Talking about the show's latest theme, "Dino Rescue" and the upcoming PAW Patrol: The Movie, Spin Master told investors:
"In late June, the first episode of the new PAW Patrol theme for 2020, Dino Rescue premieres. In the 2 to 5 age category, we garnered strong ratings and with boy specifically, we saw the highest ratings since the Mighty Pups Special in January. We're very pleased to see that premier also attracted older audiences in the 6 to 11 age category, which bodes well for our movie release next year. Overall, PAW Patrol's Dino Rescue ranked as the number one show on television in Q2 amongst preschoolers. We remain on track to deliver the PAW Patrol movie in August '21, as planned.
[...]
The toy line from a new PAW Patrol Dino Rescue theme, including Dino Controller, our first ever motorized preschool vehicle has been very well received by retailers. This innovation complements our existing strong and diversified lineup, including Bakugan, Kinetic Sand, Games & Puzzles, Monster Jam, DC, Outdoors and many others."
Talking to investors, the company also revealed that themed episodes of PAW Patrol, such as Dino Rescue and Ultimate Rescue attract older viewers:
"Brian Morrison, TD Securities
Excellent. One last small one. In terms of the strong ratings at PAW Patrol, are you seeing any shift in the demographics of your audience with the new theme? Are you seeing expansion of it with the Dino added?
Ronnen Harary, Co-Founder, Co-CEO & Director, Spin Master
It's interesting. It's I think that the answer is yes. I think that the themes, if you watch, and I encourage everybody on the call to watch the latest theme because it's amazing. It's slightly aged up versus the traditional PAW Patrol show that we make. And I think that, that actually enables us to get a wide breadth of audience where we can still capture some 6 and 7-year-olds. It's funny the themes, I think the themes give the older kids some cover over their younger siblings, where they're watching a themed pup version of PAW Patrol versus watching the traditional PAW Patrol. So I think the themes at the end of the day and things like the movie are enabling us to keep the fans into the franchise longer. So I think the answer is yes."
The company also revealed that production on the movie has not been affected by the COVID-19 (coronavirus) pandemic, due to staff working from home, however, the company acknowledges that, due to the on-going pandemic, there is a slight chance that PAW Patrol: The Movie may have to be released on subscription on-demand (SVOD) services rather than theatrically, as originally planned:
"Luke Hannan, Canaccord Genuity
Understood. Last one for me and then I'll pass the line. I appreciate the commentary that you guys gave about how the PAW Patrol movie is still on schedule to be introduced a year from now in August 2021. I'm just curious if you've had any discussions internally or with your partners about maybe changing the distribution method for that movie just given what's happened with COVID-19, maybe going straight to SVOD or something of that nature.
Ronnen Harary
Yes. We're still early. The production fortunately because it is animation is on track and has not been affected by COVID. That being said, it is not easy on any of the animation studios that produce content for us. So we really appreciate the hard effort that everybody is making by a work-from-home environment. But things are on track, and currently, right now, we're still on plans to deliver the movie theatrically in fall of 2021. If we get closer to the time, we'll evaluate some other options if the COVID is still persisting at this high level.
[...]
Gerrick Johnson, BMO Capital Markets
That's very helpful. I appreciate it. And yes, on Etch A Sketch, we've been seeing the big programs out there. They look excellent. And one more for me. Similar to Luke's question. It looks like your DC movies for next year, Batman, I guess, are still on schedule, so is PAW Patrol. How are you thinking about entertainment next year? Because it looks like we're going to have a huge log jam with everything moved into 2021. Minions moved. You still have Jurassic World. You still have Ghostbusters moved. You have all the Marvel movies moved. So how are you thinking about those programs next year? Does that give you some pause with all the other stuff cluttering the landscape?
Ronnen Harary
It's a good question, Gerrick. How are you doing?
Gerrick Johnson
I'm fine.
Ronnen Harary
I'd say with PAW Patrol, I mean, there really is not a lot of offerings in the feature film area for the younger set. So I think we're really stand-alone in that space. And then when you look at things like the Batman and DC movies, it's going to be interesting. They're going to be tackling -- they're going to be fighting it out for audience share and stuff like that. But I think that when you look at the strength of the franchise itself, when you look at Batman, it is such a strong franchise that it's holding up right now, not even in a movie year quite well. I also put a lot of, what's called, emphasis on the product line itself. I mean, our team has put an incredible program together, and you see the results in the sales themselves with the product.
And I think they'll do the same with an exceptional product line that will match the movie at -- in the theater. So I think at the end of the day, the underlying property is extremely strong, and the product will match it very well. And I don't know whether or not the sale -- if the theater receipts will be down a little bit, whether or not that will affect the overall sell-through of the line. But it's yet to be determined, and you don't know whether or not -- there's a lot of uncertainty. So things may move -- continue to move and people may move their movies to 2022, and we don't know. So we'll see. I think it's something we should drill down a little bit more probably on the next call or the call after that.
[...]
David McFadgen, Cormark Securities
A couple of questions. So there's been a few questions asked about the PAW Patrol feature film. I was just wondering if you could tell us what the level of capital is at rescue. Or if you can't get specific, is there anything to be worried about? Just given what we're seeing in the theatrical market here with people pulling films and so on. And then secondly, you gave us an outlook on the gross margin you expect for the second half of 2020. And I was wondering, can you give us something similar for the selling, marketing, distribution and product development expenses as a percentage of revenue.
Ronnen Harary
Yes. So in terms of PAW Patrol, maybe, I think that we're on track right now to finish the film and have the film ready to go to a wider audience. We'll see closer to the time if the theatrical is the right option for it. But what we're seeing in the marketplace, if you look at things like trolls that changed their strategy last minute as a result of COVID, they were still able to garner huge audience share and also garner a lot of revenue as a result of it.
So other options have emerged as a result of COVID that give optionality for us for PAW Patrol. And we'll look at the optionality closer to the time. But right now, we're on track for the theatrical, and if COVID persists, we'll look at all options, but the fans are going to, the fans are there and the fans are excited to see something like a theatrical and the context is very different from a traditional TV show."
Additionally, Spin Master also revealed its partnership dynamic with Nickelodeon:
"[It's] really an amazing partnership with Nickelodeon and Nickelodeon handles all the licensing and merchandising. They do all the style guides, they vet all the partners. They work with the partners. They do all the retail meetings for PAW Patrol. They help promote the franchise itself."
Spin Master also revealed that, although sales of PAW Patrol toys were strong, sales have been down, in part due to the COVID-19 pandemic:
"Offsetting the strong performance from these brands were declines in Dragons, Hatchimals, Bakugan, PAW Patrol and Gund. In Europe, gross product sales declined 21.6% to just under $50 million. And in the rest of the world, gross product sales declined 42.4% to $28.5 million. Many of these markets saw a larger negative impact on consumer activity as a result of COVID in North America for 2 reasons. Firstly, many do not have sufficiently broad e-commerce adoption to offset store closures. Secondly, many of these markets have a much larger specialty toy component compared to North America, where mass retailers are more dominant.
Although product lines, including Bakugan, Dragons and PAW Patrol were most significantly affected, our newly launched DC line partially offset this weakness. In the quarter, international gross product sales represented approximately 28% of total gross product sales, down from 36% in 2019. The relative strength in North America during COVID was the key driver. The Activities, Games & Puzzles and Plush segment led our gross product sales growth for the quarter, increasing 19.2%. According to NPD, the U.S. Games & Puzzles market was up 46% year-over-year.
We benefited from this with particular strength in our Cardinal Games & Puzzles portfolio. In Activities, we are seeing exceptional growth in Kinetic Sand, which doubled this quarter over last year. Plush, which comprises Guns, has, however, been disproportionately affected by COVID, since its business is largely driven by U.S. specialty stores, most of whom were not open in Q2.
Gross product sales in Pre-school and Girls declined by 22.9%. PAW Patrol, which was down for the quarter, remains among the top 10 properties in the toy industry but was under pressure from the COVID-driven reduction in birthday parties and other events-driven sales. We are currently seeing this start to shift, and I will provide details on PAW Patrol POS performance shortly.
We saw a significant decline in gross product sales in the Boys Action and Construction segment, which was down 30.5%. As Ronnen noted and as we called out in May, the industry-wide shift towards stay-at-home games, Puzzles & Activities, came at the expense of other categories, most notably, Action Figures and Collectibles, which rely on social interaction. The decline was driven by Dragons, which was expected as it's in a post firm year as well as Bakugan, partially offset by sales of DC licensed products and Tech Deck. The Remote Control and Interactive Characters segment continued to decline and was down 25.4%, driven by lower sales of Hatchimals, Juno and Luvabella. These declines were partially offset by increases in Monster Jam RC and PAW Patrol RC. Monster Jam RC was up despite large-scale live event cancellations. Gross product sales in our Outdoor segment rose by 9.1% as parents looked to get the kids active outside and in pools and on beaches as the weather warmed up.
[...]
In the second half of 2020, as is typically the case, we expect to see a rebalancing between shipments and POS as retailers replenish channel inventory. The scale of this replenishment will likely be affected by macro factors, including global back-to-school decisions, which could emphasize stay at home and educational play categories, especially if online or hybrid school models emerge. In the U.S., PAW Patrol POS recovered in Q2 to negative 1% from negative 17% year-over-year in Q1 and reducing the year-to-date decline to negative 10% year-over-year. The Ultimate Fire Truck performed well with Q2 POS growing 12% year-over-year. In-store displays at Walmart and Target supported the recovery in Q2 as more customers returned to stores.
Outside of the U.S. PAW showed POS growth in Q2 in markets such as France, Benelux and Australia. PAW Patrol is currently rebounding strongly with high-teen POS growth in most markets. Kinetic Sand continues to show triple-digit year-over-year POS growth, and we're starting to see an overall strong rebound in European POS, especially in France, the U.K. and Germany, driven by growth in PAW Patrol and other core brands.
We are fortunate to have strong retail partners such as Walmart, Target and Amazon, which remained open during the worst of the lockdown and have picked up a larger share of consumer spending. Target and Walmart comprised approximately 50% of our global volume in Q2. Including Amazon, our next largest customer globally, our top three represented 60% of global volume in Q2.
Mark Segal, CFO & Executive VP, Spin Master
[...]
Obviously, our POS results are significantly higher than shipments right now. And so that means retail inventories are being drawn down. Every week that goes by, retailers are getting a better line of sight to Christmas, more data points. And at some point, they're going to have to step in, offset by the macro cautions that Ronnen just described. But overall, we feel optimistic about that.
In terms of other revenue, other revenue, as you know, comprises licensing and merchandising income, TV distribution income and app revenue from Toca and Sago. So I think for the second half of the year, as we see a rebound in PAW Patrol and other franchises, which we generate a lot of licensing and merchandising income from, we should see a pickup in that. I think it's going to be tempered to some extent by the environment in which we're operating.
So we're not expecting to see a significant increase. And certainly, overall, I think other revenue will be down relative to prior years. But we are seeing a strong increase in app revenue and revenue related to our subscription activities in Toca and Sago. So there's a nice balance there.
[...]
Gerrick Johnson
Yes. And definitely, the NPD numbers are overstated because you don't have the small specialty retailers included that are obviously being closed and backlogged. But moving on, the massive declines in international kind of masked real performance of some of your brands. And I know, Mark, you talked about a couple, but you went a little quickly, and I might have missed. But can we talk maybe in terms of North America only your performance of some of your key brands that are most interested in like PAW Patrol, Bakugan, Hatchimals and then games and activities, how they perform both shipments and retail in North America only?
Mark Segal
Sure. In North America, are you talking about for the quarter?
Gerrick Johnson
Yes.
Mark Segal
Okay. Let me just refer you back to what we said. So overall, POS in the U.S. was up 23%, okay? And in the U.S., PAW Patrol was actually down 1% in Q2 from minus 17% in Q1. And overall, the year-to-date decline in POS is 10%. Currently, we're seeing that POS even grow further. Kinetic Sand POS is up triple digits. And really, if you actually look what's happening right now in the U.S., current POS continues to accelerate. We're seeing continued strength driven by features at Walmart and Target, and the Dino SKUs are beginning to set. So that's driving POS up at PAW Patrol. Kinetic Sand remains a triple-digit POS growth.
Cardinal and Board Games & Puzzles are showing high double-digit growth POS. Bakugan POS has picked up to mid-teens. It was actually lower than that in the quarter. Bakugan, as you know, was affected by COVID in Q2 itself. Monster Jam is showing consistent 20% plus POS growth and POS for Batman and DC is solid. The negatives from a POS perspective are Hatchimals and Dragons, which are both down double digits from a POS perspective. And just one interesting data point. It's not material in dollars. But Etch A Sketch is showing very strong mid-double-digits POS growth due to the introduction of our licensed lines. So that's an interesting data point on one of our acquisitions. So hopefully, that helps."
Spin Master's Q2 2020 financial results can be found here. A transcript of the company's Q2 2020 earnings call can be read in full at Seeking Alpha.
More Nick: Michael Phelps and Son Boomer Team Up with 'PAW Patrol' to Teach Kids About Water Safety!
H/T: Toy World Magazine.
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