Good day. Welcome to the Spin Master fourth quarter and full year 2022 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sophia Bisoukis. Please go ahead.
Thank you. Good morning, and welcome to Spin Master's Financial Results conference call for the fourth quarter and year ended December 31st, 2022. I am joined this morning by Max Rangel, Spin Master's Global President and CEO, and Mark Segal, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A, and audited consolidated financial statements are available on the investor relations section of our website and at spinmaster.com and on SEDAR. Before we begin, please note that remarks on this conference call may contain forward-looking statements about Spin Master's current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements, and any other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and are reasonable in the circumstances.
However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results to differ materially from those expected or implied by the forward-looking site statements. As a result, Spin Master cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Except that as may be required by law, Spin Master has no obligation to update or revise any forward-looking statements, whether because of new information, future events, or otherwise. For additional info on these assumptions and risks, please consult our cautionary statements regarding forward-looking information in our earnings, a release dated March 8, 2023. Please note that Spin Master reports in U.S. dollars and all dollar amounts to be expressed today are in U.S. currency unless otherwise noted.
I would now like to turn the conference call over to Max.
Good morning, and thank you for joining us today. 2022 was another year where we made meaningful progress on key priorities. Our commitment to reimagining everyday play across our three creative centers continues to give us a strong platform for growth, enabling us to achieve an increase in constant currency revenue for 2022 against the backdrop of a challenging economic environment. 2022 was really a tale of two halves. In toy, we had an exceptionally strong start to the year, building on the momentum from 2021, coupled with retailers bringing in goods earlier to minimize anticipated supply chain disruptions going into the fall. This resulted in us having the biggest first half in our history, with gross product sales up almost 35% compared to 2021.
In the second half of the year, with higher interest rates and inflation hurting consumers' discretionary spending, retailers had much higher than expected inventories going into the peak holiday season. Consumers became more price sensitive and focused on finding discounts. We saw reduced consumer spending impact toy point-of-sale trends and, in turn, reduced retail orders. This created a difficult environment for us to launch new and innovative products, which is the core of our toy strategy. Our fourth quarter results were below last year. We ended the year as the fourth largest toy manufacturing globally per Circana, who you may remember as NPD, up from number five in 2021. Toy industry continued to show its resilience despite macroeconomic challenges.
Overall, sales for the U.S. toy industry were flat for the year and up 22% globally compared to the pre-pandemic years of 2019. We continue to believe the toy industry is a growth industry, and we expect it continue to growing over time. One of the consequences of the weak fourth quarter to the industry and for us is that retail inventories at the end of 2022 were up in both dollars and weeks of supply compared to a very low level a year ago, and they remain elevated during Q1 2023. Retailers are focused on inventory and profitability management and have limited their replenishment orders to bring levels down. We are working closely with them, and we expect to be back in balance by end of Q2.
Our fourth quarter global POS declined 6% over year, which was in line with the industry according to Circana. For 2022, our global POS was down 1.2%, also in line with the industry. A significant portion of the year-over-year decline can be attributed to the lower PAW Patrol POS as we were lapping the PAW movie in 2021. Declines in global POS for PAW in the fourth quarter were consistent with what we experienced in quarter three, with a decline of 23% per Circana. On an annual basis, PAW Patrol POS declined 16%. Despite these POS declines, the PAW franchise remained the number one preschool toy property globally, both on a quarterly and yearly basis per Circana.
PAW Patrol has accomplished what only a few preschool franchises have ever achieved, to remain in the hearts and minds of kids and their families for more than a decade. Today, we believe the PAW Patrol franchise is stronger than ever, we have a series of exciting activities planned in 2023 as we celebrate its 10th anniversary. Excluding PAW Patrol, our POS grew by 1.1% in Q4 and 4.8% on an annual basis for the G11 countries per Circana. We are particularly pleased with the performance of our international markets, where we outperformed the industry. We were in the top 10 in 10 out of 11 markets. Over the past few years, we have significantly expanded our licensed toy portfolio, bringing in popular entertainment franchises with built-in fan bases, resulting in continued growth in POS for this element of our business.
According to Circana, our licensed portfolio POS increased 32% in Q4, driven by Gabby's, DC Comics, Monster Jam, and Wizarding World. Circana calculates that our licensed business has grown 61% since 2019, now comprises 30% of our POS, compared to just 19% in 2019. We are known in the industry for our deep understanding of the preschool category. That is why we were chosen by DreamWorks Animation to be the global toy partners for Gabby's Dollhouse. What a fantastic collaboration this has been for us. Gabby's Dollhouse continues to outperform in 2022, with the Dollhouse play set, a second-year item, taking the spot as the number 1 overall item in the infant, toddler, and preschool super category in the US for Circana.
Gabby's has quickly risen to be one of the top preschool properties globally, and we believe the franchise has great potential for the future. Monster Jam was a third property in vehicles in quarter four, up one position from 2021, and the brand remained the number two property for 2022 in POS, increasing 4% according to Circana. The strong performance of Monster Jam aided our vehicle performance in the vehicles category, seeing us gain share and increase POS by 5% in 2022. We are excited for a blockbuster year for the DC franchise in 2023, with three theatrical movies planned, which will see us launch toy lines to complement the movies and characters. Additionally, we have new innovations in our core Batman offering, including an epic large-scale play set, which is sure to be a Toy of the Year contender.
In 2023, we are continuing to grow our licensed portfolio with the launch of our first product for Disney's new preschool animated series, Firebuds, which has just launched in North America with a rollout plan for this summer. One of our primary growth strategies is to pursue strategic M&A across our creative centers. We have made 28 acquisitions since the company was founded in 1994, and 18 since our initial public offering in 2015. We completed the acquisition of Rubik's Cube in 2021. This past year marked the first opportunity to inject our own innovation into Rubik's portfolio with the launch of the Rubik's Phantom, featuring thermochromic technology. It was also the first year in which we were able to apply our integrated marketing support to the brand.
The result of each has been a notable increase. Now Rubik's Cube becoming the tenth-largest brand in the games and puzzles super category in the quarter, up from the sixteenth position in 2021. POS grew 4.5% compared to a decline of 4.3% in the category for the quarter, according to Circana. Building on our rich history of acquisitions, we recently announced three toy and game acquisitions. In August, we further diversified our games and puzzles offering by acquiring games and titles from SolidRoots, a creator of family board games, including the popular game, Mind the Gap. A few weeks ago, we closed the acquisition of 4D Brands portfolio of 3D puzzle kits, opening up new opportunities to inject innovation into our puzzle portfolio with new form factors and popular third-party licenses.
We also announced the purchase of HEXBUG's brand, which will be strengthening our robotic toy range capabilities. We continue to look for accretive acquisition opportunities to further diversify our overall portfolio, stay on the leading edge of children's play, and pursue new areas of growth. Our entertainment creative center had a really strong year, growing licensing and merchandising revenue while also continuing to develop our content pipeline for screens of all sizes. In addition to continuing to create fresh PAW Patrol content, we introduced two new properties in 2022, including Sago Mini Friends on Apple TV+, making the first cross-creative center collaboration with our digital games creative center, and we started delivery of Rubble & Crew, our first PAW Patrol spin-off series, airing on Nick Jr.
2023 will be our biggest year ever in terms of entertainment content releases, showcasing the investments we have made to create a diversified content pipeline. We have several new series launching in 2023, including two entirely new properties. The first is a preschool series, Vida the Vet, which will air on BBC in the U.K. and on Corus Treehouse in Canada, with more broadcasting partners to be announced soon. The second is a new fantasy adventure series franchise. We just announced last week called Unicorn Academy. This exciting launch exemplifies our approach to franchise building. With fully branded experiences planned across all three creative centers. The journey begins with a Netflix original series this fall, which will be followed by a toy line in 2024 and a digital game which is in development, as well as an expansive licensed consumer products initiative.
I've seen the initial episodes, and it is truly magical with some of the most visually stunning animation we have ever created. I mentioned earlier that we will launch our second feature film for the PAW Patrol franchise on September 29th in conjunction with Paramount, a few weeks earlier than originally anticipated and planned, and in advance of the first long weekend in October. Our first PAW Patrol spin-off series, Rubble & Crew, debuted on Nick Jr. on February 3rd, and early reads for the show are very positive. Many of you saw the toy line in our L.A. showroom in January, which centers around a construction play pattern. In addition to the spin-off, we have a series of specials throughout 2023 to commemorate PAW's 10th anniversary.
Our digital games creative center faced tough comparisons in 2022, given the unprecedented growth in digital games we experienced during the pandemic when screen time was unlimited. While we have had incredible growth within digital games over the past 2 years, we have started to see the pattern normalize. Engagement in our apps and games remain high at 58 million monthly active users in Toca Life: World, but in-app purchases declined in 2022, which reduced revenue. We remain very ambitious about the long-term growth opportunities within our digital games creative center, in part due to the development we have underway and given the trend of children spending more of their leisure time in the digital world. In 2023, we will release several new digital games.
Nørdlight, the digital game studio we acquired in August last year, is developing a new mobile game leveraging our iconic Rubik's Cube IP, which will take us into the casual gaming space. The Originator team is deep in development of our first in-house developed digital game for PAW Patrol called PAW Patrol Academy. The game will invite preschoolers to join missions, games, and content designed to blend story and interactivity with educational and emotional learning and is set to launch in conjunction with the movie. In Q3, Sago Mini will introduce a digital games bundle, which will give subscribers access to a host of our educational digital games from a Sago Mini, Toca Boca, and Originator portfolios, all for one monthly subscription fee. We believe this will be driving growth and be a simpler and cost-effective way for parents to manage a subscription for their kids.
In summary, we are squarely focused on continuing to execute on our strategy of leveraging our global IP across our creative centers. As we look ahead, we expect to face continued macroeconomic headwinds this year and continue to foresee a period of volatility impacting consumer demand. One of the most significant factors that will impact our 2023 performance is elevated retail inventory levels in the first half of the year, and we are managing this closely. We are also focused on managing our operational costs, ensuring we position Spin Master to thrive. We are being prudent in our approach to cost management while balancing the need to invest in key organizational capabilities to scale our business.
Given our healthy financial position, we are also focused on pursuing acquisition opportunities to attract new fans, reach new audiences, and engage new players in order to further solidify our leadership in children's entertainment and deliver profitable growth now and into the future. I am now going to pass it over to our CFO, Mark Segal, to cover our financial performance in more detail, as well as our 2023 outlook.
Thank you, Max. Good morning, everyone. The fourth quarter was a challenging quarter relative to last year. Revenue came in at $465.8 million, down 25%, or $484.2 million, down 22% in constant currency. This compares to $620.5 million last year, reflecting a decline in the toy creative center due to the customer order timing shifts described earlier in the year, along with a decline in digital games revenue. Entertainment revenue for the quarter was up 9.5%. Looking at Q4 creative center performance in more detail, toy gross product sales were $479.2 million, a decline of $148.3 million or 23.6%. On a constant currency basis, gross product sales declined 20.6%.
2022 was a year where we saw unusual phasing of revenue towards the first half, primarily due to the low level of retail inventory entering the year after exceptional growth in 2021. First half gross product sales outpaced POS as retailers were replenishing lower inventory exiting 2021. Retailers also brought in goods earlier than normal in 2022 to avoid anticipated supply chain disruptions in the fall and began building inventory levels well ahead of the holiday season. We expected this to reverse in the third quarter and accelerate in the fourth quarter. Although POS did improve, consumer demand was lower as inflation and interest rates took their toll and demand came much later than expected. This caused retailers to reduce replenishment orders throughout Q4, which impacted our performance across categories and regions.
Q4 results overall were heavily skewed by the volatility and timing of this retail inventory movement throughout 2022. Preschool and dolls and interactive declined by $50.1 million or 19.9%, driven by lower sales of PAW Patrol, which, as Max noted, was strong last year in the wake of the movie release, offset by higher sales of Gabby's Dollhouse. Activities, games, and puzzles and plush declined by $45.9 million or 22.2%, mainly due to the games and puzzles portfolio and Kinetic Sand, offset by higher sales of Rubik's. Wheels in Action decreased $56.1 million or 38.4% due to decreases in DC Comics licensed products, mainly due to difficult comps against shipments for the Batman movie in Q4 of 2021. Geographically, North America saw the biggest drop in Q4, both in dollars and percentage terms.
Revenues in North America declined $101.1 million or 28% to $260.7 million. North America accounted for 54.4% of total GPS in Q4, down from 57.6%. International sales, comprising Europe and the rest of the world, declined $47.2 million or 17.7% and comprised 45.6% of total sales, up from 42.4%. Our full year results paint a more complete performance picture. For 2022, we generated over $2 billion in revenue, down 1% on a reported basis and up 1% in constant currency. Despite the backdrop of a difficult macroeconomic environment, we were pleased that 2022 revenue was in line with 2021 and 28% above 2019. Gross product sales for the year grew 3.5% in constant currency.
I noted last quarter, since our IPO in 2015, we have more than doubled revenue from under $1 billion in 2015 to over $2 billion currently, delivering a compound annual growth rate of nearly 13%, considerably outpacing the industry. Back to the Q4 P&L, Q4 sales allowances were 17.2% of gross product sales, up from 13.6% as we managed our inventory levels and executed higher markdowns and promotions as consumers were more price sensitive and responsive to promotional activity. 2022, sales allowances were 12.2% compared to 11.8% last year, slightly above the high end of our historical range.
Toy revenue or gross product sales net of sales allowances declined 26.8% to $396.7 million from $542 million, reflecting the gross product sales trends and increased sales allowances. Q4 adjusted EBITDA for toys was a loss of $24.4 million compared to adjusted EBITDA of $40.8 million. A margin of -6.2% compared to +7.5% due to higher administrative and marketing expenses as a percentage of revenue, partially offset by improved gross margin from product mix and price increases we implemented earlier in 2022. The shift in seasonality year-over-year was a significant driver in the comparison of EBITDA margin. Turning to our other creative centers.
Q4 entertainment revenue increased $2.7 million or 9.5% to $31.2 million from $28.5 million. Adjusted operating income was $20.5 million, up 53% from $13.4 million in Q4 2021, and adjusted operating margin was 65.7% compared to 47%. The significant increase in entertainment profitability was driven by higher licensing and merchandising revenue, as well as lower amortization due to fewer content deliveries. As a reminder, when we discuss entertainment profitability performance on a standalone basis, we focus on adjusted operating margin as this is after content amortization. This is true of digital games as well. Digital games revenue decreased 24.2% to $37.9 million, driven by lower in-app purchases in Toca Life: World.
In constant currency, digital games revenue declined 19.8% to $40.1 million. Adjusted operating margin was 32.5%, down from 38% from lower revenue and higher product development and personal costs related to future game development. From a consolidated P&L perspective, Q4 gross margin was 49.9% compared to 52.1%. The 220 basis point decline was largely driven by higher sales allowances and increasing closeout sales and unfavorable foreign exchange, partially offset by price increases, lower ocean freight, higher entertainment L&M revenue, and lower content amortization. SG&A in Q4 was $237.8 million compared to $267.4 million, representing 51% of consolidated revenue, up from 43.1% as a result of a decline in revenue.
Adjusted SG&A was $233 million compared to $260 million, representing 50% of consolidated revenue, up from 41.9%. The full year SG&A rate is more reflective as the shift in seasonality year-over-year created less comparable figures. For 2022, adjusted SG&A was 37.5% compared to 35.3% in 2021. Looking within SG&A, marketing expenses in Q4 decreased by $8.7 million to $83.3 million due to lower media spending in response to lower Q4 volume. Marketing expenses as a percentage of consolidated net revenue in Q4 increased to 17.9% from 14.8%. For the full year, marketing increased to $5.4 million to $185.1 million from higher media spend and trade show expenses.
As a percentage of revenue, marketing for the full year increased to 9.2% from 8.8%. For Q4, administrative expenses declined by $12.6 million to $91.2 million, primarily due to lower incentive compensation and favorable foreign exchange. For the full year, administrative expenses grew by 7.1% to $353.8 million due to higher personnel related costs, travel and professional services expenses, partially offset by favorable foreign exchange and lower incentive compensation. As a percentage of revenue, administrative expenses increased to 17.5% from 16.2%. In Q4, we recorded a net loss of $13.8 million or $0.13 per diluted share compared to net income of $26.5 million or $0.25 per diluted share.
On an adjusted basis, net income in Q4 was break even compared to adjusted net income of $38.7 million. Adjusted EBITDA declined to $12.4 million compared to $78.3 million. Adjusted EBITDA margin was 2.7% down from 12.6%. Adjusted EBITDA for the full year of 2022 was $389 million at a margin of 19.3% compared to 20.3% in 2021. After adjusting 2021 for the PAW Patrol movie distribution revenue and amortization, adjusted EBITDA margin in 2022 of 19.3% was up 10 basis points over 2021. Turning to the balance sheet, we ended the year on a very strong financial footing.
Our balance sheet is in the best position it has been in, which will provide more flexibility to execute our growth strategy. We managed inventory levels aggressively in Q4. Our commercial teams did a great job in this area. Our on-hand inventory at the end of 2022 was $105 million, down $32 million compared to $137 million at the end of 2021. Our remaining inventory continues to be of high quality. Retail inventory for Spin Master products is also predominantly current and of good quality. Our core net working capital as a percentage of full year revenue was 13%, up 2.5% compared to last year, driven by lower payables due to the timing of purchases, partially offset by the reduction in inventory and trade receivables.
Free cash flow in Q4 was - $30 million compared to positive $211 million, driven primarily by the loss in the quarter, higher net working capital and more cash used in investing activities. Full year free cash flow was $150 million compared to $340 million. The decline was due to lower cash from operations driven by changes in net working capital, partially offset by lower cash used in investing activities. We ended the year with $644 million in cash, up from $563 million. We are in an extremely strong liquidity position with available liquidity of over $1 billion. Looking ahead to 2023, we expect to continue to face volatility and a tough macroeconomic environment, with high interest rates and inflation putting pressure on families' disposable incomes.
As Max said earlier, we continue to believe that the toy industry is a growth industry, but continuing macroeconomic headwinds and market volatility may impact 2023 consumer demand. Our outlook for gross product sales reflects our view that consumer behavior in 2023 is likely to continue to be adversely affected by inflation and recession concerns, which in turn could impact retailer buying plans as they look to manage their inventories and profitability. Retail inventory carryover and the anticipated order reductions as retailers draw down their elevated inventory levels, particularly in the first half of 2023, will reduce our 2023 gross product sales and was a factor in our outlook. We expect the seasonality of gross product sales to return to historical averages of 30%-35% in the first half compared to 45% in 2022.
This will make H1 2023 comparisons to H1 2022 particularly challenging, especially in Q1. We expect our toy revenue and profitability to be down in the first half. While we don't usually comment on quarterly expectations, we will note that we expect Q1 to account for approximately 10% of full year gross product sales compared to approximately 15% typically. We expect retail inventory carryover headwinds to clear by the end of the second quarter, followed by corresponding growth in the second half of 2023. We expect full year 2023 gross product sales to be flat to slightly down overall. We expect our total revenue growth to be in line with 2022. In addition to toys, from an entertainment revenue perspective, we have a strong slate of entertainment content for 2023, where we are delivering six shows and the second PAW movie.
In Q3, we expect to reflect approximately $17 million of distribution revenue for the PAW movie from Paramount in entertainment revenue and approximately the same amount in amortization of the capitalized intangible asset. To be clear, 2023 gross product sales and revenue guidance does include movie-specific toy sales and licensing and merchandising revenue. Regarding digital games, we expect a stabilization in digital games revenue levels for 2023. Foreign currency translation is expected to have a neutral to marginally positive impact on revenue based on current rates. With respect to profitability, we will continue to look at pricing selectively in relation to market needs and cost input levels. We expect sales allowances to be approximately 12% of gross product sales. We see some tailwinds in 2023 for toy COGS. Ocean freight is expected to be down from 2022. Resin costs have stabilized or come down.
On electronic components, we have seen improvements in both costs and lead times and expect this to provide favorable COGS improvements. For paper and packaging materials, we have seen some improvement. However, to a lesser extent, as high e-com use of shipping boxes and cardboard as a more sustainable material than plastic is keeping prices from dropping as much as we are seeing on other commodities. In entertainment, we see headwinds in 2023 on gross margin, driven by the large amount of new content deliveries. This will impact consolidated gross margins as well. The distribution revenue arising from the delivery of new entertainment content is gross margin dilutive until we can generate toy sales and licensing and merchandising revenue once the shows have become established.
We are focused very closely on cost control for all areas of SG&A and have looked at our fixed costs carefully to ensure we can drive operating leverage. We expect marketing costs to be between 9%-10% of revenue. We are managing our people costs and administrative costs very carefully. Taking all of this into account, we expect 2023 adjusted EBITDA margin, excluding the PAW movie distribution revenue, to be flat to slightly up compared to 2022. Tax is expected to be approximately 25%. Capital expenditures are forecast to be approximately 7% of revenue from 5% in 2022 as we continue to invest in entertainment and digital games content.
Total depreciation and amortization is expected to increase from $68 million in 2022 to approximately $150 million in 2023, primarily as a result of more deliveries of entertainment content. Free cash flow in 2023 is expected to be slightly up compared to 2022. To conclude, we have built a platform that we feel confident will continue to generate above-industry growth. We will continue to seek opportunities to harness the potential of our three creative centers acting independently but also collaborating across platforms to exploit the full potential of our talent, innovation capability, and intellectual property. Our business model leverages our global capabilities and allows us to scale our business to capture the full value of our IP.
Our teams remain committed to a disciplined operating and cost control model. As an organization, we are measuring ourselves in a way that maximizes long-term shareholder value. That concludes our remarks. We'll now open the line and take questions. Operator, please go ahead.
Thank you. If you would like to ask a question, please signal by pressing star one on your 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, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from John Zamparo with CIBC. Please go ahead.
Thank you. Good morning. I wanted to start on industry conditions and appreciate the color from or about your key retail partners and their inventory positions. I wonder if you can share anything about your ability to gain more visibility into their inventory position and their order patterns throughout the year.
Good morning, John. We exited Q4 with known retail inventories, which we've built into our 2023 guidance. you know, obviously, as we exited and we now enter 2023, our POS consumption has basically remained exactly in line with the category. We're actually exactly as the category is performing. Inventories are beginning to come down, but we don't see that completely getting to clean until the end of Q2. That's what we know today with about, you know, eight weeks of data.
Okay. Understood. My follow-up is on Rubble & Crew. I know you mentioned it's been a positive reception so far, but is there anything quantitative you can share on that would give some insight? On the show so far, maybe it's relative to PAW Patrol or just anything to add some color there. Like I said, I know it's early, but just like to get a sense of the sustainability of that property.
Sure. Remember, we basically started airing this early February, so far, you know, our audience has responded incredibly well. Our premieres posted double-digit gains in playback. Our most recent premiere delivered really high, you know, engagement. The viewership is comparing very positively with other PAW episodes we've launched in the past. We feel very encouraged by that. We just set toys on March 1st, and our 1st week or so has been very positive, but it's just a week. That was basically done at Walmart. So far we feel very strongly.
Okay, that's helpful. I'll pass it on. Thank you.
If you find your question has been answered, you may remove yourself from the queue by pressing star two. We'll take our next question from Martin Landry with Stifel GMP. Please go ahead.
Hi. Good morning. My first question is on your guidance. You know, it looks like consensus is for the industry to be flat this year. Looking at your guidance in terms of flat revenues, you know, I would expect or I would think that PAW Patrol toys are gonna get a bit of a boost from the movie. It looks like you have some new stuff with Firebuds coming on. Your digital games are gonna be flat. I'm trying to understand what's gonna be, you know, down this year. What's dragging a little bit the rest of the portfolio to bring your revenues flat this year versus last year?
Good morning, Martin. Thank you. Look, there are obviously some positives in 2023 for sure. We've been through those all in detail today. The reason we're guiding the way we are on gross product sales really relates to the industry carryover heading into 2023. There was significant industry retail inventory carryover, that is gonna affect the first half, that was a factor in our guidance. Now we, as a company, Spin Master, our retail inventory was actually in pretty good shape, although we did have some carryover as well, not nearly as extensive as the rest of the industry. That certainly was a factor in our guidance. Max, you wanna add anything?
Martin, good morning. I just wanna add one thing on what Mark just said. Because the industry was bloated, we actually almost participate in that as basically buyers have to distribute our dollars, and first would like to basically get rid of the inventories. When others are higher, we're in that same boat. Unfortunately for us, short term, we are basically getting through that cycle. Just to be clear, we are keeping a close eye on our POS, the spring items were set. We're actually plowing forward, with, you know, optimism, but we actually live in this situation. I just wanna make sure I put that in context. All that is important because as we said, for the second half of the year, of the year, we have to get to clean.
You know, retailers have been conservative, and so that's likely what you're seeing as well, as we actually deal with them, and they deal not just with, as you heard from the script, not just inventory, but their profitability. We wanna take that into account. We're being prudent, but we're being aggressive with the innovation we have 'cause we feel very strongly about it.
Okay, that's helpful. Wanted to touch a little bit on your new franchise that you've announced the last week, Unicorn Academy. Just trying to understand a little bit your expectations for that franchise, you know, in terms of revenue potential. Could this be bigger than your other franchise you've developed internally like Vida the Vet or Mighty Express?
We're super excited. It takes us into a space that is wide space for us, right? We don't have a franchise for that audience necessarily. That's the first thing. The second thing is we've really studied how audiences are being built and how franchises are being developed and are succeeding. We have, you know, basically first view to a very successful franchise in Gabby's Dollhouse, and in strong collaboration with them, have learned a lot. We've built all that into our, into our franchise, you know, development plan, and that basically debuts in the, in the, in the coming fall on Netflix.
We've studied how to build that. We feel very strongly that as we get to 2024 and we begin to monetize that franchise through toys and consumer products, licensing and merchandising, we are well set to basically get new, you know, new audience sales in our three creative centers. I failed to mention digital games. We have a game in development. We're also very excited, and we've seen how complementary to the audience built that, you know, that ecosystem is. From a size perspective, you know, we're just gonna be more shy to tell you something today. We can talk to you offline. We're very excited.
Okay. Okay, just last question. Just to make sure, I understand how amortization costs flow through your bottom line for the movies. For PAW Patrol, you know, can you remind us what was the net income impact on the first movie?
Just remember there's various aspects that impact our P&L for a movie. What we did in 2021 was we called out specifically the distribution revenue that we received from Paramount, which was really a share of our cost reimbursement. We get the revenue in, Martin, that actually gets reflected in distribution revenue. Amortization is the amortization of the intangible asset that's been built up on our balance sheet. That gets added back from an EBITDA perspective, which is why we always talk about EBIT when we discuss our entertainment business. The issue that we have is that we don't do a movie every single year. Everything that I've just described to you for the movie is equally true of our TV shows. It's exactly the same principle.
However, we don't do a movie every year. In 2021, we actually broke it out to make it comparable to 2020 and 2022. The same with our guidance for 2023, we're breaking that out so it becomes comparable to 2022. If we were actually making movies every single year, then we wouldn't need to break it out the way that we do. I hope that helps. Does that clarify?
Yeah. Okay. Maybe we can take it offline. Okay, that's it for me. Thank you.
We'll take our next question from Gerrick Johnson with BMO. Please go ahead.
Great. Thanks. Good morning. Hey, Mark and Max. I wanted to hear a little bit more about your marketing tactics in the quarter. I think you said, if I heard it correctly, you pulled back. Did you ramp up, pull back? What did you do with your marketing when you saw retail, you know, slowing down?
Gerrick, in the fourth quarter, our marketing dollars were down, but they were up as a percentage of revenue. For the year, marketing was actually up year over year relative to 2021. We're at around 9.2% for the year, relative to 8.8% in 2021. You know, between 9% and 10% is our historical range of marketing spend. 2021 was an unusual year because of, you know, the massive growth and the demand that happened in 2021. We didn't need to spend as many marketing dollars in 2021 as we would normally would, so we got a little bit of a pickup in 2021 from that. As it relates to tactics, I'll let Max comment on that.
Good morning, Gerrick. We actually continued to invest in Q4. I think it first mentioned, and I think you know it, that a lot of the purchase in Q4 went to online. Online did really well, not just in Q4, but throughout the year. A lot of the searches basically were done on Amazon. we continued to spend aggressively on Amazon, on our marketing and on PAW as well. You know, just to make sure that that was part of the tactics as you are asking the question. We had a lot of content that we had to flow to online, you know, demand creation, which we did.
That was basically one big component of our marketing shift in Q4, just to basically go where eyeballs were going and where search words were being searched. That's the biggest component of our marketing shift that we did, and we continue to execute that as we actually get into 2023. We're not, we're not planning, just to be clear, to draw down inventory, sorry, marketing dollars. We have a few innovations we're excited about. We have a couple of new franchises we're excited about, so we're pretty intent on spending marketing dollars.
Okay, great. Thanks for that, Max and Mark. Sort of related, you know, promotions at retail. When we, when we were looking, it just seemed like Target, Walmart, the U.S.-based retailers were somehow hesitant to use promotions. There were plenty of Spin Master promotions, especially early. How were those discussions? Was there a pushback from retailers when you said, "Hey, you know, things are slowing down, we need to promote, and run some discounts." It didn't seem like the retailers were very aggressive in promoting for some reason, especially early.
I think your intuition is correct. You know, remember, we were headed into second half of the year, we're talking 2022, which is your question. I'll just-
Yeah
... answer to that very directly. When you got to the third quarter, right? We've talked this in the last call, but I'll just remind ourselves, there was basically a period where people were beginning to draw down, but the consumer didn't respond. When we got to Q4 and that hadn't worked, we had to basically go a little bit harder. Your question about whether retailers were leaning in with us to do that or not. Well, the conversation was what % do we do, what % do they do, etc. That was basically on the table. We saw no choice but to make sure that we were responsibly trying to get our items, cleaned to get into the year.
Our own inventory, we did really well with, and our retail inventory did better than competition 'cause we were aggressively pushing that agenda.
Yeah, great. That was very clear. I've just one more and then I'll drop out. The PAW Patrol distribution revenue, that's just theatrical related or movie theater related, right? When does the streaming hit? When would that start to be booked?
Okay. Gerrick, you're correct. The $17 million approximately that we've called out relates specifically to the distribution rev. The movie this year is going to be different to 2021 in the sense that there's a theatrical release at the end of September, followed by Paramount+ 45 days later. If you recall, in 2021, it was day and date, and the theatrical and P+ release were actually on the same day. Now we have two promotional windows, You know, to actually get the impact of the promotion of the movie. We feel very encouraged by this strategy and things are more, you know, normal now in terms of the COVID environment, whereas in 2021, things were just coming out of COVID when we launched that movie in August.
Overall, we feel good about the second PAW movie. You know, I think because it's a little bit later as well in the year, it's gonna actually drive gross product sales and licensing and merchandising a little bit later than it did in 2021, but and more into 2024 as well, particularly on the LNM side. Overall, we're very encouraged by the movie.
Yeah, I'm sorry to monopolize so much of this time here, but, just again, the distribution revenue for streaming, that should hit what? In November. That would be a benefit to the fourth quarter. You're calling out $17 million in the third quarter. What should we call out for the fourth quarter?
Right. The way that the economics work on this movie, if you recall in 2021, the amount was actually $23 million or $26 million actually, that was reflected for distribution revenue. This year we're reflecting less, and we're taking more of a revenue share and more of a kind of a risk-based approach where Paramount will recoup earlier, and we'll actually get more revenue as a result of that. That revenue, Gerrick, is actually gonna flow a little bit later into 2023 and into 2024 as it relates to streaming.
Okay, great. Got it. Thank you.
We'll take our next question from Luke Hannan with Canaccord Genuity. Please go ahead.
Thanks. Good morning. Mark, in your prepared remarks, you touched on a number of tailwinds as it relates to COGS in 2023 and freight as being one of them. I realize there's only so much that you guys can disclose here, but presumably if we were to assume that the freight environment maybe gets a little bit better throughout 2023, how much of a benefit or would that be a benefit at all to you guys? I guess what I'm trying to ask is how much as we sit here today, how much of your freight costs are locked in for the year versus how much can you flex should there be some alleviation in rates?
Thanks, Luke. Yeah, the question is an interesting one. Ocean freight rates have come down quite significantly, and we've actually built a fair amount of that into our outlook. We're actually looking at freight rates on a quarterly basis now. To the extent that freight rates come down even further, there is some potential upside as it relates to the later quarters. We are seeing some pressure and some indications from the ocean freight carriers that there could be a slight uptick in the second half of the year. We are being a little bit cautious on that, but there could be some upside there.
Okay, understood. Then also if we just think about the PAW movie for a second here, if we think back to 2021, obviously it was a very different environment. The retailers more or less, and you can correct me if I'm wrong, but the retailers more or less were trying to get as much inventory as they could get their hands on. It was a clearly a very challenged supply chain environment. It's much different this time around. I think the commentary in 2021 was that the retailers had left some sales on the table, if you will.
Has there been any indicator conversations or preliminary expectations on their front that they could maybe be, we'll say, a little bit more aggressive when it comes to timing the sales, or timing the inventory rather for the movie this time around?
I think, Good morning, Luke. I believe that the movie for retailers is an important building block for PAW along with Rubble. We're trying to get to the movie window with like a super great clean shelf so that the movie items and all the innovation that you would have seen can shine. That's basically the number one objective. Right now they're working closely with us to make sure we get to that specific condition. We feel strongly that we are set up as of now to accomplish that. That's the objective.
Just to add to what Max said, if you go back to 2021, because the movie was released in August, there was actually a fair bit of a gross product sales that landed up in Q2 in advance of the movie. The movie is now at the end of September, the majority of the shipments for the movie will actually be in Q3. Some will be in Q2, but mostly in Q3. There'll obviously be gross product sales that land in Q4. Most of the licensing and merchandising revenue for the movie, you know, the backpacks, shoes, you know, that kind of stuff is really gonna come very late in Q4, but mostly in 2024.
Okay, understood. I'll pass the line. Thank you.
Take the next question from Brian Morrison with TD Securities. Please go ahead.
Good morning. Mark, I understand the composition of the PAW Patrol movie economics, but if you're participating more in the risk share, I presume you're gonna share more on the upside of the box office receipt. Is this correct? Can you just remind me the box office benefit from 2021?
Yes, the first part to your question is correct, Brian. We will actually get less upfront from Paramount as it relates to the movie, we'll share more and we'll share quicker as it relates to the ongoing receipts and the upside in the revenue. Once Paramount has recouped their promotion and marketing budget, we'll share in the revenue. In 2021, we didn't necessarily break that out and we're not gonna break out specifically the movie-related revenue all in from the movie. What I will tell you is that what we saw with the first movie is that we actually got some of that upside in 2021. We actually got it in 2022 and a little bit in 2023 as well.
I think the benefit of our rev share in the movie economics will actually be mostly in 2024, but also into 2025 as well. It really depends on how successful the box office is and how quickly Paramount recoup their costs on the movie.
Okay. second question. I wanna just go back to inventory. I understand the retail channel inventory being heavy. On the corporate level, though, you brought that down very nicely. I wonder how you feel that you stack up relative to your peers on the, on a corporate level.
I'll go first, and then Max will add some commentary there. Just numerically, if you look at our networking capital and if you look at our working capital management in general over the last few years, I would say we are well ahead of the industry, and I think we lead the industry by a wide margin in terms of our working capital management.
Against our two biggest US-based competitors, and the data is public, we basically we did better. We declined in our own inventory. One of them actually went up 23%, the other went up 15%. A material difference.
Last question. I wanna understand the introduction of Nørdlight. What's the strategy bringing this to market in 2023? How meaningful should we expect this to contribute to the top line? Mark, do you still have the target of doubling digital revenue over time?
Brian, just to clarify, did you say Noid?
Digital games.
We didn't hear on this end.
Yes. Pardon me.
Our target of 20% for digital revenue in the next few years still stands. I'll go first, Max, and then you can add. Just Nødvendig is currently working on a bunch of projects relating to Spin Master IP. The acquisition that we did of Nørdlight in 2022, because Nørdlight was actually helping Nødvendig in the development of the Rubik's game, if you recall, Brian. What we did was we actually acquired Nørdlight, and they are the ones that are fully focused right now on bringing the Rubik's digital game to the market in 2023 in the middle of the year. Noid, the Noid studio is working on other Spin Master IPs, whereas Nørdlight is directly focused on bringing the Rubik's game to the market this year.
In aggregate, though , how meaningful should we expect these to be?
First and foremost, thanks. It's a great question, and we're super thrilled about our digital games future. I'm just gonna give you some more context. I think Noid basically is getting us into casual game, and Rubik's is our first execution of that. That is a really large addressable market for us we don't play in today, right? We are getting into a soft launch this year, and you can expect that that growth in that property will express itself late into the year and into 2024. That addressable market is very, very large. That's first and foremost. We also have other studios that we're excited are bringing new games to our digital games portfolio as well. We've talked about the PAW Patrol Academy. That to us is very exciting.
It's basically going to be launched into Q4 and to coincide with the movie. All the, you know, all the advertising and all the promotion for the movie will help us drift and basically get that property into market. We're seeing prototypes. We're excited. That's basically slated to launch as well. On top of that, we're working on two other games that will go into soft launch later in the year. We're super determined to continue to expand the addressable market on digital games towards our 20%. It's a combination of organic and inorganic, but we're thrilled. Teams are doing a great job and, you know, full force ahead.
Okay. Thanks for the clarification and the color.
I'll take our next question from Jaime Katz with Morningstar. Please go ahead.
Hi. Good morning. Thanks for taking my questions. I think in your prepared remarks you had said that, POS or sales were trending exactly in line with the category. Maybe that was during the Q&A. I don't think you articulated what the category was doing this year. Could you just clarify that to start?
Yeah. It's been flattish, just to be clear. It basically depends. You know, we typically look at the whole, at the globe in G11, and so it depends by country. If I were to aggregate it for you, it's about flattish, and we've been about flattish.
Excellent. Then you guys have a thought process on how inventories will right size themselves at retail, I guess, through the second quarter. Can you give us sort of an idea of what the sensitivity to EBITDA margins are if that process takes longer than anticipated, perhaps if it takes, like, the whole year? Because I suspect some of the benefit would be assumed in the second half of the year.
Jaime, just as a general macro comment, obviously the seasonality shift we're gonna see in 2023 versus 2022 is gonna be quite dramatic. H1 2022 was 45%. We expect it to be somewhere between 30%-35% this year in H1. Really it just becomes a question of how long it takes for the retailers to actually manage their inventory levels down. Our current e-expectation is that that is going to happen mostly in Q1. That's why we actually gave specific guidance on Q1 because it's an unusual year that we're dealing with in terms of Q1.
There will be a relatively material EBITDA impact in Q1 as a result of the fact that re-replenishment orders and retailers managing the inventory in Q1 is gonna impact Q1 shipments quite dramatically. We think Q2 is gonna start moving towards normality, and therefore by the end of Q2, we'll be in a situation where heading into the second half of the year, we'll be in good shape and the comps will be much better. Obviously, to the extent that something changes on the retail front, which we can't predict, and there's timing of shipments that may move from Q1 to Q2 or Q2 to Q3, that will shift some EBITDA margins, but we can't guide to that level of precision right now at this point.
Excellent. Then lastly, can you just talk a little bit about the Spin Master Ventures business? I know it was noted that there were a few new partnerships, and I guess it would be helpful to know maybe what sort of product offerings those represent and maybe where you guys are seeing the opportunity to try to take share in new white space categories. Thanks.
We did a few small investments in the fourth quarter of 2021. In total for ventures, since inception to current, we've invested about $10 million in the ventures area, a combination of toys, entertainment, and digital games. We did a small investment, a follow-on investment, actually, in the toy space in Q4, and we did two in the entertainment space in Q4 of 2021. These are, you know, areas in entertainment where we saw nice content, we liked what they were doing and in one case, there was a technology capability in entertainment that we wanted to explore further.
You know, nothing has changed in terms of our strategy, and we're quite excited about some of the things that we're seeing coming out of the venture space. The biggest and most significant venture activity that occurred in the year was when we actually acquired Nørdlight, which was a follow-on investment from an early in venture investment, and that was exciting for us in terms of the Rubik's developments that Max described earlier.
Great. Thank you.
Okay. Operator, we're gonna have time for two more questions, and then we're gonna have to call it.
Okay. Thank you. We'll take the next question from Sabahat Khan with RBC Capital Markets. Please go ahead.
Great. Thanks. Good morning. Just I guess there's been a bit of discussion on the inventory here. Could you provide maybe a little bit more color on, you know, is there specific categories? You know, you talked about maybe preschool being a bit more back-ended weighted, partly driven by the movie. Is there any categories you're a bit more focused on, where you wanna get the retail side of the inventory a bit more cleared up?
Good morning, Sabahat. Yes, I will get into it. I think it's important that we realize that when we think about and report inventory, we're thinking global, right? The first call of order is to make sure we understand that within, outside of the North America, and particularly the US market, in the US, there's quite a big difference. In Europe, you know, there might be pockets, and I'm talking about, you know, really small pockets in certain countries, but it's not the same as we have in the US. That's the first thing to note. We're dealing with those, you know, very specific items in Europe, and we feel good about where we need to get to. That's point number one.
Point number two, when you think about the U.S. within North America, that is where, you know, we have the majority of the issue and where we have the majority of our focus. Within the U.S., you also have to look at channels, and within channels, you have to think about mass, and within mass are two customers, and that is where the majority of the issues are that we're working through. E-commerce is in a very different place, and in fact, club is in a different place. There might be some dollar channels, customers that may have sporadic things that we're working through, but that's the context at a geographical and then channel level. Then we do have color and specificity within categories as well.
Within infant preschool, you know, PAW exited the year, and Mark Segal in his prepared remarks said 16% decline in POS, so we're working through some things. When you think about it's basically some of the themes in Q4 that because of all the congestion of inventory into Q4, we're not able to sell through. Those are new themes. When you get that new theme into 2023, it's not like it's a theme that would've, you know, been there for a year. It's a theme that has been there for about three months at best. That's the condition. There are maybe other couple of categories, but by and large, I think that's the color I wanted to provide.
All right. Great. Then just a quick one on, you know, you mentioned e-commerce there. Anything, I guess, on that front that you're investing in or changing as we kind of look forward post-pandemic, or is it just more now growing in line with the major customers, whether it's e-commerce only or the bigger box ones? Just curious how maybe you're thinking about that channel as we kind of operate in a post-pandemic world.
Very differently. It's a big component of our revenue. You know, I don't know if we put that on the prepared remarks, but I'm happy to share. It's public, so I'm not saying anything that is not public. The number 1 customer in the U.S. is no longer who it would have been 1 year ago. It's actually Amazon. We prepared for that over a year and a half ago and changed our technology stack to make sure that we were doing better in that space, not just for Amazon to be clear, but as other, you know, other digital commerce was happening, whether at Target or at
You know, Walmart or beyond, we adjusted. That's point number one. Point number two, our share has done better in e-commerce than it has in brick-and-mortar, which is good 'cause we prepare for it. As we go forward, you know, we have a team solely focused on driving our sales and our content in e-commerce. It is not just sales and revenue, it's about also marketing our products through that medium. We have a whole new way to do it. We're excited about it, and it's going beyond the U.S. into other parts of the world.
Great. Thanks very much.
This will be the last question, operator.
Thank you. We'll take the last question from Gerrick Johnson with BMO. Please go ahead.
Hey, all right. Thanks. Yeah, the last question here is I wanna go back to something that I think, Max, you might have said earlier in the year, that you thought PAW Patrol revenue this year would be equal or better to PAW Patrol revenue in 2020, the year before the first movie. Did that play out?
It did.
Excellent.
Gerrick. I know we couldn't tell you in a quiet period, but, you know. By the way that happened on revenue, on POS, you know, again, we've looked back to 2019. We have countries that are in 2022 growing double-digit, both revenue and POS. It's a difference of development of the property depending on the country. You know, we're vigilant, and we look forward to a stronger 2023 and making sure the brand stays healthy, if not healthier, as we exit the movie year.
Great. Thank you very much, Max.
Thank you. That concludes our call. Thank you very much, everyone. We will be talking to you again in May with the release of our Q1 results. Thank you. Talk to you then. Take care. Bye-bye.
This concludes today's call. Thank you for your participation. You may now disconnect.