Spin Master Corp.

Welcome to Spin Master's Financial Results Conference Call for the second quarter of 2025. I am joined this morning by Christina Miller, CEO; and Jonathan Roiter, Spin Master's CFO.

For your continuance, the press release, MD&A and consolidated financial statements 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 at Spin Master's current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements and any other future events or developments.

Forward-looking statements are based on currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such assumptions will prove to be correct, and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements.

As a result, you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information in our earnings release dated July 31, 2025.

Except as may be required by law, investor disclaims any intention to update or revise any forward-looking statements whether because of new information, future events or otherwise. Please note that Spin Master reports in U.S.

dollars and all other amounts today are expressed in U.S. currency unless otherwise noted.

I would now like to turn the conference call over to Christina.

Good morning, everyone. I'm pleased to join my first official analyst call since joining as CEO earlier this month.

I have the opportunity to lead an incredible company that creates play experiences that bring joy to kids and families around the world. Spin Master has a diverse portfolio of brands that we've built, acquired, partnered with brands like Paw Patrol, Melissa & Doug, Monster Jam, How to Train Your Dragon, Toca Boca provide us with a strong foundation from which to scale and reach more consumers, audiences and players globally.

Turning to our performance this quarter. As expected, we faced some headwinds.

Total revenue declined by 2.7% as retailer buyer patterns within toy shifted in response to evolving tariff rates in the U.S. Our decrease in toy revenue was partially offset by double- digit growth in [ games ], demonstrating the strength of our 3 creative center approach.

In the second quarter, tariffs cause retailers to temporarily pause orders and, in some cases, delay set holiday dates, negatively impacting selling. Despite these shifts, we saw strength in key toy categories both in revenue and at point of sale, enabling us to maintain or grow on grow share for many of the categories in which we compete.

Looking at our total addressable market, we grew POS by 7.4% in the quarter ahead of the industry, which grew 3.7% for comparable categories. We retained our leadership position in infant, toddler and preschool categories, thanks to a combination of owned and licensed IP with POS growing 3% compared to market, which grew 2% Per Circana.

The inclusion of Melissa & Doug, Ms.Rachel within our portfolio helped to strengthen our market position. our license business grew 43.1% in the quarter, outpacing industry growth Per Circana, thanks to a roster of popular license toy partnerships, including Monster Jam, How to Train Your Dragon, Ms.

Rachel and Gabby's Dollhouse. Speaking of Monster Jam, this brand is fueling consistent growth with us.

Within the vehicle category, POS from Monster Jam grew 13.1% in the quarter, enabling us to take share, maintaining its position as #2 in the category. Looking forward, we have a strong lineup of toys just hitting shelves now and into the fall for the holiday season.

We have strong innovation across our portfolio, including key brands like Tech Deck, Melissa & Doug, PAW Patrol and Kinetic Sand. In addition to our owned IP, we have licensed toys for films, including Jurassic World, How to Train Your Dragon, Superman, which had a successful box -- which just had successful box office openings and Gabby's Dollhouse slated for September.

Moving to our own entertainment studio. We're progressing against our strategy to create content and engage our audience wherever they are.

While entertainment revenue declined in the quarter as expected, we expanded the distribution of key properties, including a second window deal with Nickelodeon in the U.S. for Vida the Vet and Unicorn Academy, both which debuted this month.

Our last Unicorn Academy special dropped on Netflix on April 9 and beat our expectations for audience engagement, outpacing the competition. Unicorn Academy generated 70-plus hours viewed globally in the first half of 2025.

All previously released chapters from the series together with the new special landed into the girl's top 5 viewed context for each one. We're continuing to invest in the health of PAW Patrol.

Production of the movie for 2026 is well in hand, and we are delivering 2 specials this year. in October and our first-ever Christmas special, which will air on both Nickelodeon and CBS Primetime.

Beyond our partnership with Paramount, in support of our goal of reaching kids wherever they watch and for the first time ever, PAW Patrol debuted on Netflix in the U.S. this July, following a successful run of Rubble & Crew on the streaming platform earlier this year.

Digital gains had a strong quarter with double-digit growth and have an engaged player network with 58 million active users. Over the past year, we've taken steps to focus on the strength of our anchor platforms, Toca Boca World and Piknik.

As such, we've made the strategic decision to pivot our focus away from Toca Boca Days to double down on accelerating Toca Boca World, building social multiplayer experience within Toca Boca universe has provided us with valuable insights. We are now leveraging those learnings and tech we developed to future-proof Toca Boca franchise.

These ships are beginning to yield positive results, giving us confidence in our ability to scale in the future. More broadly, we're making investments to expand services capabilities, deepened performance marketing and strategic focus has been to diversify our revenue streams across our 3 creative centers, and we've only just begun to truly capitalize on our deep catalog of content, brands and gaming platforms.

We have potential to deliver long-term growth by fully harnessing cross-creative center collaboration, staying grounded in consumer-first mindset and bringing joy through engaging characters, stories, digital world and physical toys will ensure we are a mainstay in the lives of kids and families everywhere. With that, I turn it over to Jonathan.

Thank you, Christina, and good morning, everyone. This quarter's performance highlights the strength and resilience of our diversified portfolio across all 3 creative centers.

We delivered revenue of over $400 million in the quarter during this complicated and challenging macroeconomic environment, bringing our year-to-date growth rate above 4%. Importantly, we delivered solid performance within our total addressable market, gaining or holding market share across the majority of our toy revenue base and continue to build momentum in our digital games business.

Adjusted gross profit was $210 million, down $13.8 million year-over-year, reflecting lower total revenue due to the temporary slowdown in U.S. retail orders early in the quarter, partially offset by growth in the digital game segment.

Adjusted gross margins declined 190 basis points, also driven by the performance of the toy segment, which I will elaborate on shortly. Adjusted SG&A increased by $9.1 million to $196.6 million or 49.1% of revenue due to investments in marketing which is partly time-related and higher selling expenses stemming from an increase in partner license brand sales.

Offsetting these higher expenses were realized savings, reflecting ongoing cost synergies related to the acquisition of Melissa & Doug and distribution-driven operational efficiencies. Taken together, lower gross profit and these targeted investments contributed to adjusted EBITDA of $29 million as compared to $54 million in the prior year.

Now before providing an overview of our creative center performance, I'll take a few moments to update you on the meaningful progress the team has made on optimizing our long-term cost of operating structure as we navigate through this dynamic environment. Beginning with Melissa & Doug, we have achieved our target run rate cost synergies ahead of plan.

The integration of Melissa & Doug continues to yield positive results with over $5.6 million in cost synergies realized in Q2, which now represent $26.5 million in annualized run rate cost synergies. In addition, significant progress was also made against our tariff mitigation plans.

We expect Q3 to represent approximately 36% of our full year GPS compared to 41% last year. Additionally, gross product sales were impacted by the timing of key planogram resets, which shifted into the second half of the year.

We estimate this had an impact of approximately $25 million in the quarter. Within our toy categories, we saw strong performance in preschool, Infant and Toddler and Plush categories led by increases in Melissa & Doug and Ms.

Rachel as well as solid growth in Wheels & Actions category, supported by increases in DreamWorks Dragon and DC. This is offset by lower sales in Activities, Games and Puzzles and [ Dolls Interactive ] in outdoor categories.

Gross profit for Toy segment declined year-over-year, reflecting lower revenue and decrease in gross margin. The margin pressure was driven by various factors, including higher sales allowances, which increased to 13.2% from 11.9% last year.

As we supported our retail partners to heightened promotional activity to drive share. Additionally, product mix had an impact on our gross margin as we strategically moved inventory in off-price and discount channels to meet retailer demand for onshore product availability.

The decrease in toy gross profit, combined with higher SG&A translated to toys adjusted EBITDA loss in the quarter of $700,000 versus adjusted EBITDA income of $20.9 million in the prior year. In the Digital Games segment, we delivered strong growth with revenue increasing 33% to $46.3 million.

This marks our third consecutive quarter of year-over-year growth, driven by higher in-game purchases in Toca Boca World and continued subscriber growth across our Piknik platform. We are beginning to see the benefits of the deliberate actions taken over the past year to sharpen our focus and concentrate resources on our 2 core platforms.

In line with this strategy, we made a decision to pivot away from Toca Days and as a result, recorded an impairment charge of $16 million in the quarter. Over time, we plan to incorporate many of the Toca Days play features into Toca Boca World, to strengthen the overall experience.

Within Piknik, our efforts are centered on subscriber growth and retention, ending the quarter up from last year and sequentially to 479,000 subscribers. Adjusted operating income for digital gains increased by $1.8 million and margins declined slightly to 16.6% from 17% in the prior year, reflecting our successful ongoing investments in paid user acquisitions.

We're encouraged by the momentum in Digital Games creative center, which reinforces our confidence in achieving stable to modest increases to sequential quarterly revenue in 2022, supported by continued investments in a growing user base in the second half of the year. Turning to Entertainment.

Revenue decreased by $4.3 million to $32.1 million, driven by lower distribution and licensing merchandise revenue. Entertainment adjusted operating income declined by $2.3 million to $17.7 million, with adjusted operating margins staying relatively flat at 55.1%.

So moving back to our consolidated results. During the quarter, we generated $26.1 million in operating cash flows, this was primarily driven by our continued focus on optimizing inventory levels.

As is typical, given the seasonal nature of our working capital cycle, the second quarter resulted in negative free cash flow of $15 million compared to negative $4 million in the prior year. The year-over-year change was a result of our planned investment in the entertainment segment as we continue to advance development of the third PAW movie and new concept for Unicorn Academy.

From a capital allocation perspective, we returned just under $19 million of capital to shareholders by way of our quarterly dividend and the continued execution of our NCIB. This brings our return on capital on an LTM basis to $96 million, while reducing our net debt by $60 million.

So in closing, we remain firmly focused on returning to consistent profitable growth trajectory. As Christina explained, this will be accomplished through a deeper collaboration across our creative centers and maximizing the impact of our innovation, brand and capabilities in the children's entertainment space.

With enhanced discipline in our execution, we aim to deliver an attractive total shareholder return. So with that, operator, that ends the formal part of the call, and please open the line for questions.

This is Andrew on for Brian Morrison. Maybe we can start with the Q2 '25 results.

A lot of moving parts in the quarter. Your revenue performance was decent, but you had some additional costs on the toy segment.

Wondering what is your view on the quarter? And what should we read through in the back half of the year in terms of improving on these results?

Yes, Andrew. thank you for the question.

Let's start with the quarter and then let's talk a little bit about the back half. From a quarter perspective, from a top line, I think the team had a really strong job in light of kind of the larger macro economic environment.

And across almost every metric that I've seen, we've done really well. And whether that's growing faster than our peer set or whether that's taking share across the majority of our revenue base and growing fast, taking more share than our competitive landscape.

So I think from a revenue perspective, I'm proud of what the team did. Obviously, there was the backdrop of -- in April a real slowdown in FOB orders.

If you recall back in April, there was a significant amount of tariffs coming out of China for China products into the U.S., and that certainly slowed down the order profile. Like a key metric that I've seen is like 3, 4 weeks where really order just like -- were really slow.

Another element is we saw some planogram resets take place later in the year. So 2 of our larger retailers for about $25 million push the reset into October versus earlier in the fall, and that obviously shifts our revenue from a Q2 to an H2 story.

So actually, if you would just adjust for that $25 million, we had some pretty impressive growth, like 3%, 4% in the toy sector -- in toy segment and versus the industry, I think that's pretty impressive. From a gross profit perspective, like we are leaning in to taking share.

I mean you see it in our results. And so we were comfortable investing in selling in as well as selling through the product.

And so there was always some pressure or decline in our gross margin as a result of that. That was a conscious choice as taking share is something that's really important to Christina and the larger management team.

From a cost perspective, our costs came in versus last year higher, obviously, from an SG&A perspective, at a consolidated level. I think you kind of have to break that into a few different categories.

we provided like more than $10 million of cost reduction around our synergies, around our tariff mitigation plan, but we are investing in the business. And so we are investing and making sure we have the right product for the back half of the year in 2026.

There was some increased marketing spend this quarter. And so as a percentage of our net revenue is certainly higher, which when I shift to the back half, I'll talk a little bit to that.

But a big portion or at least a decent portion of that was timing, timing related in that we had a lower revenue base, and we were supporting the POS in the quarter. We'll get the benefits of that spend in the back half of the year.

So like when you think about the quarter, like what I look at is top line, we took share. We made a conscious choice to sell in product and sell through product and it's working, and that serves us well into the future.

And then from a cost perspective, there's a significant portion of that, that was timing related as we had a lower revenue base. So then your second question is how does that go for the back half of the year?

The back half of the year, we have amazing products. We have the right price points, more than 50% on the toy side of our products are going to be below $20 in the most important holiday -- an important holiday season, which is the most important part of our year.

Our theatrical releases are doing incredibly well, How to Train Your Dragon. Melissa & Doug had a great Q2, and so we're going to keep working on that.

Monster Jam, Hatchimals. We have great products, great gains in market share in some of these categories -- some of these product lines that I just shared with you.

So from a top line, we're focused on just continuing to gain share. That's our #1 goal in a market that has a lot of uncertainty, and that uncertainty ultimately can play out by a shift -- so there's a little bit of uncertainty in the market.

That's a summary of kind of Q2 and I'll elaborate a little bit later on some questions on the back half of the year.

That's great color. And then just maybe as a follow-up, recognizing that the tariff situation remains fluid.

But with all the actions taken to date with respect to tariffs, just wondering if you're able to quantify maybe the direct and indirect expenses you anticipate you may be able to recover in 2026.

Sure. So when you think of tariffs, you got to think of 2 functions.

There's the actual tariff cost and then there is the change in retailer behavior and obviously that how consumer behaves. Just to elaborate a little bit on those.

The retailer has made a change in how they're buying. So you know that the majority of our business was and it continues to be an FOB, but DOM is becoming much more important as retailers are, if you will, delaying the purchases and we're relying more on onshore replenishment than they've historically done.

So that's an element that will affect our volume. And that will lead to destocking ultimately, like one to think about it is that it will lead to destocking in the industry as they have that shift from FOB to DOM as well as that they are being more conscious to their inventory levels.

The second element is the consumer. We took share in H1, our H1 POS Per Circana in our TAM was essentially flat.

And so Q2 was very high. That's when the Easter period was.

Q1 was from a POS perspective lower and so it was essentially flat. But without higher than the industry.

The industry was negative 1. So how the consumer reacts on the back half of the year.

I think that's still question marks as there could just be less dollars available for them as they're working through potentially higher prices across our large basket of goods, not just on the toy side. Then there's the actual cost themselves.

And so from a cost, we can quantify the cost and then we have offsetting price. We're essentially recovering like 80% to 85% of the actual cost with price in the near term.

And in the longer term, we're going to fix that through our mix. We're going to address it through the products that we bring out to the market and ensuring that we have to continue to have the right mix.

Now in overall, like dollars because that was your question, I think you can think about it this way. Like for the full year, if I over like put everything together, tariffs probably have an effect of about $90 million, and we have cost savings that we put in place and including Melissa & Doug's synergies about $60 million, $65 million.

My first question, I'm trying to understand where Q3 and Q4 will land. It sounds like there's a lot of timing-related issues.

Jonathan, you talked about some retailers shifting their purchases from FOB to domestic delaying revenue recognition. planogram resets delays.

This sounds like it's all delays and shift. So I'm wondering -- I understand you don't have any guidance.

You haven't restated your guidance. But help us understand a little bit where you could land in terms of revenues for Q3, like there a potential for you guys to go back into a growth mode in terms of revenues on a year-over-year basis for Q3?

Let me take a step back. So we have 3 creative centers in our business.

Obviously, I'll come to [indiscernible] the largest, but let me talk about the 2 others first, just to help, help give you a little bit more information. From a Digital Games perspective, our focus, I think it's about 12 months -- over the last 12 months has been to really focus down on these 2 platforms.

You've seen Christina and I, we're here for about 90 days, and we've already made some decisions around ensuring that we were getting the right return of capital on investments that we made. And that was the decision around Toca.

That drove the Toca Days decision. It's working, right?

We had double-digit growth, and we expect that double-digit growth to continue in the back half of the year in Digital. On the Entertainment side, essentially we can -- that's an easy business to model in year and essentially the year-over-year loss, I mean, it happened in H1.

We can model that out and sort of other factors taking place, it's a pretty stable business. So then it comes down to the toy side.

And I think in my prepared remarks, we gave some kind of percentage of ultimately how that could look like from a GPS perspective. So let me talk to you about more of an H2 as opposed to trying to get really specific in Q3.

The 2 factors at play that we have to be thinking about. So we're not giving guidance, but it doesn't mean that we're not running our business.

And when we're running our business around the inventory levels that we want to have the promotional spends, et cetera, there are some assumptions that we're making. And I think there's 2 critical assumptions that we're making.

Assumption number one is that based on what retailers have said publicly. And based on how they've shifted their buying patterns, we do expect destocking like ultimately for them to be holding less inventory as they finish the year.

That is predominantly a U.S. event, but there's also some international at play there, and that's more kind of micro to us than necessary macro to the industry.

So that could be a significant number that destocks in kind of the $70 million to $90 million range. From a POS perspective, again, H1 where we took share, we outperformed the market.

And that's Per Circana, publicly available information, it's clear. We are outperforming.

We're doing -- we're very proud of the performance we've done versus the market. We are aware that the consumer could be more stressed in H2, and there could be some negative POS pressure.

That being said, because our inventory is onshore, because we have the ability to quickly respond and because we have phenomenal products and because 50% of our products are below $20, we are ready to replenish and refill the pipeline as we sell through the product, and that's what we're focused on is selling the products through the retailers in the back half of the year.

Okay. And maybe just a follow-up.

You touched on lease stocking by retailers and you say that this could be a headwind of $70 million to $90 million. As of the end of Q2, can you talk a little bit about your inventory levels, both at your warehouses and at retailers are they elevated?

Are they in line with historical levels? Any color would be great.

Well, you see in our financials, actually, they're lower than last year. I mean 1 of the things that we did take advantage of in Q2 is looking at our inventory position onshore in the U.S.

and saying, hey, what products do we have that ultimately could fill shelf space and even gain additional shelf space and additional doors in the market. So from an inventory position, we're well incredible -- positioned coming out it really served us well, quite frankly, our inventory position around Prime because we had a very, very -- we're very pleased with our Prime performance.

We again took share in Prime and outperform the market. So from a kind of underlying performance, we continue to take share.

We continue to outperform the market. And from an inventory position, we're -- you've seen our results well positioned, and we're planning to be well positioned in the back half of the year.

And then lastly, from a retailer perspective, they, they are having lower inventory levels, which has obviously some near-term transitiontory period for us. But as we head into 2026, that really only becomes upside.

And Martin, as you may remember when you were at 1 of our Investor Days, we talked about growing and expanding in the value channel. So we've done that as well in the last 12 months.

We really penetrated that channel to add extra distribution across our product lines, and we're seeing growth there as well.

Okay. Let's hope this is the worst quarter you to ever have to report.

You have them as well.

All kidding aside. I mean, Jonathan, this is another example with the stock having dropped as much as 18%.

Just another example of maybe some better communication around the quarter, around the quarter, especially when there are certain moves and actions being taken by the company because the surprise here in terms of the EBITDA pressure is more in terms of the added marketing spend. And again, a lot of this conversation goes back to timing, right, timing of spend on cost, the timing of some of the top line.

So if I could just start with -- I know we're not going to get much guidance out of you, but I was surprised that you said 36% GPS contribution in Q3. And so it then begs the question.

Do you guys think you're going to deliver growth for the year in GPS and total revenue? Maybe I'll start there.

A lot to take in there, Adam. I appreciate the color.

So this year, this year is certainly a transitory year. And I think by explaining that destocking and explaining that even though we are taking share and even though that we are outperforming the market, the TAM in which we're playing, you would suggest that ultimately, no, there would not be growth this year, if you take those 2 comments.

So I think that's been pretty transparent. And when [indiscernible] your frustration and understand it.

And I think that's what Christina and I and the management team are working towards around ensuring that we have a very clear story, very transparent in terms of how we see the performance, which I think you're seeing some pretty transparent words that we're using. And then there's obviously improving the execution and bringing us back to profitable growth.

I mean in my prepared remarks, the words were there, we're going to go back to profitable growth. So we were very clear that this year, that is not happening.

And it's not happening because of factors that are wider macroeconomic events that we're doing -- I believe, an exceptional job of navigating through. The areas that are not affected by tariffs are doing well.

Europe, as an example, Digital Games. And the tariffs ultimately are transitory.

I mean we have to work through it. We still don't know the official rate yet for one of our larger manufacturing hubs.

But once we have that and once there's clarity, then we can start executing against our plan. And ultimately, we're turning back to that profitable growth that all of us want to and are striving to achieve.

And it comes from investing in the innovation engine of this company. We have a phenomenal brand.

Yes. I think, look, I think with the new CEO, new CFO, this was destined to be a pseudo kitchen sink quarter so to speak.

But I hear you on the GPS, that's helpful. If I can then just unpack the disclosure around the $90 million of tariffs and then more specifically, the cost savings of $66 million.

So a few months back, we had heard that the company was pursuing about $100 million in OpEx savings combined with some CapEx deferrals to get to about $100 million of cash flow savings. So if we dig that into the $66 million, which sounded like it was specifically OpEx related, as you said, Jonathan, like how much are you leading in on that Melissa & Doug stuff, which to be as in the past?

Because I would have thought that pursuant to those prior disclosures that you would have had about $60 million of OpEx load through mitigation activities to deal with the tariffs. So maybe help it.

We're still on track with those prior disclosures?

I mean there's an example of disclosure that lends itself to confusion, right? Because cash savings.

I mean, I don't, I [indiscernible]. So I was very clear in my prepared remarks, again, about this kind of clarity and OpEx and CapEx, and let me give you a little -- kind of give you a range, I think, $80 million and $90 million.

And let me be even more clear. About 2/3 of that is OpEx, about 1/3 of that is CapEx.

So that kind of gives you the tariff mitigation savings. And then year-over-year, I mean, the team has done a phenomenal job of integrating Melissa & Doug way ahead of plan, right?

We've hit our run rate synergies this quarter. So year-over-year, we have about $12 million-ish of Melissa & Doug.

And then the rest is the 2/3 of the $80 million to $90 million range that I gave you. So that's where the savings come from.

It's a mixture of looking at what we're doing and saying, are we getting the economic return? Are we getting the proper return on invested capital on these activities.

If we are, let's keep doing it. If we're not, let's discuss whether we can.

And if we don't think we can, let's stop doing it. And that's the activities the team is doing, and you saw it within, again, 90 days, a decision around Toca Days.

And so there's more of that, that obviously Christina are going to go do as we look at our investment portfolio and ensuring that every dollar that we put into the business, we're getting an attractive return.

I guess this one is more so for Christina. But I was just kind of curious if you could expand on your pricing actions.

How much price have you taken so far? Can we expect you to take more price?

And when will that be hitting shelves?

I'll jump in and then Christina can add some more color maybe just on the back half of some of the great products that we have around the H2. From a pricing perspective, I think what I shared is that we were able to -- ensuring that our customers and our consumer -- more importantly, our consumers have a great offering, that is our #1 goal at really competitive prices.

And so remember by looking at price, but then also managing mix, more than 50% of our SKU base in H2, the highest propensity to spend period will be below $20. We did take some selective pricing actions that will be reflected obviously in retail prices, and those happen early in Q3.

And they represent probably about -- if you remember, when I explained tariffs, there's the at tariff cost and then there's the volume aspect, and that was how we got out to that larger number. But a much smaller portion of that is just the tariffs, and we were capturing about 80%, 85% of the increased cost.

So from a kind of position perspective, we're well suited from additional prices -- we're going to really focus and lean in on mix in 2026 as opposed to pricing. But we're really well positioned.

And maybe, Christina, you want to talk a little about pricing [ mix ].

Well, I think in that the major note, Jonathan, on that, we're really looking at the pricing mix and having across our portfolio, about 50% of our products be under that $20 price point. In addition to that, we have some really great products to be excited about coming to market across all our major brands, PAW Patrol, Gabby's Dollhouse, Ms.

Rachel, Monster Jam and then rebuilding gun. There's a lot of great stuff coming.

So I think across Melissa & Doug as well. So we're confident in our product pipeline and our innovation that we're delivering to retail this fourth quarter or through the back half of the year in total.

And like I said, it's mostly about making sure we have the right pricing mix across the category, and we feel like we're going into the second half with that well in hand.

And if I can look even further out, 2026, first of all, we want to have the headwind of the destocking. In fact, depending how retailers behave, but it could actually be a tailwind.

And we have -- as you know, the PAW Patrol movie is coming out PAW3, [indiscernible]. We're going to see -- we're really excited about kind of the early cuts that we've seen and ultimately, what that's going to happen from a toy and a merchandising perspective.

There's some great new products coming out in Gund. HEXBUG, we're really excited with the innovation that we're seeing.

Monster Jam, I mean, the momentum is strong. And when I see the innovation that's coming out next year and that international -- and further international expansion, we're really excited.

Obviously, Ms. Rachel the momentum is really strong.

So -- when we look past the event H2, we -- into next year, going back to, I think, Adam's question, we're we are working towards returning to profitable growth, and we have all the building blocks in place to get us back there, and that's where our focus is.

Great. No, super helpful color.

And then just 1 follow-up. I know you're lapping some Melissa & Doug inventory, but I was just wondering if you could talk a little bit more about your inventory composition specifically bridging that year-over-year gap especially in the time when your toy peers are seeing elevated inventory growth and more of the industry shift to that domestic inventory?

Thanks for the question. I think this I think this is one of the -- going back to even Adam, like just being able to tell our story a little cleaner.

I mean we took share -- we made a strategic decision to invest in selling in and then once it's in, selling through. That is above the market.

that leads to lower inventory. And that's why our inventory is down year-over-year as we made these kind of decisions.

We open doors, we take more share, we take more space and that positions us well for the following years. So from an inventory position, I mean, you're seeing it like it all comes together.

You're seeing our inventory fall in Q2 versus last year as we've been selling in product and selling through product. Now the good news is in H2, our marketing spend will be much more in line with last year, perhaps even lower.

Now Q3, it was really low last year. So I'm just saying from an H2 perspective, when you look, they'll be much more consistent this year than last year, and I expect that to come in as lower percentage.

And our sales allowances is -- this year coming in the back -- the second half of the year, we'll continue to be focused on selling and product and making sure they're selling through. But ultimately, we would expect that our sales allowance to be roughly in line with last year's numbers as well.

So I noticed in the supplemental slides relating to tariff mitigation that the previous specific targets you gave around Vietnam sourcing have been removed. I'm just wondering if there's been any shift in that sourcing strategy with some of the more recent tariff developments.

And if you could explain the reasoning behind that.

Yes. No, look, Vietnam -- going back to our mitigation plan, let's go through the 4 buckets.

Bucket one, if you recall -- if you will recall was around diversification out of China. The team has done, again, really strong work last year the -- on average, 64% of our U.S.-based cost of goods sold was coming from China.

And this year, we're going to finish at 37%. So it's a significant drop.

Where is that going? A portion, a large portion is going to be Vietnam.

And so we're setting up those -- that production and it's going incredibly smooth. In fact, some of the -- there's some transitory costs that we're seeing, but ultimately, the underlying cost profile is as or look as attractive or more attractive than China.

Now there are products that we can't take just to Vietnam and has to remain in China just because of the sheer -- the infrastructure around those technical products remain in that country versus Vietnam. But we are diversifying out our base.

We have important operations in India, important sourcing out of India, Indonesia, even Europe. So it has kind of a broad base.

That was the first element of our tariff mitigation plan. The second element was being optimizing the supply chain.

You've seen it in Q2, where we took advantage of the inventory that we had within the U.S. And secondly, we've also been able to mitigate the actual tariffs by changing the mechanics of how we sell, and those are kind of well documented around first sales, et cetera.

So that's a huge -- that's another important lever. The third lever was the pricing actions, which I've elaborated on already.

And then the fourth lever was the savings, which essentially is -- on the top end of the range is essentially the same number that was given before, but now I've been able to specify what's OpEx and what's CapEx. So from a tariff mitigation plan, again, the team is executing on what they said they would do.

Okay. Great.

That's very clear. And then Jonathan, with respect to the NCIB, you're about 3 quarters through it.

At this point, you've continued buying back stock through Q2 and into July. I guess what's your thinking around buybacks for the balance of the year?

And do you think you're in a position to fully execute on the NCIB, assuming, of course, that your shares remain cheap and attractive?

Well, we always think that they're undervalued. Let me raise that up a little bit to kind of capital allocation, if I can, and obviously kind of address your specific question.

our view, my view and our collective view here around capital allocation as follows: The first is that we are committed to investing in the business. We're committed from an OpEx perspective and from a CapEx perspective.

I think Christina and I are incredibly committed to ensuring that we're getting the right return on those investment dollars. And you've already seen actions that we've taken, and that's kind of the lens in which we see the world.

And so -- it begins with investing in the business and being very clear on what kind of returns we want to get when we invest in the business. The second element is returning capital to shareholders.

If I look at the LTM, we've essentially given -- brought back over $100 million to shareholders, both through the quarterly dividend and through the NCIB, which is your question, I'll address that, as well as pay down debt by $60 million. So this is a -- maybe one thing that's misunderstood about this business is that we do generate a lot of cash even after the investments that we make back in the business, and we return it to our shareholders.

With regards -- I'll finish, and then I'll come back to answer you. Lastly, M&A continues to be an important factor of how this business has grown.

This is a 30-year-old business that essentially is over $2 billion of revenue. M&A has played a role in that.

We're looking on the toy side to continue to supplement the product categories that we're in as well as enter new categories that have potentially higher growth. And then on the digital side, we continue to build out the capabilities that we have across our 2 platforms.

So specifically with regards to the NCIB, we believe in a capital allocation that is disciplined, that you can model and that is repeatable, unpredictable. And so if we're active in the -- if we issue an NCIB, it means that we're going to execute against the NCIB, that's the reputation that we want to have.

Okay. That's great.

And Jonathan, if I could just sneak in 1 more quick one. I appreciate that you guys obviously didn't reintroduce the guidance this quarter given that you both only started within the last few months.

But is that something that you're aiming or planning to do during the Q3?

Let's -- look, let's cross that bridge when we get there. I mean there's 3 factors as to why we chose not to.

It's not that we're not -- it's not because we're new. There's 3 factors.

Factor 1 is the actual tariffs, what's happening. Factor 2 is can we get a good sense of how retailers are behaving or buying patterns, excuse me.

And then the third is how the consumer is going to react. Like on the first one, we're probably a week away from having some clarity, right?

I think there was one last big country, and that should be hopefully resolved in the coming weeks. And then as we start getting comfortable that we can understand the change in DOM and FOB and the implications, as well as how the consumer is reacting to the -- whether there is or isn't inflationary in the wider kind of basket of their goods, that's when we would make the decision as to come back.

So I don't want to call it a day, but those are the 3 factors that held back being able -- our decision not to give guidance, reinstate guidance this quarter.

Yes, Jonathan, I still -- I think we'll take this offline just need to better understand kind of all the OpEx tariff impact and cost savings and stuff, but we can do that off-line. I think bigger picture, just 2 questions and maybe to both of you, frankly, but obviously, Christina, maybe with the emphasis on you.

When you look at the overall toy business, outside of the things you can't control with respect to tariffs and macro. Is there anything that you see as kind of meaningfully broken or needs fixing relative to perhaps what the rest of us see.

And then secondly, on strategy, Christina, I would be curious just to get an update on where the strategy for the broader company is shifting on the margin? I know in the prepared remarks, there is some commentary on that front, but maybe you could drill down a little bit more for us.

Drew, a couple of things. I would say that I don't think that I believe anything is meaningfully broken.

I think we came out earlier this year and said that as it relates to toy that we're going to go and compete in the places where we can be #1 or #2. And I think you see us doing that and executing against that.

So I see it more as a bigger opportunity long term. One, to continue executing there but as well as looking around to other categories that we can then -- we can open up and compete in as well.

So I think that is core to the toy strategy as well as looking at other -- we're growing in Infant, Toddler and Preschool, what else can we be doing in those spaces. We have great brands that are wholly owned by Spin Master as well as when you look at the success of the box office and how that's translated to growth for us in top line, whether with How to Train the Dragon, Gabby's Dollhouse is yet to come, Superman.

So we've been in some of the really big box office movies. And next year, we have 1 of our own coming in PAW Patrol.

So we really believe in that property and what that can continue to do. So I think when you look at our numbers this year, it's a known off year out of the movie cycle.

And next year, we will be back with another great movie with a great theme. And as Jonathan mentioned earlier, really getting a look at the first cuts in the first few weeks I've been here and couldn't be more impressed.

It's not easy to make a third movie that's possibly better than the first or second one, but I really do think the team has done great work there. I also would like to say outside of the toy business that we're expanding distribution.

We're getting in front of our audiences in a bigger way. And I think ultimately, when you back out and you look at how that drives our business, it's really a critical part.

This month, we went -- we've found some -- not found, we have some new distribution outlets. So whether it's PAW Patrol debuted on Netflix in the U.S., the first couple of seasons there.

whether you look at Vida the Vet or Unicorn Academy getting placed onto Nickelodeon in additional second window or you look in the greater European market on some other second windows that we're getting for Vida the Vet. So I think the more we can go where our audience is, the more we can be consumer-minded and our strategy, the more successful we will be driving our business, whether it's in any of the 3 core creative centers.

As much as we spent a lot of time talking about toy this morning and understandably why, given the tariff situation, the macro economics around it. I don't want to overlook the fact that we are positioned as an integrated children's entertainment company.

So by that, I mean we have strong muscles in 3 categories and how to cross- collaborate is one of the ways we will unlock value in the future. Jonathan alluded to or directly said, focus, focus, focus and how we can go deeper on the things that are really working for us and how we can then look to create net new.

Now on this call, I'm sure we don't want to talk about that so much because that provides a longer-term value, and you're looking so much further out. But I feel confident that what we have the capability to put in the pipeline for innovation in toys as well as content and digital content is second to none.

And as I look further that's really where I see the opportunity is that we continue to strengthen the 3 creative centers. You see Digital really growing this quarter and grew 33%.

Looking at that kind of growth and knowing what's in the pipeline in the second half. For Toca Boca World, we're better positioned for more content throughout the entire second half than we had in the first half, looking at how we can continue to test pricing how our live operations plays into it.

So when you look at live ops content, pricing and promotion that we have coming, we believe we have a strong second half, the Toca Boca in line. Piknik, we're getting top line growth as well.

we have a portfolio of skills in that -- in those games, whether it's math. Now we have a coloring game, we have language games, consistently looking at how we can gain engagement there and add to that portfolio and therefore grow it.

So I understand the focus on toys, it's absolutely necessary. But I ask as we back out and look at the business holistically, I think we're making strides and using diversification to our benefit.

I believe in the talent that's inside this organization in both our capabilities on innovation and now it's our job to start putting more of that into the pipeline. So you can see how we're going to get sustainable growth in the future.

And that's really what I'm pushing towards.

Yes. That's helpful.

Christina answered my third question on the Digital Games outlook in the back half here. So that's good for me.

I wanted to dig a little deeper on this the retailers that are deferring orders into the back half of the year? And specifically, I'm trying to get a better understanding of what you're thinking as far as sales allowances because there are a lot of moving parts here, right?

There's this FOB versus domestic mix. But then also, it feels like the selling window is going to be a little bit shorter.

We don't know where exactly the consumer is going to land by the time the holiday spending season sort of rolls around. In my mind, that does increase the risk of potential markdowns and there being more charges when it comes to sales allowances specifically.

So can you -- I realize that you're not giving guidance as of yet, but can you just frame up for us specifically what your expectations are when it comes to the sales allowances in the back half?

Sure. No.

I mean, that's exactly -- I think some of the words we used exactly kind of reiterate why it's so difficult to be able to come out and be -- give formal guidance. But what do we know?

So what we know is just continue to reinstate -- reinforce is, we're gaining share and we're taking share in H1. Christina walk through why we have a strong H2 in terms of our product categories.

And so I don't see a reason why that won't happen again. We are going to support that, though, and we will support it through both marketing dollars and through sales allowance.

Marketing this quarter because revenue is smaller and because the timing, there's a higher proportion of marketing as a proportion of net revenue, and we expect that to come back down to in line with last year, if not lower in H2 as our revenue base grows. And then -- and we take advantage of the spend that we had in Q2 that will help us in Q3 and onwards.

And then specifically around sales allowance, like your specific question, Sales allowances were higher in Q2 than last year. It goes again to the strategy that we've had around gaining share, making sure that if we put product in, it sells through and making sure that we open up new doors and Christina talked about that through the value channels being an example, and then making sure we're supporting our retail partners so that it's profitable for them as well.

But when we look specifically in H2, I don't really see right now based on how the consumer is behaving, any real material increases in H2 versus last year. In fact, maybe there could be some decreases because we have such a strong product category.

And because, again, 50% of our SKUs are below the $20 mark, it could even potentially be a little bit lower than last year from a sales allowance perspective.

Okay. And then for my follow-up, I just want to make sure I heard this correctly.

I know in the past, you gave the target of getting to 70% of your sourcing coming from outside of China by the end of the year. And I think I heard you correctly, Jonathan, that you're on track to have it be 37% of your product coming from China by year-end.

Did I hear that correctly?

Yes. I think there's an exactly -- not to -- being clear in of -- that number that you were stated, I would say before is right, but then what ends up happening is it's part of it's seasonal based.

And so we said, well, look, let's take away from the seasonality and let's just give you an average number. So the average number we will finish at 37%.

But I would say that's in line with kind of the other way that it was shared with you last quarter. But this is a better way of looking at it average for the full year because each quarter, there are seasonal aspects of what's being bought from China or other countries.

So in the spirit of being more transparent, giving clear data, this is an example of what we're doing. But it's not -- I know the number is different, but it's still the same logic.

We're just giving you an easier number to -- a truer number for the year and not benefit, say, from seasonality, which -- that number that you had had that benefit in it.

Okay. Sorry.

So the 70% had the benefit of seasonality in it, you're saying?

Correct. And so now by saying an average for the year were 37%, I think it's a cleaner number for you to -- 37% coming from China to the U.S.

that's a cleaner number for you. And we gave you the comparison of last year, which was 64%.

Yes, I just wanted to dive in just on the Activities, Games & Puzzles segment because I know it's obviously down in the quarter, down 6 months. Just wondering, is there one in particular, that's really driving that decline?

Or is it the 5 or 6 that you listed in the MD&A. I'm just wondering if there's anything that really stands out?

And when do you think that, that segment might return to growth?

Yes. So why don't I take this quarter?

And then Christina, maybe talk a little bit of some of the work that I know the team is doing around bringing back growth to our Games, to that section as we look kind a little bit further out. In the quarter, I mean, there's nothing specific that I would call out more than what's in the prepared remarks.

We have a portfolio approach around our product categories. Again, the vast majority of our revenue base took share.

And so more -- comfortably more than 50%, more like 2/3 of our revenue base took share. So when you have a portfolio approach, there will be some categories that won't be taking share.

And so that was one of the categories. We recognize that there is -- going back to Christina's comment around innovation.

This is an area where we know we want to lean in, and we do believe that -- and we know that we can return to growth in this category. And so Christina, if you have any comments you want to about the category itself longer term?

Yes. I think as Jonathan just said, that we know that there is a growth in this category and returning to growth is important to us.

I would go back to my earlier comment about focus. We have a pretty wide portfolio of products and doing the proper sort of assessment about where we can grow, where we can, what we can lean into is the work that's being done.

I also would say that we're coming off of Rubik's, which was a year anniversary last year that definitely helped in that category versus this year. So it's looking for opportunities like that and looking for some new games and innovation that we can use to drive that category.

So I would just say keep an eye on it moving forward, it's definitely something we're focused on.

Well, thank you, everyone, for joining us, and we look forward to speaking to you again in our upcoming third quarter call in October of this year. Thank you.