going into 2026. We have successfully reduced our own inventory levels in the year by about 20% due to our sell-through efforts with Melissa & Doug successfully reducing its age inventory as well as a reduction within Spin Master of licensed products that we are exiting. Our improved days inventory outstanding, combined with improved payable management, help us decrease our consolidated cash conversion cycle by 7 days.

During the year, we generated $308 million in operating cash flow despite the headwinds in the U.S., illustrating the cash generating power within our model. CapEx was approximately $185 million, which included certain projects that I outlined on our third call. Specifically, approximately $24 million related to our IT investments to upgrade our enterprise software across our global organization and approximately $33 million, which was attributed to our new [ Lylli ] office and showroom of which about $15 million was funded by our landlord. After CapEx and lease payments, our free cash generated was used to purchase Lylli in the fourth quarter. We also returned about $80 million of capital to shareholders through our quarterly dividends and by maximizing our share buyback program for the second year in a row.

We have now reduced our TSX listed shares outstanding by approximately 7% over the past 3 years through our buyback programs. Net debt, excluding lease liabilities, was held flat year-over-year as we prioritize return of capital. We ended the year with one turn of net leverage, including leases.

Now digging into our fourth quarter results by segment. Toy GPS declined by 5%. This was a significant improvement over the 20% decline we experienced in the third quarter, which was driven by the delayed timing of retail orders as many had moved from direct import to domestic replenishment. In the fourth quarter, we lapped much of that timing issue as domestic replenishment sales surged in December by 50%, making up for some of the reduced import sales that we experienced in prior months. A special thank you to our sales, supply chain management and fulfillment teams for navigating us through such an abrupt tariff-driven change in retail order patterns in 2025.

In the fourth quarter, we support our retail partners and invest in sell-through to optimize our inventory, which resulted in Toy revenues and gross profits declining faster than GPS. The quantum, however, was not unusual and sales allowance percentage and gross margins were in line with levels we have seen in the fourth quarter of 2024 and 2023. As much of our promotional efforts in Toy were above gross profit, we reduced our marketing expense and OpEx, which helped protect EBITDA. As we noted on our last call, Melissa & Doug was negatively impacted in 2025 due to the tariff-driven environment and increased competition. While we are executing our plan to stabilize and return the brand to growth, the change in dynamics led us to take a noncash goodwill impairment charge.

Turning to Entertainment. Revenues increased 3% driven by higher distribution revenues stemming from deliveries of content. However, adjusted operating income declined due to a $12 million increase in amortization of content development within cost of sales, reflecting the in-period dilutive impact from content delivery.

Within Digital Games, revenues increased 16%, driven by increased partnership revenues, increased engagement and monetization on Toca Boca World and improved retention and higher ARPU in Piknik. The revenue increase drove a 24% increase in adjusted operating income.

So now turning to our outlook for 2026. We are guiding for a stable to low single-digit growth in revenues and a mid- to upper single-digit growth in adjusted EBITDA. The top end of our range reflects growth drivers with a downside reflecting conservatism due to the uncertain economy and its impact on the U.S. consumer demand. In terms of drivers, we expect healthy growth in Entertainment, through the release of PAW Patrol movie and more modest growth in Digital Games as it faces a challenging comp in '25 when it grew by more than 20% and benefited from significant partnership revenues.

As it relates to Toy, we expect drivers to include the third PAW Patrol movie, M&D improvements, continued innovation through the portfolio, exciting new licenses as well as the potential to recapture some shipping revenue that we lost in the prior year. Headwinds to growth will be the lapping movie years for DreamWorks Dragons, Gabby's Dollhouse as well as exiting certain licenses, notably D.C.

In terms of top line cadence throughout the year, we anticipate year-over-year results in Entertainment to be relatively stable in the first half, with growth in the second half following the release of the PAW Patrol movie. This would be a combination of revenues of approximately $20 million, followed by additional distribution revenues thereafter.

Within Digital Games, we're aiming for modest growth in each quarter with rates increasing in the second half partially driven by the launch of our new PAW Patrol digital game and improvements we are making to our platforms. And in Toy, we anticipate an approximately 30-70 split in Toy revenues between the first and second half of the year with the first quarter anticipated to be in the low double digits and the second quarter high teens. Year-over-year results through the quarters in Toy are anticipated to be volatile to a significant shift in retail order patterns last year. Retailers pull forward orders in the first quarter last year in anticipation of the introduction of tariffs, which makes it a challenging comp.

Therefore, in the first quarter, we are expecting a significant year-over-year decline in Toy, which in turn is anticipated to result in a double-digit decrease on a consolidated basis. For the same reason, of course, we should have easier comps in Toy in the following quarters, notably in the third quarter. In terms of gross profit, I'll note that the current geopolitical climate may result in certain higher cost of sales such as freight. It is too soon to quantify these. We do expect approximately $22 million of increase in depreciation and amortization within cost of sales, primarily related to amortization of entertainment content development. In the first quarter specifically, we expect a year-over-year decline in gross margin due to a $12 million increase in entertainment amortization. In terms of operating expenses, we anticipate efficiencies in certain areas to help us pay for increased technology investments. The increased adjusted EBITDA margin implicit in our guidance is consistent with the 50 to 100 basis point general target, I outlined on previous calls.

As it relates to adjusted EBITDA cadence, we expect seasonality to be similar to last year and '24, with the second half representing more than 85% of our full year results. In the first quarter specifically, we anticipate negligible EBITDA due to the anticipated decrease in gross profit. Below adjusted EBITDA, we are anticipating depreciation and amortization in 2026 to be approximately $160 million, with the increase driven by entertainment, as I previously noted. Finance costs are anticipated to be similar to 2025.

Now turning to our cash flows. Lease payments are anticipated to be just under $40 million annually and our CapEx is anticipated to be approximately $150 million in 2026. Now about $25 million of this relates to investments we are making to upgrade our enterprise software, which we expect to launch by the end of the year. This includes leveraging the latest technology to prove and automate our data quality and processes and facilitate tighter integration within our creative centers.

The remainder is primarily investments in 3 areas: first, new entertainment content of which 70% is earmarked to continue to expand the PAW Patrol universe, where we generate strong cash-on-cash returns with much of the remainder on our new animated original IP film. Secondly, [ tooling within toy ]. Apple intensity in toy continues to remain in the low single digits. And thirdly, digital game projects. Specifically, the majority will be spent on Toca Boca with a focus on driving growth through next-generation game development, additional content, features and platform upgrades. The remainder will be spent on driving retention in Piknik by investing in new game launches, content expansion and live service development, and we'll be completing our new PAW Patrol digital game.

In terms of capital allocation, we remain focused on first investing and driving growth, both in OpEx and CapEx. With the free cash we generate after CapEx and lease payments, we expect to continue to look for M&A to further our strategies. We are maintaining our dividend. We are also renewing our share buyback program.

So in summary, we'll look to maintain a balanced capital allocation approach with prudently [indiscernible] conservative leverage.

With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from Adam Shine from National Bank Financial.

And of course, thanks for the outlook and a lot of details, Jonathan. If I could go back, one item that I didn't hear was on the sales allowance front. And maybe you can talk a little bit more in terms of the nature of promotional activity that you think might transpire during the course of this year, let alone perhaps still in Q1.

Thank you for the question. I'm glad that you appreciate the details on the guidance, return to guidance. In terms of sales allowances, we finished this year I didn't -- sales allowance in Q4, I'd point out that those are similar to levels that we had in '23, '24. And so really, when you look at the overall year of '25, it's not necessarily an anomaly. And so heading into 2026, I think we're expecting similar levels. We're really early in the year. Sales allowances really are determinant of your products. And when we look coming out of New York Toy Fair, there's a lot of excitement around our core new products. And so ultimately, sales allowances, we are expecting it to be similar to 2025.

As you reflect on some of the latest dynamics around the tariffs, I think we were moving from 10% into 15% perhaps other changes are afoot. How do you read the landscape. Is this another year where you effectively pass pricing on to the consumer to wash the tariff impact? One part to the question. And then secondarily, are there other benefits to be extracted by virtue of some of the supply chain management issues you pursued last year?

Yes. Thanks, Adam. It certainly is a dynamic environment. You're right, we're currently at 10%. I think there's some expectation from the Treasury Secretary that next week we'll move up to 15%. Bear in mind, those are lower than the previous years. If we just step backward for a moment in 2025, tariffs themselves were not -- the actual dollars that we paid were not material. The net dollars that we paid versus price was not material. Really tariffs, the element that was material was how the consumer ended up showing up and how the retailer bought throughout the year. So we don't expect a movement from 10% to 15% or thereabouts to have a material impact on the net dollars going out. Obviously, the bigger question mark is, does that impact the consumer? And does that impact the retailers? So far, as we began Q1 and 2 months in, we have not seen changes in the retailer purchasing behaviors with the change in the tariff environment.

And just one last one, and I'll queue up again. Just to confirm and clarify with respect to the PAW Patrol movie expected distribution, I think you said $20 million. And is that something that hits the Q3? Or is that $20 million figure the -- a figure for all of 2026?

No. So when we release the theater -- release the move, there's contractual responsibilities. And of those, we received $20 million, and that will be a Q3. How the movie performs, then there's additional funds that we would receive.

Perfect and this is as per the last 2 movies.

Your next question comes from Kylie Cohu from Jefferies.

First, just thinking about the industry as a whole, what are you expecting from preschool infant and toddler category? And then also just like the broader toy industry as a whole for 2026 in terms of sales growth?

I think that what we -- just looking at the category overall for us, we see that the consumer sentiment like towards the end of last year was a little bit softer, but improved by the time we got into December slightly. And that toys continue to -- people still continue to shop for toys, even if it's on a promotional basis, right, that they're looking for discount or otherwise. So our approach going forward and even towards the end of last year is to make sure that we have a balanced mix on pricing that across all of our brands that we're bringing value to the consumer.

So more than 50% of our products are still priced below $19.99. So I think we have that kind of mix between driving innovation, helping grow that category and then also making sure that we have price points that work. And on top of that, I would add that we have some of the stronger brands in the space as well. So whether it's PAW Patrol being in a movie year or continuing to see growth in Ms. Rachel or Gabby's Dollhouse had a good year coming off the movie. So I think when we move into next year, it's about what else can we bring into that category, given our strength in that category and creating products for that category and then how do we continue to drive the products that we -- brands we have.

Super helpful color. And then I guess last one for me is just kind of what needs to go right in order for the results to end up at the high end of your EBITDA guide?

Thanks, Kylie. Well, if we go back to kind of our prepared comments, there are really 3 focuses that we have, right? The first is capture the PAW Movie moment. And so ultimately, not just success at the theater, but also the toys that we have launched that are associated with the movie. We've had really strong response coming out of New York. And so we're really feeling bullish and positive about those products. The second is realizing the full moment of Toca and fully realizing the Toca's potential. So that is a multiyear journey. And we're going to start seeing over the course of this year, increased content, increased features, increased Toca being outside of the digital realm.

That is a multiyear journey and executing on that will certainly help on the high end. And then lastly, we talked about for a number of quarters now, returning M&D to growth, and that is a focus of the team. We have -- we brought back innovation to the pretend play category. There's some new areas that we're launching products around and the feedback that we received, again, from the Toy Fair was positive. And so ultimately, those are the 3 elements that would bring us to the top end, plus the consumer showing up and plus stability with how retailers are ordering throughout the year.

Your next question comes from Gerrick Johnson from Seaport Research Partners.

Given the Supreme Court tariff ruling, has that changed conversations with dealers? And just in general, how are they wanting this to be fulfilled in the first half? Are they shifting back to FOB or still pretty much domestic fulfillment?

It's still too early to tell, right? The changes are coming daily at this point. So being able to react to them before the next one comes, I think people are just taking a wait-and-see approach at the moment. So we're not seeing any drastic changes.

Okay. And how are they wanting to be fulfilled? Last year that we talked a lot about that shift from FOB to domestic and have we shifted back to normal shipping patterns? Or are we still in that domestic preferred over FOB?

Domestic continues to be about at the same rate as it was. We don't see a big swing back immediately.

.

Yes. I think it will take a number of years for that change. And if anything, there may be more domestic than FOB over the course of the year.

And then on channel inventory, I heard a couple of numbers. Was it down 12%, down 20%? What was the channel inventory number?

Sure. So the channel is down 12%. So that certainly positions us well kicking off the year. And we were down 20% year-over-year. And so from a working capital perspective and again, also positioning us well for next year with the quality of our inventory on hand.

Okay. Is there still any excess out there in the channel that needs to be cleared or inhibiting first quarter -- first half shipments?

I think there's always going to be some level of access. I would just revert back to we're starting the year in a great position, both from our own inventory position, down 20% and the market -- the retailers down 12% that is a strong position to start from.

Your next question comes from Jaime Katz from Morningstar.

I hope you guys can give us some insight. Maybe I missed it in the prepared remarks, but do you have any insight to the POS momentum coming out of the quarter? We're in March already. So hoping to get a little bit more recent visibility.

I mean I think right now, at this moment, it's slightly up is what we're seeing for the POS getting into the first 8 weeks of the year.

Okay. And then we haven't really talked too much about this trading card market. But for horror specifically, I'm not very in the weeds in the space. I think there are some other brands in this space. So can you talk a little bit about what the total addressable market there is for you guys to tap into? How you expect the rollout of that to go and sort of when you expect it to start contributing to the P&L?

Sure. A couple of pieces there. I think in the prepared remarks, you would have heard us talk about a two-pronged approach, right? So we have a distribution partnership with Italian brainrot, which is a trading card brand out of Italy. And that will be the first one to go to market and that will be more of a mass trading card play. And then when you look at Hellbreak, which is the strategic trading card game that we're putting into the market later this year, and that's a multiyear growth initiative. So it will start at specialty and really look to permeate that channel and grow with the fan base that older demo.

Right now, there's a big show going on in the trade show market called GAMA in Kentucky. And that's like one of the first legs of really revealing it to the specialty channel and to building fandom for the game. The game is there this week. It's doing really, really well. That's that first leg. So I think that really, at this point, it will be about -- we will not see huge growth from this category in 2026. It will start to grow more for us in '27 and '28.

Your next question comes from Brian Morrison from TD Cowan.

Maybe just you mentioned the key to returning M&D to growth. In New York, we saw the expanded product line beyond [ wood ], the expanded addressable market and your international expansion opportunity. But what's the strategy to gain market share following the tariff heightened impact last year? Is it product differentiation? Will you have to use price? How do we gain more market share back?

There's a couple of paths to returning M&D to growth, right? It's never going to be one thing. I think it is regaining retail space right across the channels, doing that through both category expansion into things like infant as well as continuing to grow our space with WOW products and driving some of the innovation you saw, also really digging into the pricing of our products as well and really making sure that the value is there for both our consumer and our retail partners.

And then last but not least, of course, is international expansion. You saw us track towards model at the end of last year with growth into our international channels and growing further there will help us really expand the brand. And then beyond that, I think anyone that was able to spend time with us at Toy Fair will see the way that there's definitely other adjacencies that Melissa & Doug can grow into from an experiential standpoint and really looking at seeing how else we can make sure that the people that love Melissa & Doug can spend time with Melissa & Doug beyond just having a toy in their hands.

Okay. And then maybe, Jonathan, can you clarify? I mean, obviously, growing Toca digital content is a priority next year or this year, pardon me. Maybe just reconcile the monthly active users in Slide 19, it appears that the ending MAU is down, but the average MAU is up. Can you just clarify how that works?

Sure, Brian. I mean the simple answer is the -- 2 numbers are different. One is an ending number and the second as an average for the period. And so what you see is the trend, I guess, ultimately, in terms of what is transpiring. When we look at Toca, they really -- you really do have to look at it across the 3 core metrics: monthly active users, the conversion of those users and then ultimately, what people are paying. And we are not managing just for 1 of those metrics. We are managing across all 3, and we're comfortable to have some variability in our MAU, in our monthly active users as we try different ways to increase our conversion and increase our, what we call, our ARPU. So we're very comfortable with the trend that you're seeing there. And we're really trying to focus on all 3 of the variables at play.

So is it safe to say it's a bigger basket from a more concentrated base of users?

Yes, Brian, I think what you're seeing is that it's both, right? And same thing that Jonathan was saying about the difference of its MAUs. It is there. Yes, we're trying to grow the top of the funnel and you see lots of releases -- content releases, both free and premium. And we are converting at the bottom of the funnel well. And I think that's one of the differences for Toca Boca versus competitors, right, is that the markets that we're going to and our ability to convert at the bottom of the funnel. So it's a little bit of both.

Your next question comes from Martin Landry from Stifel.

Jonathan, I just want to talk about the impairment charge you took on Melissa & Doug, it's pretty large. I just want to understand when you did your cash flow analysis to write down the goodwill, was the write-down driven by a lower revenue profile? Or is it more from a lower profitability profile?

Yes. Thank you, Martin. The math on any time you're looking at your CGUs and ultimately, the goodwill associated with it is driven first by your top line. And then what -- how does that translate into cash? Clearly, in 2025, we talked about a number of times. M&D was a brand that was disproportionately impacted by the tariff environment as the vast, vast majority of its production was coming out of China and the vast majority of the sales were to the U.S. And so it had a disproportionate impact.

So when you take that in consideration, you rerun your model, ultimately, the baseline of where you're starting from is lower, and that's what drives the impairment. What's important is what we're doing going forward. And I think Christina walked through the growth drivers quite clearly. We're really excited to see a path to having more doors and more shelf space in 2026 than we had in 2025. And couple that with the innovation, the right pricing and continued international expansion. We think that we're -- our aspiration and our goal to bring back Melissa -- M&D back to growth, we're well underway on that.

Okay. And switching gears, I mean, in the past, there were lots of discussions and efforts and resources dedicated to the development of IP internally like Unicorn Academy, for instance. But we don't hear you talk about or maybe I've missed it, but is this a strategy that you're still pushing to develop IP internally? And what's the pipeline of the IP developed internally, if there is any?

Thanks, Martin. I think that we did discuss it a little bit in the prepared remarks around, one, obviously, we are continuing to invest in PAW Patrol, and we talk a lot about that. I think that's definitely one of the things you're noticing. And then other than that, we do have a pipeline of content, whether it's the 4 quadrant movie that's in development. Whether it's relooking at [ Bakugan ] which is an internal property talking about how we're going to develop Toca Boca. Again, when we look at driving and unlocking value for our portfolio, it's about getting it to its full potential.

So I think one of the things you're noticing is the pipeline is filled with some of our very core brands that we have the ability to pull through across all of our creative centers. And then we always have a robust development slate where we're looking at what are the new content we can create. And as we get further along with that, we will obviously share it.

Okay. So is it fair to say that there's more focus on your core brand and trying to develop new stuff at the moment? [indiscernible]

No. I think that, again, I'm going to take a chance of just sort of repeating myself. But I think that, obviously, the core brands inside our portfolio are the brands that we are focused on giving and unlocking -- giving attention to and resources and unlocking their potential. Not in -- it's not binary. It's not just doing that. I think the development brands are just that. The same way we're developing over 500 toy products that we will bring far less of those to market.

So we have a strong development pipeline. We're constantly looking at what else we can bring to market and when. But as you're probably aware, it's a pretty long process between when we start to develop the property and when we bring it to market. So no less development currently, what's closer in sight is the development or the shows that we're talking about.

Yes. And there's a healthy -- 30% of our entertainment CapEx budget is outside of PAW. So there's a healthy amount of dollars that are being placed on those items that Christina just walked through.

Yes, we will always be a company that's in the active creation, right, that we're always looking at building and adding to our portfolio, and developing franchises across the business, whether they come from digital or they come from toy or they come immediately from content. So I think it's about looking left and right around us to bring what can we pull into content and then where are there those new content ideas. So we are, in fact, doing both. We are committed to doing both.

Your next question comes from Luke Hannan from Canaccord.

I wanted to follow up on the PAW movie contribution. I think I heard you correctly, it should be $20 million that's going to be recognized in Q3. Is the accounting for that similar as in the past where it will show up -- 100% of that revenue shows up in the EBITDA line and then there's the associated charges against that? And then if so, so just a clarification, so that $20 million then is included in the adjusted EBITDA guidance. And then if we break that out, it's more like flat to up low single digits on the year rather than mid- to high single digits?

I missed the second part. But on the first part, I think it was muffled when I mentioned before. So similar to historical practices when we release content, if we're within a partnership, there's contractual -- we've met some contractual responsibilities and therefore, there is -- we can tell you the number that we're going to receive. And so we're going to receive $20 million of revenue. There will be amortization associated with that against that $20 million as we release content. I didn't get the second part of your question. I apologize.

Maybe -- so I'll just clarify that. So in the past, like in 2023, for example, the number was in and around $15 million, and that showed up -- 100% of that revenue showed up in the adjusted EBITDA line as well. So in effect, it's almost like the margin on adjusted EBITDA was a little bit higher relative to where it should be because you have the amortization showing up below the EBITDA line. So I guess I'm just trying to think of, if we're thinking about it on a like-for-like basis, we're thinking of the margin expansion in '26 versus '25, should we be then excluding that $20 million of contribution from 2026 EBITDA?

Yes. So it's -- I mean, I thought I addressed it, sorry. It's no different than in the past. So the $20 million, there's amortization associated with it. So therefore, EBITDA, you do see a flow through, through the EBITDA, where you won't see it flow through, excuse me, fully is to the [ EBITDA ].

Yes. Got it. Okay. Appreciate that. And then just as a follow-up, you talked about there are certain dynamics, obviously, geopolitical dynamics going on right now that make it very difficult to figure out what the impact is of higher freight costs on what your COGS is going to be going forward. Can you just give us an idea of what it is that you're seeing as far as changes in freight rates currently?

Well, I mean, currently none. But I mean we're 4 days into the spike in oil. And so ultimately, I think it will come down to how high does oil go and how long does it stay at those rates. We're 4 days into the increase in prices. So right now, there's, what I'll say, no material impact. Of course, if this continues for an extended period of time, you will -- we will start seeing that. And there's probably a 3- or 4-month lag in terms of our freight costs and then ultimately hitting our P&L through our COGS.

Your next question comes from Drew McReynolds from RBC.

Two for me. First, on the Digital Games side, just in terms of profitability. Obviously, we saw a little bit of a margin lift here in Q4 on pretty good performance. I think margin is stable overall in 2025. Just as you continue to grow the top line here, and invest in the platforms, how do you see margins unfolding going forward?

And then second question on the M&A environment. Just maybe for you, Jonathan, just what areas of focus at a 30,000-foot view, are you looking at, at the moment?

I'll start on the first one on the margins on Digital. There's really -- like when you think about Digital, there's 3 revenue streams ultimately that are in that business, there's the Toca stream, the Piknik stream and the partnership stream. Partnerships are very accretive. And so that's why you sometimes see some variability, upward variability on our margins is when we get to -- when we recognize partnership revenue. Some deals, we get to recognize all at once. Some deals are over, of course, a number of years. And if they're material, we do on the call, I'd like to point out the accounting treatment associated with it.

Then when you look at Toca and Piknik, they're both in very different stages of their journey. Toca has hit what I'll call scale, and so it's a very accretive business. And our focus is to continue to manage all 3 of those metrics that I talked about before and bring -- and further bring Toca to life outside of the Digital realm.

Piknik, we're scaling that business, and so there are certainly more investments associated with the Piknik business. And so the accretion around Piknik is smaller than you would see at Toca. So those are the 3 variables at play when you look at the Digital business.

And then in terms of M&A, we're -- I would say the current management team continues to have the same focus as the previous management team around the importance of M&A to our growth platform. Areas that we continue to be looking at are areas that can boost up our core competencies within Toy, areas that we're not necessarily playing in and are high growth in Toy, regions that we can benefit from as well. And then we continue to be actively looking and you saw our last acquisition was in the digital space in the digital realm where we can add more content and more capabilities.

[Operator Instructions] Your next question comes from Ty Collin from CIBC.

I just want to circle back to the discussion around margins. So the 2026 guidance implies probably somewhere between 50 and 100 bps of EBITDA margin improvement. As discussed in a previous question, it sounds like a fair bit of that is going to be coming from Entertainment and Digital rather than the Toy business. So I guess my question is just what's it going to take to kind of get core Toy profitability back to 2024 levels? What does that pathway look like? And are there any other sort of self-help levers available to the company to get there?

Thanks, Ty. It's a great question. The challenge when you have kind of these high-level numbers, you don't see kind of all the different pluses and minuses underneath each. What I can tell you is that there is accretion and there is margin improvement within the Toy business. It's the biggest part of our business, right? It's 80-ish percent of our overall business. We are -- and we've talked about in the past, ensuring that we are setting up this company to have a new growth cycle and a sustained growth cycle and a profitable growth cycle.

So there are investments that we're making on the increased margin because we are getting -- from a portfolio approach, we are getting accretion on entertainment. So this is a year where we could certainly put dollars back to work to set ourselves up for success, '27, '28 and '29 on that journey of continuing to grow the top line and expanding our margins. I've talked in the past that I see this business being able to consistently add 50 to 100 basis points a year for a number of years, and we're doing it. And so we're making sure we can do it this year, and we're going to make sure we can keep on doing it going forward.

And there are no further questions at this time. I will turn the call back over to Christina for closing remarks.

Thank you all for being with us today. We look forward to talking to you on our Q1 call on April 30th.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.

Good morning, ladies and gentlemen, and welcome to the Spin Master Corp. Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025.

I would now like to turn the conference over to Tim Foran, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining our call. With me here today are our CEO, Christina Miller; and our CFO, Jonathan Roiter. For your convenience, the press release, MD&A and consolidated financial statements are available on the Investor Relations section of our website at 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 currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such assumptions will prove to be correct, and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, you are cautioned not to place undue reliance on these forward-looking statements.

For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information in our earnings release dated today, October 30, 2025. Except as may be required by law, Spin Master disclaims any intention to update or revise any forward-looking statements, whether because of new information, future events or otherwise.

Please note that Spin Master reports in U.S. dollars, and all dollar amounts today are expressed in U.S. currency, unless otherwise noted. Also note that unless noted otherwise, all percentage growth rates refer to the 3 months ending September 30, 2025, relative to the same period in 2024.

I would now like to turn the conference call over to Christina.

Thank you, Tim, and good morning to everyone who is joining us today. In terms of an agenda for the call, I will start with a review of the quarter and how things are shaping up for the holiday season. Then I will provide a high-level overview of our strategy and priorities before passing it to Jonathan to provide a financial review of the quarter.

This quarter, Toys, Entertainment and Digital Games once again captured the imagination of kids and parents, reflecting our focus on innovation and storytelling. However, underlying performance was not matched in our financial results, but this was anticipated.

Toy revenues have been negatively impacted this year by the shift in retailer buying patterns stemming from tariffs. At the POS level, we performed significantly better in Toys in Q3 than our revenues reflect. Based on Circana, we grew our market share within key categories globally. Our overall POS was down 1% compared to an industry decline of 2.5% in our TAM as consumer demand declined in the U.S., notably in September. Spin Master Toys recorded positive POS. This was offset by a decline in Melissa & Doug. We grew our market share within Preschool, Infant, Toddler and Plush, driven by strong performance from Ms. Rachel and GUND. We were #1 in Preschool, where PAW Patrol remains a top property. Within Wheels & Action, our POS growth was 7x higher than the rest of the industry, driven by Monster Jam in vehicles and How to Train Your Dragon in action.

Turning to Entertainment, we continue to create new and original IP. We delivered our first of five new PAW Patrol specials this quarter, and we greenlit our first original IP film. This is a major milestone for our Entertainment studio. The animated four-quadrant film is directed by David Soren. This adds to our upcoming feature film slate, including Paw Patrol: The Dino Movie next summer and the live action Bakugan movie in development.

Within digital Games, we had a strong quarter with growth in Toca Boca and Piknik, driven by improved monetization of our platforms. Toca Boca conversion and average revenue per paying user were on track. Monthly active users were down. This was due to competition and our focus on higher spending markets. Piknik subscribers were up, as was retention and ARPU. We also benefited in the quarter from the delivery of Toca Boca Jr classic games to a third-party platform. Looking ahead to Q4 across our three creative centers, we are well positioned going into the holiday season.

Within Toys, in Q3, we were the only manufacturer to have three new toys leading their super category in the U.S. per Circana. We also have a broad range of brands featured on the retailers' top toys list. In terms of consumer demand, Circana expects 2025 holiday shopping season to be less predictable and more spread out this year than ever before.

Now turning to Entertainment, we're celebrating the holiday season with our PAW Patrol Christmas special. It is set to air in the U.S. on Paramount+, Nickelodeon and for the first time ever on CBS primetime on Black Friday. We've also secured international distribution on streaming platforms and other major networks. There will also be a theatrical screening in 3,600 theaters across 17 countries and territories.

In Digital Games, we have a robust lineup planned for Q4 of new features, content releases and strategic partnerships, including the recent collaboration with Sanrio.

Looking into 2026 and beyond, I believe we have a sound strategy focused on monetizing our core brands and franchises and developing new IP across our three creative centers. However, to date, our execution has not met our ambition. I see an opportunity to increase our baseline of success by focusing on consistent foundational improvements applying greater executional discipline and never forgetting that innovation is core to our DNA.

Beginning with Toys, we have fantastic core brands, including PAW Patrol, Melissa & Doug, GUND and Kinetic Sand, we are investing to grow these brands through creativity and innovation. A great example is how we created an all-new brand with our digital pet, Bitzee. We have since extended the brand to Bitzee Hamster Ball and licensed versions with Harry Potter, Jurassic World and Disney with more to come. This approach to brand innovation and extensions drives reoccurring revenues and ultimately helps us grow market share.

We are taking the same approach with Melissa & Doug, the market leader in early learning. The business is primarily evergreen, which is complementary to Spin Master's core toys. Melissa & Doug was in line with expectations in 2024, but it faced challenges in 2025 due to impact of tariffs and competitive pressure. We are executing on a plan to return to growth by driving more innovation and new introductions in 2026 in core categories where we have leadership share, including developmental toys, puzzles and pretend play. We are also moving M&D into adjacent categories, leveraging its strong brand trust with parents. This includes new extensions like Sticker WOW!, which has performed very well, as well as extending into partnerships and licenses, including Disney and Ms. Rachel. And we have begun international distribution of M&D using our global infrastructure and expertise to provide retailers with a curated line.

Beyond our core brands, we are partnering with the leading entertainment companies and continuing to maximize existing long-term relationships. Our current TAM is $50 billion, and we still only have 4% of it. So there is a tremendous opportunity for growth. When we look further out, we are exploring opportunities to move into adjacent high-growth categories, focused on areas where we have the right to win and be an innovation leader.

Within Entertainment, our focus is simple: Develop and own our IP, be platform agnostic and meet kids where they watch, play and engage. We're continuing to invest in PAW Patrol as a priority franchise and expand its universe. 2026 will see the release of the biggest movie yet. We're taking advantage of this across all business lines, including an amazing line of toys and products around the Dino Movie theme, a series of specials and new seasons of PAW Patrol and Rubble & Crew to build excitement for the movie release and a new digital PAW Patrol game. We're also building the next wave of original IP, including a big year for Unicorn Academy content in 2026 and a reinvention of Bakugan.

Within Digital Games, we have taken deliberate actions to sharpen our focus and concentrate resources on our core two platforms, Toca Boca and Piknik. In Toca Boca World, we are strengthening the overall experience through investing in our tech stack, more frequent features and content drops and more timely strategic collaborations. This year, we've delivered more content, features than ever before. And as a result, we're seeing strength in the bottom of our funnel, specifically in ARPU. And we're bringing Toca Boca to retail, including a collaboration with MINISO in 2026. This is the first step in fully realizing the brand.

Within Piknik, our efforts are centered on subscriber growth and retention. We are continuing to improve the user experience and adding more value to our bundle for parents, soon to include a new app in the reading category. We are diversifying and growing revenue by licensing gains to third parties.

In summary, our focus across Spin Master will be ensuring creativity, storytelling and innovation return to being the core of our business. We'll support this by prioritizing funding for product development, innovation and the overall creative pipeline, being disciplined in our investments and putting engagement of kids and families at the forefront. We've been successful in establishing a presence everywhere kids are through our three creative centers, Toys, Entertainment and Digital Games. Now it's time to unlock the value across all three and realize the full potential of our brands.

With that, I turn it over to Jonathan.

Thank you, Christina, and good morning, everyone. As Christina noted, our Toy POS was down only 1% in the third quarter. However, in large part due to the continued shift in retail behavior, stemming from tariffs, we saw a more negative impact on our reported Toy sales. In the third quarter, specifically, Toy gross product sales or GPS, declined 20% or $180 million.

The primary drivers of the delta between our POS and our GPS performance were: First, we saw a decline of $160 million in FOB orders as retailers move more orders to domestic replenishment, primarily due to tariffs. And two, retailers globally have been managing their inventory tightly, which reduced domestic replenishment orders. This also applies to distributors in countries where we use third parties in certain cases, due to not wanting to carry high inventory in the current economic and geopolitical climate.

Now some of the shift in retailer ordering is timing. We expect to recapture some of these orders in coming quarters via domestic replenishment assuming the current FOB to domestic ordering proportions remain in place. However, as I noted in our second quarter, a portion could be considered as lost sales as opposed to timing unless we were to see a restocking benefit next year.

Positively, our belief is that retailers are now at a lean inventory level. So the industry should have a relatively healthy setup going into 2026. Our own inventories declined versus a year ago due to sell-through efforts, which reduced our inventory, excluding tariffs, by $36 million. Our reduced days inventory outstanding, combined with improved working capital management, helped us decrease our consolidated cash conversion cycle by 11 days. We've also continued to make strides in our supply chain diversification for the U.S. market. We expect China to represent approximately 30% of our U.S. cost of goods sold in 2026 compared to 64% in 2024.

Melissa & Doug will still have a high proportion due to its high-quality wood products. As a premium brand in a price competitive market, quality and costs are the most important factors and further diversification will occur as these two can be maintained.

Turning to our revenues. The decline of 17% was driven by the decline in Toy for the same reasons impacting GPS. This was partially offset by a strong increase in Digital Games for the reasons Christina mentioned. We recorded an incremental $10 million in partnership revenue in Digital Games in the quarter. The actual games launch is happening in the fourth quarter, but delivery and revenue recognition came through this quarter. As there is no associated platform costs with this revenue, this drove an increase in our gross profit margin.

Below that, adjusted SG&A was stable versus last year with efficiency initiatives offsetting general inflation and higher royalties and IT costs. Adjusted EBITDA, operating income and net income declined due to the reduction in Toy revenues with margin compression, reflecting negative operating leverage.

We recorded strong operating cash flows, driven in part by improved working capital management. CapEx increased by $11 million due to leasehold improvements, IT investments and an acquisition of certain Toy assets. On a year-to-date basis, CapEx has increased by $33 million, primarily due to leasehold improvements, IT investments and investments in Entertainment content. CapEx includes our new Los Angeles office and a Toy showroom, we anticipate approximately $7 million in CapEx related to this in both '25 and 2026.

Additionally, following the acquisition of Melissa & Doug, we are upgrading our enterprise software across our global organization. We expect to spend $20 million to $25 million in CapEx this year and a similar amount next year related to this. In both cases, these initiatives are already in the capital intensity expectations we outlined earlier in the year. CapEx for these will complete next year, freeing up cash in 2027.

As it relates to IT investments, we expect this to help us improve our demand forecasting and planning, operate more efficiently, including within our supply chain; scale our business without adding incremental cost; and lastly, optimize our cost structure.

Our free cash in the quarter was focused on buying back our shares. Post quarter, we completed an acquisition of a digital reading and storytelling company for preliminary total considerations of $20 million, which includes significant contingent considerations. This is consistent with our focus on building core learning skills in our Piknik bundle to drive acquisition and retention. Reading is a critical learning skill and that their technology will be a valuable addition to Piknik. It is also an acquihire of a talented development team for our Digital Games business. We'll be able to provide more color on plans for this in the coming year.

Looking ahead to the fourth quarter, due to the unresolved tariff situation, we have not reinstituted guidance for the year. However, as I noted, due to the timing of our orders, we're aiming for an improvement in our year-over-year financial results in the fourth quarter compared to what we saw in this quarter. Our adjusted SG&A is anticipated to be approximately $60 million less this year than what we had originally planned at the beginning of the year or what was reflected at the high end of our originally provided guidance range. This stems from efficiency initiatives we have undertaken, including M&D synergies as well as avoiding new headcount costs and reducing discretionary costs.

Similarly, our CapEx is anticipated to be [ $40 million ] less than our originally budgeted plans for the year. This reflects our focus on returning to profitable growth, which enables us to invest in creativity and innovation while driving higher returns on our investment and delivering attractive shareholder returns.

With that, operator, please open the line for questions.

[Operator Instructions] And your first question comes from Kylie Cohu with Jefferies.

You mentioned that this holiday season is going to be unpredictable, choppy. I was just kind of curious what you've seen from retail ordering so far as well as consumer demand. You mentioned the Q3 POS, what we're seeing so far quarter-to-date? And then also how you're adjusting your marketing and promotional strategies to these shifts?

Kylie, thanks for the question. I think the -- early on, what we're seeing in Q4 is strong POS in our key categories where, as we talked about in Q3, we're up significantly in Wheels & Action. We took some market share there, and that GPS is not necessarily the gauge for our Toy performance at the moment. In Preschool, Infant and Toddler, we continue to take market share. The category was down a little bit, but we continue to be the market leader there. In Activities, we're seeing a POS decline due to some underperformance in games in our arts and crafts. Though Melissa & Doug has actually done well in the latter category. Sticker WOW! has been a really top performer for us.

So I think in the current environment, what we're seeing is there are some lower-priced competition that's doing well in the wooden toy category. And for M&D, we're improving our position in this category through innovation. And we're seeing that across the Spin Master products. It's really where we are driving innovation that we're seeing good performance in top new toys. Our Stack'd Bracelet Studio is another good example of that.

As it relates to marketing, I think you see a couple of things, right? Across the top toys, all of the materials that have gone out by retailers were included in all of that. In some cases, we have some -- we have more top toys than most of the other manufacturers. So I think that that's a great starting point. As it relates to the marketing shift from Q3 to Q4, I think our spending is increasing in Q4 against our toys as the retailers continue to set.

Yes. Thank you, Christina. Maybe I would just add a couple of comments here. I mean certainly, it's too early in the quarter to shape up how the consumer is going to turn up. I mean, the next 10 weeks are critical in the year. We're certainly targeting an improvement in our year-over-year Toy results versus Q3. And we have -- we think we have the products -- the right products, the right price points, right? More than 50% of our products are below that $20 mark. But as Christina mentioned in her introductory comments, the industry believes this is going to be a little bit choppier season, so kind of saying that the consumer sentiment and intentions that this could be a less predictable and more spread-out season than we've recently seen.

So while we're -- we think we have the right products, we know we have the right products. We're showing up at the right places. We have more products on the top -- retailer top list -- toy list than in recent memory. We have more new products leading super categories, as Christina mentioned, than any other manufacturer. We're also recognizing that this is a unique Q4, and that Q4 will be an important part of our year.

Got you. All that color is super helpful. And I hate to be so shortsighted. But I guess just one follow-up from that would be, how are your average selling prices relative to last year and kind of your assortment -- how do you feel about your assortment in that lower-priced categories?

I'd say that we feel comfortable at this point that we have about -- we have more than 50% of our price points below the $19.99 price point. And then even some of the higher, more giftable price points such as Primal Hatch and the new Gabby dollhouse, we're seeing early signs of good POS around that. And that, again, some great innovation and some great marketing around those items are definitely -- create a real giftable moment while we make sure we maintain that price point that is below $19.99 for a lot of items as well. So we feel good about the mix.

Your next question comes from Martin Landry with Stifel.

I'd like to touch on Melissa & Doug quickly. The sales were down this quarter, and I think they've been down year-to-date as well. I'm just wondering, is it a function of losing shelf space at retail? Or is it a function of more slower velocities at retail?

I think it's more than one thing, Martin. I think it's -- again, we are -- I think we're seeing that the tariffs have impacted Melissa & Doug, a little more than our core brands, just given that more of our toys were coming out of China through the course of the year. So I think that's one of the reasons. The other is that there have been lots of competition, lower price point competition in the marketplace that has, on the lower end, taken some of our share.

So you see us -- we look at POS going into the fourth quarter, and we're seeing signs of recovery, and we're really confident about what's to come in 2026. But those two things, between the tariffs and the lower price competition, they ate some market share from us this quarter.

Yes. And Martin, what that lets you see is if you bifurcate M&D and if you bifurcate the legacy Spin -- legacy Spin POS, we're very pleased with that POS. And Christina kind of laid out the issues that we're facing with M&D this year. When we look forward into next year, we're really confident of the plan that we have to address the issues. We're seeing in some of the shelf space that we're in, higher productivity, in fact, than we had last year. And the innovation that's coming for next year, the new product categories, the new lines are -- there's a lot of excitement from the retailer perspective because it's different than what's the competitive landscape that's out there.

Okay. That's helpful. And I'd like to hear a little bit about Black Friday coming up. Black Friday is bigger and bigger in terms of dollar spends for the holidays. What is your strategy? How are you preparing for Black Friday? Are you intending to be a bit more promotional than previous years? Just a little bit about your strategy ahead of that would be great.

Yes. Martin, I would say that I wouldn't put it all on Black Friday, either. I think Cyber Monday becomes bigger and bigger as well. So I think ultimately, yes, the entire weekend will be a big moment across retail sales. And as we see the uncertainty, meaning when people are going to start buying, there's lots of reasons to believe that it will happen around that window.

I think one of the things you'll notice is really how we have a solid plan in place around PAW Patrol in particular around that window with our new Christmas special airing. It will be airing on Black Friday in the U.S. on CBS, the first time it's in broadcast, will also be in theaters from a promotional standpoint. So I think you see us lining up all of the content marketing around these windows. It's not targeted towards one specific day. We're working with all of our retail partners globally to make sure that we are part of all of the initiatives that are ongoing and then we're lining up our media around that, both from an organic social standpoint as well as a traditional media standpoint.

So I feel good about our plans for that window. And I'd say the extra special for this year about that day, in particular, would be PAW Patrol Christmas special airing in broadcast.

Your next question comes from Luke Hannan with Canaccord.

Jon, I wanted to follow up on something you had mentioned in your prepared remarks talking about the Digital Games business. I believe you had mentioned that there was an incremental $10 million of revenue that you recognized during the quarter from partnership revenue. So first, if you could confirm that?

And then second, how much of that fell to the bottom line? And what are the opportunities that you have in Digital Games for future partnerships going forward?

Yes, sure. Thank you, Luke. So as you know, our Digital Games strategy really centers around two core platforms. Within one of those platforms, within the Piknik platform, we are developing apps that continue to drive up our subscriber base and driving revenue growth. In addition to monetizing the value through our own platform, we have the ability to partner with others, and we'll announce who that is in the fourth quarter when it actually goes live. So we sold it in Q3. We revenue [ rec-ed ] it in Q3. Ultimately, it goes live in mid-November, so we can obviously talk to you about that then.

But we like these opportunities. We continue to believe there's more of these opportunities. Why we like it is, not only is it incredibly accretive to the point that I think you were asking where most of that revenue flows to the bottom line. There is some support costs that you have on a year-over-year basis for it. But why we like it, an additional reason is that it actually drives the awareness higher on our core Piknik platform. So we see a correlation when we launch these. This is not our first and it won't be our last. We see a correlation with increase in subscribers.

So it really supports the whole ecosystem and allows us to re-plow some of those incremental dollars back into development, more apps that then makes Piknik even more attractive, et cetera. So it becomes this kind of virtuous circle.

Got it. I want to ask also about the Entertainment segment as well and specifically L&M opportunities. I think this will probably something -- probably be a topic that's more relevant when we get to the latter portion of next year and the third PAW movie is going to be released, but just want to get a better understanding of -- I know historically, it's a pretty lumpy line item to model, but you do have quite a bit in the entertainment pipeline. I mean, just broadly speaking, how should we be thinking about L&M opportunities over the course of at least the next couple of quarters?

Yes. I mean, look, it's a good question, a fair question. It's one where without -- the fact that we're not giving guidance, it kind of limits my hand to give a huge amount of detail around it, except to say that as we release content, so as there's more content being released, and as you know, we entered -- at the beginning of the year, we announced that we're entering into a heightened investment in additional content, and we're seeing it as an example, on Black Friday, the PAW show coming out on CBS, as well as in, I think, 3,600 theaters worldwide.

So as we have more and more content being released, you naturally have L&M, which is obviously incredibly accretive, an important part of the Entertainment revenue stream and profit stream. So you can imagine that over time, that should correlate with the increased distribution revenue that we have as we release more and more content. Of course, there's some choppiness to it. And I think what we will do is really call out so it's really clear for you when there is these onetime benefits so that you're able to build that into your model.

Okay. Last one for me, and then I'll pass the line. But I just wanted to follow up on the commentary earlier on there being lower price competition in the wooden toy category. Is that from the other large player in the category? Or is that from other competitors?

That's been from a lot of private label. So we're seeing at retail that some lower-cost private label competitors were coming in on some key items that were causing some pricing pressure.

Your next question comes from Adam Shine with National Bank.

Maybe for you, Jonathan. The -- if we look at last week, we heard Mattel maintaining the guidance and certainly implying a big lift to their toy sales in the Q4. And I think even Hasbro followed up saying that even they're expecting some growth out of their toy business, I think ex licensing, in Q4. Can you give us a little bit of help in terms of -- I know it's going to be an improvement on Q3, as you said. I think the question is how big an improvement is? Is maybe Melissa & Doug a bit of a gatekeeper in terms of a little more optimism around growth? Any color around the cadence of toys in the Q4?

And then also, if you don't mind, maybe also for Christina, how U.S. retailers have come back to you in terms of orders because certainly, Mattel and Hasbro acknowledged an acceleration of retail orders following some of the timing issues in Q3.

Yes. So -- thank you, Adam. Maybe I'll start with it. Look, I think you were really trying to assess kind of how does Q4 shape up and we have to kind of recognize that we're not giving specific guidance in that we are still -- and the reason for it is that we feel that we're still in a time of great -- a significant uncertainty in the market. And so being careful of how we manage expectations and how we set those expectations, I think that is the certain prudence on our part in terms of the statement that we made versus some of those peers that you've laid out.

What I can tell you is when we look at the year-over-year Toy reserves compared to Q3, we certainly are targeting improvement. You'll recall that I think in Q2, I mentioned that GPS for Q3 was going to be around 36% of our GPS. So I think that's still -- we're still comfortable with that. We -- from an adjusted SG&A perspective, we certainly think those costs will be stable to slightly down as we look into the fourth quarter. So seeing a clear path to operating leverage in the fourth quarter.

Going back to kind of the initial question from Kylie, we have we believe the right product at the right price point. We're hearing that from our retail partners. We're seeing, in some cases, higher productivity on shelf space than we saw early in the year. And now we have to wait and see how this ultimately plays out over the next 2 months.

Yes. Adam, I just -- I go back to, I believe we're well positioned, right? When I look through the POS week-on-week, I see there being growth week-on-week on our POS. I see some key items moving through the register, and I'm confident that we have the ability to get product to shelf. So we have to see how the uncertainty plays out, but I still believe we're well positioned.

Okay. I appreciate that. And then maybe one follow-up, Jonathan. You talked about the additional investments. I think you had talked about that, frankly, a few months back, so going into next year and the savings that will come. A number of questions that came up last week on those other calls spoke to, obviously, ongoing concerns about how the tariff implications going into next year? Are they at 2x to reflect upon in terms of the full year? And I think the commentary from other management teams has been no, don't think of it that way and acknowledge that we're continuing to push on our mitigation actions.

So from your perspective, Spin Master has never been very aggressive on annual cost cutting. Can you maybe speak to -- you already talked about the progress on SG&A earlier in this call, but can you speak to further initiatives as you get more comfortable in the seat in terms of pursuing as a regular cadence going forward?

Yes. So -- sorry, we're just moving the phone. We need to invest in a more conducive conference call.

Adam, I think how I would look at it is, one thing we called out in our prepared remarks is there is investments in our internal tech stack to help us be not only more effective around, say, supply chain planning, around our forecasting, but also be more efficient in how we operate internally. And you're going to start seeing some of those -- that heightened CapEx roll off at the end of next year. And then we'll ultimately leverage that -- there'll be some benefits that we can -- that we'll be able to leverage into the business.

My philosophy, and I think our philosophy as a wider management team is that we grow the top line, and we deliver operating leverage. We make the right capital decisions to get the right returns and ultimately, we drive TSR. So like it all goes together, Adam. I think there's an opportunity to continue to -- we know there's an opportunity to keep driving operating leverage in this business and that's going to come through multiple levers that as we head into next year, we'll keep on executing against.

Your next question comes from Jaime Katz with Morningstar.

I guess I have a theoretical sort of follow-up to that last question, and the opportunity for operating leverage. If we can think about next year, and I know this is early, as maybe a flat sales year, given that we know ordering pattern is a little bit better now, would we still be able to think about capturing EBITDA expansion? Or is -- do we need to have top line growth to really offset the incremental tariffs we're looking at next year?

Jaime, look, this -- like let me break that down in a couple of different ways. I mean the first way is that this business, just structurally, there's operating leverage, right? So as you grow, structurally, we have a fixed cost base. And I talked about in the last question, some of the things that we're doing to take -- be even more effective with the current cost base that we have to grow -- to support a higher growth, higher top line. So this business fundamentally has a structure that has fixed cost leverage and therefore, operating leverage.

When we look into next year, again, there's certainly not any guidance this year. We're not giving guidance now for 2026. But when we look at next year, having operating leverage is something that I think this management team feels confident that we can deliver. And when I look at my past life, like in the past life, I used to say like a business should be able to deliver 50 to 100 basis points in any given year, some years more, some years less. And I think that's kind of the range that there's no reason why this business doesn't do the same.

Okay. And then do you guys have any internal data that you want to share on what you expect the PAW Patrol contribution to be from the October and the holiday specials embedded in the fourth quarter?

Yes. I mean, I can take it. So the special itself is not a huge entertainment revenue driver, what it is, is a phenomenal marketing tool to keep PAW central in the hearts and minds of our consumer base. And we believe that there's a way to kind of replicate this on an annual basis as well. So this becomes a kind of perennial event.

It's more next year, Jaime, to think about how the release of the movie, that happens in the third quarter. As you know, like if I take the PAW movie 2, when we released it, there was a $20 million production revenue release that we would have. So it's really a Q3 story next year. That continues in Q3, Q4 and then into -- a little bit into the following year.

Yes. The one thing I would add to that is that when you think about the movie and even our Netflix distribution, really, it becomes about wider awareness for the brand and bringing brand health to the brand just to make sure that gross viewing minutes are up across the brand and that we're bringing more and more people into it on a regular basis. So it's really almost top of funnel for the Entertainment.

Your next question comes from Ty Collin with CIBC.

Maybe just first one, I'm wondering if we could drill down a little bit more on the POS performance in Q3 by geography, just maybe the difference between North America and the U.S. versus international? And could you also just maybe clarify the comments made at the top of the call about how POS trends were in September?

Yes. So why don't I start off with that. I might have missed your second part of the question, Ty. So please don't hesitate to ask it again.

Let's kind of bifurcate POS into, like you said, international and the U.S. We certainly took share in the U.S. from a POS perspective. And as I think in the prepared comments or in one of the questions, we talked about there's a little bit of bifurcation between M&D and what I'll call legacy Spin, where Spin, the POS was -- we're quite pleased with it in the third quarter. And we're addressing -- we laid out how we're addressing the M&D situation as we head into next year. And then internationally, that POS was not as strong as our overall share, overall versus the North American market.

I missed your second part of your question, I apologize.

Yes, sorry. The second part, I just wanted to clarify the comments made on how POS trended in September, specifically. I think there was a comment, I wasn't sure if I heard accelerating or decelerating in September specifically?

Ty, it's Tim here. We just kind of called out that in September, yes, consumer demand in the U.S. specifically weakened. As you probably would have seen, there's macroeconomic uncertainties weighed on the consumer sentiment in the Q3. So as we indicated at your conference in July and August, I think our POS was kind of -- the market wasn't down as much, but it ended up being down about 2.5% for the quarter, and that was primarily due to deceleration for the TAM in September, specifically.

Okay. Got it. And then just for my follow-up, circling back to Digital Games. So I mean, some pretty decent top line improvement even ex the $10 million in partnership revenues that you recognized in the quarter. I mean, was that driven by any specific changes or adjustments at the product level or to the approach around promotion and monetization? Anything to call out there in terms of how you approach that creative center?

Yes, absolutely. I think one of the things is you see us really being focused this year on ensuring profitability as we go forward in Digital Games. And being focused on subscriptions in Piknik and on monthly active users and ARPU in Toca.

So what was different, I think, is that our users -- we had more releases of features, collaboration -- and collaborations in that particular product. than we've had before. And we had a great -- just recently, we had a great collaboration with Sanrio. And we're seeing that the bottom of the funnel is performing really, really well, and we've had some focus on that as opposed and -- to higher spending markets.

We're really happy with the team in place. They're -- we're seeing an acceleration of growth obviously from last year. When I look at H2, certainly expect that double-digit growth for H2 as a whole. And when we look into next year, really excited about from the content that examples that -- accelerating our content and our partnership within Toca and then within Piknik, even adding more apps that will just drive a higher subscriber base, keep them longer, have a longer TAM, and provide more value ultimately to the consumer. So we're really excited with the Digital creative center and the team that we have there.

Your next question comes from David McFadgen with Cormark.

A couple of questions. So I was just wondering what drove the Digital Games revenue up, despite the fact that MAUs were down? Like how did you just drive that increased monetization?

Well, there's -- so there's more than one lever, right? Look, so if we take Digital, there's more than one lever. There's top of funnel and then ultimately, if you use Toca, the conversion. So you have 50-plus million monthly active users, how many of those are actively participating in buying content? And then ultimately, what's the purchase price that they're buying? So there's more than one lever to play within Toca. Our focus this year has been very much, to be frank, focusing on that bottom part of the funnel. We're going to obviously shift towards having a more balanced approach in 2026.

And then Piknik, there is subscriber growth and the same thing, you keep customers longer. And then there's ultimately a higher ARPU that you would have with those individual customers.

And the last piece around the ability to further monetize the apps that we develop. But again, not just from a onetime revenue base, but more from the ecosystem supporting the overall ecosystem of Piknik and driving attention to it that would then ultimately feeds into subscriber growth. So multiple levers to play. This year, we've been very focused on ensuring the monetization and the unit economics are working, focus on that and then next year, continue to drive that top of funnel.

Yes. I think we've been really levering up on our conversion for average revenue per paying user, and we're seeing the results of that. And that's very much coming through the content deliveries, the feature deliveries and the collaboration. So giving more relevant content to our fans more frequently that we know that they want, and we're seeing that performance.

And then, again, as Jonathan was just saying, we're very much focused on the bottom of the funnel to make sure that we're seeing that conversion. And then the same thing with Piknik, we're seeing both retention and ARPU up. And we'll also benefit from diversifying our revenue, as mentioned earlier in the call by selling some of our games to a third-party gaming platform. So last quarter, we talked a little bit about the benefit of having focus in these key areas; here, you see us executing.

Now based on those comments, it would seem that what we've seen in Q3 should continue into Q4 and then into '26, right?

I would -- well, I think -- yes, on the underlining elements of the unit economics. Remember that, that partnership revenue was about $10 million. And when we were thinking about our -- internally our planning, I mean, the ability to -- the revenue recognition happened in Q3 versus Q4. So I think you got to just keep that in mind as you're thinking about the overall growth for Digital.

And I would just stand by kind of my previous comment, which we continue to expect double-digit growth in H2. But Q4, because that partnership revenue materialized in Q3 versus Q4, it's probably more like single digit. That doesn't take away our bullishness as we head into the long term with our Digital creative center.

Okay. And that's helpful. And then just looking at the Preschool segment. So given the comments you made about Melissa & Doug, you lost some share, increased competition and so on, is it safe to assume that Melissa & Doug's revenue performance or the decline was greater than the overall Preschool segment?

Well, the POS, yes, we indicated that Melissa & Doug's POS was down and Spin Master Toy's was up. So yes...

Yes. I'm just talking about revenue in the quarter. Like I'm just wondering if Melissa & Doug's revenue decline was greater than the overall segment for Preschool.

Well, I would answer it this way. I would say that I would take a step back from the Infant, Toddler, Preschool category. We -- per Circana, we continue to be very stable in terms of our share. So that's at the macro because we always see more than one brand that we have, and we have multiple levers to play within that category. And that's how we look at it. We look at it from a portfolio approach. Some years, some will be up, some years will be down.

Specifically with M&D, the narrative that we shared is that, yes, this year, there is heightened -- there's multiple factors at play. And this year, the revenue performance is not at the levels that we would like it to have. We believe that we have the plan in place. There's a new management team here, quite frankly, the leader of M&D has been with the organization for about a year, she's doing a phenomenal job. We have -- she has a great plan, and we have a great plan to execute next year to ultimately return that brand to growth.

Okay. And then you called out a couple of buckets of CapEx or various CapEx initiatives. Can you just give us what you expect the total CapEx to be for 2025, including the spend on intangibles?

Yes. I think we -- I'm just going through. I think we gave the number that we said we think it's going to be around $70 million less than we initially expected, Tim, right? That's what I think we said -- sorry, $60 million or $70 million. So...

Somewhere around $175 million, thinking about it, is kind of ballpark.

So less than what we initially thought. And so about $175 million this year.

Your next question comes from Brian Morrison with TD Cowen.

Lots of good color on the call here that's to be digested. I appreciate that. But I do want a point of clarification, Jonathan. In the prepared remarks, it says we're aiming for improvement in our year-over-year financial results in the fourth quarter compared to what we saw in this quarter. Can you just clarify for me because I haven't really digested. Does that mean that you think you're going to have better results relative to Q4 last year or for Q3 this year?

So when I said that, what I -- I mean, here was my thinking. We were down year-over-year revenue in Q3 by 17-ish percent, yes. And when I look at Q4, I see a marked improvement of that number. So I hope that provides a little clarity, Brian.

Yes. No, I'll play with the math. I now understand it. I guess just bigger picture -- a lot of the questions have been answered here, but bigger picture, I guess, Christina and/or Jonathan, you've been in the seat for, call it, a year or half a year to a year for -- depending on...

No. 4 months and 6 months, but yes.

Okay. Half a year. You're making progress on core properties, your capital allocation, your cost efficiency, it seems like things are really starting to go the right way here. I'm just curious, to put you on the spot, do you have a north star here in terms of financial performance or like mid-cycle EBITDA? We get back to a normalized industry environment, what is reasonable in your view, you threw out -- prior to you arriving, the prior management team threw a $500 million in EBITDA ballpark. Like is that an achievable number in a normalized cycle for the industry?

Well, I mean, of course, $500 million is an achievable number. The question is time frame. Like -- so I don't know what was that, I would have to go back and look. So I mean, to answer your question directly, yes, and then it becomes time frame. We will see next year in February or March when we have our fourth quarter call, we'll be able to provide more insights into 2026 and how we see the long -- and then perhaps how we see kind of the long-term trends in this business.

That -- going back to what we said before, like we fundamentally believe we can return this business to profitable growth. We have -- as we're starting to shape up our plans for 2026 specifically, seeing the phenomenal products that we have; seeing how this organization is coming together around everything related to PAW, supported by the movie; seeing the plan for M&D's turnaround; seeing the trajectory of the Digital Games business and seeing the focus on ensuring that we're really effective with both our OpEx and our CapEx. We're very -- I can only say we're really excited about the future and believe that we can provide attractive TSR to our shareholders.

Your next question comes from Drew McReynolds with RBC.

Two for me. First on back to the Digital Games. Christina, you alluded to, and you've done so in prior quarters, competition on the Toca Boca World side. Is that just generally a generic comment with respect to all the proliferation of platforms out there? Or is there something more nuanced in that competitive dynamic?

And then second question, I guess, for you, Jonathan, on the IT investments into the kind of better demand forecasting and planning, can you give us a sense of, I guess, how much this can move the needle in terms of your ability to essentially forecast and predict what is obviously a seasonal and somewhat lumpy business. Just want to see kind of where the yardsticks are currently and where they're going?

Sure. Thanks for the question. Yes, I think on Toca Boca, what you hear us saying is, of course, there's, what you alluded to, the macro environment where we're always fighting for attention and there's lots of other games and platforms that are out there. But there are specifically some gains that are giving away an awful lot of free content on a regular basis that are driving some competition in MAU, and we are definitely focusing on both, driving MAU but as well as converting that. So I think our strategy is a little bit different, but there are competitors in the space, definitely competing with us for that top-of-funnel attention on a more free basis.

And Drew, on the IT side, we -- I think one of the catalysts to looking at our IT stack certainly was the M&D acquisition and seeing the benefits of having one platform and more up-to-date platform. We can't ever get away from this business being an H2 business. That is an underlining factor. What this will do, though, is allow us to make better and more -- and quicker decisions. And I think that's the key here. So to be able to better adapt to that H2 and quick -- in a quicker manner adapt to the trends in the second half, whether it be chasing inventory, hot products or whether it be adapting to a slowdown in any given product.

It also allows the organization as a whole to work as one team. And we talked a little bit in our first call where we saw an opportunity of bringing the three creative centers to work stronger together and really unleashing the full potential of our owned IP by leveraging the three creative centers. This actually also will help bringing the team together, right, bringing clearer information so we can make better decisions at a holistic enterprise level. So it could also help drive that top line, which is ever so important.

That's helpful. And then just the time frame for getting all of that done where you internally begin to see a big difference on what you described. Is that all kind of kicking off in 2026? Or is the real kind of flow-through benefit, I know it's ongoing, but is that a 2027 thing?

Yes. So like the -- I mean, the heightened CapEx and some heightened OpEx that we have is this year and next year. So you would imagine the benefits really start flowing through after that.

There are no further questions at this time. I would like to turn the call over to Christina Miller.

Thank you. Thank you, everyone, for joining us. We appreciate your interest in Spin Master, and we look forward to speaking with you again in the new year. Thanks.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the Spin Master Corp. Second Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded today, Thursday, July 31, 2025. I would now like to turn the conference over to Sophia Bisoukis. Please go ahead.

Welcome to Spin Master's Financial Results Conference Call for the second quarter of 2025. I am joined this morning by Christina Miller, CEO; and Jonathan Roiter, Spin Master's CFO. For your continuance, the press release, MD&A and consolidated financial statements are available on the Investor Relations section of our website at spinmaster.com and on SEDAR+.

Before we begin, please note that remarks on this conference call may contain forward-looking statements at 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 currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such assumptions will prove to be correct, and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information in our earnings release dated July 31, 2025.

Except as may be required by law, investor disclaims any intention to update or revise any forward-looking statements whether because of new information, future events or otherwise. Please note that Spin Master reports in U.S. dollars and all other amounts today are expressed in U.S. currency unless otherwise noted. I would now like to turn the conference call over to Christina.

Good morning, everyone. I'm pleased to join my first official analyst call since joining as CEO earlier this month. I have the opportunity to lead an incredible company that creates play experiences that bring joy to kids and families around the world. Spin Master has a diverse portfolio of brands that we've built, acquired, partnered with brands like Paw Patrol, Melissa & Doug, Monster Jam, How to Train Your Dragon, Toca Boca provide us with a strong foundation from which to scale and reach more consumers, audiences and players globally.

Turning to our performance this quarter. As expected, we faced some headwinds. Total revenue declined by 2.7% as retailer buyer patterns within toy shifted in response to evolving tariff rates in the U.S. Our decrease in toy revenue was partially offset by double-digit growth in [ games ], demonstrating the strength of our 3 creative center approach. In the second quarter, tariffs cause retailers to temporarily pause orders and, in some cases, delay set holiday dates, negatively impacting selling. Despite these shifts, we saw strength in key toy categories both in revenue and at point of sale, enabling us to maintain or grow on grow share for many of the categories in which we compete. Looking at our total addressable market, we grew POS by 7.4% in the quarter ahead of the industry, which grew 3.7% for comparable categories. We retained our leadership position in infant, toddler and preschool categories, thanks to a combination of owned and licensed IP with POS growing 3% compared to market, which grew 2% Per Circana.

The inclusion of Melissa & Doug, Ms.Rachel within our portfolio helped to strengthen our market position. our license business grew 43.1% in the quarter, outpacing industry growth Per Circana, thanks to a roster of popular license toy partnerships, including Monster Jam, How to Train Your Dragon, Ms. Rachel and Gabby's Dollhouse.

Speaking of Monster Jam, this brand is fueling consistent growth with us. Within the vehicle category, POS from Monster Jam grew 13.1% in the quarter, enabling us to take share, maintaining its position as #2 in the category. Looking forward, we have a strong lineup of toys just hitting shelves now and into the fall for the holiday season. We have strong innovation across our portfolio, including key brands like Tech Deck, Melissa & Doug, PAW Patrol and Kinetic Sand.

In addition to our owned IP, we have licensed toys for films, including Jurassic World, How to Train Your Dragon, Superman, which had a successful box -- which just had successful box office openings and Gabby's Dollhouse slated for September.

Moving to our own entertainment studio. We're progressing against our strategy to create content and engage our audience wherever they are. While entertainment revenue declined in the quarter as expected, we expanded the distribution of key properties, including a second window deal with Nickelodeon in the U.S. for Vida the Vet and Unicorn Academy, both which debuted this month.

Our last Unicorn Academy special dropped on Netflix on April 9 and beat our expectations for audience engagement, outpacing the competition.

Unicorn Academy generated 70-plus hours viewed globally in the first half of 2025. All previously released chapters from the series together with the new special landed into the girl's top 5 viewed context for each one.

We're continuing to invest in the health of PAW Patrol. Production of the movie for 2026 is well in hand, and we are delivering 2 specials this year. in October and our first-ever Christmas special, which will air on both Nickelodeon and CBS Primetime. Beyond our partnership with Paramount, in support of our goal of reaching kids wherever they watch and for the first time ever, PAW Patrol debuted on Netflix in the U.S. this July, following a successful run of Rubble & Crew on the streaming platform earlier this year. Digital gains had a strong quarter with double-digit growth and have an engaged player network with 58 million active users. Over the past year, we've taken steps to focus on the strength of our anchor platforms, Toca Boca World and Piknik. As such, we've made the strategic decision to pivot our focus away from Toca Boca Days to double down on accelerating Toca Boca World, building social multiplayer experience within Toca Boca universe has provided us with valuable insights. We are now leveraging those learnings and tech we developed to future-proof Toca Boca franchise. These ships are beginning to yield positive results, giving us confidence in our ability to scale in the future. More broadly, we're making investments to expand services capabilities, deepened performance marketing and strategic focus has been to diversify our revenue streams across our 3 creative centers, and we've only just begun to truly capitalize on our deep catalog of content, brands and gaming platforms. We have potential to deliver long-term growth by fully harnessing cross-creative center collaboration, staying grounded in consumer-first mindset and bringing joy through engaging characters, stories, digital world and physical toys will ensure we are a mainstay in the lives of kids and families everywhere.

With that, I turn it over to Jonathan.

Thank you, Christina, and good morning, everyone. This quarter's performance highlights the strength and resilience of our diversified portfolio across all 3 creative centers. We delivered revenue of over $400 million in the quarter during this complicated and challenging macroeconomic environment, bringing our year-to-date growth rate above 4%.

Importantly, we delivered solid performance within our total addressable market, gaining or holding market share across the majority of our toy revenue base and continue to build momentum in our digital games business. Adjusted gross profit was $210 million, down $13.8 million year-over-year, reflecting lower total revenue due to the temporary slowdown in U.S. retail orders early in the quarter, partially offset by growth in the digital game segment.

Adjusted gross margins declined 190 basis points, also driven by the performance of the toy segment, which I will elaborate on shortly.

Adjusted SG&A increased by $9.1 million to $196.6 million or 49.1% of revenue due to investments in marketing which is partly time-related and higher selling expenses stemming from an increase in partner license brand sales. Offsetting these higher expenses were realized savings, reflecting ongoing cost synergies related to the acquisition of Melissa & Doug and distribution-driven operational efficiencies. Taken together, lower gross profit and these targeted investments contributed to adjusted EBITDA of $29 million as compared to $54 million in the prior year. Now before providing an overview of our creative center performance, I'll take a few moments to update you on the meaningful progress the team has made on optimizing our long-term cost of operating structure as we navigate through this dynamic environment.

Beginning with Melissa & Doug, we have achieved our target run rate cost synergies ahead of plan. The integration of Melissa & Doug continues to yield positive results with over $5.6 million in cost synergies realized in Q2, which now represent $26.5 million in annualized run rate cost synergies. In addition, significant progress was also made against our tariff mitigation plans. We expect Q3 to represent approximately 36% of our full year GPS compared to 41% last year. Additionally, gross product sales were impacted by the timing of key planogram resets, which shifted into the second half of the year. We estimate this had an impact of approximately $25 million in the quarter. Within our toy categories, we saw strong performance in preschool, Infant and Toddler and Plush categories led by increases in Melissa & Doug and Ms. Rachel as well as solid growth in Wheels & Actions category, supported by increases in DreamWorks Dragon and DC. This is offset by lower sales in Activities, Games and Puzzles and [ Dolls Interactive ] in outdoor categories.

Gross profit for Toy segment declined year-over-year, reflecting lower revenue and decrease in gross margin. The margin pressure was driven by various factors, including higher sales allowances, which increased to 13.2% from 11.9% last year. As we supported our retail partners to heightened promotional activity to drive share.

Additionally, product mix had an impact on our gross margin as we strategically moved inventory in off-price and discount channels to meet retailer demand for onshore product availability. The decrease in toy gross profit, combined with higher SG&A translated to toys adjusted EBITDA loss in the quarter of $700,000 versus adjusted EBITDA income of $20.9 million in the prior year. In the Digital Games segment, we delivered strong growth with revenue increasing 33% to $46.3 million. This marks our third consecutive quarter of year-over-year growth, driven by higher in-game purchases in Toca Boca World and continued subscriber growth across our Piknik platform. We are beginning to see the benefits of the deliberate actions taken over the past year to sharpen our focus and concentrate resources on our 2 core platforms. In line with this strategy, we made a decision to pivot away from Toca Days and as a result, recorded an impairment charge of $16 million in the quarter. Over time, we plan to incorporate many of the Toca Days play features into Toca Boca World, to strengthen the overall experience. Within Piknik, our efforts are centered on subscriber growth and retention, ending the quarter up from last year and sequentially to 479,000 subscribers.

Adjusted operating income for digital gains increased by $1.8 million and margins declined slightly to 16.6% from 17% in the prior year, reflecting our successful ongoing investments in paid user acquisitions. We're encouraged by the momentum in Digital Games creative center, which reinforces our confidence in achieving stable to modest increases to sequential quarterly revenue in 2022, supported by continued investments in a growing user base in the second half of the year.

Turning to Entertainment. Revenue decreased by $4.3 million to $32.1 million, driven by lower distribution and licensing merchandise revenue. Entertainment adjusted operating income declined by $2.3 million to $17.7 million, with adjusted operating margins staying relatively flat at 55.1%.

So moving back to our consolidated results. During the quarter, we generated $26.1 million in operating cash flows, this was primarily driven by our continued focus on optimizing inventory levels. As is typical, given the seasonal nature of our working capital cycle, the second quarter resulted in negative free cash flow of $15 million compared to negative $4 million in the prior year. The year-over-year change was a result of our planned investment in the entertainment segment as we continue to advance development of the third PAW movie and new concept for Unicorn Academy.

From a capital allocation perspective, we returned just under $19 million of capital to shareholders by way of our quarterly dividend and the continued execution of our NCIB. This brings our return on capital on an LTM basis to $96 million, while reducing our net debt by $60 million. So in closing, we remain firmly focused on returning to consistent profitable growth trajectory.

As Christina explained, this will be accomplished through a deeper collaboration across our creative centers and maximizing the impact of our innovation, brand and capabilities in the children's entertainment space. With enhanced discipline in our execution, we aim to deliver an attractive total shareholder return.

So with that, operator, that ends the formal part of the call, and please open the line for questions.

[Operator Instructions] We'll take our first question from Andrew Lopez with TD Cowen.

This is Andrew on for Brian Morrison. Maybe we can start with the Q2 '25 results. A lot of moving parts in the quarter. Your revenue performance was decent, but you had some additional costs on the toy segment. Wondering what is your view on the quarter? And what should we read through in the back half of the year in terms of improving on these results?

Yes, Andrew. thank you for the question. Let's start with the quarter and then let's talk a little bit about the back half. From a quarter perspective, from a top line, I think the team had a really strong job in light of kind of the larger macro economic environment. And across almost every metric that I've seen, we've done really well. And whether that's growing faster than our peer set or whether that's taking share across the majority of our revenue base and growing fast, taking more share than our competitive landscape. So I think from a revenue perspective, I'm proud of what the team did. Obviously, there was the backdrop of -- in April a real slowdown in FOB orders. If you recall back in April, there was a significant amount of tariffs coming out of China for China products into the U.S., and that certainly slowed down the order profile. Like a key metric that I've seen is like 3, 4 weeks where really order just like -- were really slow. Another element is we saw some planogram resets take place later in the year. So 2 of our larger retailers for about $25 million push the reset into October versus earlier in the fall, and that obviously shifts our revenue from a Q2 to an H2 story. So actually, if you would just adjust for that $25 million, we had some pretty impressive growth, like 3%, 4% in the toy sector -- in toy segment and versus the industry, I think that's pretty impressive.

From a gross profit perspective, like we are leaning in to taking share. I mean you see it in our results. And so we were comfortable investing in selling in as well as selling through the product. And so there was always some pressure or decline in our gross margin as a result of that. That was a conscious choice as taking share is something that's really important to Christina and the larger management team.

From a cost perspective, our costs came in versus last year higher, obviously, from an SG&A perspective, at a consolidated level. I think you kind of have to break that into a few different categories. we provided like more than $10 million of cost reduction around our synergies, around our tariff mitigation plan, but we are investing in the business. And so we are investing and making sure we have the right product for the back half of the year in 2026. There was some increased marketing spend this quarter. And so as a percentage of our net revenue is certainly higher, which when I shift to the back half, I'll talk a little bit to that. But a big portion or at least a decent portion of that was timing, timing related in that we had a lower revenue base, and we were supporting the POS in the quarter. We'll get the benefits of that spend in the back half of the year. So like when you think about the quarter, like what I look at is top line, we took share. We made a conscious choice to sell in product and sell through product and it's working, and that serves us well into the future. And then from a cost perspective, there's a significant portion of that, that was timing related as we had a lower revenue base. So then your second question is how does that go for the back half of the year? The back half of the year, we have amazing products. We have the right price points, more than 50% on the toy side of our products are going to be below $20 in the most important holiday -- an important holiday season, which is the most important part of our year. Our theatrical releases are doing incredibly well, How to Train Your Dragon. Melissa & Doug had a great Q2, and so we're going to keep working on that. Monster Jam, Hatchimals. We have great products, great gains in market share in some of these categories -- some of these product lines that I just shared with you. So from a top line, we're focused on just continuing to gain share. That's our #1 goal in a market that has a lot of uncertainty, and that uncertainty ultimately can play out by a shift -- so there's a little bit of uncertainty in the market. That's a summary of kind of Q2 and I'll elaborate a little bit later on some questions on the back half of the year.

That's great color. And then just maybe as a follow-up, recognizing that the tariff situation remains fluid. But with all the actions taken to date with respect to tariffs, just wondering if you're able to quantify maybe the direct and indirect expenses you anticipate you may be able to recover in 2026.

Sure. So when you think of tariffs, you got to think of 2 functions. There's the actual tariff cost and then there is the change in retailer behavior and obviously that how consumer behaves. Just to elaborate a little bit on those. The retailer has made a change in how they're buying. So you know that the majority of our business was and it continues to be an FOB, but DOM is becoming much more important as retailers are, if you will, delaying the purchases and we're relying more on onshore replenishment than they've historically done. So that's an element that will affect our volume. And that will lead to destocking ultimately, like one to think about it is that it will lead to destocking in the industry as they have that shift from FOB to DOM as well as that they are being more conscious to their inventory levels. The second element is the consumer. We took share in H1, our H1 POS Per Circana in our TAM was essentially flat. And so Q2 was very high. That's when the Easter period was. Q1 was from a POS perspective lower and so it was essentially flat. But without higher than the industry. The industry was negative 1. So how the consumer reacts on the back half of the year. I think that's still question marks as there could just be less dollars available for them as they're working through potentially higher prices across our large basket of goods, not just on the toy side. Then there's the actual cost themselves. And so from a cost, we can quantify the cost and then we have offsetting price. We're essentially recovering like 80% to 85% of the actual cost with price in the near term. And in the longer term, we're going to fix that through our mix. We're going to address it through the products that we bring out to the market and ensuring that we have to continue to have the right mix. Now in overall, like dollars because that was your question, I think you can think about it this way. Like for the full year, if I over like put everything together, tariffs probably have an effect of about $90 million, and we have cost savings that we put in place and including Melissa & Doug's synergies about $60 million, $65 million.

Our next question comes from Martin Landry with Stifel.

My first question, I'm trying to understand where Q3 and Q4 will land. It sounds like there's a lot of timing-related issues. Jonathan, you talked about some retailers shifting their purchases from FOB to domestic delaying revenue recognition. planogram resets delays. This sounds like it's all delays and shift. So I'm wondering -- I understand you don't have any guidance. You haven't restated your guidance. But help us understand a little bit where you could land in terms of revenues for Q3, like there a potential for you guys to go back into a growth mode in terms of revenues on a year-over-year basis for Q3?

Let me take a step back. So we have 3 creative centers in our business. Obviously, I'll come to [indiscernible] the largest, but let me talk about the 2 others first, just to help, help give you a little bit more information. From a Digital Games perspective, our focus, I think it's about 12 months -- over the last 12 months has been to really focus down on these 2 platforms. You've seen Christina and I, we're here for about 90 days, and we've already made some decisions around ensuring that we were getting the right return of capital on investments that we made. And that was the decision around Toca. That drove the Toca Days decision. It's working, right? We had double-digit growth, and we expect that double-digit growth to continue in the back half of the year in Digital.

On the Entertainment side, essentially we can -- that's an easy business to model in year and essentially the year-over-year loss, I mean, it happened in H1. We can model that out and sort of other factors taking place, it's a pretty stable business. So then it comes down to the toy side. And I think in my prepared remarks, we gave some kind of percentage of ultimately how that could look like from a GPS perspective. So let me talk to you about more of an H2 as opposed to trying to get really specific in Q3. The 2 factors at play that we have to be thinking about. So we're not giving guidance, but it doesn't mean that we're not running our business. And when we're running our business around the inventory levels that we want to have the promotional spends, et cetera, there are some assumptions that we're making. And I think there's 2 critical assumptions that we're making. Assumption number one is that based on what retailers have said publicly. And based on how they've shifted their buying patterns, we do expect destocking like ultimately for them to be holding less inventory as they finish the year. That is predominantly a U.S. event, but there's also some international at play there, and that's more kind of micro to us than necessary macro to the industry. So that could be a significant number that destocks in kind of the $70 million to $90 million range. From a POS perspective, again, H1 where we took share, we outperformed the market. And that's Per Circana, publicly available information, it's clear. We are outperforming. We're doing -- we're very proud of the performance we've done versus the market. We are aware that the consumer could be more stressed in H2, and there could be some negative POS pressure. That being said, because our inventory is onshore, because we have the ability to quickly respond and because we have phenomenal products and because 50% of our products are below $20, we are ready to replenish and refill the pipeline as we sell through the product, and that's what we're focused on is selling the products through the retailers in the back half of the year.

Okay. And maybe just a follow-up. You touched on lease stocking by retailers and you say that this could be a headwind of $70 million to $90 million. As of the end of Q2, can you talk a little bit about your inventory levels, both at your warehouses and at retailers are they elevated? Are they in line with historical levels? Any color would be great.

Well, you see in our financials, actually, they're lower than last year. I mean 1 of the things that we did take advantage of in Q2 is looking at our inventory position onshore in the U.S. and saying, hey, what products do we have that ultimately could fill shelf space and even gain additional shelf space and additional doors in the market. So from an inventory position, we're well incredible -- positioned coming out it really served us well, quite frankly, our inventory position around Prime because we had a very, very -- we're very pleased with our Prime performance. We again took share in Prime and outperform the market. So from a kind of underlying performance, we continue to take share. We continue to outperform the market. And from an inventory position, we're -- you've seen our results well positioned, and we're planning to be well positioned in the back half of the year. And then lastly, from a retailer perspective, they, they are having lower inventory levels, which has obviously some near-term transitiontory period for us. But as we head into 2026, that really only becomes upside.

And Martin, as you may remember when you were at 1 of our Investor Days, we talked about growing and expanding in the value channel. So we've done that as well in the last 12 months. We really penetrated that channel to add extra distribution across our product lines, and we're seeing growth there as well.

Our next question comes from Adam Shine with National Bank Financial.

Okay. Let's hope this is the worst quarter you to ever have to report.

You have them as well.

All kidding aside. I mean, Jonathan, this is another example with the stock having dropped as much as 18%. Just another example of maybe some better communication around the quarter, around the quarter, especially when there are certain moves and actions being taken by the company because the surprise here in terms of the EBITDA pressure is more in terms of the added marketing spend. And again, a lot of this conversation goes back to timing, right, timing of spend on cost, the timing of some of the top line. So if I could just start with -- I know we're not going to get much guidance out of you, but I was surprised that you said 36% GPS contribution in Q3. And so it then begs the question. Do you guys think you're going to deliver growth for the year in GPS and total revenue? Maybe I'll start there.

A lot to take in there, Adam. I appreciate the color. So this year, this year is certainly a transitory year. And I think by explaining that destocking and explaining that even though we are taking share and even though that we are outperforming the market, the TAM in which we're playing, you would suggest that ultimately, no, there would not be growth this year, if you take those 2 comments. So I think that's been pretty transparent. And when [indiscernible] your frustration and understand it. And I think that's what Christina and I and the management team are working towards around ensuring that we have a very clear story, very transparent in terms of how we see the performance, which I think you're seeing some pretty transparent words that we're using. And then there's obviously improving the execution and bringing us back to profitable growth. I mean in my prepared remarks, the words were there, we're going to go back to profitable growth. So we were very clear that this year, that is not happening. And it's not happening because of factors that are wider macroeconomic events that we're doing -- I believe, an exceptional job of navigating through. The areas that are not affected by tariffs are doing well. Europe, as an example, Digital Games. And the tariffs ultimately are transitory. I mean we have to work through it. We still don't know the official rate yet for one of our larger manufacturing hubs. But once we have that and once there's clarity, then we can start executing against our plan. And ultimately, we're turning back to that profitable growth that all of us want to and are striving to achieve. And it comes from investing in the innovation engine of this company. We have a phenomenal brand.

Yes. I think, look, I think with the new CEO, new CFO, this was destined to be a pseudo kitchen sink quarter so to speak. But I hear you on the GPS, that's helpful. If I can then just unpack the disclosure around the $90 million of tariffs and then more specifically, the cost savings of $66 million. So a few months back, we had heard that the company was pursuing about $100 million in OpEx savings combined with some CapEx deferrals to get to about $100 million of cash flow savings. So if we dig that into the $66 million, which sounded like it was specifically OpEx related, as you said, Jonathan, like how much are you leading in on that Melissa & Doug stuff, which to be as in the past? Because I would have thought that pursuant to those prior disclosures that you would have had about $60 million of OpEx load through mitigation activities to deal with the tariffs. So maybe help it. We're still on track with those prior disclosures?

I mean there's an example of disclosure that lends itself to confusion, right? Because cash savings. I mean, I don't, I [indiscernible]. So I was very clear in my prepared remarks, again, about this kind of clarity and OpEx and CapEx, and let me give you a little -- kind of give you a range, I think, $80 million and $90 million. And let me be even more clear. About 2/3 of that is OpEx, about 1/3 of that is CapEx. So that kind of gives you the tariff mitigation savings. And then year-over-year, I mean, the team has done a phenomenal job of integrating Melissa & Doug way ahead of plan, right? We've hit our run rate synergies this quarter. So year-over-year, we have about $12 million-ish of Melissa & Doug. And then the rest is the 2/3 of the $80 million to $90 million range that I gave you. So that's where the savings come from. It's a mixture of looking at what we're doing and saying, are we getting the economic return? Are we getting the proper return on invested capital on these activities. If we are, let's keep doing it. If we're not, let's discuss whether we can. And if we don't think we can, let's stop doing it. And that's the activities the team is doing, and you saw it within, again, 90 days, a decision around Toca Days. And so there's more of that, that obviously Christina are going to go do as we look at our investment portfolio and ensuring that every dollar that we put into the business, we're getting an attractive return.

Our next question comes from Kylie Cohu with Jefferies.

I guess this one is more so for Christina. But I was just kind of curious if you could expand on your pricing actions. How much price have you taken so far? Can we expect you to take more price? And when will that be hitting shelves?

I'll jump in and then Christina can add some more color maybe just on the back half of some of the great products that we have around the H2. From a pricing perspective, I think what I shared is that we were able to -- ensuring that our customers and our consumer -- more importantly, our consumers have a great offering, that is our #1 goal at really competitive prices. And so remember by looking at price, but then also managing mix, more than 50% of our SKU base in H2, the highest propensity to spend period will be below $20. We did take some selective pricing actions that will be reflected obviously in retail prices, and those happen early in Q3. And they represent probably about -- if you remember, when I explained tariffs, there's the at tariff cost and then there's the volume aspect, and that was how we got out to that larger number. But a much smaller portion of that is just the tariffs, and we were capturing about 80%, 85% of the increased cost. So from a kind of position perspective, we're well suited from additional prices -- we're going to really focus and lean in on mix in 2026 as opposed to pricing. But we're really well positioned. And maybe, Christina, you want to talk a little about pricing [ mix ].

Well, I think in that the major note, Jonathan, on that, we're really looking at the pricing mix and having across our portfolio, about 50% of our products be under that $20 price point. In addition to that, we have some really great products to be excited about coming to market across all our major brands, PAW Patrol, Gabby's Dollhouse, Ms. Rachel, Monster Jam and then rebuilding gun. There's a lot of great stuff coming. So I think across Melissa & Doug as well. So we're confident in our product pipeline and our innovation that we're delivering to retail this fourth quarter or through the back half of the year in total. And like I said, it's mostly about making sure we have the right pricing mix across the category, and we feel like we're going into the second half with that well in hand.

And if I can look even further out, 2026, first of all, we want to have the headwind of the destocking. In fact, depending how retailers behave, but it could actually be a tailwind. And we have -- as you know, the PAW Patrol movie is coming out PAW3, [indiscernible]. We're going to see -- we're really excited about kind of the early cuts that we've seen and ultimately, what that's going to happen from a toy and a merchandising perspective. There's some great new products coming out in Gund. HEXBUG, we're really excited with the innovation that we're seeing. Monster Jam, I mean, the momentum is strong. And when I see the innovation that's coming out next year and that international -- and further international expansion, we're really excited. Obviously, Ms. Rachel the momentum is really strong. So -- when we look past the event H2, we -- into next year, going back to, I think, Adam's question, we're we are working towards returning to profitable growth, and we have all the building blocks in place to get us back there, and that's where our focus is.

Great. No, super helpful color. And then just 1 follow-up. I know you're lapping some Melissa & Doug inventory, but I was just wondering if you could talk a little bit more about your inventory composition specifically bridging that year-over-year gap especially in the time when your toy peers are seeing elevated inventory growth and more of the industry shift to that domestic inventory?

Thanks for the question. I think this I think this is one of the -- going back to even Adam, like just being able to tell our story a little cleaner. I mean we took share -- we made a strategic decision to invest in selling in and then once it's in, selling through. That is above the market. that leads to lower inventory. And that's why our inventory is down year-over-year as we made these kind of decisions. We open doors, we take more share, we take more space and that positions us well for the following years. So from an inventory position, I mean, you're seeing it like it all comes together. You're seeing our inventory fall in Q2 versus last year as we've been selling in product and selling through product. Now the good news is in H2, our marketing spend will be much more in line with last year, perhaps even lower. Now Q3, it was really low last year. So I'm just saying from an H2 perspective, when you look, they'll be much more consistent this year than last year, and I expect that to come in as lower percentage. And our sales allowances is -- this year coming in the back -- the second half of the year, we'll continue to be focused on selling and product and making sure they're selling through. But ultimately, we would expect that our sales allowance to be roughly in line with last year's numbers as well.

Our next question comes from Ty Collin with CIBC.

So I noticed in the supplemental slides relating to tariff mitigation that the previous specific targets you gave around Vietnam sourcing have been removed. I'm just wondering if there's been any shift in that sourcing strategy with some of the more recent tariff developments. And if you could explain the reasoning behind that.

Yes. No, look, Vietnam -- going back to our mitigation plan, let's go through the 4 buckets. Bucket one, if you recall -- if you will recall was around diversification out of China. The team has done, again, really strong work last year the -- on average, 64% of our U.S.-based cost of goods sold was coming from China. And this year, we're going to finish at 37%. So it's a significant drop. Where is that going? A portion, a large portion is going to be Vietnam. And so we're setting up those -- that production and it's going incredibly smooth. In fact, some of the -- there's some transitory costs that we're seeing, but ultimately, the underlying cost profile is as or look as attractive or more attractive than China. Now there are products that we can't take just to Vietnam and has to remain in China just because of the sheer -- the infrastructure around those technical products remain in that country versus Vietnam. But we are diversifying out our base. We have important operations in India, important sourcing out of India, Indonesia, even Europe. So it has kind of a broad base. That was the first element of our tariff mitigation plan. The second element was being optimizing the supply chain. You've seen it in Q2, where we took advantage of the inventory that we had within the U.S. And secondly, we've also been able to mitigate the actual tariffs by changing the mechanics of how we sell, and those are kind of well documented around first sales, et cetera. So that's a huge -- that's another important lever. The third lever was the pricing actions, which I've elaborated on already. And then the fourth lever was the savings, which essentially is -- on the top end of the range is essentially the same number that was given before, but now I've been able to specify what's OpEx and what's CapEx. So from a tariff mitigation plan, again, the team is executing on what they said they would do.

Okay. Great. That's very clear. And then Jonathan, with respect to the NCIB, you're about 3 quarters through it. At this point, you've continued buying back stock through Q2 and into July. I guess what's your thinking around buybacks for the balance of the year? And do you think you're in a position to fully execute on the NCIB, assuming, of course, that your shares remain cheap and attractive?

Well, we always think that they're undervalued. Let me raise that up a little bit to kind of capital allocation, if I can, and obviously kind of address your specific question. our view, my view and our collective view here around capital allocation as follows: The first is that we are committed to investing in the business. We're committed from an OpEx perspective and from a CapEx perspective. I think Christina and I are incredibly committed to ensuring that we're getting the right return on those investment dollars. And you've already seen actions that we've taken, and that's kind of the lens in which we see the world. And so -- it begins with investing in the business and being very clear on what kind of returns we want to get when we invest in the business. The second element is returning capital to shareholders. If I look at the LTM, we've essentially given -- brought back over $100 million to shareholders, both through the quarterly dividend and through the NCIB, which is your question, I'll address that, as well as pay down debt by $60 million. So this is a -- maybe one thing that's misunderstood about this business is that we do generate a lot of cash even after the investments that we make back in the business, and we return it to our shareholders. With regards -- I'll finish, and then I'll come back to answer you. Lastly, M&A continues to be an important factor of how this business has grown. This is a 30-year-old business that essentially is over $2 billion of revenue. M&A has played a role in that. We're looking on the toy side to continue to supplement the product categories that we're in as well as enter new categories that have potentially higher growth. And then on the digital side, we continue to build out the capabilities that we have across our 2 platforms. So specifically with regards to the NCIB, we believe in a capital allocation that is disciplined, that you can model and that is repeatable, unpredictable. And so if we're active in the -- if we issue an NCIB, it means that we're going to execute against the NCIB, that's the reputation that we want to have.

Okay. That's great. And Jonathan, if I could just sneak in 1 more quick one. I appreciate that you guys obviously didn't reintroduce the guidance this quarter given that you both only started within the last few months. But is that something that you're aiming or planning to do during the Q3?

Let's -- look, let's cross that bridge when we get there. I mean there's 3 factors as to why we chose not to. It's not that we're not -- it's not because we're new. There's 3 factors. Factor 1 is the actual tariffs, what's happening. Factor 2 is can we get a good sense of how retailers are behaving or buying patterns, excuse me. And then the third is how the consumer is going to react. Like on the first one, we're probably a week away from having some clarity, right? I think there was one last big country, and that should be hopefully resolved in the coming weeks. And then as we start getting comfortable that we can understand the change in DOM and FOB and the implications, as well as how the consumer is reacting to the -- whether there is or isn't inflationary in the wider kind of basket of their goods, that's when we would make the decision as to come back. So I don't want to call it a day, but those are the 3 factors that held back being able -- our decision not to give guidance, reinstate guidance this quarter.

Our next question comes from Drew McReynolds with RBC Capital Markets.

Yes, Jonathan, I still -- I think we'll take this offline just need to better understand kind of all the OpEx tariff impact and cost savings and stuff, but we can do that off-line. I think bigger picture, just 2 questions and maybe to both of you, frankly, but obviously, Christina, maybe with the emphasis on you. When you look at the overall toy business, outside of the things you can't control with respect to tariffs and macro. Is there anything that you see as kind of meaningfully broken or needs fixing relative to perhaps what the rest of us see.

And then secondly, on strategy, Christina, I would be curious just to get an update on where the strategy for the broader company is shifting on the margin? I know in the prepared remarks, there is some commentary on that front, but maybe you could drill down a little bit more for us.

Drew, a couple of things. I would say that I don't think that I believe anything is meaningfully broken. I think we came out earlier this year and said that as it relates to toy that we're going to go and compete in the places where we can be #1 or #2. And I think you see us doing that and executing against that. So I see it more as a bigger opportunity long term. One, to continue executing there but as well as looking around to other categories that we can then -- we can open up and compete in as well. So I think that is core to the toy strategy as well as looking at other -- we're growing in Infant, Toddler and Preschool, what else can we be doing in those spaces. We have great brands that are wholly owned by Spin Master as well as when you look at the success of the box office and how that's translated to growth for us in top line, whether with How to Train the Dragon, Gabby's Dollhouse is yet to come, Superman. So we've been in some of the really big box office movies. And next year, we have 1 of our own coming in PAW Patrol. So we really believe in that property and what that can continue to do. So I think when you look at our numbers this year, it's a known off year out of the movie cycle. And next year, we will be back with another great movie with a great theme. And as Jonathan mentioned earlier, really getting a look at the first cuts in the first few weeks I've been here and couldn't be more impressed. It's not easy to make a third movie that's possibly better than the first or second one, but I really do think the team has done great work there. I also would like to say outside of the toy business that we're expanding distribution. We're getting in front of our audiences in a bigger way. And I think ultimately, when you back out and you look at how that drives our business, it's really a critical part. This month, we went -- we've found some -- not found, we have some new distribution outlets. So whether it's PAW Patrol debuted on Netflix in the U.S., the first couple of seasons there. whether you look at Vida the Vet or Unicorn Academy getting placed onto Nickelodeon in additional second window or you look in the greater European market on some other second windows that we're getting for Vida the Vet. So I think the more we can go where our audience is, the more we can be consumer-minded and our strategy, the more successful we will be driving our business, whether it's in any of the 3 core creative centers. As much as we spent a lot of time talking about toy this morning and understandably why, given the tariff situation, the macro economics around it. I don't want to overlook the fact that we are positioned as an integrated children's entertainment company. So by that, I mean we have strong muscles in 3 categories and how to cross-collaborate is one of the ways we will unlock value in the future. Jonathan alluded to or directly said, focus, focus, focus and how we can go deeper on the things that are really working for us and how we can then look to create net new. Now on this call, I'm sure we don't want to talk about that so much because that provides a longer-term value, and you're looking so much further out. But I feel confident that what we have the capability to put in the pipeline for innovation in toys as well as content and digital content is second to none. And as I look further that's really where I see the opportunity is that we continue to strengthen the 3 creative centers. You see Digital really growing this quarter and grew 33%. Looking at that kind of growth and knowing what's in the pipeline in the second half. For Toca Boca World, we're better positioned for more content throughout the entire second half than we had in the first half, looking at how we can continue to test pricing how our live operations plays into it. So when you look at live ops content, pricing and promotion that we have coming, we believe we have a strong second half, the Toca Boca in line. Piknik, we're getting top line growth as well. we have a portfolio of skills in that -- in those games, whether it's math. Now we have a coloring game, we have language games, consistently looking at how we can gain engagement there and add to that portfolio and therefore grow it. So I understand the focus on toys, it's absolutely necessary. But I ask as we back out and look at the business holistically, I think we're making strides and using diversification to our benefit. I believe in the talent that's inside this organization in both our capabilities on innovation and now it's our job to start putting more of that into the pipeline. So you can see how we're going to get sustainable growth in the future. And that's really what I'm pushing towards.

Yes. That's helpful. Christina answered my third question on the Digital Games outlook in the back half here. So that's good for me.

Our next question comes from Luke Hannan with Canaccord Genuity.

I wanted to dig a little deeper on this the retailers that are deferring orders into the back half of the year? And specifically, I'm trying to get a better understanding of what you're thinking as far as sales allowances because there are a lot of moving parts here, right? There's this FOB versus domestic mix. But then also, it feels like the selling window is going to be a little bit shorter. We don't know where exactly the consumer is going to land by the time the holiday spending season sort of rolls around. In my mind, that does increase the risk of potential markdowns and there being more charges when it comes to sales allowances specifically. So can you -- I realize that you're not giving guidance as of yet, but can you just frame up for us specifically what your expectations are when it comes to the sales allowances in the back half?

Sure. No. I mean, that's exactly -- I think some of the words we used exactly kind of reiterate why it's so difficult to be able to come out and be -- give formal guidance. But what do we know? So what we know is just continue to reinstate -- reinforce is, we're gaining share and we're taking share in H1. Christina walk through why we have a strong H2 in terms of our product categories. And so I don't see a reason why that won't happen again. We are going to support that, though, and we will support it through both marketing dollars and through sales allowance. Marketing this quarter because revenue is smaller and because the timing, there's a higher proportion of marketing as a proportion of net revenue, and we expect that to come back down to in line with last year, if not lower in H2 as our revenue base grows. And then -- and we take advantage of the spend that we had in Q2 that will help us in Q3 and onwards. And then specifically around sales allowance, like your specific question, Sales allowances were higher in Q2 than last year. It goes again to the strategy that we've had around gaining share, making sure that if we put product in, it sells through and making sure that we open up new doors and Christina talked about that through the value channels being an example, and then making sure we're supporting our retail partners so that it's profitable for them as well. But when we look specifically in H2, I don't really see right now based on how the consumer is behaving, any real material increases in H2 versus last year. In fact, maybe there could be some decreases because we have such a strong product category. And because, again, 50% of our SKUs are below the $20 mark, it could even potentially be a little bit lower than last year from a sales allowance perspective.

Okay. And then for my follow-up, I just want to make sure I heard this correctly. I know in the past, you gave the target of getting to 70% of your sourcing coming from outside of China by the end of the year. And I think I heard you correctly, Jonathan, that you're on track to have it be 37% of your product coming from China by year-end. Did I hear that correctly?

Yes. I think there's an exactly -- not to -- being clear in of -- that number that you were stated, I would say before is right, but then what ends up happening is it's part of it's seasonal based. And so we said, well, look, let's take away from the seasonality and let's just give you an average number. So the average number we will finish at 37%. But I would say that's in line with kind of the other way that it was shared with you last quarter. But this is a better way of looking at it average for the full year because each quarter, there are seasonal aspects of what's being bought from China or other countries. So in the spirit of being more transparent, giving clear data, this is an example of what we're doing. But it's not -- I know the number is different, but it's still the same logic. We're just giving you an easier number to -- a truer number for the year and not benefit, say, from seasonality, which -- that number that you had had that benefit in it.

Okay. Sorry. So the 70% had the benefit of seasonality in it, you're saying?

Correct. And so now by saying an average for the year were 37%, I think it's a cleaner number for you to -- 37% coming from China to the U.S. that's a cleaner number for you. And we gave you the comparison of last year, which was 64%.

This next question appears to be our last question. This question will come from David McFadgen with Cormark Securities.

Yes, I just wanted to dive in just on the Activities, Games & Puzzles segment because I know it's obviously down in the quarter, down 6 months. Just wondering, is there one in particular, that's really driving that decline? Or is it the 5 or 6 that you listed in the MD&A. I'm just wondering if there's anything that really stands out? And when do you think that, that segment might return to growth?

Yes. So why don't I take this quarter? And then Christina, maybe talk a little bit of some of the work that I know the team is doing around bringing back growth to our Games, to that section as we look kind a little bit further out. In the quarter, I mean, there's nothing specific that I would call out more than what's in the prepared remarks. We have a portfolio approach around our product categories. Again, the vast majority of our revenue base took share. And so more -- comfortably more than 50%, more like 2/3 of our revenue base took share. So when you have a portfolio approach, there will be some categories that won't be taking share. And so that was one of the categories. We recognize that there is -- going back to Christina's comment around innovation. This is an area where we know we want to lean in, and we do believe that -- and we know that we can return to growth in this category. And so Christina, if you have any comments you want to about the category itself longer term?

Yes. I think as Jonathan just said, that we know that there is a growth in this category and returning to growth is important to us. I would go back to my earlier comment about focus. We have a pretty wide portfolio of products and doing the proper sort of assessment about where we can grow, where we can, what we can lean into is the work that's being done. I also would say that we're coming off of Rubik's, which was a year anniversary last year that definitely helped in that category versus this year. So it's looking for opportunities like that and looking for some new games and innovation that we can use to drive that category. So I would just say keep an eye on it moving forward, it's definitely something we're focused on.

That is our last question. I'll turn the conference back to Jonathan Roiter, CFO, for any additional remarks.

Well, thank you, everyone, for joining us, and we look forward to speaking to you again in our upcoming third quarter call in October of this year. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.