Spin Master Corp. (TOY) Earnings Call Transcript

[Audio Gap] Down or [ full thing ]?

I'm going to go to Stephanie first. Where's Stephanie? Current? Do you like my Sri Lankan look? My Sri Lankan surfing look?

[indiscernible]

Yes. Okay. Fine.

Good answer, Steph. Okay. Well, yes, that's the first time we've had you in the video there isn't it. What's the next hairstyle going to be, that's the question. How are we innovating?

Yes. That was pretty good, Mark.

So Spin Master was founded in 1994. So we've just celebrated our 25th anniversary, and we've been growing and diversifying ever since 1994. Since going public in 2015, we've grown our revenue from about $1 billion or just under $1 billion to nearly $1.7 billion last year. We're recognized as the industry leader in innovation and for our ability to develop toys and games that spark imagination for kids and adults alike. We have a scalable international platform and a strong foundation for continued growth across our 5 business segments. You see the pie over there with our 5 business segments. Now we look at our business now through 3 verticals, not only physical toys and games, but also through our entertainment properties, and increasingly, our digital toys with Toca Boca and Sago Mini. So we've created a portfolio of entertainment franchises and the system to generate new IP, and we have a very finely honed ability to monetize our IP. In 2016, we complemented our physical toy and entertainment business with the acquisition of Toca Boca and Sago Mini. Our industry is undergoing fundamental change, and we're moving quickly to adapt to the new realities, leveraging the underlying strength of our core business, our dedication to innovation, our financial stability and a renewed commitment to operational excellence. Despite our success, we're not close to being done. We're focused and we're ready to grow. A little bit more detail on our global network, which is a really important part of our foundation for future growth. We strategically built a global sales marketing innovation network that scales 28 businesses, 6 R&D centers around the world and generate sales in over 100 countries. We're also ramping up our sourcing and procurement activities outside of China with new manufacturing capabilities in Vietnam, Mexico and India with other countries under consideration. It's very important that you understand that this multidimensional global platform gives us a competitive advantage in terms of our ability to understand kids' play patterns and serves as a foundation for future growth. Let's go deeper on our 4 growth strategies and how we look at execution in the context of an evolving kids' landscape. I'm going to hand over to Ronnen now to walk us through this piece.

Great. Thank you, Mark. First of all, I just want to thank everybody for coming, and thank you guys who came from Toronto and you made the trip. It means a lot for us that you guys are physically here in the room. I'm going to say something controversial. I know we're -- Mark loves when I already go off script. I know that we're at Toy Fair, and I'm going to encourage you guys to not only think of us as a toy company. A large part of our business is toys, okay, but there is also the entertainment part of the business and there's a digital toys and games part of our business. And to best elaborate on that, as we've been doing toys for now 26.5 years, and we understand the art form of toys, we understand the innovation part of toys and it's very, very deep within the company, but at the same time, we've been producing entertainment for 12 years now, and Jennifer will talk about it today, and we've produced over 1,000 episodes of content, and we're starting -- we're not starting, we understand the language and the art form of producing and entertaining and telling engaging storytelling. And the third part is with the acquisition of Sago Mini and Toca Boca. And when I was thinking about it, we've been -- this -- when we acquired the business, it's been about 3.5 years. So it's 3.5 years that Spin Master has actually gone up the learning curve and understood this space, but that business is actually going to be celebrating its 10-year anniversary come this spring. So the people that run those businesses have been doing it for 10 years. And I think this is the unique thing that makes us different -- and it makes us different is that we have these 3 very distinct art forms that entertain kids from the ages 2 to 9, and where there's a crossover between those departments, between those areas of the business, there's natural light touch crossovers, which Jason and Jennifer will actually highlight in some of their presentation to you today, and that's where the magic happens. But what I really want to stress to you guys is that each of these areas of the business is a standalone business on its own. You could carve out the entertainment division, okay, and it could run, and it could be independent on its own. And you can carve out the digital part, you can carve out the toy part. I'm not saying we're going to carve anything because this -- that's the magic, okay, of when you look at the umbrella and just going back to encourage you guys, is think about us as a children's entertainment company, a family friendly children's entertainment company that has 3 different ways to actually connect with kids and bring them into the fold. The next thing is our growth strategies, which we shared with you guys for many years. They haven't changed. The first is to innovate and -- innovate and use our external and internal R&D network, which I'll elaborate on; develop evergreen global entertainment and digital toy franchises; increase our sales internationally through our global footprint; and open up offices in various countries around the world and emerging markets; and leverage our global platform through strategic acquisitions. So on the innovation side, everything that we do is rooted in innovation, whether it is starting a potential brand from scratch, which you guys saw today with [ Present Pets ], or it potentially could be taking a long-standing franchise, like DC Comics or Batman, and infusing it with innovation. It needs to happen all over the place. And for us, this is deep in our DNA. When you start a toy company from scratch 25 years ago in a mature business. The only way you can actually break into the business is by innovating, and that's what we did for the first 10, 15, 20 years. And it's so cool because innovation is like a cool buzzword, but back in 1994 when we started, it was like, innovation, kind of, entrepreneur, like kind of that hadn't even been put in the business programs back then. So it's -- this is so key to who we are as a company. It's so woven into the fabric, and you see it throughout all the relationships we have. So let's talk about the internal inventor network. We work with 200 to 300 inventors around the world. And when I was thinking about this today, those relationships are not years long, they're decades, okay? They are decades long that we've been working with these inventors. Some of them are new, right, because we're infusing newness, but these are decade-long relationships. And we do interesting things like, for example, every single year, we bring the inventors to Los Angeles. We show them our complete line. We open up the kimono because we've been doing business for so many years, and we tell them exactly what's going on in our business. And the reason why we do that is so that they can actually invent and understand what's best needed for our line, okay? And when you go back to Batman today, you'll see inventions all over the place because they've known about it for 2 years or 1.5 years since we got the license and they've actually infused it into that product line. And so the inventors are very smart because they're like -- they want to return on their time and where can they best land a product so they can get the royalties. The other part about our business, which is amazing and getting stronger year in, year out, is our own internal development. So we have our team called Act, which is led by Amy Pruzanski and David McDonald, 2 toy veterans, extremely tenured. That's the most amazing thing about our business is we love people that have been in the industry for long periods of time that are tenured and that understand it. Because to understand the toy part of the business, it's an art form, and it's something that gets passed on to generations. And so when you have people that are very tenured, it really livens it up. So we have their Act team. We just started a team called [ Pact ], which is focused specifically on innovation and packaging because packaging is becoming so much more important to win at retail. And we also have our innovation team in Japan. We also have our innovation team in China. And so this real infuses and gives us a richness of ideas to work with. And the last thing I just want to impart on you guys is that the most important thing is to have a really wide funnel, okay? In our industry you just want to have a wide funnel of ideas, okay, because the bigger your funnel of ideas are, then you can have more selection, and you're not so -- you're not stuck. You just have -- it's basically -- it's like a contest, okay? If you have a lot of product, the best stuff rises to the surface. And then the key part is to actually be very judicious in terms of what you actually put into the line. But this is what we're constantly focused on is actually making sure that the funnel is the widest. Am I slow Mark? Am I slow?

No.

Okay. Good. Just to make sure -- the funnel is super wide, okay? And then you have choice and you have optionality, and then you have longer time to develop things. The longer you have time to develop things, the things are better. Like that [ Present Pets ], that's 2.5 years' worth of development, just to share with you guys some inside baseball. The next is the way we do our pipeline. And you guys have heard us talk about this for many years, it's a 36-month brand innovation pipeline. And this is so, so key to our business. And it's rooted in 3 things. It's rooted in visibility, okay, it's rooted in realism, and it's rooted in cross-function. And the visibility is the most important thing. The people that are the GBU leaders, the people that run the businesses, their visibility looking 3 years out, how their business is going to perform versus where it is today is the most important thing, okay, that they need to do. They have to have a very clear understanding on what their business is going to be like in 3 years' time from now. And if there's drop-off in their business, in their business segment, they need to have realism with what that drop off is, and then they have to delve into the cross-function, which is the ability to tap into either our innovation network, internally or externally, whether or not they want to fill up their pipeline with a licensed property or potentially with an M&A acquisition. And so it's this coalescence that comes together. And we meet on a regular basis, and we have these hard conversations that are based in realism. What is going to happen with the business, okay? And everybody goes after it, and we've started this now for many, many years. And it's -- I actually, I was like, do I really want to share this with the world because this is something that we came up with as a way to take out the cycle, okay, on the toy part of the business. And we're very proud of this, and we're very proud of the cross-selling functionality. And the last thing I just want to say on this is if you saw our performance on a top line perspective, in 2019, ex Hatchimals, our business grew 16%, which is a testament to this process, which is a testament to the invention team, which is a testament to the licenses, M&A, to everything that goes on in the business. On the next slide, we just want to talk to you guys about what we do with stuff like Hatchimals that is -- brings in a lot of revenue. And what we do is we actually diversify. We take success, we take wins, okay, and through those successes and through those wins, we diversify the portfolio. And what I'm super proud of this Toy Fair is within 1 year, what the team has actually done with the Gund portfolio is absolutely amazing, and they're just beginning. If you see Baby Gunds with all the new innovation they brought, they told me that they went into the vault because the company is over 90 years old. They told me what's in the vault is unbelievable. That whole crinkle stuff that that's -- the Crinkle Tinkles came from the vault.

Ronnen, I think we've actually got some of them on the chairs, is that what you're talking about?

Yes. The Crinkle Tinkle, yes, it's on the chair. So it's the ability to actually buy a company like Gund with this incredible brand, with this incredible heritage, with this incredible vault, and infuse it with super talented people, super talented people. [ Lauren ], that you guys heard, I mean, her and her team, the team that she's built has been spectacular, and I think that company is a jewel. I think it's a diamond in the rough. And I think the Baby Gund is a ruby within the rough, and it's just an incredible thing. So this is what this just highlights is the ability to clearly identify and use our money from the big things like Hatchimals and get diversification and steady reoccurring revenue streams. On the license stuff, I just want to, again, highlight Monster Jam and DC. And it's one thing to actually win a license and it's another thing is what do you actually do with the license. And I'm really proud of the company for what we've actually done with those 2 licenses. Monster Jam in 2019 experienced the highest retail sales that they've had in 10 years. The highest retail sales in 10 years. So that was a testament to the focus and to the team and everything that Adam talked to you guys today in the presentation. The same thing with DC. We got the license. The question is, once you get the license, what do you do with it? How do you innovate the license? What are you going to do? And I can tell you that it's set in January, and it's off to an incredible, incredible start. I encourage you guys to see it at retail and to speak to the buyers and just to get some insight onto how that line is performing and how it's performing up against its competition. But it has exceeded our expectations and it is a testament to what happens when you get a license like that. And so we're very focused now on getting other A licenses and getting other A licenses in the fold. I think that we are an appealing option for the industry as a result of what's happened with Monster Jam, what's happened now with DC and also with the solidification of our global footprint around the world. We truly are a global option, which is super important to all the various licensors in the marketplace. And so our goal is to secure one license a year. We're very focused on making that happen, and over and above smaller ones that may come into the fold. I also want to note that we did sign Gabby's Dollhouse this year, and that's coming out next year, but it's going to be on Netflix this year. It's another preschool property, which rounds out our portfolio. And it's in partnership with DreamWorks, which we have a great partnership with How to Train A Dragon (sic) [How to Train Your Dragon]. So it's in partnership with them, and it's going to be on Netflix, as I said, and we're very much looking forward to that coming into our preschool portfolio. And lastly, on the area of television shows. So usually, I speak for a long time. So I'm going to defer to Jennifer on this one, and Jason. But I just want to tell you that the individuals sitting at this table that run these businesses are exceptional human beings. They are so passionate about what they do and so skilled and so tenured in their space, and we're so lucky to have them. And the team that they actually put together and the people that work with them in the studios are exceptional, and I encourage you guys all to come to Toronto and to get a tour of our seventh floor, our entertainment floor. I encourage you guys all to come to visit Sago Mini in Toronto. They're not in our building because Sago Mini decided that they wanted to preserve their own unique culture and they refused to come. It's a whole story in itself. If you guys can just give me 2 minutes, I'll tell you guys a really funny story. Have I ever shared with you guys the story?

Some of the people.

This is a funny story. So basically, after we made the acquisition, we moved into this new office in Toronto. So I said to Jason, I said, "Jason, why don't you guys come in. It's a new office. You can work with the entertainment team. It's great. It'd be fantastic." He's like, "No, you know, Ronnen, not everybody is so excited." I'm like, "Okay, well, you can still come." He's like, "Can I do a survey?" So I said, "Survey? Who does surveys? We're entrepreneurs. Okay, do your survey." He does a survey, it comes out really bad, they don't -- no one wants to come. But I said, "Jason, I'm like, can I come do a town hall with everybody and speak to the group." He says, "Sure, you can come." So I come, I speak for 1.5 hours, okay? I pull out all the stops, every bit of charm I possibly have. He said "Ronnen, can I do a survey?" I said, "Sure, do a survey." He called me back next week, he goes, "Ronnen, it's worse." It's worse, it's worse. But I will share with you, it was -- and I was like, "Okay. Fine, stay where you are." It was the greatest decision because what we've learnt, okay, is when you make an acquisition, the best acquisitions are the ones that you leave alone. You leave them alone, you just do light touch when it comes to strategy, and you'll see some of the strategy Jason we'll talk about now, but you leave them alone. That's one of the greatest learnings I can share with you guys in the last 5 years is when you make an acquisition, pay a fair price, okay, with great management and leave them alone, okay, because that's where they thrive. And this was probably -- this acquisition is worth 3x, okay, if not 4x, okay, what we paid in -- back in 2016 for it. So -- and the other thing is just the -- and I'll leave it on that note. I'm super excited. We spent a lot of time in the last 2 years strategizing and what Jason is going to talk about is about 2 years' worth of work coming to market now, and Jennifer is going to talk about stuff, which is also a year's worth of work that's coming to market. So with that, I'll bring up Jason Krogh.

Thank you, Ronnen. That was quite the introduction. So I'm Jason. I'm the guy who refused to move his team into the Spin Master office. I'm very excited to be here and to share the work that we're doing both at Sago Mini as well as Toca Boca. First, I wanted to speak a little bit to our history. We're best known as creators of children's apps. So we are the leading brand in creating children's apps for all the popular platforms. Together, the 2 studios have published more than 70 titles, generated more than 350 million downloads, and we have 20 million monthly active users. So that means there's 20 million devices globally around the world that on a given month will fire up one of our games. I also have there the fact that we have subscriptions. So this is relatively new, but we have 120,000 active subscribers to the products on the Sago Mini side of the business. We have -- I'm not going to be very humble about this. We have 2 fantastic teams, truly cross-functional, so developers, designers, animators, artists, analytics people, performance marketing people all sitting tightly together, chasing all these exciting goals. The apps we have built so far are really just a foundation for where we are going next. So let's go to the next slide. So again, we are based in Toronto. Sago Mini focuses on the younger preschool audience of 2 to 5 year olds. Toca's studio is based in Stockholm, and they focus on ages 6 plus. For us, we're really focused, obviously, on apps. For monetization, we're really focused on subscriptions, fits really, really well with parents who are looking for preschool content. For Toca, they're also, obviously, in the app business but are looking at -- they're more focused on in-app purchase monetization, so freemium monetization and also exploring multiplayer gaming. So let's keep going. I don't have really -- this is the only chart I have in the presentation today, not a big chart and graph guy. But I did want to highlight just the size of the gaming market in general and its dynacism. So it's a massive industry, and it's been growing steadily at 15% to 25% year-over-year. I often go back to an analyst, [ Matthew Ball ], who talks about some of the unique qualities of gaming and what drives its growth. For one thing, all of the technology improvements, both platforms, hardware and software, often are not stealing customers away from one space, but in fact, opening gaming to entirely new audiences. And that's really what was our story. It was the iPad came out in 2010, and suddenly, a whole generation of children were going there for a gaming experience. He also uses the term sort of IP kiln. This idea that the fact that we have very tight feedback loops, we're working directly with customers, we're constantly iterating, we published something like 40 updates in the last year, means that we can be very responsive to our community, and we can generate a lot of great IP. Okay. Let's keep going. So I'm going to start with the Sago Mini side, kind of walk you through our sort of key products, including a couple that are brand new. So first is Sago Mini World. So Sago Mini World is a digital subscription service. It combines all of our individual titles into a single app and parents subscribe monthly or annually for access. We have 120,000 active subscribers inside World, and it's growing quite nicely. It's $7.99 a month or $49.99 per year. And we introduce new content throughout the year, so we launch 4 to 5 new games into Sago Mini World. So on the back of the success we've had on this, we have really refocused around the subscription model and looked at new places where we can take this. So the first one is a brand-new physical subscription service. So if we go to the next slide, you'll see Sago Mini Box. We launched this just a few days ago. So it's a new subscription box service sold direct to customer both through our existing audience and fans through the apps as well as new customers. The boxes are really, really beautiful. Everything inside the box is really thought and designed from the ground up for this distribution method. And the idea is this is a package of sort of play as a service. If you are a family with a preschooler in your life, especially if they like Sago Mini apps, this delivers fantastic pretend play experiences, and it's the best thing in its category. Everything in here is really designed and speaks directly to the kids. So it becomes -- it takes this experience of receiving mail from our characters and really magnifies it. So I'm very excited about this one. It has huge potential for where this can go in the future, and it also speaks to our cross functional team. We have people who work in e-commerce, we have people who work in analytics and digital marketing as well as toy design. Let's move on to our next thing. So this one is completely new. We've been working on this for nearly 2 years, I think. So we are launching a new learning platform. So Sago Mini School is going to be an educational app. It's also a digital subscription. It's going to launch in Q2 of this year, and we've consistently seen demand and interest from parents for educational digital products. And we see there's a gap there in terms of the quality of what's available currently, so I'm very excited about this. It takes a very modern spin on learning. It's not just 1, 2, 3s and A B Cs, although those are in there, there's a lot of problem solving, creative self-expression and other themes in here. So again, designed from the ground up. So everything in here is sort of state of the art in terms of usability and functionality. We're going to launch new topics within School every single month. And again, it's going to be available for $7.99 a month or $59.99 per year. We have a little video, so why don't we take a look. [Presentation]

So that is Sago Mini School. It's the first time I'm really showing it to an audience outside of Spin Master, so I'm very excited.

Jason, can you just spend 30 seconds telling everybody about the educational consultants and the type of learning?

For sure, [ Ethan ]. So one of the big insights when we first started working on this was looking at sort of the most contemporary thinking in preschool education. There's a lot of stuff around play-based learning. The province of Ontario where we're based is actually a leader in this space of play-based learning and curriculum. And I think the big idea was children today are raised with all this technology, which allows them -- will help them with spelling, will help -- they're very good calculators, these devices and technology we have in our life. And so where does that leave us? It really leaves us with a generation of parents who want their kids to be curious, who want the kids to ask questions, who want their kids to be creative problem solvers. Find the problems and also to express and communicate those problems. So it's really zooming out beyond sort of the core curriculum about all these kind of skills that just create good learners because if you're a good learner, you can adapt to all the change that the world can throw at you, and that's really the big idea that underlies this. That also ties in nicely with this. So the parent app is a really cool feature of Sago Mini School. So the app actually has a companion parent app, and so parents can monitor and can see the activity that their kids are having. But it's not about like, here's how many words your kid read, or here's how many things they can add, it's here's a drawing your kid created or here's a puzzle they solved. Well, here's an interesting topic. They were really interested in bugs or they were really interested in rainbows, maybe here are some things you can talk to your kid around these themes. So the idea is to make it very, very easy for the parent to be engaged and become a part of that learning experience. So again, I've never seen this done before, and I think it's going to add a ton of value to the overall offering. Okay. So again, launch in a few short months. This one is going to be quick, but there is a show in the works. So we are working very closely with Jennifer and the Spin entertainment team. This is one of those places where we can leverage all of the expertise that they bring to bear to bring our cast of characters into a new format. So I'm very excited about that one. Let's keep going. Okay, so I'm going to switch over to the Toca Boca side for a little bit. So Hair Salon really was the app that started all of this craziness. So it launched actually in 2011. There's 4 Hair Salon apps out there. It's generated more than 50 million downloads, and it's been a massive hit. It's been -- and it also spans like a very wide age range. And it really coins this notion of digital toy. It's not a game. There's no scores and points. It really is the digital equivalent of the kind of toys that Spin Master makes. So next month, we are launching Toca Hair Salon 4. Some beautiful new features, but the biggest difference here is we're actually launching an in-app store. This will allow us to actually treat the app as a living, breathing product. So we're going to release new content throughout the year and make it available for purchase within the app. So I think that's going to do very good things for growing the business. Let's go on to the next thing. So Toca Life: World. We saw a little bit of it in the video earlier. It's our most successful digital toy franchise across both brands. It is a giant virtual place that actually started out as a series of individual apps. We brought them all together, and again, with an in-app store front so we can constantly release all through the year, literally weekly or monthly, new content packs that are available for purchase as well as new features. This has driven a ton of growth for us. And I do have a little video for you to take a look at. [Presentation]

So that's Toca Life: World. So -- and 2019 was a very successful year for the franchise. Some of you may have seen the partnership we did with H&M. We had a whole back-to-school program in the fall. It was a great example of how we can extend the app experience into other categories, and this year is going to be even bigger. We have Toca Life Stories, which is animated shorts. So 4-minute shorts that are going straight to YouTube. First one just went out last week. We have some toys, which I've seen a few of them around here, done in partnership with Gund, and we are also working on Toca Life subscription box, which is going to be amazing. So we just continue to feed Toca Life: World and raise awareness across all these different categories. I'm super proud of the work that's behind all this. Let's keep moving. So just to sum up, I've shown sort of 6 key products that we're working on, but I also want to reiterate to sort of the teams and the structure that enables us to do these kind of crazy projects. And again, it's something that I'm extremely proud of, this capability to bring a lot of different disciplines together into the room and spin out things that are really focused first on digital play but then can be extended through all these other types of opportunities into other spaces. So that's really the recipe for success and growth for us. All right. With that, I'm going to turn it over to Jennifer.

Just before, Jen, when you go up. Just to close on Jason's presentation, we have 2 really big goals here. One is we want Sago Mini to become the #1 preschool brand in the world -- preschool digital brand in the world. That's what we're shooting for here with everything that you guys saw today. And then the other thing is to focus on building a sizable subscription business. Over to you, Jen.

Thank you. Hi, everyone. Thank you so much. It's really nice to be here. I'm really excited to tell you about all the great things we're doing in the entertainment division and show you a sneak peek of a few things that have never been seen outside of this room before. So I'm pretty excited. So 20/20/20 marks the 12th year of Spin Master's entertainment business. And it's incredible that in that short period of time, we've produced 9 television series, over 1,000 episodes of content, and now over 200 episodes of short-form content for digital platforms, including the Toca Life shorts that Jason just spoke about. And we are in over 160 countries around the world with our preschool series and boys' action series. So it's been an incredible 12 years, but there is a lot more left to come. What we've built is really a testament to the team that we have internally. Spin Master entertainment is headquartered in Toronto, and we have an incredible internal team who work with the best writers, directors, animation studios, voice talent and music composers from around the world. We're very fortunate to have our headquarters in Toronto because it is widely known that Toronto is the best-in-class for preschool animation in the world. That gives us a competitive advantage as well as access to a very deep talent pool, both in Toronto and really across Canada. Our entertainment goal continues to be to launch at least one new entertainment property per year while continuing to extend on existing properties with new content, new formats and new themes every season. We're going to talk a little bit about new formats today. There's a lot of conversation right now about multi-platform content. And really, what that means is that children more now than ever are watching content on everything from their smartphones to their tablets to their laptop to still the TV set in the living room. And we have to be everywhere that they are, and we create content specifically for different platforms. When you hear a lot about this multi-platform approach, that's really what we're talking about, and our goal is to continue to build things across all platforms and always updating and refreshing with new content. So currently, we have a robust and growing global entertainment property pipeline, which includes such titles as Abby Hatcher, season 2 of which is premiering next month on the Nickelodeon and will be debuting this summer on Netflix. Zo Zo Zombie, I think you guys got a chance to see some of the toys upstairs. This is our first direct-to-YouTube format in digital platforms. So this is a short-form content series. We're going directly digital right where we know our audience is. And this is in partnership with CoroCoro of Japan. Of course, PAW Patrol, which is in 160 countries and remains the #1 preschool property in the world. But we're not stopping, we're still going. Just this week, Nickelodeon announced the pickup and green light of season 8, and we'll be talking about another exciting initiative in just a few moments. And Bakugan, our amazing boys' action property, which continues to build penetration globally since its launch in 2019. So season 2, Bakugan: Armored Alliance, will flight on all Cartoon Network channels digitally and linear on March 1, at this -- with all new content and a really exciting new theme. Simultaneously on March 1, the second half of season 1 of Bakugan will go live on Netflix. These 2 events will also be supported and driven on our digital and YouTube channels, which highlights our multi-platform and multiscreen approach to content and to digital marketing. And there is more coming on Bakugan. We are already in production on season 3 and in development on season 4. So you can go on to the next slide. So in new news, a few weeks ago, Netflix and Spin Master together announced a new CG animated preschool series, Mighty Express, featuring an ensemble cast of trains and kids in an expansive world with amazing adventures. Season 1 will feature 52 11-minute episodes, and it debuts on Netflix this September. A complementary YouTube channel with exclusive short-form content and music videos and episodes will launch prior to the series and will drive to that launch on Netflix. This is our first partnership on an original series with Netflix or with a streaming service in general, and that furthers our commitment to these multi-platform franchises and also to new content distribution models. Mighty Express is a property for today's generation of children. It's modern. It's adventurous. It's featuring kids driving these incredible trains that have exciting features and customizable cars. I really think this show embodies what we do best at Spin Master, which is to take a classic theme, add freshness through innovation and then pair it with wonderful characters and compelling storytelling with best-in-class animation. So with that, this is the first-ever sneak peek of Mighty Express. [Presentation]

So that's Mighty Express.

Jen's really sharing today. [indiscernible]

You said you wanted to see something new, so I thought I'd do it here. Did you like it?

That was great.

Okay. Good.

[indiscernible].

You can tell me later. Well, here's the big news. We're very excited to announce, and I'm sure some of you saw the press release on Friday, that we are partnering with Paramount and Nickelodeon to launch the first ever full-length animated PAW Patrol theatrical film, which will be heading to theaters in August of 2021. This has been a really exciting journey for us as a company, for us -- for the series producers, for the creatives behind the brand and everyone across the organization. So last Friday was a really exciting moment that we finally got to share this with the public. Paramount will be distributing the film. It will be global, and you'll be learning more about it in the months to come as we release more and more exciting news around the movie. But this film will feature an all-new location, a new pup, and it will be animated in high-quality feature film animation at an incredible studio in Montréal, called Mikros Animation. And it will showcase our pups in a way we've never seen before and in their biggest rescues to date. With Spin Master producing the movie and leading the creative process, we are building in-house our feature film production capabilities, and it's a really exciting time. We're able to attract best-in-class talent in the feature film arena. And our hope is that PAW Patrol will be the first of many feature films and will set the foundation for other properties to follow onto the big screen. So now I want to talk a little bit about how we view and think more broadly about content and intellectual property creation. We talk a lot about franchises and building a franchise model. And the success of properties such as PAW Patrol has proven it out. It's proven that creating an evergreen, compelling and engaging kids content and then combining that with retail initiative, such as toys, helps to optimize the brand equity and, in turn, drives higher growth and alternative revenue streams, from licensing and merchandising to the live shows and across multiple categories of consumer products in a successful franchise and helps us to diversify and build a broader recurring revenue stream across toys, content and mobile digital direct-to-consumer markets. A franchise model really implies a holistic approach to rights management, which is driven by entertainment and toy and various licensing and merchandising initiatives as well as app-based and console-based games. The franchise is then amplified globally by our strong global presence across multiple content platforms and multiple lines of business. And what that all really says and what that all really means is that when you have a great property that has incredible storytelling and you can get that property onto as many platforms as possible globally and reach a broad audience, and that audience cares about those characters and cares about that property, they will then engage with the products that you put on shelf from a toy standpoint. They want to play with those characters at home. They want to bring those worlds into their living room and sit on the floor and play them out. And when that happens, that really unleashes a broader ability to capitalize, to bring those products into different categories and to really create a kind the franchise you see with something like PAW Patrol. And all that success then, in turn, enables us to do something like make a feature film, which feeds back into the loop over and over again. So really, when we talk about franchise, we're talking about managing all of our rights across television, feature film, toy and other merchandising and licensing categories globally so that every area of the business supports every other area of the business. In our current model with PAW Patrol, it's about a strong partnership with Nickelodeon, whereby they manage the sales and distribution of the show globally as well as the licensing and merchandising activities to nontoy manufacturers, such as apparel, bedding, shoes, et cetera. For Mighty Express and for other franchises yet to be announced, we intend to manage all these functions internally, and we've already built the capabilities to do so. This will allow us to earn higher margins on the franchise as a whole as well as to maintain the care and control of our own intellectual properties. This is important for the future. Everything that we do when we're building these properties and these ideas from the ground up is all about leveraging them, growing them, maintaining them and sustaining them. So the more rights that we hold internally and manage, the better we are to manage our large franchises into the future. So that's all for me today. Thank you for having us. I mean is there anything you'd like to ask?

No.

Okay. Thank you.

Thank you, Jen, and thank you, Jason. It was all so very interesting. I hope you all enjoyed those insights and not having to listen to myself or Ronnen going through those stories before. Anyway, let's move on to our third growth strategy now, which is to increase our sales in international, developing and emerging markets. If you look at the slide, you'll see the industry is around 30% North America, 70% outside of North America, international. If you look at us in 2019, we were almost the exact inverse of that, 61% North America, 39% international. Just as an aside, when we went public in 2015, we were -- around 28% of our sales were outside of North America. And we said at that time that our goal was to get to around 40%. And here we are 5 years later, we've actually just achieved that goal. We've achieved just under 40% in 2019. And now we are resetting that goal to get us to around 45%. If you actually have a look at the handout there, I apologize, it was a QC error there, that 60% should be 55%. We corrected it for the screen, but we're not going to get to 105% of the market. Anyway, we are going to continue to grow internationally by adding sales and marketing personnel in our existing international sales and marketing offices. We're going to open new company-owned offices on a very selective basis. In 2019, we opened up Russia. We also went direct in Greece, Austria, Switzerland and the Balkans. And in 2020, we intend to open up a small presence in Turkey. We're going to focus also on growing our business with our existing third-party distributors in those countries where we will likely never have a direct presence, either because the market is too complex or too small or for other risk management reasons. And then finally, to the extent that we're not present in a country, we will then look to either open up directly or to add in a new distributor into that territory. So hopefully, we'll be sitting here in a few years' time telling you that we got to 45%. Our final growth strategy is to drive leverage of our global innovation and distribution platform through strategic acquisitions. Now our business model is very capital efficient. Just as a reminder, we emphasize variable costs over fixed costs. So we do not own any meaningful manufacturing capacity, we do not own any animation studios, we do not own any warehousing, it's all third party. So if we manage our business correctly and tightly, we're able to generate a significant amount of free cash flow. Now we see M&A as an attractive way of deploying some of that free cash flow. Since we actually founded the business in 1994, we've completed 21 acquisitions, 10 prior to 2015 when we went public, and 11 since. These acquisitions help us strengthen and diversify our brand portfolio and create opportunities for crossover technology and collaboration, as you saw very much with some of the work that both Jen and Jason described today where you see how a lot of this is infused across different areas of our business. The industry is still very fragmented. The top 10 toy companies in the U.S. represent about 45% of the market, and the top 20 represent about 60%. And so below the top 20, there are a large number of small companies that we think represent meaningful opportunities for us to do tuck-in acquisitions, and we continue to look at them. When we look at an acquisition, we tend to look at the criteria that you see on the right-hand side of that slide. I would argue that the first 3 are probably the most important in terms of the filtering. We want to make sure that we're acquiring solid intellectual property or brands. We want to make sure that we have an opportunity to innovate what we acquire. And we also want to make sure we have an opportunity to leverage our global platform when we're looking at these acquisitions. That's not to say that the other categories are not important, but those are certainly the first 3. During the year, we completed the acquisition of HedBanz and also the Orbeez brand that you saw up in the showroom. HedBanz now gives us global rights, whereas we only had rights to North America before. We'll continue to seek strategic, accretive acquisitions, leveraging our strong balance sheet and our attractive free cash flow profile. I do want to say that we will remain disciplined and very, very concerned about our approach to valuation in order to make sure our acquisitions are accretive. And that has been a challenge for us over the last while because acquisitions -- sorry, valuations have become very stretched, and so we've actually passed on a number of opportunities just because we did not believe that they represented value for us. I'm going to very briefly go through the financial numbers. I don't want to spend too much time on this because we have our call coming up on March 5. I did want to talk to you and just remind you very quickly around our monetization strategy because many people don't fully understand our revenue model. So if you look at the page here, it's a busy page, but essentially, it's broken down into 3 categories: you have physical goods, you have content and you have digital toys. On the left-hand side, physical toys, where we actually sell to Walmart, we sell to Amazon and Target. We also sell to third-party distributors, and we're in the early stage of our D2C initiatives, which Laura is leading for us. It's still very small, but over the next few years, we think D2C could become a more important part of our business. Finally, we also actually license our IP to third parties who then create physical goods. You could argue that, that actually belongs in content as well, maybe the arrow should be extended from content over to that as well to represent kind of a joint initiative, but that's what Jen was talking about with apparel, bedding, shoes, pajamas, that kind of stuff where we're actually licensing our IP out and we're earning licensing and merchandising income. We then have our content where we're actually selling our show to broadcasters. We're also potentially monetizing YouTube and video games. And then on the right-hand side, you have digital toys, which Jason went through in detail, where we're actually selling apps. We actually are generating subscriptions. We have in-app purchase money coming in. And then also potentially some physical goods over there as well, as we've just announced with the Sago physical boxes. We're going to go through this again, obviously, on March 5, but just very briefly, I wanted to call out, since 2013, we've grown our top line at around 20% CAGR. We've grown our bottom line at around a 27% CAGR. Ronnen touched on it very briefly. Even though our sales were down in '19 versus '18, I think we were very proud of the fact that we grew our top line 16%, excluding a $230 million decline in Hatchimals. That's a very significant achievement that I don't want you to lose sight of. Okay. Now one of the things that we are very focused on is strengthening our core. Now we can talk about it now. I know many of you want to see action. And that's really why Paul is here and why we are so focused on remediating some of the problems that we had in 2019. We're really looking at the -- through 3 verticals. Firstly, our supply chain optimization. We want to get our DC structure and our capabilities right. We want to improve our on-time delivery and our fill rates and our schedule attainment. We need to improve our customer service. We still have really great relationships with customers, but we did, in 2019, hurt some of our relationships. We are going to be focused very heavily on key metrics and KPIs. And then, again, we want to look at our domestic and FOB mix. There is no right answer to what our domestic and FOB mix is, it depends on regions. North America is more FOB centric, Europe is more [ DOM ] centric. It also depends on the customer, and it also depends on the product. But we have historically been more focused on FOB, which is actually more efficient for us. Even though our margins are slightly lower, it doesn't touch our warehouse system. We moved very heavily into more DOM in 2019, and that was part of the problem that we had with our warehousing issues in 2019. Secondly, we want to focus on process simplification and automation. We want to increase our levels of automation. We want to simplify some of our business processes. We want to be focused more on data-driven insights, and we want to refine our systems to increase productivity, and this is something that Paul and his team are looking at very closely. Finally, you would have seen the announcement about 2 weeks ago around Tara Deakin being promoted to Chief People Officer. This is not a position that we've had before. That was a signal to not only our employees but also to you that we're looking at people far more seriously with far more intent. Tara is a very high-quality individual. Came out of TD Bank, Citigroup before that, and she's going to be really focused on developing our talent pool. We want to make sure that we attract and retain the best global talent that we can. We want to make sure that we allocate resources to the most important areas of the business where they're needed. We want to make sure that we set goals and we improve accountability, and we want to make sure that we improve coordination between the teams. So that really is the internally focused element of what we're doing in 2020. The whole team here is aligned on that. It's not just Paul, it's myself, it's Ronnen, it's Anton, it's everybody across the business to make sure that we remediate what happened in 2019 and that we go forward in 2020. Keep in mind what happened in 2019 was mostly a self-inflicted wound. We know how to do this. We've been delivering product for 25 years successfully, and we just need to actually fix things and get back on to track. We will keep you updated on progress as we go throughout the year on these initiatives. Finally, to conclude the presentation today. I just want to focus you on our capital allocation process. We have a very focused -- we're very focused rather on consistent, effective and balanced capital deployment. We'll continue to be focused on growth, and we're deploying capital accordingly. We'll continue to be deliberate and strategic, especially when it comes to acquisitions, and only adding brands and companies where we see opportunities to add value through our expertise. Our strong balance sheet, combined with our focused working capital management and free cash flow generation, positions us very well to continue to exploit future growth opportunities. So as we look forward, the strength and diversity and depth of our brands, our entertainment franchises and our digital toys, along with our track record of successful innovation, gives us confidence in delivering our long-term organic gross product sales growth targets, which is, as you know, mid- to high single digits. We have a focused financial plan, a leadership team focused on execution and employees who are highly committed to delivering our vision. So with that, let me conclude. Thank you for joining us here today. It's much appreciated. And we'll now take some questions, if you have any.

[ Chase ], that's a great name in the context of our PAW Patrol franchise?

Yes. So my question is, I was listening to the Walmart Investor Day, and I thought it was notable that Doug McMillon, the CEO, made a comment that for the first time in a long time, there wasn't a hot toy this Christmas. And I wonder how much of that is due to a cyclical issue or due to a structural issue. And the structural issue I'm thinking about is in the post Toys"R"Us world, it seems that retailers are only setting toys after Halloween, and we've got this window compression, and it doesn't seem to be that there's an avenue for incubation. So I think you guys put together a great show this year, but I also thought the same thing last year. And I'm wondering what you're doing differently -- sorry, firstly, do you agree with that? Is it cyclical or structural? And secondly, what are you going to do differently in approaching this holiday that you didn't do the past year?

I think I'll take the question.

Go on, Ronnen.

I don't think -- is it working? Yes. I think it's -- [ Chase ], I think it's cyclical. I think that there has been other years in the past when there just hasn't been that like magical toy, and the magical toys rise all boats. It's an amazing thing, it's -- actually, when there's a hit toy and there's something that brings the kids into the space, and it's good for all the toy companies. I think that our industry is extremely resilient. And it will adapt and it will learn from what's actually happening in the marketplace. And so I think a lot of it comes to our marketing and our marketing at retail, and we'll probably share with you guys more specific as the year goes on, how we're actually going to tackle it. But I can tell you that I don't think -- kids are kids, they always want innovative toys, and our industry will actually provide it. And how we actually market it and how we actually retail it and how we communicate it will evolve and it will change. But I think that it's going to be -- I don't think there's anything, let's call it, structurally.

Ronnen, if I could just add to that. [ Chase ], the one thing to keep in mind is that the industry is a global industry. And as we showed you there earlier, 30% of the industry is the U.S. So I don't think you should be too -- I mean, obviously, it's important, but there are other countries around the world where the industry is growing very rapidly, double digits in Mexico, in Russia and in other places, so China, India and so on. So there is still a lot of growth potential, and so don't only focus on the U.S. as the bellwether of everything.

Bobby, you had a question?

So on the shift to the studio model from your current model, could you just talk about the difference in how that will affect the funding or the capital that you invest in that business? I'm presuming the higher margins might be accompanied by more upfront investment?

Are you talking about with the feature film?