Spin Master Reports Strong Q3 2017 Financial Results

27.6% increase in Revenue and 27.9% increase in Adjusted EBITDA

TORONTO, Nov. 7, 2017 /CNW/ - Spin Master Corp. ("Spin Master" or the "Company") (TSX: TOY; www.spinmaster.com), a leading global children's entertainment company, today announced its financial results for the third quarter ended September 30, 2017. The Company's full Management's Discussion and Analysis and Unaudited Interim Consolidated Financial Statements for the three and nine months ended September 30, 2017 are available on SEDAR (www.sedar.com) and posted on the Company's web site at www.spinmaster.com/financial-info.php.

"Our revenue and profitability in the third quarter reached an all-time high," said Anton Rabie, Spin Master's Chairman and Co-CEO. "In addition to our excellent financial and operating performance, we acquired certain assets of Aerobie further bolstering our Outdoor business segment. Subsequent to the quarter end, we revealed the second generation of our successful Hatchimals brand. The latest iteration, Hatchimals Surprise, was launched globally on our second annual Hatchimals Day and generated tremendous excitement."

Q3 2017 Financial Highlights as compared to the same period in 2016¹

• Revenue of US$606.1 million increased 27.6% from US$475.0 million
• In Constant Currency² terms, revenue increased by 26.6%
• Gross Product Sales² increased 27.4% to US$660.9 million, compared to US$518.6 million, driven by sales of PAW Patrol, Hatchimals and Cardinal games, which more than offset declines in Air Hogs and Zoomer
• Gross Product Sales² increased 22.6% in North America, 37.2% in Europe and 41.9% in the Rest of World. International Gross Product Sales² on a combined basis was 32.5% of total Gross Product Sales², increasing from 29.9% in 2016
• Other Revenue, which primarily reflects merchandising royalty and television distribution income from products marketed by third parties using Spin Master's owned intellectual property, as well as app revenue from Toca Boca and Sago Mini, was US$17.7 million compared to US$17.3 million
• Gross profit increased 27.9% to US$316.9 million, representing 52.3% of revenue, compared with US$247.7 million, or 52.2% of revenue
• Selling, general and administrative expenses ("SG&A"), excluding share-based compensation expenses, represented 26.8% of revenue compared to 26.2%. SG&A increased slightly due to higher warehousing expenses as well as a charge from the Toys "R" Us bankruptcy filing of $5.4 million
• Net income was US$108.8 million, or US$1.07 per share, compared with US$83.3 million, or US$0.82 per share
• Adjusted Net Income² was US$111.7 million, or US$1.10 per share, compared to US$87.5 million, or US$0.86 per share
• Adjusted EBITDA² was US$170.3 million compared with US$133.3 million in 2016; Adjusted EBITDA Margins² remained flat at 28.1%
• Free Cash Flow² was US$145.2 million compared to US$117.2 million
• On July 28, 2017, Spin Master acquired certain assets of Aerobie Inc., a leading manufacturer of outdoor flying disks and sports toys including the Pro Ring, Superdisc and Sprint Ring and the Orbiter Boomerang, for US$10.7 million.  The Aerobie portfolio will be managed by Swimways as part of the Coop family of outdoor leisure products and will be reported in the Outdoor business segment.

"Our strong third quarter results and our continuing focus on operational efficiency has the Company well positioned as we enter the busy holiday shopping season," said Ben Gadbois, Spin Master's President & COO. "Spin Master's ongoing drive to innovate is evidenced by the successful launches this Fall of Luvabella and Hatchimals Surprise, which have contributed to the strength and depth of our product portfolio.  International sales growth continues to accelerate and we are very pleased with the performance of our new direct markets in Australia, Central Eastern Europe and China. In the initial weeks of the fourth quarter, we have seen strong momentum in our sales and in consumer reaction to our products."

"The continued success of our entertainment business led by PAW Patrol highlights our commitment to creating engaging global entertainment content" said Ronnen Harary, Spin Master's Co-CEO.  "The show is resonating very well around the world, including new markets such as China and Germany, and consumer engagement is increasing through live events and the experiential PAW Patrol Road Tour.  We are working on new PAW Patrol themes and also have an exciting slate of entertainment properties in development for 2018 and beyond."

September 30, 2017 Year to Date ("YTD") Results as compared to the same period in 2016

For the nine months ended September 30, 2017 Spin Master generated revenue of US$1,110.5 million, an increase of 36.1% from US$816.1 million for the same period in 2016. In Constant Currency² terms, revenue increased by 36.2% YTD relative to 2016. YTD Gross profit increased to US$571.6 million, or 51.5% of revenue, compared with US$424.7 million, or 52.0% of revenue in the first nine months of 2016.

SG&A expenses YTD, excluding share based compensation expenses associated with equity participation agreements and the grants of restricted share units to employees at the initial public offering, represented 33.0% of revenue compared to 32.6% in the comparable period in 2016. Net income for the nine months ended September 30, 2017 was US$141.0 million, or US$1.39 per share, an increase of 45.7% from US$96.8 million for the same period in 2016. Adjusted Net Income² YTD was US$147.5 million, or $1.45 per share, up 33.1% from US$110.8 million in the first nine months of 2016.

Adjusted EBITDA² for the nine months ended September 30, 2017 increased to US$244.9 million, up 34.1% from  US$182.6 million for the same period in 2016. Adjusted EBITDA Margins² YTD decreased slightly to 22.0% from 22.4% for the comparable period in 2016, primarily due to acquisition-related product mix.

Free Cash Flow² for the nine months ended September 30, 2017 was US$175.0 million compared to US$122.6 million for the same period in 2016.

Q3 2017 and Q3 YTD 2017 Business Segment Gross Product Sales² as compared to the same periods in 2016

Gross Product Sales² in the Activities, Games & Puzzles and Fun Furniture segment increased 2.5% in both the Q3 and YTD periods, primarily driven by the games portfolio, which includes Cardinal and Marbles, and increases in Kinetic Rock, Dr. Dreadful and Etch A Sketch, offset by decreases in Bunchems, Kinetic Sand, Kinetic Foam and Marshmallow. Gross Product Sales² in the Remote Control and Interactive Characters segment increased 78.3% and 107.5% in the Q3 and YTD periods respectively, primarily due to sales of Hatchimals, Hatchimals Colleggtibles and Luvabella, offsetting a decline in Air Hogs and Zoomer. Gross Product Sales² in the Boys Action and High-Tech Construction segment decreased  24.6% and 37.0% in the Q3 and YTD periods respectively, primarily due to the decline in Angry Birds, Teenage Mutant Ninja Turtles and Secret Life of Pets licensed products, partially offset by an increase in sales of Tech Deck, Star Wars,Pirates of the Caribbean, and DreamWorks Dragons licensed products. Gross Product Sales² in the Pre-School and Girls segment increased 19.0% and 16.5% for the Q3 and YTD periods respectively, driven by PAW Patrol and Rusty Rivets offset by declines in Brightlings, Chubby Puppies and Popples licensed products. Gross Product Sales² in the Outdoor segment increased 69.2% in Q3³.

Outlook

Spin Master confirmed its outlook for the full year 2017, provided in August 2017  for organic Gross Product Sales² growth, excluding Swimways, to be in the mid 20% range, relative to 2016. Including Swimways, Spin Master continues to expect Gross Product Sales² growth in the low 30% range compared to 2016.  Seasonality for 2017 is expected to be consistent with prior years.  Adjusted EBITDA Margins² in 2017 are consistent with guidance provided in August 2017 and are expected to increase by approximately 100 basis points over 2016.  Some of the Adjusted EBITDA Margin² upside that might otherwise have been possible for 2017 has been limited as a result of the bankruptcy filing by Toys "R" Us as we expect some sales disruption to continue into Q4 and the early parts of 2018. Over the long term, Spin Master's growth rate for organic Gross Product Sales² is expected to converge towards the Company's long-term growth target of mid-to-high single digits.

Conference call

Ronnen Harary, Co-Chief Executive Officer, Ben Gadbois, Global President & Chief Operating Officer, and Mark Segal, Executive Vice President and Chief Financial Officer will host a conference call to discuss Q3 2017 results on Wednesday, November 8, 2017 at 9:30 a.m. (ET).

The call-in numbers for participants are (647) 427-7450 or (888) 231-8191. A live webcast of the call will be accessible via Spin Master's website at: http://www.spinmaster.com/events.php. Following the call, both an audio recording and transcript of the call will be archived on the same website page.  The audio recording and transcript of the call will be available indefinitely.

About Spin Master

Spin Master (TSX:TOY; www.spinmaster.com) is a leading global children's entertainment company that creates, designs, manufactures, licenses and markets a diversified portfolio of innovative toys, games, products and entertainment properties. Spin Master is best known for award-winning brands including Zoomer®, Bakugan®, Meccano®, and 2017 Toys of the Year, Hatchimals®, Air Hogs® and PAW Patrol®. Since 2000, Spin Master has received 82 TIA Toy of The Year (TOTY) nominations with 21 wins across a variety of product categories, including 13 TOTY nominations for Innovative Toy of the Year, more than any of its competitors. To date, Spin Master has produced six television series, including 2007 success Bakugan Battle Brawlers and current hit PAW Patrol, which is broadcast in over 160 countries and territories globally. Spin Master employs over 1,500 people globally with offices in Canada, United States, Mexico, France, Italy, United Kingdom, Slovakia, Poland, Germany, Sweden, the Netherlands, China, Hong Kong, Japan and Australia.

Non-IFRS Financial Measures

In addition to using financial measures prescribed under IFRS, references are made in this press release to "Adjusted EBITDA", "Adjusted EBITDA Margin", "Adjusted Net Income", "Free Cash Flow", "Gross Product Sales", "Constant Currency" and "Sales Allowances", which are non-IFRS financial measures. Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.

Adjusted EBITDA is calculated as EBITDA (i.e., net earnings before borrowing costs, taxes and depreciation and amortization) excluding one time or other non-recurring items that do not necessarily reflect the Company's underlying financial performance, including share based compensation expenses, foreign exchange gains or losses, restructuring costs, public offering costs and write downs, among other items. Adjusted EBITDA is used internally as the key benchmark for incentive compensation and by management as a measure of the Company's profitability.

Adjusted EBITDA Margin is calculated as Adjusted EBITDA divided by revenue. Management uses Adjusted EBITDA Margin to evaluate the Company's performance compared to internal targets and to benchmark its performance against key competitors.

Adjusted Net Income is calculated as net income excluding one time or other items that do not necessarily reflect the Company's underlying financial performance including foreign exchange gains or losses, restructuring costs, the accounting effect of the phantom equity expense and write downs, among other items and the corresponding impact these items have on income tax expense. Management uses Adjusted Net Income to understand the underlying financial performance of the business on a consistent basis over time.

Constant Currency represents Revenue and Gross Product Sales results that are presented excluding the impact from changes in foreign currency exchange rates. The current period and prior period results for entities reporting in currencies other than the US dollar are translated using consistent exchange rates, rather than using the actual exchange rate in effect during the respective periods. The difference between the current period and prior period results using the consistent exchange rates reflects the changes in the underlying performance results, excluding the impact from fluctuations in foreign currency exchange rates.

Free Cash Flow is calculated as cash from operations before changes in working capital less capital expenditures plus any cash used in brand or business acquisitions. Capital expenditures include expenditures on assets such as property, plant, equipment (primarily expenditures of tooling) and the production of television properties. Management uses the Free Cash Flow metric to analyze the cash flow being generated by the Company's business.

Gross Product Sales represent sales of the Company's products to customers, excluding the impact of marketing, incentive and Sales Allowance adjustments. Changes in Gross Product Sales are discussed because, while Spin Master records the details of such Sales Allowances (in its financial accounting systems at the time of sale in order to calculate revenue, such Sales Allowances are generally not associated with individual products, making revenue less meaningful when comparing its product category and geographical segment results to highlight trends in Spin Master's business.

Sales Allowances represent marketing and sales credits requested by customers relating to factors such as co-operative advertising, contractual discounts, negotiated discounts, customer audits, volume rebates, defective products, and costs incurred by customers to sell the Company's products and are booked as a reduction to Gross Product Sales. Management uses Sales Allowances to identify and compare the cost of doing business with individual retailers, different geographic markets and amongst various distribution channels.

Management believes that Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Free Cash Flow and Gross Product Sales are important supplemental measures of operating performance and highlight trends in the core business that may not otherwise be apparent when relying solely on IFRS financial measures. Management believes that Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Free Cash Flow, Gross Product Sales and Sales Allowances allow for assessment of the Company's operating performance and financial condition on a basis that is more consistent and comparable between reporting periods. The Company believes that lenders, securities analysts, investors and other interested parties frequently use these non-IFRS financial measures in the evaluation of issuers.

The following table presents a reconciliation of Revenue to Sales Allowances and Gross Product Sales, Net Income to EBITDA, Adjusted EBITDA and Adjusted Net Income, and Cash from (used in) Operations to Free Cash Flow for the three and nine month periods ended September 30, 2017 and  2016. All references to $ refer to US$:

Forward-Looking Statements
Certain statements, other than statements of historical fact, contained in this press release constitute "forward-looking information" within the meaning of certain securities laws, including the Securities Act (Ontario), and are based on expectations, estimates and projections as of the date on which the statements are made in this press release. The words "plans", "expects", "projected", "estimated", "forecasts", "anticipates", "indicative", "intend", "guidance", "outlook", "potential", "prospects", "seek", "strategy", "targets" or "believes", or variations of such words and phrases or statements that certain future conditions, actions, events or results "will", "may", "could", "would", "should", "might" or "can", or negative versions thereof, "be taken", "occur", "continue" or "be achieved", and other similar expressions, identify statements containing forward-looking information. Statements of forward-looking information in this press release include, without limitation, statements with respect to: the Company's outlook for 2017 (see "Outlook"); future growth expectations; the expected benefits of the Company's investment spend; the Company's operating momentum, financial position, cash flows and financial performance; the Company's future growth, drivers for such growth, and the successful execution of its strategies for growth; the seasonality of financial results and performance; and the success of entertainment properties expected to be launched in 2018 and beyond.

Forward-looking statements are necessarily based upon management's perceptions of historical trends, current conditions and expected future developments, as well as a number of specific factors and assumptions that, while considered reasonable by management as of the date on which the statements are made in this press release, are inherently subject to significant business, economic and competitive uncertainties and contingencies which could result in the forward-looking statements ultimately being incorrect. In addition to any factors and assumptions set forth above in this press release, the material factors and assumptions used to develop the forward-looking information include, but are not limited to: the expanded use of advanced technology, robotics and innovation the Company applies to its products will have a level of success consistent with its past experiences; the Company will continue to successfully secure broader licenses from third parties for major entertainment properties consistent with past practices; the expansion of sales and marketing offices in new markets will increase the sales of products in that territory; the Company will be able to successfully identify and integrate strategic acquisition opportunities; the Company will be able to maintain its distribution capabilities; the Company will be able to leverage its global platform to grow acquired companies' brands sales; the Company will be able to recognize and capitalize on opportunities earlier than its competitors;  the Company will be able to continue to build and maintain strong, collaborative relationships; the Company will maintain its status as a preferred collaborator; the culture and business structure of the Company will support its growth; the current business strategies of the Company will continue to be desirable on an international platform; the Company will be able  to expand its portfolio of owned branded intellectual property and successfully license it to third parties; use of advanced technology and robotics in the Company's products will expand; access of entertainment content on mobile platforms will expand; fragmentation of the market will continue to create acquisition opportunities; the Company will be able to maintain its relationships with its employees, suppliers and retailers; the Company will continue to attract qualified personnel to support its development requirements; and the Company founders will continue to be involved in the Company and that the risk factors noted below, collectively, do not have a material impact on the Company.

By its nature, forward-looking information is subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. Known and unknown risk factors, many of which are beyond the control of the Company, could cause actual results to differ materially from the forward-looking information in this press release. Such risks and uncertainties include, without limitation, the factors discussed under "Risk Factors" in the Company's continuous disclosure documents filed under the Company's profile on SEDAR (www.sedar.com) including the Company's Management Discussion and Analysis and Annual Information Form. These risk factors are not intended to represent a complete list of the factors that could affect the Company and investors are cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements.

There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Forward-looking statements are provided for the purpose of providing information about management's expectations and plans relating to the future. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, or to explain any material difference between subsequent actual events and such forward-looking statements, except to the extent required by applicable law.

SOURCE Spin Master Corp.