Good morning, ladies and gentlemen, and welcome to the Spin Master Corp. Second Quarter 2025 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press zero for the operator. This call is being recorded today, Thursday, July 31, 2025. I would now like to turn the conference over to Sophia Bisoukis. Please go ahead.
Thank you. 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 convenience, 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 about Spin Master Corp.'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 31st, 2025. Except as may be required by law, Spin Master 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, and partnered with. Brands like PAW Patrol, Melissa & Doug, Monster Jam, How to Train Your Dragon, and 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 purchasing patterns within toys 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 three creative center approach.
In the second quarter, tariffs caused retailers to temporarily pause orders and, in some cases, delay holiday set 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 our growth 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 within our portfolio helped to strengthen our market position.
Our licensed business grew 43.1% in the quarter, outpacing industry growth per Circana, thanks to a roster of popular licensed toy partnerships, including Monster Jam, How to Train Your Dragon, and Gabby’s Dollhouse. Speaking of Monster Jam, this brand is fueling consistent growth with us. Within the vehicle category, POS for Monster Jam grew 13.1% in the quarter, enabling us to take share, maintaining its position as number two 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 have 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 of which debuted this month. Our last Unicorn Academy special dropped on Netflix on April 9th and beat our expectations for audience engagement, outpacing the competition. Unicorn Academy generated 70+ hours viewed globally in the first half of 2025. All previously released chapters for the series, together with the new special, landed into the girls' top five viewed content 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 two specials this year, one in October and our first ever Christmas special, which will air on both Nickelodeon and CBS Primet ime. 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 games had a strong quarter with double-digit growth and had an engaged player network with 58 million active users. Over the past year, we've taken steps to focus on the strengths 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've developed to future-proof Toca Boca franchise. These shifts 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 live services capabilities, deepen performance marketing, and strategic focus has been to diversify our revenue streams across our three creative centers. We have 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 a consumer-first mindset and bringing joy through engaging characters, stories, digital worlds, 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 three creative centers. We delivered revenue of over $400 million in the quarter during this complicated and challenging macro-economic 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 toy revenue due to the temporary slowdown in U.S. retail orders early in the quarter, partially offset by growth in the digital games 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. On a segment, 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's 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 represents $26.5 million in annualized run rate cost synergies. In addition, significant progress was also made against our tariff mitigation plan. 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 planned grand resale, 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 and actions categories, supported by increases in DreamWork's Dragons and DC.
This was offset by lower sales in our activities, Games and Puzzles, and Dolls Interactive and outdoor categories. Gross profit for Toy segments declined year-over-year, reflecting lower revenue and a decrease in gross margins. 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 through heightened promotional activity to drive share. Additionally, product mix had an impact on our gross margin, as we strategically moved inventory into 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 two core platforms. In line with this strategy, we made the 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 out of the digital games 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 2025, supported by continued investments and 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%. Moving back to 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 awarding capital cycle, the second quarter resulted in a negative free cash flow of $15 million compared to - $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 the development of the third PAW Patrol movie and new content 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 of capital on an LTM basis to $96 million while reducing our net debt by $60 million. In closing, we remain firmly focused on returning to a consistent profitable growth trajectory.
As Christina Miller explained, this will be accomplished through a deeper collaboration across our creative centers and maximizing the impact of our innovation, brands, and capabilities in the children's entertainment space. With inherent discipline in our execution, we aim to deliver an attractive total shareholder return. With that, operators, I end the formal part of the call, and please open the line for questions.
Thank you very much. If you would like to ask a question, please signal by pressing star one on the telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, a reminder, press star one to ask a question. We'll take our first question from Andrew Lopez with TD Cowen. You may now begin.
Thank you. Good morning. This is Andrew on for Brian Morrison. Maybe we can start with the Q2 2025 results. A lot of moving parts in the quarter. Your revenue performance was decent, but you had some additional costs on the toy segment. I'm 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?
Good morning, Andrew. Thank you. Thank you for the question. Let's start with the quarter and then talk a little bit about the back half. From the quarter perspective, from a top line, I think the team did a really strong job in light of the larger macro-economic environment. Across almost every metric that I've seen, we've done really well, whether that's growing faster than our peer set or taking share across the majority of our revenue base and growing fast, taking more share than our competitive landscape. 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.
A key metric that I've seen is there's three or four weeks where orders just were really slow. Another element is we saw some planogram resets take place later in the year. Two of our larger retailers, for about $25 million, pushed the reset into October versus earlier in the fall, and that obviously shifts our revenue from a Q2 to an H2 story. If you would just adjust for that $25 million, we had some pretty impressive growth, like 3%, 4% in the toy sector and toy segment, and versus the industry, I think that's pretty impressive. From a gross profit perspective, we are leaning into taking share. You see it in our results, so we were comfortable investing in selling in as well as selling through the product. There was 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 I and the larger management team. From a cost perspective, our cost came in versus last year higher, obviously from an SG&A perspective at the consolidated level. I think you have to break that into a few different categories. We provided more than $10 million of cost reduction around our synergies, around our tariff mitigation plan, but we are investing in the business. We are investing in making sure we have the right product for the back half of the year in 2026. There was some increased marketing spend this quarter. As a percentage of our net revenue, it's certainly higher, which, when I shift to the back half, I'll talk a little to that.
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. When you think about the quarter, what I look at as top line, we took share, we made a conscious choice to sell in product and sell through product, and it's working. That serves us well into the future. From a cost perspective, there's a significant portion of that that was timing related as we had a lower revenue base. Your second question is, you know, 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. We're going to keep working that. Monster Jam, Hatchimals, we have great products, great gains in market share in some of these categories, some of these product lines I just shared with you. From a top line, we're focused on just continuing to gain share. That's our number one goal in a market that has a lot of uncertainty. That uncertainty ultimately can play out by, so there's a little bit of uncertainty in the market. That's a summary of kind of Q2.
I'll elaborate a little bit later on some questions on the back half of the year.
Thank you. That's great color. Maybe as a follow-up, recognizing that the tariff situation remains fluid, with all the action taken to date in 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. When you think of tariffs, you have to think of two functions. There is the actual tariff cost, and then there is the change in retailer behavior and obviously how the consumer behaves. Just to elaborate a little bit on those, the retailer has made a change in how they're buying. You know that the majority of our business was and continues to be on an FOB, but DOM is becoming much more important as retailers are, if you will, delaying their purchases and relying more on onshore replenishment than they've historically done. That is an element that will affect our volume, and that will lead to destocking ultimately. One way to think about it is it'll lead to destocking in the industry as they have that shift from FOB to DOM, as well as being more conscious of 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. Q2 was very high. That's when the Easter period was. Q1 was, from a POS perspective, lower. It was essentially flat, but that was higher than the industry. The industry was - 1. 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. From a cost, we can quantify the cost and then we have offsetting price. We're essentially recovering like 80%- 85% of the actual cost with price in the near term. 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 we continue to have the right mix. Now, in overall dollars, because that was your question, I think you can think about it this way. For the full year, if I put everything together, tariffs probably have an effect of about $90 million. We have cost savings that we put in place, including Melissa & Doug synergies, about $60 million, $65 million.
That's great. Okay, that's all for me. I'll jump back through the queues. Appreciate the color.
Thank you. Our next question comes from Martin Landry with Stifel. You may now begin.
Hi, good morning, Christina and Jonathan. My first question, I'm trying to understand where, you know, 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 shifts. I'm wondering, you know, I understand you don't have any guidance. You haven't restated your guidance. Help us understand a little bit where you could land in terms of revenues for Q3. Like, is 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?
Thank you, Martin. Let me take a step back. We have three creative centers in our business. Obviously, I'll come to talk to toys, the largest, but let me talk about the two others first just to help give you a little bit more information. From a digital games perspective, our focus, I think it's about 12 months, or the last 12 months has been to really focus down on these two 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 on capital on investments that we made. That was the decision around, you know, that drove it, 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, that's an easy business to model in year. The year-over-year loss, I mean, it happened in H1. We can model that out. Short of other factors taking place, it's a pretty stable business. It comes down to the toy side. I think in my prepared remarks, we gave some kind of percentage of ultimately how that could look like from a GPS perspective. Let me talk to you about more of an H2 as opposed to trying to get really specific in Q3. The two factors at play that we have to be thinking about. We're not giving guidance, but it doesn't mean that we're not running our business. 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. I think there's two 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 and 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. That's more kind of micro to us than necessary macro to the industry. That could be a significant number that de-stocks in kind of the $70 million- $90 million range. From a POS perspective, again, H1, where we took share, we outperformed the market. That's per Circana publicly available information. It's clear we are outperforming. 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. That is what we're focused on, selling the product through the retailers in the back half of the year.
Okay, maybe just to follow up, you touched on the destocking by retailers, and you say that this could be a headwind of $70 million- $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.
Sure. You see in our financials, actually, they're lower than last year. One 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? From an inventory position, you know, we're incredibly, you know, we're well positioned coming out of Q2. It really served us well, quite frankly, our inventory position around Prime because we had a very, very, you know, we're very pleased with our Prime performance. We again took share in Prime and outperformed the market.
From a kind of underlying performance, we continue to take share, we continue to outperform the market, and from an inventory position, you see in our results, we're well positioned, and we're planning to be well positioned in the back half of the year. Lastly, from a retailer perspective, you know, they are having lower inventory levels, which has obviously some near-term transitionary period for us, but as we head into 2026, that really only becomes upside.
Martin, as you may remember, when you were at one of our Investor Days, we talked about growing and expanding in the value channel. We have done that as well. In the last 12 months, we have really penetrated that channel to add extra distribution across our product lines, and we are seeing growth there as well.
Thank you for the call. Best of luck.
Thank you. Our next question comes from Adam Shine with National Bank Financial. You may now begin.
Okay, thanks a lot. Let's hope this is the worst quarter you two ever have to report.
You, Adam, 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, 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. Again, a lot of this conversation goes back to timing, right? Timing of spend on cost, the timing of some of the top lines. 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. 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. This year is certainly a transitory year. I think by explaining that destocking and explaining that even though we are taking share and even though we are outperforming the market, the TAM in which we're playing would suggest that ultimately, no, there would not be growth this year if you take those two comments together. I think that's been pretty transparent. I hear 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. There is also improving the execution and bringing us back to profitable growth. In my prepared remarks, the words were there.
We're going to go back to profitable growth. We were very clear that this year, that is not happening. It's not happening because of factors that are wider macro-economic 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 is an example, digital games. The tariffs ultimately are transitory. We have to work through it. We still don't know the official rate yet for one of our larger manufacturing hubs. Once we have that and once there's clarity, then we can start executing against our plan. Ultimately, we're turning back to that profitable growth that all of us want to and are striving to achieve. It comes from investing in the innovation engine of this company. We have a phenomenal brand.
I think, look, with a new CEO, new CFO, this was destined to be a pseudo kitchen sink quarter, so to speak. 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. 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.
If we dig that into the $66 million, which sounded like it was specifically OpEx related, as you said, Jonathan, how much are you leaning in on that Melissa & Doug stuff, which to me is in the past, because I would have thought that pursuant to those prior disclosures that you would have had about $60 million of OpEx alone through mitigation activities to deal with the tariffs. Maybe help if we're still on track with those prior disclosures.
Yeah, and I mean, there's an example of disclosure that lends itself to confusion, right? Because cash savings, I mean, I don't, that can be interpreted many ways. I was very clear on my prepared remarks again about this kind of clarity and, you know, OpEx and CapEx. Let me give you a little, and I gave you a range, I think $80 million, $90 million. Let me be even more clear, you know, about 2/3 of that is OpEx, about 1/3 of that is CapEx. That kind of gives you the tariff mitigation savings. year-over-year, 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. year-over-year, we have about $12 million-ish of Melissa & Doug.
The rest is the 2/3 of the $80 million- $90 million range that I gave you. 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 a 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. If we don't think we can, let's stop doing it. That's the activities the team is doing. You saw it within, again, 90 days, a decision around circuit days. There's more of that that obviously Christina and I are going to go do as we look at our investment portfolio and ensuring that whatever dollars that we put into the business, we're getting an attractive return.
Thank you for that. I'll queue up again. Thanks.
Thank you. Our next question comes from Kylie Cohu with Jefferies. You may now begin.
Hey, good morning, and thanks for taking my question. I guess this one's 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? Thank you.
I'll jump in, and then Christina could 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 ensure that our customers and our consumers, more importantly, our consumers have a great offering. That is our number one goal at really competitive prices. Remember, by looking at price, but then also managing mix, more than 50% of our SKU base in H2, in the highest propensity to spend period, will be below $20. We did take some selective pricing actions that will be reflective, obviously, in retail prices, and those happened early in Q3.
They represent probably about, if you remember when I explained tariffs, there's the actual tariff cost, and then there's the volume aspect, and that was how we got up to that larger number. A much smaller portion of that is just the tariffs, and we were capturing about 80%, 85% of the increased cost. 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. We're really well positioned, and maybe Christina, you just want to talk a little bit about.
I think you hit 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, you know, rebuilding Gund. There's a lot of great stuff coming. I think across Melissa & Doug as well. 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. 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.
Yeah, and if I can look even further out, 2026, first of all, we won't have that headwind of the destocking. In fact, depending on how retailers behave, it could actually be a tailwind. We have, as you know, the PAW Patrol movie's coming out, PAW 3, the dinosaur focus. 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. Hex Bots, we're really excited with the innovation that we're seeing. Monster Jam, the momentum is strong. 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.
When we look past even H2, into next year, going back to, I think, Adam's question, we're very, we are working towards returning to profitable growth, and we have all the building blocks in place to get us back there. That's where our focus is.
Great. No, super helpful. Just one 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 a time when your toy peers are seeing elevated inventory growth and more of the industry shift to that domestic inventory. Thanks.
Yeah, thanks for the question. I think this is one of kind of the, going back to even Adam's, 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. 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 year. From an inventory position, 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.
The good news is in H2, our marketing spend will be much more in line with last year, perhaps even lower. Q3, it was really low last year. I'm just saying from an H2 perspective, when you look, it'll be much more consistent this year than last year. I expect that to come in as a lower %. Our sales allowances this year coming in the back, the second half of the year, we're continuing to be focused on selling in product and making sure they're selling through. Ultimately, we would expect that our sales allowance will be roughly in line with last year's numbers as well.
Awesome. Thank you so much.
Thank you. Our next question comes from Ty Collin with CIBC. You may now begin.
Good morning. Thanks for the question. 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.
Yeah. No, look, Vietnam, like, you know, going back to our mitigation plan, let's go through the four buckets. Bucket one, if you recall, was around diversification out of China. The team has done again really strong work. Last year, 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%. It's a significant draw. Where is that going? A portion, a large portion is going to Vietnam. We're setting up those by production, and it's going incredibly smooth. In fact, there's some transitory costs that we're seeing, but ultimately the underlying cost profile is as attractive or even more attractive than China. There are products that we can't take just to Vietnam and have to remain in China just because of the sheer, the infrastructure around those technical products remain in that country versus Vietnam.
We are diversifying out our base. We have important operations in India, important sourcing out of India, Indonesia, even Europe. It has a kind of a broad base. That was the first element of our tariff mitigation plan. The second element was optimizing the supply chain. You've seen it in Q2 where we took advantage of the inventory that we had within the U.S. We've also been able to mitigate the actual tariffs by changing the mechanics of how we sell. Those are kind of well documented around first sales, etc. That's another important lever. The third lever was the pricing actions, which I've elaborated on already. The fourth lever was the savings, which essentially is, on the top end of the range, essentially the same number that was given before, but now I've been able to specify what's OpEx and what's CapEx.
From a tariff mitigation plan, the team is executing on what they said they would do.
Okay, great. Thanks. That's very clear. Jonathan, with respect to the NCIB, you're about three quarters through it at this point. You've continued buying back stock through Q2 and into July. What's your thinking around buybacks for the balance of the year? Do you think you're in a position to fully execute on the NCIB, assuming, of course, that your shares remain cheap and attractive?
I 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. You know, our view, my view, and our collective view here around capital allocation is 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. You've already seen the actions that we've taken, and that's kind of the lens in which we see the world. 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, you know, brought back over $100 million to shareholders, both through the quarterly dividend and through the NCIB, which is your question. I'll address it. As well as paid down debt by $60 million. 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 into the business, and we return it to our shareholders. With regards, I'll finish and then I'll come back to answer me. 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. On the digital side, continue to build out the capabilities that we have across our two platforms. Specifically in regards to the NCIB, we believe in a capital allocation that is disciplined, that you can model, and that is repeatable and predictable. 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. Jonathan, if I could just sneak in one 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. Is that something that you're aiming or planning to do during the Q3?
Let's cross that bridge when we get there. There are three factors as to why we chose not to. It's not that we're not, it's not that because we're new. There are three factors. Factor one is the actual tariffs, what's happening. Factor two is, can we get a good sense of how retailers are behaving or buying patterns, excuse me. The third is how the consumer is going to react. On the first one, we're probably a week away from having some clarity, right? I think there's one last big country, and that should be hopefully resolved in the coming weeks.
As we go, 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 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. I don't want to call it a date, but those are the three factors that held back being able to make our decision not to give guidance, reinstate guidance this quarter.
Got it. Thanks.
Thank you. Our next question comes from Drew McReynolds with RBC Capital Markets. You may now begin.
Yeah, thanks very much. Jonathan, I think we'll take this offline, just to better understand all the OpEx tariff impacts and cost savings and stuff. We can do that offline. I think bigger picture, just two 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? 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. Thank you.
Thank you, 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 toys, that we're going to go and compete in the places where we can be number one or number two. I think you see us doing that and executing against that. I see it more as a bigger opportunity long term, one to continue executing there, but as well as looking around at other categories that we can then, we can open up and compete in as well. I think that is core to the toy strategy, as well as looking at other, you know, 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 translated to growth for us in top line, whether it was How to Train Your Dragon, Gabby’s Dollhouse is yet to come, Superman. We've been in some of the really big box office movies, and next year we have one of our own coming in PAW Patrol. We really believe in that property and what that can continue to do. 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. 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. 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. 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 an additional second window, or you look in the greater European market on some other second windows that we're getting for Vita the Vet.
I think the more we can go where our audience is, the more we can be consumer-minded in our strategy, the more successful we will be in driving our business, whether it's in any of the three 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 macroeconomics around it, I don't want to overlook the fact that we are positioned as an integrated children's entertainment company. By that I mean we have strong muscles in three categories, and how they 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.
On this call, I'm sure we don't want to talk about that so much because that provides longer-term value and you're looking so much further out. I feel confident that what we have the capability to put in the pipelines for innovation in toys, as well as content and digital content, is second to none. As I look further, that's really where I see the opportunity is that we continue to strengthen the three creative centers. You see digital really growing this quarter and it grew 33%. Looking at that kind of growth and knowing what's in the pipeline in the second half, for Toca 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.
When you look at live ops, content, pricing, and promotion that we have coming, we believe we have a strong second half for Toca Boca in line. Piknik, we're getting top line growth as well. We have a portfolio of skills 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. I understand the focus on toys. It's absolutely necessary. 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. 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.
That is really what I'm pushing towards.
Yeah, that's helpful. Christina, you answered my third question on the digital games outlook in the back half here. That's good for me. Thank you very much.
Thank you.
Thank you. Our next question comes from Luke Hannan with Canaccord Genuity. You may now begin.
Thanks. Good morning, everyone. I wanted to dig in a little deeper on this, the retailers that are deferring orders into the back half of the year. 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.
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. Thanks, Luke. No, I mean, that's exactly, I think some of the words you use exactly kind of reiterate why it's so difficult to be able to come out and give formal guidance. What do we know? What we know is, I just continue to read and reinforce this, we're gaining share and we're taking share in H1. Christina walked through why we have a strong H2 in terms of our product categories. I don't see a reason why that won't happen again. We are going to support that though. We will support it through both marketing dollars and through sales allowance. Marketing this quarter, and because revenue is smaller and because there's this timing, there's a higher proportion of marketing as a proportion of net revenue.
We expect that to come back down to in line with last year, if not lower in H2 as our revenue base grows. We take advantage of the spend that we had in Q2 that will help us in Q3 and onwards. 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. Christina talked about that through the value channels being an example. Making sure we're supporting our retail partners so that it's profitable for them as well. 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. 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, thanks. 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. 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?
I think there's an example, you know, being clearer in kind of that number that you stated before is probably right. What ends up happening is part of it's seasonal based. We said, let's take away from the seasonality and just give you an average number. The average number we will finish at is 37%. I would say that's in line with the other way that it was shared with you last quarter. This is a better way of looking at it as an average for the full year because each quarter there's seasonal aspects of what's being bought from China or other countries. In the spirit of being more transparent, giving clear data, this is an example of what we're doing. 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 benefits, say, from seasonality, which that number that you had had that benefit in it.
Okay, sorry. The 70% had the benefit of seasonality in it, you're saying?
Correct. By saying an average for the year of 37%, I think that's a cleaner number for you—37% coming from China to the U.S. That's a cleaner number for you. We gave you the comparison of last year, which was 64%.
Okay, got it. That's helpful. I'll pass the line. Thanks.
Thank you. This next question appears to be our last question. This question will come from David McFadigan with Cormark Securities. You may now begin.
Great, thank you. I just wanted to dive in just on the Activities, Games and Puzzle segment because I noticed, you know, it's obviously down the quarter, down six months. Just wondering, is there one point in particular that's really driving that decline or is it the five or six that you listed in the MDMA? Just wondering if there's anything that really stands out and when do you think that that segment might return to growth?
Why don't I take this quarter and then Christina, maybe talk a little bit about some of the work that I know the team's doing around bringing back growth to our game, to that section as we look a little bit further out. In the quarter, 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. The vast majority of our revenue base took share. More comfortably more than 50%, more like 2/3 of our revenue base took share. When you have a portfolio approach, there will be some categories that won't be taking share. That was one of the categories.
We recognize that, 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. Maybe Christina, if you have any comments you want to about the category itself longer term.
I think as Jonathan Reuter just said, we know that there's 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't, what we can lean into is the work that's being done. I also would say that we're coming off of a Rubik's , which was a 50-year anniversary last year that definitely helped in that category versus this year. It's looking for opportunities like that and looking for some new games and innovation that we can use to drive that category. I would just say keep an eye on it moving forward. It's definitely something we're focused on.
Okay, all right, thank you.
That is our last question. I'll turn the conference back to Jonathan Roiter, CFO, for any additional remarks.
Thank you everyone for joining us, and we look forward to speaking to you again in our upcoming three-quarter call in October of this year. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.