Supply chain, but we got down our production out of China in legacy Spin to about 25%. We had, by the end of the year, a very diversified supply chain. In terms of financial impact, there was about $50 million in our COGS this year that are being impacted by tariffs. We got the tariff refund of about $40 million. We've elected to We're not including that in earnings. It's a one-time benefit. We've used that ultimately to pay down our debt. In terms of retailer behaviors, certainly the tariffs last year impacted how they were buying. You saw a shift from direct import to domestic replenishment, and you also saw them reset their fall line much later in the year.
What's happening this year is you're having the setting of a line returning to its historical norms in August, which is great for us because therefore product is on shelf for a longer period of time, and you can have the POS and the replenishment from it. As well as you're seeing a very stable percentage of domestic replenishment versus direct import. Specifically for us in Q4, we really like the products that we have, and we're seeing a pickup in demand, and so there could be a little bit higher domestic replenishment as retailers restock shelves as they sell through our products.
Okay. Apart from tariffs too, you've got a lot of other inputs that you guys deal in a lot of plastics, things like that, and obviously crude oil, freight, all of these things impact your business. Just want to talk a little about some of the other inflationary impacts you're managing right now.
Yeah. There certainly is this year. You saw in March we had, as we all know, oil went going up quite significantly to over $100 a barrel. That impacts resin, which is an important part of our toys, as well as transportation. You also had components go up in terms of cost as well. For us, the impact this year is about $15 million, one five.
We are working through that. We have not raising prices. What is, I think, pretty unique about our space and our company within that space is that every single year we are essentially resetting our line with the retailers. In fact, our sales team was in L.A. last few weeks, this week, essentially showing next year's line. When we build next year's line, we took into consideration where commodity prices were, and so we adapted ultimately what the product is, how much plastic is being used, et cetera, as well as the mix. We are still going to hit all the price points we want to hit, as well as keep the margins for us and the retailer incorporating the higher commodity prices.
Okay. Because you would be shipping Christmas 2026, or you would have already shipped Christmas 2026 now, and you are selling Christmas 2027 now.
Our direct import business right now, with still maybe one or two weeks left around what will impact this year.
Yeah.
Or maybe another month or so. Then you start selling in for the spring.
Okay.
You have direct imports for the spring that you will start seeing in November, December, and that goes obviously into January. We do have the pickup in Q4 naturally of domestic replenishment as you are refilling what is already on the shelves.
Okay. I think one of your larger acquisitions since you have been public was Melissa & Doug, I believe, and this has been somewhere where you are looking to turn around the sales performance of that brand. You want to talk about how the company has been addressing that?
Yeah. Melissa & Doug was an acquisition done three years ago. Very important part of our business today. It is a much more replenishment business, a more stable business. Has a higher mix of specialty than mass versus our Spin business. Returning it to growth has been one of the core focus of this year. Pleased to see July and August, our sell in, so what we call it our GPS, our sell in, is up. Now it might have been easier comps than last year, but nevertheless it is up. From a POS perspective, seeing some stability within the POS in August. Look, our focus here is bringing newness to the product and ultimately having more shelf space.
Newness to the product, we launched in August, a product called Cherry Lane, which is essentially a dollhouse, but when you think of dollhouses, you typically think of playing vertical. This is now you can look down, it is modular, and different pieces coming together. Much easier for younger kids with their smaller hands to play. We actually sold it out when we launched on our DTC channel, and now we are in traditional retail. We are taking the brand out of the toy aisle. We have a partnership with Random House where we have books as well. So innovation coming in that brand. We have a partnership with Van Leeuwen, which in the U.S. is a cult 300-ish ice cream shop where we have an ice cream shop. It is our number one DTC product right now.
A lot of newness, a lot of excitement that we are bringing to the brand, and that leads to more shelf space and therefore more volume. In the U.S., we have more shelf space. It is our second full year now international with the brand, and we will be in more stores. We are in more stores today than we were last year. That is as we have newness with the product, we are able to obviously expand our distribution as well.
A product like that, where are the natural sort of markets beyond North America that you want to go?
The Melissa & Doug is an iconic brand in the U.S. It grew up in the U.S. as really an iconic brand that hits above its weight, if you will. It creates a lot of these partnership opportunities that I just laid out. Those are really
Can you just maybe take a second?
Sure.
And explain what it, like just say, we're talking about toys here, might as well paint a picture.
Sure. Melissa & Doug is a learning brand, a wood block brand, excuse me. Traditionally wood, and biggest categories would be pretend play. If you think of a broom, a mop, a sweep, that's actually the number one product within that brand. Ice cream shops, if you have kids, you would have ice cream cones and you could put ice cream cones on top of it. Innovation around Sticker WOW!, which is a book under, I think, $9.99, where you're using water to highlight different products that come out. So, it's a brand that has repeatable SKUs year in, year out, pretend play, and-
Kind of ageless.
Yeah. Well, I think for the younger age category.
Yeah. Sorry, I meant ageless in like it's not a fad.
Exactly.
Kind of a product.
Exactly.
It's something that's there forever.
Predominantly U.S. when we bought it, and that's where the power of that brand has been. One of the thesis of the acquisition was to take it international. What does that mean? Well, international means for us, obviously Canada, as we're a Canadian-based company, and then also internationally in Europe. That's where we're building out and we're seeing the retailers and the consumer really appreciating the quality that comes with the product line.
It stays Melissa & Doug in France. It doesn't become Genevieve and Robert or something like that?
Still Melissa & Doug.
Okay. That's good. You also just recently bought Hapiko, am I saying that right?
Hapiko.
Yeah, Hapiko. This is a cool product if you haven't seen it. Of course, I was doing my digging on the weekend about getting prepped for the conference, then immediately Mark Zuckerberg knows and sends it into my Instagram feed. Stickerbox is the lead product.
Yeah.
If you haven't seen this, it's very cool. You want to talk about it?
Yeah. You've asked me to describe the product.
Yeah.
I will take a second to describe it. An incredibly simple product that does such an incredible thing. A simple red box, one screen, and a button. A child or even adult press that button, your wildest imagination, what are you thinking, what do you want to see, and it will print out that as a sticker. You take that sticker and then you color it, you do what you will with that sticker, and you're building out your collection, and that's how you're interfacing with the internet. You're not interfacing directly with the internet. You're using the AI and digital as an enabler to have physical play. That's what makes it so special is the connectivity between digital and physical. It is, I think, the future of play, where it's just not in one medium. This is what this has.
Secondly, the OS system, the proprietary OS system, is truly child safe, which is so incredibly important in this space right now. If you're bringing an AI-enabled product, you have to be sure of it being child safe, and this is what this is. Lastly, from being the CFO, what I like about this is that the reoccurring business, the reoccurring revenue model that it creates, right? You're buying a box, you're buying the razor, and then there's this opportunity to continue to be buying blades. When we were doing the due diligence, the thing that really struck me was the continued engagement of children over an extended period of time with the box, and how we saw that and how we know that is you have to replenish, you're buying stickers again.
Yeah.
Right? The more you are using it, the more stickers you are buying, and what struck me was just the high rate of replenishment, which shows how engaging this is for children. When we look at what we can do when the team at Hapiko is under, or with us at Spin Master, we can bring the scale. I think they have been sold out 13 times since launch. Right? From their supply chain, they cannot keep up. We have that power to bring the supply chain. We then have the power to actually bring it out to our customers. We then also have the licensing relationship to be able to extend this product across even greater capabilities than it has today.
Bringing them into the team, us working with them, us learning from them, and them learning from us, we are really excited what this can produce in 2027, and more importantly, beyond, as we continue to build out the product line with them.
Refresh my memory too, for Hapiko, they are a single product company more or less, or?
In market today as a single market, as a single product.
Yeah.
What attracted to us is the pipeline of products as well. There is a series of additional products. Again, this product, where you see it today, where you will see it two, three, four years from now, while still being a red box, I think it will be able to do so much more over time and create that reoccurring revenue stream, which is so exciting as a CFO.
Excellent. Let's talk about some of the other franchises too. Obviously, when you think about Spin Master, PAW Patrol is probably number one. You have just had the third movie, I believe.
Yeah.
Come out. Can you talk a bit about the response from consumers and retailers, and how you plan to capitalize on the success of it?
Yeah. Capturing the PAW moment has certainly been a goal of 2026, and capturing it across all the creative centers. That is another important part of what the leadership of Christina is helping us work through, is really capturing the full power of the three creative centres that we have. The movie came out in August. I think it was the highest-rated movie, which is fantastic to see. There is multiple elements to the movie in terms of the economics of it. What we will be receiving in Q3 is the production revenue associated with that, so $20 million. From a box office perspective, it is performing in between the first and second movie, perhaps closer to the first movie.
At about $150 million-$155 million box office. Now, just as an aside, our partners and we are really happy with it. The exhibitors are really happy with it. Our distributor's really happy with it. We're happy with it. If you think of the gross of what that would equate if it was just adults buying tickets, it's like a $300 million gross. That's a lot of people in theaters, and especially this movie is shown predominantly earlier in the day, so it's great. All our partners are really happy with it.
Now, from an economics perspective, perhaps it's a little bit on the lower end where we like to be from a gross, but again, it's not just one leg. There's multiple legs to this, and our toys are certainly outperforming the first and second movie. We learned a lot from how to market our toy. Well, first of all, what to bring, the price points, and then how to market it and how to activate it. We had at Walmart, Paris Hilton, we had Nick Carter at Target. Amazon had a promotion associated with it. From a POS perspective, the swing of Spin Master in the U.S. or from stable or slightly declining POS happened in August to be positive, and we've been positive ever since, and it's been built partly based on the success of the toys that are certainly exceeding the first and second movie performance.
Then it's more than that, too. There's the new digital game that came out. This brings a lot of excitement to the brand. We have a new series of PAW Patrol. We have Rubble. There's going to be some new announcements that are going to come out soon. I think our viewership on Netflix is up 5%, so the brand's incredibly healthy, and that's one of the goals of the movie, too, is to bring back health and keep the brand healthy as you go through different movie cycles.
One of the tough parts about the toy business is always trying to time these product cycles well. Third movie done, do you keep pressing forward on that, or how does the company decide when to really continue to press those franchises or maybe take a break from them?
Yeah. PAW is something we continuously invest in. As I just go back to announcements to come and all the partners that we had, and I walked through kind of the reasons why, especially from the exhibitors perspective as well as from our partner at Paramount, are very pleased with the performance of the movie, and more announcements to come obviously over time, but those we'll have to wait for.
Okay.
The cycle's about, it takes about three to four years from a decision to move forward to be able to release another movie.
You talked a bit about gaming. That's sort of a, from my understanding, a more nascent part of the business. That's something that's growing. How should we think about investing in that side of the business as we go into 2027, 2028?
Yeah. Just to give some background, our digital creative center has, I call it two studios or two real platforms and three revenue streams. The two platforms are Toca Boca, which is a platform aimed towards kind of starting around 6 to kind of early teens. More girl-focused than boy, if you look at the user base, which is a great demographic to have. Somewhere between 50 million and 60 million active users around the world, and it's an in-app game purchase. What we're doing with that brand, because it's an at-scale brand, an in-scale product, is that our focus is on bringing more content and more partnerships within the game, as well as improving the tech stack.
We have been doing a lot of work around the tech stack in the first half of the year, and that is why you are kind of seeing some within that platform, kind of stability in terms of revenue. When we look in the back half of the year, the amount of partnerships we have, we believe, that will ultimately drive the revenue growth. We just announced, for example, a partnership with Adidas. There is going to be some new announcements that we are going to have, and that drives more in-app purchases. It drives more people to the platform, and then more in-app purchase. Our other focus is to take Toca Boca out of the digital world and bring it to the physical.
One of the achievements that I think the organization is incredibly proud of, is showing how the digital creative center can work with the other creative centers. Now we have Toca Boca within Miniso, a retailer throughout the world. We can buy Toca Boca product. You can actually get your hand on it, which is a pretty cool thing. When you look at Piknik, it is an earlier stage investment at about a half million subscribers, so it is a game learning platform for a little bit younger audience. Half a million subscribers. The goal within Piknik is to continue to create more content that ultimately drives retention, which then ultimately makes the unit economics stronger, and then you invest more marketing in. That is the cycle that we are in. Earlier this year, we bought a company called Lylli, which is a reading app.
Ultimately, you can imagine how that can work within the Piknik universe to help with retention. Lastly, in terms of revenue stream, the third revenue stream would be these studios create applications or apps and games, and there is a way to monetize those as well without harming the two studios. In fact, it actually serves as a vehicle to attract users to the studios. You essentially partner with Apple, Google, Netflix, and your games will be on the platform for one to three years, and you are getting a fee associated with that. Digital, which is obviously a smaller part of our business, but from a revenue perspective, but from a profit perspective, is a much bigger part because the gross margins are about 2/3 roughly, versus toys that are about 50%.
Right. How does the outlook for AI impact how that industry, you think, plays out over a while? Because so much of what you hear about is the ability to sort of quickly generate these apps. Do you think those margins get even better going forward, or is it still too early to tell?
Look, we look at AI in a number of different lens. The first is how we use it internally as a company.
Yeah.
As an organization, we are adopting, leveraging technology to work us more effectively, efficiently, and collaboratively. We are seeing that every single day. Specifically within the studios, certainly being able to create code, leveraging AI is much easier today and will continue to get easier. That is something we are leveraging. Then on the entertainment side, being able to create short content is something that is much easier to do, too. Instead of having to make large bets around new content, it is so much easier today and tomorrow even easier than today to quickly create content, test it out, will it work, and do I want to invest further in this IP with a series or a movie, et cetera. So it de-risks, if you will, some of the investments that we have to make within digital entertainment.
Got it. We have about just under 10 minutes left here. We will maybe stick to some numbers, if you do not mind.
So you talked about in your last quarter, you reiterated your full year outlook for low single-digit revenue growth, mid to high single-digit EBITDA growth. What's your feeling about how the rest of the year plays out?
Yeah, sure. Thank you. Number of questions. I like those.
Yeah.
When we had our second earnings call, we obviously, as you said, reiterated the guidance, and we also laid out how we thought Q3 would transpire. Pleased as we kind of getting closer to the end of the quarter to see it transpiring as we expected.
Yeah.
More specifically on that is that we said we thought we would see stable revenue. The reason for the stable revenue is we have obviously the movie revenue that I alluded to before. But the headwind that we were going against was that in our earnings call, we called out that in Q2, there's about $40 million of toy revenue that when we were doing our planning, we expected it to come in early July. It came in late June. That was related to direct imports around predominantly the PAW Patrol set of toys. So that's a headwind of about $40 million that we took out of Q3 and put in Q2 and realized. If you normalize for that, I think we see some growth in our toy side.
On digital, complicating it is that the partnership revenue that I talked about last couple questions ago, the rev rec associated with that is always a little bit tricky. Not to bore everyone, but from a rev rec perspective in digital, when you have these partnership deals, you have to assess whether you still have a responsibility over the next three years as to whether there's anything else you need to do. Last year, there was two deals, one in Q3 and one in Q4, one for $12 million in Q3 and one for $8 million in Q4, where it was a three-year deal, and it was a little bit abnormal. We met all our responsibilities, so we had to rev rec a three-year deal in year, and that is not the norm of what has directly happened.
So that's kind of the headwind on why you see stability. From an EBITDA perspective, we expect to see a slight decline year-over-year. Really two factors when you have kind of stable revenue, but from a gross margin perspective, we said about 200 basis point contraction. A few reasons for that. First is when you release the movie, there's production revenue and a lot of amortization of the content you created. So it's not very accretive initially. It gets very accretive when you have your distribution revenue later on.
But in quarter, not very. Second part would be going to that $12 million. There's no cost associated with that partnership revenue last year.
Right.
So incredibly last year, accretive.
Pretty high margin last year.
Yeah.
Yeah.
This year you do not get it. Lastly, there is that higher commodities that we talked about, and we said, there is about $15 million that we are working through and we are absorbing within the guidance range we have. So that is what creates the gross margin pressure. Lastly, there is about $12 million of marketing that could have happened in Q2, but ultimately is going to happen in Q3 when we look at it. So that is why you ultimately see stability in our revenue and some EBITDA pressure or at least decline year-over-year. Again, this is how we thought the quarter would play out within the overall guidance range
Yeah.
That we gave for the full year, and we will update the market last week of October on the remainder of the year.
How are you feeling about the consumer demand, pricing, given everything that is going on in the market? Maybe you are hearing something from your retail partners, too, that would give you a little bit more insight as well.
Yeah. The consumer is resilient. That's the headline. Perhaps it's because it's our product, but I think there is a general resiliency right now that you're seeing in the consumer. Toys is something that certainly people make trade-offs for. In other words, they will trade off for toys for their children.
Yeah
When they're making choices, there certainly is a bifurcation of consumers, where you have more established, a little bit older, maybe wealthier, that are more prepared to pay for higher priced items. But younger families, a little less affluent, still want to buy toys. It's an important part of the childhood of their children or their grandchildren. It's still part of their purchasing behaviors. With Spin, we sell across all channels, whether it be specialty, hobby, mass, DTC, or value. So there's always something for someone.
We're very careful to have more than 50% of our SKUs below $19.99 as well, going back to something for everyone. But one of the products, for example, that we are chasing right now is a $79.99 product, which relates to the PAW movie, which is a truck with an inflatable dinosaur. So there's something for everyone, and it's important for us to ensure that we bring value for our consumers and also for our retail partners.
One of the things you guys have been talking about too is the ability to generate a little bit more margin expansion going forward. I think you sort of bucketed it at about 50 basis points-100 basis points per year. What do you guys have to do to deliver that long term?
Yeah. Thank you. This year, the midpoint of the guide would assume about a 70 basis point improvement if you take the midpoint year-over-year. There are a few things going in our factor. Any business that grows, there is some fixed cost portion.
Yeah.
You are going to benefit from that. That is not unique to us. What perhaps is unique to us is the three creative centres that we would like to grow faster, being digital and entertainment, are about, if you take them together, 67% gross margin versus a toy gross margin of 50%. Just as your mix shifts, that will also drive. Lastly, one of the focal points when Christina and I first joined, in our first 12 months with the management team, we have been re-looking at what we have been doing, and we have been looking and saying, "Are we getting the returns that we want to get on these investments?" If I look back in the last 12 months, we have restructured some of our workforce as far as where we are focused.
Yeah.
We have shut down studios. We have stopped investment in some assets. We have held some variable costs fixed as we redeploy those dollars. There is work that we can do within our cost base, and I can comfortably say we are not done yet, doing some of being thoughtful around how to get better returns on the assets that we have.
Okay. Just for our last question, probably a good idea to take a beat and talk about capital allocation priorities for the next couple of years.
Sure. Really proud of the team. If you look at our debt levels today, if you strip out capital leases, we're, I think at the end of Q2, 0.3 leverage, so really low leverage. Since the acquisition of M&D, we paid down $350 million of debt. We returned $200 million of capital to shareholders. We have done M&A. We create a lot of capital. The first thing is we'll do is we'll reinvest in the business. That's number one.
We want to grow the business. We want to do it through OpEx and CapEx. Followed Cap-
What are the just big CapEx buckets for the business?
Sure. Yeah. Our business is kind of like a mid-single - digit capital intensity business.
If you think of toy, it is less than 2%. It is somewhere between 1 and 2, as that is like the dyes and the molds.
Yep
For the toys, the bigger bucket in all it would be entertainment. When you are creating content, you are capitalizing that. The PAW movie would have CapEx associated with it.
Yep.
Lastly, within digital, as you are building new apps, would have, and then there is running the business, the steady code, running the business. CapEx is investments in the business, M&A, which we have shown the ability to do, and it has driven the growth. We target a high teen IRR. Even when you include M&D, which obviously was not from the fact that we took the impairment, we are still very comfortably in the mid to high teens in terms of our overall M&A portfolio. Lastly, we will return capital to shareholders. We have done it through the NCIB, which is our third year in a row. The first two we fully utilized. We are now well underway. We have a quarterly dividend, which will be in our third year next. We are in our second year this year, so we are really pleased with.
Lastly, we pay down debt, which we have shown the ability to do, and have that really low leverage, which creates huge amount of flexibility for the business as opportunities present themselves out there.
Perfect. All right. Well, that is our time. I want to thank everyone for attending today. Thank you, Jonathan.
Thank you.