Spin Master Corp.

Thank you. Lindsey.

Good morning everybody and welcome to Spin Master's financial results conference call for the full year and fourth quarter ended December 31, 2020. I am joined this morning by Ronnen Harary, Spin Master's CEO, Co-CEO; and Mark Segal Spin Master's Chief Financial Officer.

For your convenience, the press release, MD&A and audited consolidated financial statements for the full year and fourth quarter of 2020 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 or any other future events or developments.

Forward-looking statements are based on information currently available to management and on estimates and assumptions made, based on factors that management believes are appropriate and reasonable in the circumstances. However, there could be no assurances that such estimates and assumptions will prove to be correct.

Many factors could cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result Spin Master cannot guarantee that any forward-looking statements will materialize and you are cautioned not to place undue reliance on these forward-looking statements.

Except as may be required by law Spin Master has no obligation to update or revise any forward-looking statements, whether because of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information contained in the company's earnings release dated March 1, 2020.

Please note that Spin Master reports in US dollars and all dollar amounts are expressed today in US currency unless otherwise noted. I would like to turn the conference call now over to Ronnen Harary.

Thank you, Sophia, and good morning everyone, and thanks for joining us today. What a difference a year makes.

At this time last year we were coming off a year in which we faced significant operational challenges and we had already started to see the early effects the COVID. Overall, I'm exceptionally proud of our team's focus, adaptability and agility to execute our day-to-day business as well as to simultaneously make significant progress in improving our operational performance.

Through 2020, we adapted to a shifting and evolving landscape, and we are very happy today to have demonstrated concrete signs of our progress. Let me highlight a few key areas of importance.

In the fourth quarter, our revenue grew nearly 4%, driven by dramatically higher digital games revenue. As we have indicated would be in the case, we were able to show significantly lower distribution cost and sales allowances.

We improved our gross margins and EBITDA margin in Q4 compared to last year, and ended 2020 with the lowest yearend inventory and accounts receivable levels since 2016. We established three creative centers, toys, entertainment and digital games.

We've strengthened these creative centers by putting leadership in place with broad and deep skillsets that will allow us to drive innovation and growth. These centers are operationally independent but linked through cross collaboration to maximize growth and optimize our return on investments.

As a result of the evolution of these three creative centers and the rise of e-commerce we are evolving rapidly into a fully-fledged children's entertainment company and are interacting with our customers more broadly and more deeply than ever before. Our customers can access our products and content through a wide range of channels, including brick and mortar retailers, subscriptions, our games-as-a-service model, streaming services and broadcasters, in theaters and directly through our direct consumer websites.

I want to update you on the progress we have made on the operational challenges we encountered in 2019. In Q4, we saw the benefits of the remediation efforts we spent much of 2020 implementing.

From an operational perspective, we focused on two key areas in 2020, which will benefit 2021 and beyond. First, our supply chain optimization, after reducing our North American DC structure footprint from 18 to 4, one less than our target of 5, we are now well positioned to manage inventory and to address changing demands in our industry.

This streamlined structure along with our one SKU one location inventory management approach, allows us to improve customer service, reduced inventory, eliminate waste, speed up the floor products and reduce customer chargebacks. Our customer-focused team strategy with consumer first internal hubs focused on a single large customer -- customer group is working well.

We are now performing at or better than the benchmark historical cost levels, when you also consider the growth in European domestic sales since 2018. We are typically higher than North America.

We intend to continue to improve further in 2021 and beyond. Secondly, we focused on process simplification and automation and we'll continue to do this year and beyond, despite the significant progress made in 2020.

The simplification and further automation of our business processes will increase efficiencies and drive cost improvements. We will be focused more on data-driven insights and we will aim to refine our systems to increase productivity.

Overall, we believe that we have not only remediated the issues we have, but we are now in a stronger position operationally than we have ever been before. Looking at some of the factors that drove our revenue growth in the fourth quarter, one of the standard items was the performance of Toca Boca, our digital games business.

Toca Life World is a game that regularly evolves with new content and play sets as well as creator tools that allow kids to express themselves and personalize their experience. Playing digital games have become an integral part of children's lives and this trend has intensified during the pandemic as kids turn to gaming to connect and communicate with their friends.

With kids spending more time at home, and with parents being more flexible with screen time, we tripled our digital games revenue in Q4, primarily due to the growth of the Toca Life World platform. Kids are playing games, bidding themselves and streaming the videos on platforms such as TikTok, Twitch and YouTube for others to watch.

Toca Boca has seen explosive growth in consumer engagement over the past half year and we believe that this major factor behind Toca Life World growth. We generated over 4 billion views, to tocaboca hashtag on TikTok in 2020 and are at nearly 5 billion currently.

We now have over 30 monthly -- 30 million monthly active users for Toca Life World. In total the Toca Boca ecosystem currently has over 40 million monthly active users compared to approximately 19 million last year.

In addition, we saw strong growth in our Sago Mini Subscription business where we had over 240,000 subscribers across Sago Mini World, Sago Mini School and Sago Mini Box at the end of 2020, compared to just over 119,000 at the end of 2019. This large monthly active user and subscriber base is a tremendous asset for us to develop and direct -- to develop a direct relationship with consumers and to which, can market and sell new digital games as we expand our product -- authorized offerings.

Socializing the digital universe is one of the major trends that has emerged from the pandemic. In this emerging digital universe kids can hang out in multiple locations and geographies and interact together.

We are now working hard on our next digital game product launches including Toca Days, a multiplayer game going live in Q4 2021 and we just launched a new Toca Boca subscription box program targeted at kids five to nine. Sago will focus on entertainment, a way for young kids play and learn simultaneously, another area which grew extensively during the pandemic, as parents sought to ensure their kids do not lag academically.

I want to briefly discuss two brands in the Toy Creative Center, Kinetic Sand and Bakugan. One of the standout performances for the year was the Kinetic Sand brand.

Kinetic Sand continues to solidify its status globally, but also increasingly in other markets. It's surging popularity and strong growth, positive online reviews and extremely popular social media presence has helped solidify the Kinetic Sand brand as a childhood activity compound in households around the world.

For context, we have around 20 million social media views per day and have had over 14 billion total views. We are pleased with the response to the Bakugan franchise since its relaunch.

Together with innovative toys, we have built a multichannel content approach encompassing television, SVOD, video games and YouTube. Bakugan toy sales were strong at the beginning of 2020 but slowed as the pandemic restricted social play for kids.

Despite these restrictions Bakugan still performed well in many countries, especially in Europe, including recently reaching number one in its category in Germany. In 2020 we launched the second season of the TV show on Cartoon Network and Netflix, introducing a new theme and corresponding toy innovation.

The second half of Season two launched on Netflix in early February. This spring, we have had two additional drops on Netflix with an hour-long special coming on March 15 and the launch of season three on April 15th.

We're excited about growing and expanding the franchise in 2021, especially as we anticipate social play for kids significantly expanding. We are experiencing -- we are working on creating an all new Bakugan experience in a world of roadblocks [ph] to help further engage with fans by bringing Bakugan to life in the game.

For the past few years, we observed the changing consumer content consumption patterns and have mobilized and established multiplatform approach to content production within our entertainment creative centers to stay ahead of the curve. Telling stories and creating engaging and enduring characters that resonate with kids around the world is important to us regardless of what screen they're watching.

Our commitment to storytelling is working. PAW Patrol currently in its eight season, continues to be the number one preschool show.

Fans around the globe responded with excitement as we announced Spin Master's feature film debut with PAW Patrol: The Movie. The animated feature film produced by Spin Master includes a cast of world-famous voice and music characters and is scheduled to debut in the theaters in late August 2021, in association with Nickelodeon and distributed by Paramount.

Late last year we launched the first ever straight streaming series with Netflix original, Mighty Express. We've taken a multifaceted approach to content creation for Mighty Express, includes the YouTube destination with short-form content music videos and character bios, as well as a mobile app to further engage kids.

Spin Master has retained the rights to the distribution of the Series outside of SVOD including licensing of consumer products and the toy line. While we currently have ten series and multiple short-form series airing or screening in 190 countries in 30 languages, the development team within the entertainment creative Center is constantly searching for fresh stories and ideas that will captivate children and families alike.

We are very proud that Spin Master's producing its first feature film PAW Patrol: The Movie. The entertainment creative center is building on the feature film strategy and we'll be bringing out other movies in the upcoming years.

We also continue to partner with the best licensors to build our presence as a toy partner for high-profile brands. In addition to core franchises such as a Monster Jam with Feld Entertainment and DC Batman with Warner Brothers, we announced several new strategic toy license agreements in 2020, including Warner Brothers, Harry Potter and the Wizarding World, Feld Super Cross and Rightfully Legends.

All of which is scheduled toy launches in fall 2021. We are proud of the trust that these IP partners have shown us and look forward to creating and unveiling innovative toys for kids and fans around the world.

Within the past year, the impact of the pandemic has profound economic and social effects, has significantly changed the mindset of the consumer. Consumers are certainly comfortable in accessing online and e-commerce.

E-commerce penetration and usage grew exponentially with strong nuances by region and we believe that as more consumers have experienced the convenience associated with these platforms through the pandemic, e-commerce usage will continue to grow. Consumers are concerned about and focused on their families' mental health and well-being.

The pandemic has had an undeniable effects on state of mind of parents and kids alike. While in the beginning of the lockdown parents were mostly focused on toys that would keep their kids busy.

Now they're increasingly interested in ways to bring their kids joy, relieve boredom and bring specialness to an otherwise monotonous time. Toys, digital games and entertainment are the perfect antidote to that monotony and continue to play an important role moving forward.

Parents have a renewed focus on togetherness. Families are finding new ways to bond and stay busy.

Co-viewing content between kids and parents has increased over COVID and is expected to carry on after lockdown. When social distancing restrictions subside undoubtedly traffic will return in-store but in-store behaviors and interactions will likely be different.

Customers are hungry for new and different. Classics were a safe choice in 2020.

But we expect consumers may shift to newness. This will allow Spin Master's to lean into its strengths in innovative product development.

We continue to tool our marketing strategies in line with these consumer trends and to make marketing as innovative as our products. We're uniquely positioned to do that as the diversified children's entertainment company across three creative centers.

Our goal is to use the strength -- the strength of three -- of all three to build a fluid ecosystem that allows us to own and grow more of our own audience, in turn, generating organic growth for our brands. Digital Now represents 50% of our marketing mix in the US and we'll continue this mix into 2021.

We'll continue to operate digital first and we continue to increase spend supporting e-commerce driving to our retailers, dotcom presence and maximizing sales online. In early January, we completed the acquisition of Rubik's Brands Limited owner of the Rubik's Cube and one of the industry's most iconic brands.

We're excited for the opportunity to put our innovation on the entire Rubik's portfolio and expand distribution through our global footprint. The acquisition of the Rubik's Cube further strengthens our presence in the games and puzzle category and gives us a platform for further innovation and global leverage.

We're always on the lookout for accretive M&A opportunities that complements our organic growth strategy and we continue to apply a disciplined approach to assessing all opportunities. We are increasingly focused on the entertainment and digital games area for M&A opportunities, given our growth in digital games our potential M&A universe has expanded dramatically.

Let me conclude by addressing our recent executive leadership changes. The dual CEO structure we have had for decades has served us well.

But we believe now -- my apologies but we believe we now have a great opportunity to transition to a single CEO model and for Anton and I to transition to different roles. To that end, we appointed Max Rangel as Spin Master's new CEO, effective April 2021.

Max is a seasoned executive who has successfully led global businesses, generating growth across multiple consumer packaged categories. He's an effective leader with a well-established ability to unlock the potential teams to boost organizational capability.

Beginning in April Anton and I will move into higher level strategic growth-oriented forward roles, continuing to drive the long-term vision and strategy for Spin Master. I will maintain involvement in the creative process for entertainment and oversight of the digital games creative center.

Anton will provide guidance on Spin Master talent and culture globally. We will continue to be actively involved in areas of the business we are passionate about including external partnerships and a strong focus on acquisitions.

Together we are energized to be taking the next step in our journey. I believe more than ever our performance in 2020 demonstrates the power of a diversified portfolio of brands, entertainment franchises and digital games and the benefits of having a sound balance sheet.

With a clear vision for the future, an exceptional leadership -- and an exceptional leadership team, a solid operating platform and financial foundation and three driving creative centers we are optimistic for 2021. We are however, mindful of the unknowns ahead of us, including the ever evolving COVID situation.

In the long term our strategic direction and diverse geographic platform, combined with the commitment of our global teams positions us to take advantage of the evolving opportunities to grow and build long-term value. I will now turn over the call to Mark.

Thank you, Ronnen. In the fourth quarter we delivered significant year-over-year improvements in our financial results.

At the outset of 2020, we entered the year acutely aware of the operational difficulties we needed to address and face additional challenges related to COVID. However, we committed to resolving the challenges we faced in 2019 and were able to methodically execute our plan and realize significant improvement in most areas, as evidenced by our Q4 adjusted EBITDA of $51.5 million, an increase of nearly $45 million over last year.

This is a direct result of the operational improvement initiatives executed throughout 2020. We continue to strengthen our balance sheet, exiting 2020 with a net cash position of $321 million, after generating over $232 million in free cash flow.

Our solid financial position together with the achievement of our operational improvement initiatives sets a very solid foundation for growth for 2021 and beyond. Our gross product sales in the quarter declined by 7.1% with a favorable foreign exchange impact of $4.3 million.

On a constant currency basis, gross product sales declined by 7.9%. One of the factors contributing to the decline was the position we took on domestic inventory in Q4 based on retailer order patterns we were seeing.

Consumers were more mission-focused in their shopping; looking to reduce the amount of time they spent in stores. We believe retailers had this in mind when they started offering their Black Friday discounts earlier and spread them out, resulting in consumer spending shifting earlier in the quarter.

We believe around 20% of December POS was pulled forward due to both retailer price promotions in October and pull forward of Black Friday deals in November. Given this pull forward, we chose to avoid carrying domestic inventory too late into Q4 and potentially into 2021 and this affected our ability to fulfill some late season replenishment and e-commerce orders, especially on hot items such as Megalodon RC, Present Pets and Hatchimals Crystal Flyers.

While this meant we did not maximize our sales, the position we took allowed us to achieve our best sell-through and the cleanest retail and Spin Master inventory levels in many years. This allowed us to exit the year with strong demand and brand momentum which positions us well for 2021.

Despite a decline in gross product sales, total revenue in the fourth quarter of 2020 was $490.6 million, up 3.6% or 2.4% on a constant currency basis. Contributing to the increase was the strong performance of digital games with over 400% revenue growth as well as a decline in sales allowances.

On a geographic basis, Europe was the strongest region as gross product sales rose 2.3%. Gross product sales in North America were down 11.8%.

In the rest of the world gross product sales were down 8.1%. International gross product sales represented 46.8% of the total compared to 43.9%.

Gross product sales in the Activities Games and Puzzles and Plush category rose 1.9% over last year, driven by continued growth of Kinetic Sand. Games & Puzzles grew for the year, driven by strength in this category during the pandemic.

Growth came from classics, adult puzzles and evergreen family games such as HedBanz. Offsetting this growth was declines in plush, which comprises GUND.

GUND continues to be negatively affected by COVID-related specialty channel closures in the US and the plush category was one of the worst performing in the industry. The Remote Control and Interactive Characters category was down 43.6% mostly attributable to the expected decline in Hatchimals offset by strength in Monster Jam RC where we saw exceptional performance from both the Mega Grave Digger and the Megalodon STORM Trucks.

The Boys Action and Construction category was up 1.8% driven by sales of DC-licensed products. Tech Deck and Present Pets partly offset by declines in Bakugan, Dragons and Boxer.

Overall, we are very pleased with our performance of the DC line this year. Our Preschool and Girls segment grew by 1% in the fourth quarter with higher PAW Patrol and Pre-School sales more than offsetting declines in other products.

PAW Patrol showed strength in the quarter in Europe and the rest of the world. The PAW Patrol Dino Rescue was a standout item and won the preschool Toy of the Year award.

For 2021 we are excited about the upcoming Wizarding World Harry Potter Fantastic Beast franchise license line in girls. Let's look more closely at POS, according to NPD; the toy categories that performed best were building sets outdoor sport toys and Games & Puzzles.

Our global POS in Q4 was up 5% compared to 7% for the industry. In Q4 our global POS ex the US was up 8% compared to 3% for the industry.

This highlights the strength of our international platform especially in Europe where we performed very strongly growing 9% in Q4 compared to 2% for the industry. We performed extremely well in key markets such as the UK, France and Germany.

In the US POS was flat for Q4 compared to a 13% increase for the industry. For the full year, global POS increased 9%, in line with the industry's 10%.

Excluding the US, our global POS in 2020 was up 9% compared to 6% for the industry. For the full year, our US POS was up 8% compared to 16% for the industry.

The primary driver of our relatively weaker US performance compared to the industry was the significant growth the industry saw in categories such as Outdoor, fashion dolls, role play and building sets where we have a relatively insignificant presence. If one isolates the NPD categories in the US which Spin Master has more than $10 million in sales our US POS grew 11% compared to 7% for the industry.

Looking at some key brands in the US, we saw higher POS in both Q4 and 2020 for Kinetic Sand, Bakugan, Monster Jam, and the Games portfolio. On a full year basis POS increases for these brands was strong double-digits and in the case of Kinetic Sand, POS was up nearly 100%.

Turning to PAW Patrol, globally, POS was up 4% for 2020. Excluding the US Global PAW Patrol POS grew 15% for 2020 and showed strong POS growth in most regions.

In the US POS for PAW Patrol declined 8% in Q4 and 6% for 2020. This decline was primarily driven by the very strong performance of higher price point PAW Patrol items such as the Dino Patrol, offset by the reduction in POS for items with price points under $10 which lend themselves more to in-store impulse purchases and declined during the pandemic.

Current global POS is solidly up 14% while US POS year-to-date is up 13%. Current POS in PAW Patrol is very strong.

In the US POS is now up over 18% year to date and 24% globally year-to-date. Kinetic Sand is up just under 50% currently and Batman is up 30%.

We expect PAW to respond very well to new content in 2021 including our movie launch in August. From a channel perspective, the shift to e-commerce continued.

In those markets where we sell directly our e-commerce penetration was over 30% in 2020 and even higher in certain markets in Europe. For 2021, we've continue to expand our e-commerce focus with our customers globally as well as through major retailer marketplaces.

Turning back to the P&L, a significant contributor to our revenue growth and improved margin in the quarter was the decrease in our sales allowances. Sales allowances for the quarter declined to 15.1% of gross product sales compared to 19.8% last year.

This is the lowest level of sales allowances we have seen in the fourth quarter since 2016. This decrease was mostly due to the strong sell through of our fall 2020 lineup, and lower markdowns, promotions and noncompliance charges compared to Q419.

The improvement in sales allowances was most pronounced in North America, where we experienced significant logistics and warehouse issues and came as a direct result of the steps we took to address these operational issue -- sorry these operational challenges throughout 2020. Furthermore, the significant improvements were made, despite a relative increase in our sales in Europe, which typically has higher sales allowance rates.

Another important contributor to revenue growth and improved gross margin was the increase in other revenue, which grew $20.4 million or 76.5% to $56.3 million. This quarter we provided further details on the primary components of other revenue.

Digital games revenue and entertainment and licensing revenue in our financial statements in MD&A. Other revenue growth was largely attributable to the 405% increase in digital games revenue to $31.8 million, primarily from in app purchases in Toca Life World and growth in the Sago Mini Subscription platforms.

Entertainment and licensing revenue was $24.5 million for the quarter, down 4.3%. Gross profit for the quarter was $241 million, 49.1% of total revenue compared to $226.1 million or 47.8% of total revenue last year.

This 130 basis point increase in gross margin was the result of lower sales allowances and higher digital games revenues, partially offset by a change in product mix to lower gross margin products such as Outdoor Games & Puzzles and higher closeout volume in the quarter compared to last year, directly related to our goal to reduce inventory levels. SG&A decreased 570 basis points in Q4 compared to last year.

As a percentage of total revenue, SG&A was 43.2% down from 48.9%. The reduction in cost was primarily related to the lower distribution costs.

Distribution costs declined by approximately $24 million to 4.6% compared to 9.8%. This sharp decline was the direct result of all the initiatives we implemented to remediate the operational issues arising in 2019.

In Q4, we recorded adjusted net income of $14.6 million or adjusted diluted EPS of $0.14, over $22 million better when compared with an adjusted net loss of $7.8 million or a loss of $0.08 per share in Q419. Adjusted EBITDA was $51.5 million in the quarter compared to $6.7 million.

EBITDA margin was 10.5%, up 910 basis points from 1.4%. Free cash flow in Q4 was $123.7 million, compared to negative $19.3 million.

Turning now to our full year 2020 performance, I will call out a few key items. Sales allowances for 2020 as a percentage of gross product sales were 12.8%, down from 13.5%.

At the end of H1 2020 sales allowances were 250 basis points -- were up 250 basis points compared to H1 2019 but ended 2020, 70 basis points down. This highlights our strong sell-through and improved operational performance, which drove lower markdowns and noncompliance charges.

Other revenue increased by 31.5% to $155 million. Higher digital games revenue of $76.8 million which nearly tripled compared to 2019 was offset by lower entertainment and licensing revenue, which declined 14.7% to $78.2 million.

Gross margin represented 46.3% compared to 49.6%. The decrease in gross margin was a function of product mix, close-outs of excess and obsolete inventory and higher freight costs, especially in the first half of 2020 which more than offset the benefits of lower sales allowances and higher digital games revenue in the second half of the year.

SG&A decreased by $10.9 million or 1.7%. Lower marketing and distribution costs more than offset higher administrative expenses.

2020 was an anomaly from a marketing spend perspective as we spent less than 9% of our revenue driven by our focus on fewer items in the COVID world. Our marketing ROI was double the rate of previous years with significantly higher sell-through.

In 2020 we will be back at the traditional 10% marketing to revenue ratio by supporting more brands and going deeper in core brands, compared to 2020. Adjusted net income for 2020 was $53.4 million with adjusted diluted EPS of $0.51, compared to $92.8 million or $0.90.

From a tax perspective, we generated an income tax recovery of $36.1 million in 2020. This comprised a one-time $33.3 million recovery arising from an internal transfer of intangible property in Q1.

Excluding this one-time recovery, the effective income tax rate for 2020 was negative 29.8% compared to 24.4% in 2019, driven by jurisdictions where pretax income or losses arose, which generated a net tax benefit of approximately $2.8 million in 2020. Adjusted EBITDA for 2020 was $180.6 million, a decline of $38 million over 2019.

Adjusted EBITDA margin was 11.5% compared to 13.8%. The year-over-year decline in profitability was primarily caused by the carryover of operating issues arising in 2019 Q4, which continued into 2020.

We estimate that the impact on 2020 adjusted EBITDA relating to these operational issues was approximately $50 million, of which $40 million was felt in H1. We are very pleased to have seen significant improvement in the second half profitability with H2 2020 adjusted EBITDA at $191 million, up $35 million or 22% over H2 2019.

Free cash flow for the year, including changes in net working capital was $232.1 million compared to only $4.7 million in 2019. The increase in free cash flow is primarily attributable to significantly higher cash flow from operations driven by the reduction in core working capital.

Core net working capital for 2020 was 13.1% of revenue compared to 21.5% last year. Inventory was down from $185 million in 2019 $102 million at the end of 2020 and we ended the year with very clean inventory both in our warehouse and retail.

This strong performance allowed us to end 2020 with $321 million in cash, compared to $115 million. With this ample liquidity and very strong balance sheet, we are well positioned to take advantage of strategic acquisition opportunities.

Turning to our outlook, we are reinstating guidance for 2021 following the withdrawal of guidance in March '20. As discussed our focus was to be structurally well positioned by the end of 2020 to be able to enter 2021 at a run rate that allows for a return close to or at our historical performance levels.

I'm pleased to say we achieved our goals and are entering 2021 with strong operational momentum. As a reminder, our guidance cycle is phased over the course of each year, in line with our reporting today May, August and November.

At each stage we will revisit our guidance with increasingly solid data based on the flow of orders and shipments. With respect to COVID we will continue monitoring the environment very closely and assess the impact to Spin Master as information becomes available.

For 2021, we expect gross product sales to grow low to mid-single digits. In terms of phasing we expect the split between revenue to be 32% to 34% H1 and 66% to 68% H2.

In terms of our domestic versus FOB mix, we expect that to be around 50-50 for 2020. We are introducing a new guidance metric for 2021.

This new metric total revenue incorporates revenue from digital games and entertainment. We expect 2021 total revenue to increase mid to high single-digits.

From a profitability perspective, we expect 2021 adjusted EBITDA margin to be mid to high teens. In addition, we expect depreciation and amortization to be up approximately $18 million compared to 2020 of that $16 million results from model deliveries of entertainment content.

We expect interest expense to remain in line with last year and our effective tax rate to be between 24% and 25%. We expect capital expenditures of approximately 5% to 6% of revenue.

To conclude, as we look to the balance of 2021, our team is fully aligned and we remain deeply committed to disciplined cost management, operational efficiency and productivity gains, as we set the foundation for return to even further growth and margin improvement. We will continue the momentum we developed in 2020, leveraging the significant improvements in our operations to propel us forward into 2021 and beyond.

We continue to believe in our long-term financial framework and that at its core, our formula for innovation and growth across toys, entertainment and digital games is stronger than ever. That concludes the formal element of our call.

We will now be pleased to take questions. Operator, please open the line.

Hello, thanks very much. Maybe start with Ronnen; I want to talk about the digital initiatives.

We've seen a big uptick on Toca Life and you guide for it to continue its upward trajectory. I heard the prepared remarks, but could you just update us what's the next iteration to build on this success?

Is it more depth within the current apps and services such as Toca Life or is it expanded breadth? I guess I'm just trying to get what are the needs of your 40 million users to build on this momentum?

Could you see some decline in users due to pandemic [ph]? And then lastly, can you just update us what the geographic breakdown is, of the digital contribution?

Yes, sure, Brian. Thanks.

And nice to hear your voice. I think the one thing that became very evident this year is that Toca Life has -- it's been a game that's been out for now over three, four years.

And the thing about the games-as-a-service business is that you're constantly able to iterate within the game and constantly put out new and fresh aspects to the game. So, when you look at our product roadmap every couple of months, we add a new creator tool or a new place for kids to visit in the game or a new destination.

And so the game is just -- it's like an ever expanding universe. It's not like traditional games when we grew up, you played the game and whatever was in the box, whatever you got is what you got.

This is a live service that we're giving to children and they are able to enter it for free. And then, as they spend more time in the universe they were able to add on different packs that they want to buy it for $1.99, $4.99 or $3.99 [ph]and.

And so the game has just gotten better and it just gotten a lot richer. I wouldn't even call it a game.

I call it -- it's a creative universe for kids. And it's a way for them to interact and actually create their own stories.

And what we saw coming into August and September was there was a crazy amount of people that were actually filming themselves with playing in the game and then uploading into Tech Talk. And that exposure and the expansion of the game really starts to increase the amount of users that were in the world.

And so if you look at things like roadblocks, you look at things like Minecraft, Toca Boca Life is similar in the sense that it's an evolving game, it just gets better over time. And so that's what the team is constantly looking to do is bring out freshness and newness within that universe and within the game.

And I think there's a multiplier effect that happens when you have that many people seeing the product, playing with the product, telling their friends, and it just -- there is a bit of a -- there is a multiplier effect and also there's a multiplier effect when you have that many people coming in to play the game. And so that's with Toca Life.

And then we're very excited with the Toca Days, which is going to be our first ever multiplayer game for mobile. So kids can actually play together, similar to the way they play in Road Blocks and in the Metaverses.

And the interesting thing that I talked about earlier, Brian was just how kids are playing games now but not only playing, but they're actually socializing in these metaverses and they're using these games to tell stories and share experiences with our brands. And so Toca Days is really our way to enter into this -- social way the kids are actually interacting today and doing in our own Toca Boca way.

And then, the last thing is that -- the nice thing is that it's very hard to launch games and to get audience today, but once you have a large user base, it's kind of like a remote and so at least you're able to get trial for your games like Toca days.

And Ronnen talk about the global nature that Brian asked from the…

Sorry, sorry. Brian, were you able to hear me okay?

Perfect.

Okay, fantastic. In terms of the -- we can maybe share that with you guys in the future, Toca Boca is extremely global.

I think it's remarkable, it's remarkable. Let us come back to maybe in the investors -- on the Investor Day on the 9th we can give you a little bit more detail on the global breakdown the majority there is -- I wouldn't say the majority.

I mean I'd say under 50% in the United States so it is very much a global brand. I mean I'd probably say that it bought and played in over 100 countries around the world, but let us get back to you on that.

Ronnen, just specifically Brian, Sago Mini just as a data point is played in over 170 current countries currently, but we will provide you more data on March 9 as Ronnen says.

And then the DC optimization, well done and making the necessary changes, I think you said you're down to four now, your prior target was five in terms of DCs. Are there more opportunities now that you're, that you're uncovering now that you've made the success or you need are you where you need to be on this initiative is there more room to go here.

I think first of all, thank you, was a lot of hard work and the team did an amazing job and Paul Blom my partner in this initiative heated the great job, excuse me, so I would say that I would say I think we're where we need to be. I think we are where we need to be and I think that we're going to continue to work these DCs and strengthen our relationships and prepare ourselves for this ever evolving landscape with e-commerce.

Okay. And in the interest of time for others, Mark, just one last quick one, your cash resources obviously your war chest here, is there anything outside of M&A opportunities that you might consider like a return of capital such as a special dividend or is there just too many organic opportunities out there?

Brian, hi, good morning. Not at this time; we have an evolving M&A strategy and we feel very confident in that M&A strategy, particularly as we continue to focus now even more so on digital games and the entertainment area.

So we're going to play out our M&A strategy. And we see a lot of opportunities there.

If in a couple of years if this doesn't actually work out for us and we're sitting with significant excess cash, then we'll have to have a discussion about a special dividend or something along those lines, but that's not on the horizon at this point.

All right. Congratulations guys.

Appreciate the time.

Thank you.

Great, thanks and good morning. Just a question on the margin guidance that you provided.

The range is pretty broad from mid-to-high teen. Can you maybe share some thoughts on what you need to do to get to that higher end of the margin guidance range?

I mean what scenario would you be sort of at the low end? Thanks.

Okay, Sabahat, thank you, good morning. Look we typically talk to around seven levers when we talk about our margins.

I just want to say we gave you the guidance range -- at this point, it's early in the year, we have to be measured. And so I would say the midpoint of that range is something that we'd be targeting as a reasonable point at this time of the year.

But typically we look at pricing as a key option. We look at our mix of products and particularly where we own the IP and we look at sales allowances as an area that we focus on.

We did very well in Q4 as you saw, we had strong sell-through, we had lower markdowns as a result of that. Our operational infrastructure improvements have driven significant reductions in noncompliance charges and that's a big impact on margins as well.

We also look at L&M income, entertainment income with a movie [ph] coming up and then digital games is an area which drives significantly accretive revenue when we were able to generate that. And so when you combine that with all of our productivity initiatives on COGS, strategic sourcing, volume rebates, reengineering and our continued focus on operating efficiencies and overhead costs and driving operating leverage.

Those were all the factors that we considered when we increased our guidance for 2021. And those are the things that will continue to either drive us towards the low end of the range, the midpoint of the range or the high end of the range.

It's a little bit early to be too specific at this point.

Fine. Great, thanks.

And then just on PAW Patrol, you shared some color earlier on some of the trends you're seeing into Q1. Can you maybe talk about how you expect that franchise to evolve this year and it seems to be a bit of variance in US versus international trends, maybe some color on what caused that and then I guess for this year should we really expect most of the growth, in call a Q3 around the movie launch?

How should we think about that platform?

So, I'll give you some POS and other specific data and then I'll pass it back to Ronnen to give his views on the overall franchise and the movie. But if you look at you PAW Patrol, PAW Patrol was a very interesting situation in 2020.

There's really five key points that you have to understand. Firstly, at the end of 2019, Q4 2019, we shipped in too much into the US and we landed up with heavy end of the year retail inventory at the end of 2019.

So, we had to -- we had to carefully manage our sell-in 2020 and also manage our media spend very carefully. Throughout the year COVID hurt PAW as many gifting occasions like birthdays were lost, especially in the second and third quarters.

In the fourth quarter, higher price point items did very well, but less than $10 price points did not do well because those tend towards more impulse shopping opportunities. And those lagged in the US.

The interesting thing is that the decline in PAW from a shipment perspective really only affected the US. In the rest of the world, PAW was up strongly in Europe, in Australia, in Canada and all other regions.

So, it was a little bit of a tale of two stories. But we feel pretty confident in PAW for 2021.

Currently POS is very strong, up 18% in the US and up 24% currently. And so we are excited about poll for 2021, especially with the movie coming up.

Ronnen would you like to comment on that?

Just briefly, I mean we're -- Sabahat, we're very fortunate to have very beloved characters. And our strategy since the beginning has been too constantly tell new and innovative stories with those characters.

And we're going to continue doing that and we're now doing that in the traditional PAW Patrol. We do it with two new themes every single year.

And as you saw with Dino Rescue, I mean was super innovative, how do you bring together? Rescue pups and dinosaurs together and tell that story without veering too far from the tone and tenor what the franchise is all about and the team did an exceptional job with that.

And now you have the third -- what I call the third aspect to how we tell stories with these beloved characters, which is bringing them to the big screen and telling a 80 minutes long format fully produced movie and that's the third way the kids can actually enjoy their beloved characters. And so you're going to continue to see us plan all three of those areas.

The traditional PAW Patrol, the themes on television and then the movies and we're going to continue that year in year out and really entertain kids in all those formats and make sure that positive very visible and the stories are rich and they are current and they are relevant today. And so that's our long term and we're going to do that year-end year out and really entertain the kits

Okay, thanks. And just maybe Ronnen, continuing with you on the entertainment side, whether it'd be the Paw Patrol movie or the DC Comics license and just some of the theater closures and things like that.

How are you guys thinking about maybe backup plans perhaps doing what some of the other entertainment companies have done? And also, have there been any discussion at the DC Comics on maybe extending the terms of your license, given that they're just it wasn't a big movie audience in the last, I guess year, and over the course of this year.

Yes, I mean we're -- we started this relation with DC and I think that everybody is very happy with the results I'm very happy with the POS and the total sales. The team's done an incredible job with the line and I think the consumers really appreciate in the newness and the freshness to it.

And so we've gone into this partnership with DC with a long-term lens and that's our goal is to be long-term partners with them. We'd like to be partners with them.

So that's our goal and we'd like to execute on that and where we're understanding with movies things change and the environment changes and movies come early and they come late. And so we just have to be good partners with them but we're looking at this relationship for the long term.

We always want to be a partner of DC. We don't want to go in and out of this relationship.

It also takes a long time for the teams to gel together and we also have Wizarding World now, which is fantastic. So that solidifies our relationship even deeper and in terms of the, dynamic and stuff like that what's going to -- it's still, it's still too early to call, what's going to happen.

But there's lots of options on the table, whether or not the actual or a combination, the app goal [ph] and PVOD, but there is lots of options on how we can actually get the PAW Movie out to the consumer come August and we're very keen on that date and not wavering from it.

Great, if I could just squeeze one last one in, maybe for Mark. we just heard some commentary from other consumer companies about congestion at ports.

Can you maybe share any color, are you hearing anything like that or is the distribution channel generally okay for you?

Hi. Sabahat, yes.

Just to add one point also to what Ronnen said on the Batman movie, just to be clear, that is moving to 2022 Sabahat which is within our license window currently just to complete the question, so no issues on that front. With regard to congestion in shipping, yes, it's an industry wide issue.

It's not specific to any one sector. We are seeing that as well.

It's come from a reduction in shipping capacity in the market and also waiting times and unloading times at ports have increased due to much larger ships that are carrying more containers. And so that is actually causing some congestion and inflation right now.

We did expect some of that in 2020 when we are planning for 2021, but to the extent that it continues for the rest of the year, there might be some impact on margins for us and for everyone else because the rates are up right now around 20% compared to where they were about six or eight months ago.

Okay. Thanks very much.

Thanks a lot. Good morning.

Maybe start with Ronnen, building on some of the Sabahat's questions on the entertainment frankly we heard a lot a week or so ago from Mattel and Hasbro really looking to accelerate exploitation of their IP. I imagine you will speak a bit more to this Ronnen, maybe next week at the investor event, but can you speak about at all some of the effort to maybe accelerate some of the activity on the entertainment side moving ahead.

And then, for Mark, couple of questions, but just on the back of the entertainment one, you've given some additional detail on depreciation amortization related to entertainment, but is there any further accounting metrics you can provide us with or sort of guide us on in regards to how to properly account maybe in H2 for that PAW Patrol movie. And then I'll circle back Mark if you don't mind for a few more guidance questions.

Thanks.

Hey, Adam. Our approach is -- our approach is slightly different to some of our competitors, but we have -- and as we've been saying to you guys for years we've always been working on a rich pipeline and developing new television shows and bringing them out.

So we actually have shows that are green light and that are in production that are coming out in the future. And so we'll be sharing that with you guys.

I don't know if we'll share with you guys in March 9 specifically what they are, but I can tell you that the pipeline is robust and the slate of development properties is robust. And we're looking to always green light one to two new properties every single year.

And so I would say an acceleration would be to try to get to that two new properties a year would be an acceleration for us over and above keeping all the existing properties maintained and fresh in the marketplace. And then, I would say the other thing that is I'm very proud of the team is the ability for us to produce our first ever feature film.

And I think it's really important for everybody to understand that are actually producing the film. We didn't license the film out to Universal or Paramount and take a royalty on it.

Our team internally in Toronto produced the film. We hired the writers.

We hired the Directors. We casted -- we did the whole casting with all that amazing voice talents for PAW Patrol.

We got the stars. We found the best people in the industry to do the music.

You guys are going to love that. We will tell you more on March 9 who's singing the main song for the movie.

So the teams really proud of them actually, go to a different task to the storytelling and produce the full animated feature film. And so in terms of increasing our effort, you will see more film coming from Spin Master in the future.

And I think that gives us a whole new way to actually entertain kids which we've never had before in the past. And that gives us just -- it's an extra quiver or extra arrow in the quiver.

So, I think that's more about the -- I wouldn't call it acceleration, I would say more consistency and also now diversity and how we can add.

Okay, thank you.

Adam, in terms of your question around accounting for the movie, just in general, if you recall, when we actually produce entertainment content, what we do is we capitalize it. And it sits on our balance sheet until we deliver it and then we amortize it.

Up until this point we've only done TV shows and we deliver those TV shows and episodes and we amortize proportionately. There is no real difference as it relates to the movie except that it's more condensed in the sense that there is one delivery as opposed to 26 episodes of delivery.

So we've been capitalizing the cost of the production onto our balance sheet and then when we deliver it, we will amortize that. And then in addition to that you will have receipts from the movie in terms of our deal with Paramount.

We also have licensing and merchandising income that flows in, we'll have toy sales obviously that will continue to go in. And most of that will actually happen in Q3.

And so what I'm going to suggest we do is that maybe Sophia can work with you offline together with you and all your -- all the other analysts to make sure that your models accurately reflect what's going to be happening in Q3, as it relates to the accounting, but, so that's the principal in general.

Right. And then just in terms of some of the guidance elements.

I mean with the marketing spend moving up towards 10% as you alluded to, Mark, it sort of speaks to the fact that there is going to be some, let's call it efficiencies elsewhere in the mix. We know that distribution as you called out $50 million of additional spend in 2020.

So maybe I'll push you a little bit on that. Is that a metric per revenue that ultimately is destined to go back towards the 2018 upon where we go 4% or may be even lower?

And then, as well when I think about the other key lever, notwithstanding some of the other seven levers you sort of hinted out before, but the other lever being gross profit with some of the benefits you alluded to come out of other revenue by implication, gross profit margin not that it has to, but it certainly looks very likely to get back to 50% at a minimum and I don't know if you want to further qualify that is. Are we ultimately moving back to a level of gross margin that can push the reported to about 50%?

Yes. Okay.

So Adam, I mean the short answer is yes. I mean, that's definitely a level that we've achieved in the past and that we want to meet and beat.

So the gross margins that we've seen in the '40s or not numbers that we happy with satisfied with in anyway. And so we want to be at 50% or even higher.

And that is going to be a big driver of increased profitability in 2021. In addition, we see our distribution cost coming down.

We are entering with a strong run rate and we feel very comfortable about our distribution infrastructure. It will pick up a little bit compared to 2018.

For example, because we do have a higher European footprint and the cost in Europe are a little bit more. So we will see some mix shifts happening in distribution.

In the case of marketing, a 10%, we see, us driving a strong -- a stronger ROI on that 10% that we have in the past. If you, look at what we did in 2020 we spent less, but we actually generated a very strong ROI and we retooled our marketing group and we are much more nimble, much more agile now, much more able to move more quickly and drive spend to where it needs to go.

And so we comfortable that at 10% level will drive even better sell through and better results. In terms of the other cost will obviously be watching our admin costs, very carefully, trying to drive as much operating leverage as we can, product development cost will stay around 2% of revenue, no major change.

And then you've got the selling cost, which are purely variable and are driven off of our mix and the licensing mix. So I don't see any major changes on those fronts.

But hopefully between higher gross margin and with the other factors I mentioned, we will be able to get our adjusted EBITDA margins back to where we were historically and hopefully even better as the years progress.

If I may, I just thought, you did bring it up, I guess it ticked up a little bit higher in 2020, certainly it looked as though there were some consultancy fees that help elevate that at a minimum in the Q4. Is that something that we are likely to see more of or that was just a function of some of the tooling in regards to the admin cost that Ronnen sort of spoke about and perhaps, I don't know, anything related to resolving some of those remediation issues?

Adam, we are investing in people to drive further growth, but we're also looking at operating leverage. We have a -- we have a significant ability to grow our sales footprint without adding any additional people, particularly in our 28 offices around the world.

The one thing to keep in mind in 2020 was the approximately $6 million legal settlement that is sitting in admin costs which was added back for adjusted EBITDA. But you are sitting in those costs and some incremental recruiting and consulting costs that we incurred in 2020 which will not be repeating in 2021.

So overall, I'm comfortable that admin costs are within the range that we need them to be. And as I said to you we continue to focus on driving as much leverage as we can.

Right. Thank you for that.

Hi, good morning. I'm hoping you guys can help us think about capital demand of the business and how that might trend over time.

So I think we look at CapEx that obviously bumped up pretty significantly. But as we think longer out what sort of level should we think about is really required to protect the company's competitive position

Good morning, Jamie. Typically we've guided to around 5% to 6% of revenue for CapEx.

About two-thirds of that relates to entertainment and the remaining one-third relates to toy and digital gaming, most of it being toy. I would say to you that's a reasonable level for 2021.

Looking forward that might tick up towards the 6% level more consistently as we grow our entertainment footprint. We will spend more on CapEx.

Our tooling for the toy business won't change dramatically. But what we are starting to see is as our digital games business grows we are investing more into digital games and so they might be increased spend on digital games driving a slightly higher CapEx rate, but I think for your models for 2021 stay with 5% to 6% and then in the longer term, maybe trending more towards the upper end of that range.

That's really helpful. And then as we think about the Hatchimals Interactive Characters business getting largely consolidated, it looks like into that growth business, does that imply, this is sort of a new base level for Hatchimals going forward or can you talk a little bit about maybe how you're thinking about reinvigorating demand there so that it grows sort of at more quickly back to historical levels?

Well, just keep in mind we've seen a major unwind in Hatchimals over the last two years from the levels that we saw in 2018. In 2019.

If you remember Hatchimals was down over $230 million. In 2020 it was down another $70 million and that dragged down the RC carry category quite significantly, and our overall sales for that matter.

But we see Hatchimals at a level now where any further decrease will not be material to our overall business numbers and we're continuing to focus on building the line, both the low price point in higher price point, Hatchimals Crystal Flyers that very well in 2020 was sold out. We actually were out of stock.

We couldn't get enough, but it's still a meaningful part of our business, but certainly not to the levels that it used to be before. Ronnen would you like to add anything to that?

So I think that's fine.

Good morning and congrats on a strong quarter. I had two questions, I wanted to ask you guys about EPS guide of low to mid-single digits.

I'm just wondering within that guidance is there anything embedded for outperformance or under performance within our toys segments or do you see that pretty homogeneous?

Good morning, George. When you say out performance just clarify specifically what you mean please?

Yes, I think you guys guided for like low to mid-single digits, do you mean [ph] you'll see one segment materially above that and one materially below that or do you expect all the segments to kind of be within that kind of bracket?

Yes. So when we guide our GPS, George, we typically don't guide below that level in terms of the individual product groupings that we publish.

So what I would say to you that we look at our business as a portfolio, some up and some down. And so overall, our guidance is for a low to mid gross product sales for the toy business.

And there will be things that go up and there will be things that go down, and that's just the nature of the industry that we're in. But that's on a blended basis portfolio basis, the way that we see the business moving for 2021.

Okay. And I mean it was a pretty impressive working capital reversal in the quarter.

Can you talk about a little bit in terms of kind of inventory levels, and how should we think about that moving into 2021?

Yes. So 2020 was an unusual year because we ended 2019 with the exceptionally high inventory and also the receivables were higher than normal.

And so we spend a tremendous amount of time as a management team focused on net working capital. The sales and operations and the finance teams all work together really closely to bring inventory levels down from $185 million to just over $100 million at the end of 2020.

And in terms of our overall core net working capital percentage we landed up at 13.1%. We also brought accounts receivable down nearly $80 million year-over-year.

So in all aspects we focused very clearly on generating free cash flow, which was a very significant underperforming area in 2019. And I think we did a stellar job as a company in achieving our goals.

Going forward for 2021. I think you should be modeling around the same levels.

I think it would be unrealistic to assume we could generate anywhere close to the kind of improvements that we saw last year going forward. So, I would say to you around the 13%, 13.5% core working capital as a percentage of sales would be a reasonable metric to look at it.

Okay, thanks. And maybe one last one for Ronnen, the appetite for a larger acquisition in digital gaming space, is that a potential we can see.

I mean you can see this year, maybe like smaller and smaller and kind of nurture philosophy that we saw with Toca?

Yes. I -- we're open to different things, but I think that our strategy and approach is going to be focused on smaller studios that are out in the marketplace.

The smaller products that they have, that can be brought into the fold. We're looking for great products with amazing studios, with really good talents.

And there's a lot of them out there and talent studios that can benefit from our large network and also our expertise, now that we're starting to build, not starting but we're getting deeper into which is acquiring users and being able to acquire users for a low cost. So, I think that focusing on smaller acquisitions and doing more of them is probably a better approach for us than buying larger bigger studios that come with a lot of complexity to them.

So I think that we're slow and steady, but very focused on the area.

Okay. Thank you.

Yes.

Great, thank you. Good morning everybody, Mark, I think you were very detailed in your outlook for 2021 so appreciate that.

One line, I didn't hear, I may have missed it was your forecast for sales allowances, what would that be?

Thanks, Gerrick, hi. Typically, Gerrick, we've historically operated in the 10% to 12% range.

I think for 2021 we'll be towards the upper end of that range, but below 12% is our goal.

Great, that's very helpful. And then I have a couple more here.

Selling, marketing distribution and product development that was probably the biggest surprise -- positive surprise relative to our model. You did discuss distribution but I was curious about product development with a lot of the projects you have going on.

How did that trend and how are you looking at that in 2021 the product development side?

Maybe Ronnen I'll go first numerically and then you can jump in with any context. Gerrick, typically, our product development costs are around 2% of sales.

Keep in mind though, that's not our full R&D spend. It's important to understand that because part of our product development spend is variabilized through our inventory royalties, which actually sit in our selling expenses.

But in terms of the straight numbers that you see on the P&L around 2% is the range that we will continue to operate in. I mean we are continually looking at areas to expand into and think about, but Ronnen maybe you could comment on that.

Sure. Gerrick, I just want make sure I understand your question, are you saying from a qualitative perspective, how is our product development going or just if you clarify?

Well, the change in that line was $135 million from $165 million right and distribution is down $24. So I am kind of asking what was Product Development and how did that trend year-over-year in fourth quarter?

And then what we should anticipate that line trending in 2021 and marks and it's usually 2% and I would assume it's partly period expenses and partly DNA coming through but anyway, what should we expect for the product development in 2021?

I can tell you that the team is first of all, they're working overtime during COVID to bring the products out. It's actually, it's a tough environment for them to work in from a creative perspective.

The team is doing an exceptional job and the team is keeping the pipeline for all the core categories that we're in and we're keeping them very small and very robust, and I would say, pushing the envelope. In terms of freshness newness innovation and I think you guys will enjoy the presentation on next week.

So you'll be able to get a glimpse into all the new products that the team has been working on, and I think that will give you a better understanding of everything once you see all the products.

All right. Maybe I'll move on to something little more qualitative and quantitative.

Mighty Express, kind of curious about the performance there, what your expectations are for Toy Line and then all three PAW, Wizarding World, what are the upcoming planned events that Warner handset of support that help you track toy sales.

Gerrick kicked across a hardball. Tum Wizarding World business goes the response has been amazing for retail, especially in Europe.

They are really, really excited about the product line. So I can just say it's really very, very exciting.

I think we can share more details with you on March 9 in terms of some of the stuff that Warner Brothers is going to do to support that. But so far very good from that front, it's really good.

And in terms of Mighty Express, Mighty Express is doing well and it is, I would definitely say that when you're starting with SVOD it's a slower build and we are going to taking a combo approach to this whereby SVOD and then in certain other markets, when linear comes online, go to linear and so you really need to be able --to have SVOD linear, YouTube all the channels are working together to get you the most amount of exposure before you put the product line into the marketplace. And so we're constantly looking at awareness levels and to make sure that the awareness levels meet our growth [ph] the awareness in levels are at the point when it's appropriate and there's enough awareness to put the product in the marketplace.

And so that's the key thing that we're focused on is building up awareness and then put in the product into the marketplace and -- not doing things based on old ways of thinking because everything has changed so much. So we're being very particular and measured when we actually go out and put the toys into the marketplace, plus our other licensed and merchandising partners.

But I'd say the show has been well received and we continue to drop new seasons into Netflix and the awareness is building, but we're taking, --I would say like this is that --it's going to take longer than your traditional Pre-School approach just because of the dislocation between linear and SVOD in 2021 in this current state of the market.

Yes, Okay and then, sorry, I do have one more quantitative question for Mark, input costs how they're going to affect you this year because Mattel called out 200 basis points of gross margin hit from input costs and they are the only ones. No other toy company has brought that up even inaudible [indiscernible] they are not seeing anything.

So why, --what are you seeing on input costs because you know Mattel see 200 basis points active it is going to be something out there, so --what's your comment on that?

Gerrick, Hi. Yes, --we are seeing some emerging signs of some input cost increases in Asia, as I spoke to be shipping cost element earlier which I'm not going to repeat.

The other element that we are seeing --is plastic resin some inflation in that area --but the point is that, at this point, we don't know if it's sustainable for the full part of the year-end and our suppliers purchase fairly significant quantities in advanced based on the order we've given them. So there might be some impact later in the year and into 2022, I don't think we can quantify it like some of the competitors might have, but there definitely something there and we're watching it very closely and looking at ways to mitigate any input cost impact in our margins this year.

That's why I also want to be more measured in terms of --our margin improvement because there is some elements of inflation that might come in that we cannot contain. So we just have to take a measured approach.

And it is early in the year at this point.

Yes. Okay, right, thank you, Mark.

Thank you Ronnen.

Okay. I think we're going to have time for maybe two more questions at most we want to try and wrap up by 11.

Thank you for sticking with us for a longer period of time.

Thanks good morning everyone. Most of our questions have been asked, but to just to tidy up.

The first is on games and it's a category that was a point of emphasis a couple of years ago and even last year when we were together at Toy Fair. If you could just talk about that category.

What you're seeing the most recent acquisition of Rubik's what your plans are for expansion of the game business? And then secondarily, a number of your key retail accounts particularly in the US, but also in Europe are really driving omnichannel businesses now with click and collect and E-commerce.

Can you talk a little bit about how you're supporting those initiatives. How that might change how you market merchandise and what you're doing with some of your big brands create online stores, I mean really leverage some of those platforms.

Thank you.

Hi, Steph thanks. I'll take the first part of the question and then Ronnen, maybe you can take the second part.

In terms of games, your question on games Steph, they really are four categories to our Games business and the first one is family bought and action games which is actually the largest category. We have a pretty solid market share and our growth outpaced the industry in 2020.

So we feel pretty good about that. Then you have Family Standard Games, which is where most of the Classic set.

and game we saw strong sales in 2020 on that category. The third category is Adult Puzzles.

We're the top 4 manufacturers in that space, but we are the fastest growing and again we grew our share in 2020 over 2019. The final category is Children's Games and Preschool Games, in that category we were actually down versus the industry.

You saw our overall games in Q4 was not as much as many of you might have expected. So we were actually down against the industry and that was mainly driven by the softening in licenses that we had licenses like baby shock LOL and Toy Story were down some of them are more tend towards more in-store traffic and impulse purchases, but with new theatrical in 2020 around zero.

That was definitely a factor. And we do see growth in 2021 in this area as theatrical licenses expand again.

So hopefully that gives you some color on the Games & Puzzles area. Ronnen would you like to talk about the Omnichannel marketing?

Yes, sure. Steph it's unbelievable because you must be listening in our Board meeting yesterday, we have the Board meeting with on the topic.

It's unbelievable what's happened in the marketplace. COVID has definitely accelerated everything.

And it's amazing to see each retailer, especially the large ones like Target, Walmart each react in their own nuanced way. And I can just tell you that our teams are really focused on this change in the way the consumer shopping and making sure that we're going to market effectively and looking at even internally how we're actually organized structurally with our teams and the competencies and capabilities that you really need to be able to win and really connect with the consumer in this digital shopping space.

It's interesting because for us, I mean the omnichannel is just, it just means -- it's everything, that's digital, it's retail, foot traffic. And so we're very focused on it.

We're very focused on it, very focused with each large retailer to bring out unique programs and everything from like looking everything like data leakage to search and making sure that we're relevant and we're very focused on it. I think that on March 9 we can actually when Laura can give you a closer look at what we're doing from a marketing perspective on some of our larger brands to answer your question on that.

But we can give you a deeper dive on how we're doing, if that's okay.

It is. Thank you.

Looking forward to next week.

Yes, looking forward to seeing you too. Let's make this last question, operator, please.

Hi, good morning guys. Just a quick follow-up on the acquisition front.

You have a rising cash balance that gives you increased flexibility. And Ronnen it seems that it will be a focus view in 2021 and onwards.

So just wondering if you could talk a little bit about what would be the sweet spot in terms of size for you for acquisitions.

I'm reticent to comment exactly what the sweet spot is because we're more focused on looking for quality companies with amazing management and focus on that and the size is -- obviously we're not, we have an approach of we like to do measured small to medium-sized acquisitions. And we think that's a more of a strategic approach for us.

So it's hard for me to comments on size and I also think it's differs by creative center. It could be different in games, it could be different in entertainment, it can be different and toys.

So, I wouldn't want to pigeonhole us in any dollar amount, but what I can tell you that we are very focused on it. And so we're spending more time in the area.

We're casting the net wider. We're going deeper into each vertical, each creative center, looking at new media, looking at games.

Obviously toys, traditional toy looking for tuck-in acquisitions, certain assets like the Rubik's expand our Games business, other things for the activities part of our business. Is there anything in the entertainment area that or new media.

So we're going to be casting the net wide. But again, everything is grounded on we really want amazing teams, individuals.

We don't want to be micro managing companies that we buy. We want to bring in amazing talent and I think the incredible thing today is that there is a lot of talented people out there is a lot of talent.

The company's and I think there's a lot of people who want to join Spin Master and join the journey of what we're doing and we're on the lookout for those talented individuals that have started companies that want to continue staying with their companies but want to monetize or feel that's better to expand and grow with us and want to be around our talent pool, and are very passionate about what they do. And I think that's really the essence of our M&A strategy, which is a very micro version of it is really looking for the talent out there.

And I think the days of you bringing in companies and you like integrate the companies and all that type stuff, it's, -- yes, there's a place for that really the amazing thing that we're seeing in the marketplace is talented individuals that want to join Spin Master that had incredible products and incredible teams that can actually take us into new spaces. So when you look at Toca Boca and Sago Mini that was, that is really one of the classic acquisitions model that we'd like to actually, annually with amazing teams in creating new spaces.

So it's a -- I gave you a different type of answer, but I hope you're satisfied.

Yes, okay. Thank you.

Okay, thank you very much.

Okay, no problem.

Well, thank you everybody particularly for staying with us for so long. As always Sophia and I are available to answer any follow-up questions and we look forward to talking to you on the 9 for our Investor and Analyst Day and talking more about our product lines and our strategy.

So, thank you all and have a great day. Bye.