CIBCThey have a $62.00 target. GLTA
EQUITY RESEARCH
September 22, 2022 Flash Research
SPIN MASTER CORP.
Key Takeaways From CIBC’s Eastern Investor Conference
We hosted Spin Master at our 21st Eastern Investor Conference in Montreal this week. We were joined by Max Rangel, CEO and Global President, and Mark Segal, CFO. We believe TOY’s business model will show resilience against consumer caution, and that its strategic initiatives provide a long runway for profitable growth. Below are key takeaways from our fireside chat.
Margins & Marketing: We view the toy segment’s elevated EBITDA margins as a structural improvement. This is the product of reducing distribution centres from ~18 down to three and focusing on reducing sales allowances. Additionally, management noted it has achieved improved ROI on marketing spend by focusing on Roblox and YouTube.
Licensing Strategy Is Compelling: We estimate that licensing comprises
nearly 20% of gross product sales. Licensed products are margin-neutral,
incremental to TOY’s base business, and the company benefits from the
increased shelf life of popular franchises. Licensed products also provide an important platform for growth due to the company’s global footprint and ability to broadly distribute them. Finally, Spin Master’s penchant for innovation frequently means a higher probability of winning new license contracts.
M&A Scope Is Wide: Management shared that its cash balance (>$500MM) creates an openness to shifting focus to larger deals (TOY has never had an acquisition of >$100MM). Management is open to acquisitions in any creative centre, though it highlighted that digital games are a key category, with opportunity for either plug-and-play type games or pre-revenue platforms that can be developed and monetized. The company has allocated additional resources to sourcing and evaluating possible M&A targets.
New Content Timeline: Management noted the sweet spot for toy creation is about one year after entertainment content launches. This allows consumers to deeply connect with content and generate virality before launching toy products. For instance, Disney’s Firebuds began streaming this week, and TOY will launch licensed Firebuds toys by fall 2023. This timeline also applies to TOY’s own new entertainment franchise, Vida The Vet, which premieres in fall 2023.
Dialing In On Digital: TOY has two important content drops in December.
We believe stickiness of consumer purchases within the digital games
segment will be an important factor worth monitoring when the company
reports Q3 results.
Operational Update: TOY provided commentary on inflationary pressures in cost inputs and freight, stating that while plastic inputs remain elevated and volatile, ocean freight has moderated from its peak. Management noted that previously enacted pricing increases have more than offset elevated costs.