In fact, The Mighty Pups DVD, which launched as Walmart exclusive, has been one of the top-selling DVD in recent history! The DVD will be available more broadly in fall 2019.
Additionally, Spin Master also revealed that they are managing PAW Patrol with a 20-year vision.
Spin Master also announced that, after nearly three years of development, Spin Master's brand-new animated preschool series Abby Hatcher, Fuzzly Catcher (26 episodes) will premiere on Nickelodeon in the U.S. and TVO in Canada in early 2019, and global distribution will follow during 2019! This adventure-based comedy series follows our heroine, 7-year-old, Abby Hatcher, as she rescues her favorite creatures, Fuzzlies, from whatever trouble they had accidentally landed themselves in. Spin Master will launch the toys in 2020 to allow the property to become established with its audience and to build anticipation for the toy!
Below are more highlights from Spin Master's Q3 2018 Financial Results Earnings Call, in which the toy company reveals the latest news about PAW Patrol! The full transcript can be read on Thomson Reuters StreetEvents on Yahoo!.
I would now like to take a few minutes to review PAW Patrol with you. As we discussed in August, for the first half of 2019, global PAW Patrol POS was slightly up. However, global PAW POS in Q3 was down, and POS on a global year-to-date basis as a result was marginally down. Excluding the U.S., POS is up 5% year-to-date. In the U.S., including TRU, PAW Patrol POS is down for Q3, mainly driven by the impact of TRU in July.
August and September showed a much improved POS performance. On a year-to-date, PAW POS is down slightly less than the decline in the overall toy industry in the U.S., again, for the third quarter. It is very important to understand what is happening behind these POS numbers. In the U.S. and the U.K., the liquidation of TRU during Q2 had a significant effect on PAW Patrol as it was one of TRU's largest inventory position.
The liquidation pulled sales into the first half. This had an impact on shipment and sales in Q3, especially in July, as Walmart, Target and other retailers did not reset their stores to capture TRU shares until August. Crucially, POS for Q3 is up 16% for the period since August 1 and is moving in a strong direction with peak seasonality just hitting. In particular, the fresh team is working, and we are closing the POS gap.
We have reached PAW Patrol's highest market share ever of over 14% in the preschool category for October, despite the market disruption caused by TRU. PAW Patrol remains the #1 property in preschool and the #8 property overall in the toy industry. Nickelodeon revised their programming strategy with more telecasts. And so far, the new Ultimate Rescue episodes are rating very high.
In mid-October, we had the highest impression levels since August 2017 and the highest of any preschool property this year. Our new short-form content on YouTube is driving greater awareness. The Ultimate Rescue Fire Truck is leading with over 15% year-over-year POS growth compared to the Sea Patroller, even though it was launched 1 month later.
The new My Size Lookout Tower did not set at most retailer until late Q3, and we are already seeing strong performance early in Q4. Both Target-exclusive programs are significantly outpacing 2017, driven by strong product and marketing. In key market internationally, we're seeing similar performance.
Looking forward, the team and product line for 2019 will be one of the strongest we have created. We are managing PAW Patrol with a 20-year vision. And whilst it is unlikely that PAW Patrol on an overall basis going forward will grow at the same rate it has historically, it is a valuable, evergreen franchise that we will continue to invest in and support with innovative toy and entertainment, including traditional TV, an annual 1-hour TV special every year in new short-form content for YouTube.
Our second growth strategy is to significantly increase our international sales. We revised our medium-term goal following our 2017 result to the upper end of our previous target of 35% to 40% of our sales internationally. Our overall international gross product sales growth continued an upward trajectory for the third quarter 2018. Markets such as Germany, Mexico and U.K. have performed well, and our newer market such as Australia and Central and Eastern Europe are continuing to show strong growth.
In China, our brands and products are resonating with consumer and sales. While still small, China is exceeding our expectation. During the third quarter, we announced a strategic partnership with internet giant, Alibaba. The strategic cooperation will be committed to creating a leading digital platform for retail, brand building and data-powered marketing, demonstrating a mutual confidence and recognition of Spin Master global potential in China.
China is a key part of our international growth strategy, and Alibaba is a strong partner who shares our commitment to excellence. The strategic cooperation agreement with Alibaba represents a significant milestone in our effort to grow China in the years ahead. In addition, we are working hard to establish our newest direct market in Russia, Greece, Austria and Switzerland for launch in early 2019.
Third, we continue to develop evergreen global entertainment properties. I want to highlight for you something that is working particularly well in our entertainment strategy. Our entertainment and brand themes work closely together, integrating the show and the toy line to deliver innovative toy ideas that translates on-screen, on-shelf and at home.
PAW Patrol is a great example of the fusion of storytelling and toy design. We are introducing themes each season that are timed to the delivery of our fall product line. This ensures that during our largest selling quarters, the new products on the retailer shelf and the new episodes on air are closely linked in both themes and content. PAW Patrol continues to perform well, and it's rating are consistently at the top of Nielsen ranking.
The rating for PAW kids 2-5 grew 3%, while total kid 2-5 declined 17%. In 2 days, on November 9, Nickelodeon will be airing the first PAW Patrol 1 hour TV special titled Mighty Pups. The Mighty Pups DVD, which was a Walmart exclusive, has been one of the top-selling DVD in recent history. The DVD will be available more broadly in fall 2019. As I mentioned earlier, we plan on doing at least 1 new PAW Patrol 1 hour TV special every year.
Fourth, we intend to grow through strategic acquisition. We have the balance sheet and financial flexibility to do so, and we are actively seeking opportunities with the right strategic fit. To position Gund for future growth, we are working on several integration initiatives, including aligning the business with internal Spin Master processes. We have already completed moving Gund onto SAP and have transitioned the reporting, warehousing, order management and inventory control process.
Similar to the work we're doing on Gund, as we seek to continue to drive margin expansion through operating leverage, we are constantly looking at ways to modernize and optimize our global organization. In the near-term, some key initiatives we're looking at include refining our global business unit and center of excellence model, both structurally and geographically, to increase operating leverage and momentum with our innovation process and our brands and franchise.
We plan on investing more in R&D, focusing on the R. We plan on enhancing our go-to-market strategy for online channel, also enhancing talent management and leadership development globally and also improving information system and data analysis capabilities to reduce non-value-added activities and improved management decision-making. We look forward to seeing you all in New York Toy Fair in February, and we are very excited to show you our 2019 line, which has some of the great innovative item -- which has some great new innovative item, including our 3 major franchise launches of Bakugan, Monster Jam and How to Train Your Dragon.
[...]
Derek Dley, Canaccord Genuity Limited, Research Division - MD & Consumer Products Analyst [12]
Okay, that's great, that's helpful. And thank you for all the color on PAW Patrol, but it sounds like you did have a strong rebound in POS in North America in August, September and October. Can you talk a little bit about the traction that you're seeing with PAW Patrol in Europe and the Rest of the World following that sort of liquidation period?
Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [13]
Yes, absolutely, Derek. So PAW Patrol is actually doing incredibly well. And overall, even if I go 1 level above PAW Patrol, we look at the toy industry globally. Year-to-date the industry, despite all the noise that we're experiencing, has grown 1.5%. And when you look at all of the different countries, most of the headwind have been experienced in the U.S., the U.K. and there's some cautiousness in the French market as well. But a lot of the other markets around the world are doing fairly well. So you have markets like Brazil, Mexico, Russia growing double digit. You have Italy, Germany, Canada and many others growing single digits as well. So the toy industry overall globally is doing fine, and PAW Patrol continues to build incredible momentum in a lot of our European countries like in Germany also with our distributors. So Mark expressed the growth we're seeing in the rest of the world and in many other geographies. So we're having strong years in a lot of these other countries, and PAW Patrol is a large part too of our success factor.
[...]
Brian Morrison, TD Securities Equity Research - Research Analyst [15]
Ben, you talked about the distribution agreement with Alibaba. I'm not sure I get a sense of the details. Is there anything really unique about this partnership? Do you have -- do you plan to have your full product line available through this channel? I'm trying to get a sense of the materiality of its growth potential.
Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [16]
Yes, Brian. So we're -- as you guys know, we launched recently our -- Spin Master did some product launch in China last year, and we built really good momentum. Into this year, we're expecting to double our sales in China. And when you look at the marketplace, we -- the retailer, traditional retail is very important, but the Chinese consumer are very, very as an e-commerce shoppers and consumers, and Alibaba has by far the largest market share in the Chinese market. And we've launched PAW Patrol with Alibaba. We have a dedicated site on Tmall. We have a dedicated site on Hatchimal, which is doing really well. And through discussion with Alibaba, I think they really like the potential of capturing more of the toy industry sales in the Chinese market with a lot of the brands that are doing well globally. And they identified Spin Master as a company they want to do more with, which is a perfect fit for our strategy in China. So not only Ronnen talk about franchise expansion in Asia, but also our product line expansion. So with Alibaba, what we will do is we will continue to do some partner marketing, making sure that we cooperate more closely to build brands in China with them. And again, their footprint with their consumers in China is definitely phenomenal. So this is something that -- the ecosystem that they have is something that is very, very strong in the Chinese market. So we're actually very excited with that partnership. And it's -- but it is not the full product line, Brian. We will actually be very strategic in which brand and franchise we release over time. It's a calculated approach versus an all for all.
[...]
Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [20]
I actually have 3 questions. Okay. First one, the guidance reduction. Look, we knew Toys "R" Us is gone and everyone else can be cautious for a while. So how much of this reduction is really less Toys "R" Us absorption anticipated and how much perhaps from declines in core lines and how much might be from slower uptake of new products?
Benoit J. Gadbois, Spin Master Corp. - Global President, COO & Director [21]
Gerrick, so obviously the line and the maturity of every products changes every year. So this is obviously -- we're still early in the season, so it's really hard to comment on that. With that said, where I think we -- Gerrick, when you look at what happened in the industry and you go back to Q2, we saw a really bigger impact on Toys "R" Us into Q3 than we had anticipated. So for example, I'll give you a fun fact. So if you look in the month of July, compare your overall marketplace without Toys "R" Us and then with the liquidation of Toys "R" Us, the average unit price on PAW Patrol in the U.S. market went down by nearly 15% as a result of the pricing effect alone of Toys "R" Us. So I think Toys "R" Us took -- move a lot of the Q3 volume into Q2. I think they took a lot of POS dollars out for the industry to their deep discount. And then I think as we go forward, Gerrick, I think we're very optimistic for all of our product lines. I think we're really excited into what 2019 is bringing, but I think it's too early to comment on what is a big-hit, what's medium and what's a disappointment, because we're just heading into the season.
[...]
Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [29]
I've got 1 for each of you. So hopefully, each of you get a chance to respond. And Ronnen -- the first one, Ronnen, is for you. I just want to understand. I think you're the first company within the industry to really reference this potential capacity bottleneck that could surmise kind of mid-holiday order pressure. So I wanted to just understand around how you're thinking about excess inventory in the channel exiting the holiday? Is this actually a bizarre kind of silver lining that this made less than the potential hangover risk of inventory into 2019? And then, Mark, one for you. Just I think you mentioned in your remarks that the return on invested capital on international is cited as high -- was cited as higher. If you can give us just some perspective on how much higher. And then wanting to understand a little bit about your international growth up towards that 40% of your mix. Can you just give us some perspective on the bigger franchise brands like PAW Patrol? How did those indexed relative to that kind of 33% in the quarter or right around that mid-30s range for the year? And then, Ben, for you. I think you mentioned you're trying to manufacturing exposure, trying to lower that over time. And I just want to make share we had the numbers right. So sounds like it's about 75% of your goods today are produced in China, on its way to closer to 40% over the next couple of years. If you could just kind of frame that for us. I want to make sure we got those numbers correct.
Ronnen Harary, Spin Master Corp. - Co-Founder, Co-CEO & Chairman [30]
Okay, that was a mouthful, Steph. So we're -- I'll start with -- I'll answer your inventory -- retail inventory, and I'll talk about the manufacturing sourcing mix. So from an inventory standpoint, we're actually very pleased how we're managing our retail inventory. And I know it's boring, but every quarter we talk about how we measure the beginning inventory at retail, shipment in POS, and then we adjust the go forward based on what we're seeing with ending inventory. And for Q3, our retail inventory on a global basis was down 9% and in the U.S. were down 13%. And all of the projection that we're doing with the guidance that Mark gave will allow us to have our retail inventory down in the high single digit at the end of the year. So we are very, very mindful and cautious with the ending retail inventory. Also, just because we're super excited about 2019 and, as you've heard, we're -- in Q1, we're launching Bakugan, Monster Jam, How to Train Your Dragon, so we really want to be -- make sure that we get our ending retail inventory position right. So we're very, very focused on this. And we expect to be down, okay. So I think that was your first question. And when it comes to the manufacturing mix, as you know, just a few years back, most of our manufacturing was in China in the last 2 years. You nailed the number. We're now down to approximately 75%. And we -- over the last few years, we have made some structural, people and strategic investment into countries like Vietnam, India and Mexico, and those are some of the other counties where -- that are the predominant other countries where the production will continue to move over time. And the strategy is in place. We're actually already executing against it. And they will ultimately reduce that number furthermore to that number that we've talked about, to that 60% plus. Mark?
Mark L. Segal, Spin Master Corp. - CFO & Executive VP [31]
So thanks. Steph, on the question of ROI for international, I don't want to be too specific about the actual ROI numbers, but I can tell you that the ROI on our international investments are very attractive. And the way you have to look at it from a kind of a modeling perspective, it's -- there's a little bit of a trade-off between the P&L and the balance sheet. So when we go direct in international markets, we're able to now sell in wholesale dollars rather than in third-party distributor dollars. And there's quite a difference between those 2. On the other hand, so we get the margin pick up and by -- and that impacts the P&L positively. However, on the balance sheet side, previously, the distributor used to take inventory risk. Now we put inventory in that block of markets. So we actually have an investment in inventory and receivables. So there's a little bit of a P&L/balance sheet trade-off there. But overall, our international investments are very attractive, and we'll continue to selectively look at markets where it makes sense for us to do that. And in 2019, we're doing -- Russia is our biggest one, and then also Grease, Austria and Switzerland are other markets where we're going direct. In terms of our international growth targets, when we went public, around 28% of our sales were international. We're now up to 33% or just under 34% at the end of Q3. We think we'll be higher than that at the end of the year. And we're continuing now to push for that 40% mark. Previously 35% to 40% was our goal. We now think with our new markets coming on stream in '19 and others in '20 and beyond, we think we'll get to 40% in the next few years.
[...]
Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [34]
So you provided some color earlier on the expectations for Bakugan. I guess when you think about the ramp-up of that platform over the next few years, I guess, without getting into specific numbers, how does a franchise like this perform during its second launch versus a ramp-up of the way, say, PAW Patrol or Bakugan kind of built up over a course of 2 to 4 years? Do you guys have some visibility on that in conversations with the retailers?
Ronnen Harary, Spin Master Corp. - Co-Founder, Co-CEO & Chairman [35]
I think, first of all, you need to look back to history and look back at previous relaunches of Boys Action properties like Teenage Mutant Ninja Turtles, Beyblade. Those are 2 really -- prime examples are Transformers. And so if treated well in terms of bringing some innovation to the toy line, treated well in terms of the content discretion, upbeat and you have a great platform. And you've obviously, waited for that next generation of kids. I think you have the ingredients there to have a robust relaunch of the product line. And for us, we're taking a long-term view on Bakugan. You have the generation of kids that grew up on it. Now they are advocates of the brand and supporters. And now we're going to have a second generation of kids. And we're going to manage this franchise for the long term. So I mean, it's going to be year-by-year and every year is going to be new innovation and new innovation tied to the TV show and all the rest of it. And so it's going to be a strong launch with a long-term focus on building the franchise. And then again building licensing merchandising, but all the other categories out there and video games and potentially some other content that we can share with you guys in the future.
[...]
Sabahat Khan, RBC Capital Markets, LLC, Research Division - Analyst [37]
Okay. And then just a quick one on the other revenue line. Like I guess, would you say that's -- I guess, this quarter it was down quarter-over-quarter, but up year-over-year. How should we think about that line? Is that any relation at all to the direction of your gross product sales or should we think about that completely as separately?
Mark L. Segal, Spin Master Corp. - CFO & Executive VP [38]
So I think you have to think about it a little separately, Sabahat. Because for the most part, we do not actually control that ourselves. In some cases, we do and in some cases we don't. But in the case of PAW Patrol, for example, Nickelodeon actually handles the L&M around the world. And so they are dealing with over 75 different licensees. In the case of Hatchimals, we're dealing with over 75 different licensees. And so to actually predict that in a rational way is somewhat challenging because we're not actually controlling that directly. So I mean, I think there must be some fundamental correlation to the property itself to which the licenses relate. But there isn't a very strong direct relationship that I could point to, to allow you to model that directly.
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More Nick: Outright Games Releases 'PAW Patrol: On a Roll' Video Game for Consoles and PC!
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