Spin Master Corp

TSX:TOY

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. My name is Erin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Spin Master First Quarter 2020 Earnings Conference Call. [Operator Instructions] Sophia Bisoukis, you may begin your conference.

[Sophia Bisoukis, Vice President of Investor Relations]

Thank you, Erin. Good morning, everybody, and welcome to Spin Master's Financial Results Conference Call for the First Quarter ended March 31, 2020. I'm joined this morning by Ronnen Harary, Co-CEO; and Mark Segal, Spin Master's Chief Financial Officer.For your convenience, the press release, MD&A and unaudited interim financial statements for the first quarter 2020 are available on the Investor Relations section of our website at spinmaster.com and on SEDAR. So 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 or 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 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 expressed or implied by the forward-looking 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 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 information on these assumptions and risks, please consult our cautionary statement regarding forward-looking information contained in the company's earnings release dated May 6, 2020. Please note that Spin Master reports in U.S. dollars and all dollar amounts to be expressed today are in U.S. currency.I would like -- now like to turn the conference call over to Ronnen.

[Ronnen Harary, Co]

Thank you, Sophia. Good morning, and thanks for joining us today. Like most businesses, we find ourselves navigating through unchartered waters. The COVID-19 pandemic has affected us all, all of us in some way. Work routines have changed. The retail environment has been altered. Supply chains have been disrupted. And ultimately, consumer demand for many items has been affected.The important things we want to emphasize today are that while COVID-19 is having a negative impact on our business, our teams are working diligently to address the obstacles in the face of this challenge. We are seeing signs of progress, and we are financially strong, and we remain committed to our core principles that have contributed to our past success.Although COVID-19 affected our global supply chain in Q1, before it was even recognized as a global pandemic, we moved quickly and prudently, adopting measures to help mitigate the impact to our team, our customers, our suppliers and our business as a whole. Our highest priority is to protect the health and safety of our 1,800 employees working in 28 offices spread over 18 countries.Since early January, we've been balancing multiple dimensions in our global response, focusing on employees' well-being and safety, workforce engagement and productivity, business continuity and health and, finally, ensuring that we continue to live up to our core values.All offices, except for our Hong Kong, China and Vietnam offices moved to work-from-home protocol in early March, and this remains in place currently. We're expecting to be back in our offices in North America and Europe sometime in June. In the meantime, we've enabled technology tools to assist people working remotely. We have successfully migrated our complex design, development and engineering functions to home-based operations, together with all other functions. Our team has really pulled together, and I'm very proud of how well we have operated under the circumstances.Giving back to the community has long been a part of our DNA. So in addition to making the safety of our employees a top priority, we've also been doing what we can to help fill the need for personal protection equipment for frontline health care workers. Our product development team came up with an ingenious solution to create PPE in late March. Using existing headbands from our HedBanz game, the team created a face shield for health care workers, and we are now producing 20,000 a day at 3 facilities in Mexico. To date, we have distributed over 200,000 units to over 100 health care facilities in Toronto, New York, California and Mexico with plans to send to other locations globally. We received many positive comments from hospitals, and it has been overwhelming to see what they are dealing with.When COVID-19 first emerged in early Q1, it affected the capacity of our supply chain in Asia, especially the 60% to 65% of our capacity located in China. Since early April, our key factories in China and Vietnam have been operating close to full capacity. Elsewhere, factories in India and Mexico are currently closed or operating below capacity. But these represent a small part of our supply network. Although the disruption in Asia in Q1 will have an effect on our availability of products in Q2, I want to acknowledge our entire Asian team who did an amazing, outstanding job at reacting to and mitigating this disruption.In many countries, since mid-March, consumer demand for our products has been impacted by the disruption caused by the virus. However, we began 2020 with a strong start with double-digit POS growth in the first quarter. Areas of strength included the launch of the new DC Comics toy line, Bakugan, Monster Jam, Kinetic Sand and Games & Puzzles. At that point, from a brand and product perspective, we observed very strong demand for categories such as Games & Puzzles and activities, which includes arts and crafts, given the new imperative for parents to keep their kids occupied while indoors. Kinetic Sand was already seeing exceptional sales increases early 2020, and the entire line has further benefited from stay-at-home guidelines. We saw similar trends following 9/11, and the lasting positive effects on the category were felt for years. We are leaning into these categories, and we believe that demand will continue throughout 2020 and going forward.Keep in mind that we are the second-largest games and puzzle manufacturer in the U.S. and are a major player in activities.Where games, puzzles and activities benefit from stay-at-home, other product categories across the industry have struggled. Purchases driven by events such as birthdays have declined, and kids cannot get together in the current environment. This has affected PAW Patrol. Collectibles and action figures are also categories that are seeing declines, which has adversely affected Bakugan and DC Comics, both of which had a very strong start to the year.Monster Jam also had a strong start this year, building on 2019, the most successful year in franchise's history. However, the lack of live events has reduced some of the focus on brand.From a channel perspective, we're very fortunate that Walmart and Target, our 2 largest customers, stayed open and continued normal operating patterns. Amazon paused all purchases of nonessential products, including toys, for a few weeks in March, but has since resumed purchases. We observed a strong surge globally in online and e-commerce shopping in Q1, especially buy online and pick up at stores purchases in the United States. Sales of our digital toys have grown as parents look for ways to entertain and educate their kids at home. Overall, we saw views up over 30% on our Toca Boca and Sago Mini platforms in Q1 and views are up 100% currently.Toca Boca and Sago Mini combined now average 25 million monthly active users per month globally, giving us a strong base of users to expand both app sales and drive consumer subscription-based products. Sago now has over 150,000 subscribers across its platforms, including Sago School, which went live late in March after 16 months of development and building very nicely.We'd encourage you to think about Spin Master not only as a toy company but as an integrated entertainment business with toys, entertainment and digital toys and games. With kids at home all day and parents being more flexible with screen time, we're seeing a strong rise in unit demand for both our digital offering and entertainment franchises.In February, we announced our newest preschool franchise, Mighty Express, will debut as planned on Netflix in September. Mighty Express features a cast of trains and kids in an expansive world filled with amazing adventures. Mighty Express is our biggest production to date and marks our first series launching directly on a streaming platform. The launch marks the shift from Spin -- for Spin Master as we will hold the rights for all consumer products, not only for toys. This will allow us to improve the margins we made on non-toy licensing and merchandising revenue streams.We also announced PAW Patrol: The Movie, which will be launched in August 2021 in association with Nickelodeon Movies and distributed by Paramount Pictures. The entertainment team is working on completing the voice talent, and we hope to share an update on the exciting cast soon.We are equally excited about our PAW Patrol theme for the fall, Dino Rescue, which will air on Nickelodeon beginning in June. It is one of our strongest themes ever. Our entertainment team is working on our third-party animation -- is working with our third-party animation studios to keep the production of all our TV shows and movies on track in a work-from-home environment, and we are fortunate that the animation production lends itself more easily to virtual work environment, unlike live action, which has been severely disrupted by COVID-19. I want to now update you on the key actions we've taken to address the operational challenges we experienced in the latter part of 2019.Although this quarter, we continued to see higher cost carried over from challenges and management mistakes of 2019, I'm pleased to say that we have made significant progress in remediating the issues. Our goal remains to have the operational issues that caused such a disruption in 2019 largely behind us as we enter Q3, and to make sure we enter 2021 with a warehousing and distribution cost run rate in line with historical norms.There are 2 key areas that we have focused on that I will discuss with you now and Mark will provide further details later. Firstly, we have reorganized the structure of our existing North American third-party supply chain network. We have focused on the consolidation, realignment and simplification of our third-party distribution centers, while ensuring we remain sufficiently agile to respond to the evolving industry and retail environment. We are targeting to ship more cost effectively and manage inventory flow to minimize storage requirements, all whilst improving service levels to customers. The planning phase has been completed, and we are now implementing the changes.Secondly, we are focused on rebuilding our operations and IT teams and improving internal and external cross-functional collaboration, particularly in connection with our forecasting and planning processes. We made some key senior leadership changes in Q1 and are continuing to strengthen our operations and IT teams. We have refreshed and reenergized these areas with highly confident individuals with deep functional expertise. We also created consumer-focused teams. These are consumer-first internal hubs focused on single large customers and consumer groups and comprised of blended dedicated sales, order management, demand planning, logistics and other credit management team members, all focused on serving the customers.To conclude, we are fortunate we operate in an industry that has shown in the past to be very resilient in the face of recessions and other disruptions, driven by low average selling prices for products, potential substitution for more expensive forms of leisure, and most importantly, since parents tend to sacrifice for themselves before their children. Together, with this industry resilience, we have diversified Spin Master's product portfolio across all 11 categories in toy industry as measured by NPD.Remember, in 2019, our sales increased 16%, excluding the $230 million decline in Hatchimals. We have also diversified geographically into 28 direct consumer markets and now serve over 100 markets worldwide.Finally, we have invested in our in-house entertainment and digital platforms that have further diversified and strengthened Spin Master. We are not the same company we were only 5 years ago.Looking forward, social distancing ramifications are likely to continue to create some shifts in consumer behavior even while or beyond the immediate crisis. We expect to see some closures of small-scale specialty stores. We anticipate more controlled foot traffic in stores with shorter, focused trips and less opportunity for impulse purchases in store. We expect to see greater sophistication in online buying and price sensitivity and more parent-driven online shopping with their kids' presence. We are also seeing a significant increase in screen time by kids 2 to 11. In March and April, screen time was up over 50%. This may decrease as the weather warms up and kids return to a normal -- more normal routine. But adoption of more sophisticated entertainment consumption habits will continue.This applies to the gaming acceleration as well. This bodes well for our Toca Boca and Sago Mini platforms. We are also sensing a shift towards co-viewing opportunities as new family rituals around TV emerged in the COVID shutdown.We are seeing a strong desire to comfort kids and return them to a sense of normality combined with grandparent separation guilt. Recall 40% of toy POS come from households without children.We're going to adjust our business to recognize these trends. Our goal remains to create excitement and magic to children globally. Our performance in Q1 is not an indicator of our future potential, and we remain cautiously optimistic for 2020, assuming the world returns to a degree of normality, which it appears to be heading towards. We have an exciting, innovative and diverse product offering for 2020 and 2021 in great entertainment and digital toy content. Our brands, partnerships, products, entertainment and mobile digital franchises continue to resonate with children as our POS demonstrates. Through our integrated resilient innovation-led business model, our diverse geographic platform and our stable financial position, we believe we are well positioned to take advantage of emerging opportunities and regain our momentum. We have made strong progress and expect to exit Q2 with a much simplified and better structures of IT infrastructure ready to handle seasonal volumes. With a solid financial foundation, we can weather this crisis, and we're poised to take advantage of any organic or acquisition opportunities as they will arise.I'll now turn it over to Mark.

[Mark L. Segal, CFO & Executive VP]

Thank you, Ronnen. On today's call, I will briefly summarize our Q1 performance and then turn to a discussion of our ongoing initiatives to improve operating performance and the business considering COVID-19.Gross product sales grew by 0.7% in Q1 to $242.3 million, with an unfavorable foreign exchange impact of $7.9 million. On a constant currency basis, gross product sales grew 4%, in line with global industry growth.On a geographic basis, Europe continued to lead growth, up 13.6% in the quarter, followed by 2.2% growth in North America and a 29.4% decline in the rest of the world. The decline in the rest of the world was as a result of lower sales in some markets in Asia and Australia, with COVID-19 impacting those markets earlier in the quarter. International gross product sales represented just over 40% of total gross product sales. Historically, we outlined the goal to reach 40% of annual sales generated from international markets. We have increased that target to 45%, which we consider achievable.As a reminder, approximately 70% of global toy industry sales occur outside of North America, and we have significant runway for future international growth. Gross product sales growth was led by the Activities, Games & Puzzles & Plush segment, which grew 24%. Overall, according to NPD, the U.S. Games & Puzzles category grew over $200 million in Q1, and we benefited from this. We are seeing growth across our entire Activities and Games & Puzzles portfolio with exceptional performance in Kinetic Sand, which more than doubled this quarter.Based on what we've seen so far in Q2, we would expect another strong quarter from this segment, particularly in the U.S. market, which continues to show extremely strong POS through April. Although the segment overall was up, our Plush subsegment, has been disproportionately hard hit by COVID-19. This quarter, we saw a decline as most Plush customers are U.S.-based specialty retailers who were closed through the back half of March and have not yet reopened. We saw strong growth in the Boys Action and Construction segment, which grew 19.6%, led by the launch of DC Comics licensed products and growth in Bakugan. Bakugan sales were strong in Q1, following the global launch of the second season of the show. Although we were pleased to see very strong sales momentum at the beginning of the year, these brands, along with most other collectible toys, have since felt the impact of COVID-19. Gross product sales in Pre-School and Girls decreased by 10.9% in Q1. PAW Patrol, which was down for the quarter, saw pressure from the combination of high inventory carryover from the 2019 holiday season, later media airing, and in particular, COVID-19, as the cancellation of birthday parties and other event-driven sales affected the brand later in the quarter leading up to Easter.We are still seeing -- or selling well across many markets outside of North America, including the U.K., Germany, Russia and Mexico, where we saw POS growth in the quarter.The Remote Control and Interactive Characters segment continued to show declines, led by Hatchimals, offset by growth in PAW Patrol RC and Monster Jam RC. Gross product sales in Outdoor declined by 15.5%, driven in part due to supply chain disruptions and beach and outdoor area closures later in the quarter. Keep in mind that our Outdoor business is mainly water focused, and the industry increase was more backyard focused. Approximately $2 million of shipments in April will move into Q2 as a result of Q1 COVID-19 supply chain issues. Let's turn now to POS. According to NPD, the global toy industry grew 4% in Q1 and 8% in the U.S. Globally, our Q1 POS, including Hatchimals, was up 10%, 2.5x higher than the industry. Global POS, excluding Hatchimals, was up 19%. We are very pleased with this performance as it demonstrates that, overall, our brands are resonating with consumers.In the U.S., POS for the quarter was up 11%, including Hatchimals and up 19% excluding Hatchimals. In the U.S. and globally, Activities and Games & Puzzles POS was up triple digits, led by Kinetic Sand and Cardinal. PAW Patrol POS was down for the quarter for the reasons I described earlier. Current global POS remains up mid- to high single digits and is bifurcated by region. In the U.S., POS in the last 4 weeks is continuing to grow at even higher rates than we saw in Q1. Activities and Games & Puzzles POS is showing continued strength. We are encouraged to see that recent POS for PAW Patrol, Bakugan and Monster Jam has now turned positive, together with Outdoors as the weather warms up. However, in Europe, except for Russia and Germany, and in countries such as Canada, we are seeing a decline in POS over the last 4 weeks due to the impact of retail closures in these countries. We are observing several trends, which affected our shipments and POS. As Ronnen mentioned, we saw a decline in event or holiday-driven toy categories, such as preschooler vehicles, offset by a significant increase in demand for arts and crafts, games and puzzles and outdoor toys, driven by parents' desire to manage their children's activities at home. With less brick-and-mortar shopping, there were fewer in-store impulse purchases. And when shopping online, parents tend to see less value in lower price on items. This reduced demand for collectible brands such as Bakugan, Monster Jam collectibles and Twisty Petz in Q1. As a result of the shift away from collectibles and towards games, puzzles and activities and more generally towards online purchases, we have seen average retail prices move from the sub-$10 range into the $10 to $20 range. From a customer perspective, we are fortunate that some of our largest customers have been able to stay open and are among the strongest retailers in the world. In the U.S., as Ronnen mentioned, Walmart and Target both have continued purchasing for both brick-and-mortar and online through Q1 and continue to do so. Together, they comprise close to 40% of our global sales for 2019 and were over 35% in Q1. Including Amazon, our third largest customer globally, these percentages would be approximately 50% and 45%, respectively.In the U.S., online sales showed strong growth in Q1 and have continued to comprise a larger component of our customers' volume. For the quarter, our sales to the online and e-commerce channel in the U.S. grew 30% compared to last year. We expect sales to U.S. online and e-commerce channels to comprise over 25% of our volume in 2020 and 30% in Q4 alone, as consumers continue to gravitate away from brick-and-mortar. In Europe, which has a very large specialty store element, many customers closed their brick-and-mortar locations. Online and e-commerce showed strong growth in some European markets, but Italy and France were hard hit, as online shopping is less developed there.Turning back to the P&L. We generated revenue of $227.3 million in Q1, which was down 4.9% from the same period last year, or down 1.4% on a constant currency basis.Sales allowances increased to 15.2% of gross product sales compared to 12.6% in Q1 last year. This increase was partly related to the continued expansion in Europe, and Russia, in particular, which has both higher prices and a higher overall sales allowance rate than the global average. We also experienced continued noncompliance charges from customers related directly to our performance issues, which began in the second half of 2019 as well as higher year-over-year margins.While the higher rates exhibited in Europe and Russia on market-related structural factors will continue, both the markdowns and noncompliance charges are controllable and a part of our efforts to improve operational performance in 2020.Other revenue, which primarily reflects licensing and merchandising royalties, television distribution revenue and app revenue, declined by $7 million in Q1 compared to last year. The decline resulted from lower licensing and merchandising royalties from PAW Patrol and Hatchimals, and was partially offset by increased revenue from Toca Boca and Sago Mini. We expect this trend to continue for the balance of 2020.Gross profit for the quarter was $90.8 million or 39.9% of revenue compared to $107.7 million or 45.1% last year. Gross profit was lower due to higher in-land and ocean freight, inventory provisions and rework expenses, higher sales allowances and lower other revenue. We estimate that approximately $14 million of the $17 million decline in gross profit relates to inefficiencies, which started in the second half of 2019.SG&A as a percentage of revenue was 64.5% in Q1, up from 50.3% last year. Please keep in mind, Q1 is our seasonally lowest quarter, and SG&A is always inflated in Q1 relative to the year as a whole. Warehousing and distribution expenses were the largest components of the SG&A increase, increasing $11.6 million year-over-year. We estimate that approximately $9 million of the $11.6 million relates directly to inefficiencies arising from 2019. Although inventory levels decreased from year-end, it was still significantly elevated relative to Q1 last year, resulting in increased storage costs. Higher inventory levels caused an increase of almost 20% in our domestic plus FOB sales mix, which, combined with our inefficient North American warehouse structure compared to last year, drove outbound transportation and activity-based warehousing costs significantly higher.Marketing expenses were higher in Q1, driven by the launch of the DC line and the new season of Bakugan. Trade show spend was also higher as well as marketing related to the launches of new products in Toca Boca and Sago Mini. Looking forward, as a result of the current environment, we have taken measures to reduce overall marketing spend and focus it to match where consumers are active, such as online and e-commerce. We expect to see the dollars-induced state going further as non-toy advertisers decrease their ad spend. As ad spend declines on TV, we will see rates decline, which will be margin accretive for us later in the year.From a tax perspective, we had an income tax recovery of just over $48 million in the quarter. Approximately $33 million of this related to a onetime internal transfer of an intangible property. Our annual tax rate is typically between 24% and 26%. Our expectation for the annual effective tax rate in 2020 is in the range of 20%. This lower rate in 2020 is driven by where we expect pretax income to be generated and the tax rates in the various jurisdictions in which we operate. We expect the 2021 tax rates will [indiscernible] slightly.For the quarter, we reported an adjusted net loss of $46.8 million or $0.45 per diluted share, compared with an adjusted net loss of $12.5 million or $0.12 per share last year.Adjusted EBITDA declined to negative $32.3 million in the quarter compared to positive $7 million last year. As I mentioned earlier, we believe that approximately $23 million of the year-over-year decline in profitability can be attributed directly to the operational efficiencies -- inefficiencies that continued into Q1 arising in 2019.Turning to the balance sheet and cash flow. Total net working capital was $210 million at the end of Q1 compared to $102 million at the end of Q1 2019 and $266 million at the end of the year.Free cash flow for the quarter, excluding working capital, was negative $74.9 million compared to negative $39.9 million. Free cash flow for the quarter, including working capital, was negative $27.8 million, the same as 2019.Inventory ended the quarter at $156 million compared to $185 million at the end of 2019 and $112 million last year. We are beginning to make meaningful progress reducing our inventory levels, although our progress has been hindered to some extent by COVID-19 as some customer outlets are closed.There is a risk of gross margin compression in 2020 as a result of this inventory carryover, as we saw in Q1, and we are constantly weighing gross margin against inventory levels and inventory carrying costs, especially as we restructure our North American supply chain.Our balance sheet remains very strong. We ended the quarter with just under $425 million in cash and net cash of $74 million. During March, the impact of COVID-19 on the capital markets and on the availability of liquidity in the financial system is of real concern. As a result, we drew a total of $350 million on our committed $510 million revolving credit facility. Given the amount of cash we had on hand at the end of the quarter, together with cash flow we will generate in the second half, and the additional capacity on our credit facility, we are solidly positioned with regard to available liquidity. We are constantly modeling the steps necessary to ensure business continuity even if this crisis lasts much longer than is currently expected. For 2020, we expect interest costs to increase by approximately $5 million over 2019.I want to now turn to our view on the balance of 2020. On our Q4 call in early March, we focused on the supply side impact of COVID-19 for 2020. The primary impact we now expect and which we started to see in late Q1 is a reduction of overall sales volumes given the disruption of many customer markets. We have taken several steps to reduce SG&A, which includes the restructuring of our North American supply chain. We are pleased to say we have made significant progress, which is aimed at driving structural cost savings and improvement in order to get our margins back to where they belong.Let me run through a few of the key areas. We are optimizing our warehouse network in North America by simplifying the structure, reducing the total number of DCs and the number of shifting points to customers.To put this into perspective, in Canada and the U.S., we are looking to go from 18 DCs and storage locations to 5 ultimately. From 18 individual facilities at end of 2019, we are now at 15. By the end of Q2, we expect to close 4 more to get to 11. In Q3, we will close a further 3 so that by the end of Q3, we will be at 8. Entering 2021, we are targeting to be at 5. As a reminder, these are third-party-owned facilities, and we will incur minimal costs in exiting these facilities. These changes will help in reducing customer noncompliance charges, eliminating cost drivers such as prepaid freight, unloading delays, demurrage charges and into warehouse transfers. We are improving our forecasting process and actions to support inventory to the timing of shipments to reduce storage of plants. We are reducing seat count and eliminating those that are not profitable.We are driving improvements in IT systems, especially connectivity with customers and warehouses, and focusing on improved data accuracy. We are enhancing reporting, monitoring and accountability around our KPIs and implementing global-based strategies. Our sales team is working hard with customers to shift as much volume as possible to FOB in the U.S. in the second half of 2020, which will take pressure off our domestic warehousing infrastructure.Finally, we are strengthening the quality and capability of our operations to see the growth in America. It is our goal to enter Q3 with a substantially more refined supply chain infrastructure, and to exit 2020 at or very close to a normalized warehousing and distribution run rate. This will yield a dual benefit from a gross and EBITDA margin perspective as both the noncompliance elements of sales announced, which is directly correlated to the performance of our supply chain and warehousing and distribution cost will decline. Equally importantly, we will be able to service our customers better through customer teams focused on higher response rates and better follow rates. We are also slowing down new employee hiring, focusing on extracting procurement efficiencies globally, particularly around the inter commodity, plastic resin and fuel surcharge cost review, reflexing and reallocating marketing dollars to brands most likely to exhibit strong sell-through in the current environment. And reducing controllable expenses such as travel, legal, rent, consulting and many others.With the continued uncertainty regarding the pandemic, we have elected not to provide formal guidance at this time. Given the dynamic nature of this uncertain event, and since the pace of recovery is yet to be determined with any specificity, we continue to regularly assess the business environment and our strategy and plans. This will determine our capacity and willingness to provide formal guidance.Directionally, we are comfortable to say that we expect the current COVID-19-related retail headwinds to continue through Q2. Combined with the Q1 supply chain disruptions, we expect Q2 sales volumes to be lower than 2019. We also expect some continued cost pressure from our 2019 operational inefficiencies to carry forward through Q2.Looking beyond Q2, we will have our operational issues largely behind us, and we are encouraged that many countries are now beginning the early stages of lifting retail and other restrictions. Based on this, we are cautiously optimistic that the second half of 2020 will turn to some degree of normality in most key markets, and we believe that we are well positioned to take advantage of this reemergence.That concludes my comments. I will now turn the call back over to Ronnen for some additional comments, and then we'll be pleased to take questions. Ronnen?

[Ronnen Harary, Co]

Thanks, Mark. Before we go to Q&A, I want to take a moment to talk about our culture, thank all of our employees, who at every level have demonstrated incredible dedication during this difficult time. We have been amazed by the levels of productivity that have been achieved broadly and globally through this crisis. Our employees are all dealing with the situation that is new and it represents challenges on many levels, including having family at home with their own needs, technological issues, disruptions in all kinds of plans and a level of anxiety that has lasted longer than expected. We truly appreciate all our employees' hard work.The way we work together has changed permanently. Our ability to lead, leverage and harness the potential of our globally distributed workforce has been tested and proven. This experience has tested our notions of distributed work and talent and the results are positive. Coming out of COVID-19, we will continue to think more globally as we build talent, more teams, think about how to bring the best of us together to achieve the business strategy. Allowing our team members to have greater control of their workday supports our commitment to push boundaries and move together and make an impact. The technology we use and the workforce flexibility benefits introduced through COVID-19 are here to stay, and will only strengthen Spin Master's employee value proposition.COVID-19 has brought our people together. And for a global company such as ours, the team has increased productivity, collaboration in a great way.With that, we'll open up now for questions. Operator, can you open the line, please?

[Operator]

[Operator Instructions] Your first question comes from the line of Stephanie Wissink with Jefferies.

[Stephanie Marie Schiller Wissink, Equity Analyst and Managing Director]

Mark, I think this question is probably best suited for you, but Ronnen, I would love for you to join in. Just hoping you can help us dimensionalize the year by semesters. There's a lot of conflicting vectors going on right now, demand, getting goods through to the channel, your own operational inefficiency remediation. So can you help us think about the first half? And then relative to your comments at the tail end regarding the second half, where you'll be on the backside of your operational issues? Sounds like some holiday order flow. The initial looks look to be pretty solid. So just help us think about the year kind of in 2 parts, if you could.

[Mark L. Segal, CFO & Executive VP]

Sure. Steph, I'll go first, and then I'll pass it back to Ronnen. So as we said in Q1, we started the year with a strong performance from a sales perspective overall. And then from late March onwards, we actually had COVID hit us. We did have some supply chain disruptions that occurred in Asia but most of that will be felt in Q2. And then Activities, Games & Puzzles and those categories really started picking up in late March. We do see Q2 being down year-over-year as a result of some disruption of Q1 supply chain and also because of maybe the customer closures.At the same time, we were working on our supply chain restructuring. And we've made significant progress. So the goal is to exit Q2 with our supply chain problems largely behind us. We did see a significant carryover from Q4 of the profitability issues and the additional costs that affected us in Q3 and Q4 of 2019.So looking ahead, we don't see any pull forward currently of demand. What's happening right now from a demand perspective is customers are filling current demand, particularly in the Activities, Games & Puzzles area. And then looking forward, where we actually took 70% of our volume in the second half of the year, we are well set up from a supply chain perspective. And as demand comes back to normal, we think we are very well positioned to take advantage of opportunities going into Q3 and Q4. Our goal exiting Q4 is to really enter 2021 with a normalized run rate on our operational costs, particularly our warehousing and distribution and then to get back to where we want to be in 2021 and beyond. Ronnen, do you want to add anything?

[Ronnen Harary, Co]

Yes. Just from a macro perspective, I think we're very fortunate, Stephanie. First of all, from an industry perspective, whereby the industry has -- has shown itself to be quite resilient in these times. And I think that the macro trends are helpful for -- more fortunate for family spending more time at home, and we're seeing that family time is deplaning itself towards the fact we have a diversified portfolio and a lot of certain categories, like Mark mentioned, the Activity category that we've been in for many years and the Games & Puzzles, obviously, we've talked about. And I think that it will be interesting when kids go back to school. There will be an opportunity for those other categories that are more school-based, the collectibles and lower price point items where kids have to share and interact together. We think we'll have an opportunity to pick up in the third and fourth quarter.And the retailers are very focused on meeting consumer demands for the third and fourth quarter. And then the other thing which is quite amazing, which I think we have to be very thankful for in our industry, is that our Asian team and our supply base has done an incredible job to catch up in the first quarter and now in the second quarter to meet all the demands for third and fourth quarter. And so from a timing perspective, we were very fortunate. I think that the way that Asia has actually handled the COVID crisis will enable us to actually meet demand, whatever that demand will be in the third, fourth quarter, but we'll be able to meet that demand from a supply chain perspective. And that's super encouraging for us.

[Stephanie Marie Schiller Wissink, Equity Analyst and Managing Director]

I think that's great. And just one follow-up, more housekeeping. I think on Mighty Express, which I think you mentioned launches September on Netflix, so I guess 2-part question. One, you made a point to call out that you have the full category rights for that. If you could just talk a little bit more about how that's distinct from other entertainment properties. And then secondly, will you be launching with toys and merchandise when the series launches?

[Ronnen Harary, Co]

Yes. Okay. So in the past, we used to do things in partnership. So for example, with PAW Patrol, we have a partnership with Nickelodeon. And so they handled the license and the merchandising. So they managed the interaction with all the various different licensees. And so this time around, we've actually built up our own internal team that will manage those relationships, kind of the style guide. We'll do the overall marketing for the franchise. So we've turned the entertainment teams into not only the content production team, but now a full franchise management and entertainment team and company.And then in terms of the date, we're going to actually let the property build, and we'll bring out the toys for Mighty Express in 2021, and we'll bring it up with complementary partners in other categories in 2021. So we want to give it a little bit of time, Stephanie, to build and build up the awareness. We basically figured out that awareness really needs to reach about 50% before you can actually put product out into the marketplace. And so that's what we're very focused on doing with Mighty Express with our SVOD partner and also with other marketing tools to build up that awareness.

[Operator]

Your next question comes from the line of Sabahat Khan with RBC Capital.

[Sabahat Khan, Analyst]

Just on the commentary that you gave around some of the specifics on the gross profit and SG&A impact of the inefficiencies. I think the totals were $14 million of the gross profit decrease and $9 million of the SG&A. How should we think about those numbers heading into Q2? Like is that sort of absolute dollar amount that we think can continue into Q2? Just trying to think of the kind of the drag, the fixed nature of it into next quarter. And obviously, there's a separate sales impact just given the background, but just want to get your thoughts on that.

[Mark L. Segal, CFO & Executive VP]

Yes. So Saba, as we said, of the $39 million year-over-year decline, approximately $23 million of that was related to operational inefficiencies from carryforward from last year. And of that, $14 million relates to items affecting gross profit and $9 million relates to distribution. So when looking at Q2, we're making significant progress in remediating some of these problems. We don't think that all of them are going to be remediated during Q2. But certainly, from a structural perspective, by the end of Q2, we hope to be in a position leading into Q3 to see some significant efficiencies starting to flow through and then by the end of the year to be in a position where we are really back to normalized run rate. So you will see some carryover of these costs into Q2, both gross margin impact and at the distribution level, hopefully at a slightly reduced rate, but there will be some in Q2, for sure.

[Sabahat Khan, Analyst]

Okay. And then sort of related to that, I mean as things you indicated start to normalize heading into Q2, and then as you get into your bigger selling season in Q3, I guess, just based on current visibility, the way you're thinking about the business, would you expect top line to be kind of up Q3 specifically year-over-year? And obviously, there's a lot of moving parts. What's sort of your base case operating assumptions at this point, given what you can kind of see out there?

[Mark L. Segal, CFO & Executive VP]

Yes. So we don't want to be too specific because we're not giving formal guidance, but I can tell you that retailers are in good shape. The ones -- certainly, our primary customers in the U.S. are buying normally. We're actually having a lot of good conversations. There's discussions around planogram dates to make sure that we don't have any impact from the Q1 supply chain effects in Q3 and Q4. It remains to be seen how the rest of the world comes back normally. I think we're a little bit more confident in the U.S. But certainly, things are turning back to normal in Europe and in other regions where markets are starting to come back a little bit. And as you know, we do 70% of our volume in the second half of the year. We are shifting and pushing our retailers to take more on an FOB basis than we saw last year. And so that takes towards more in Q3 than it does in Q4. But we are quite confident and optimistic that we will have a solid second half of the year. Exactly how big that is going to be remains to be seen at this point in time.

[Sabahat Khan, Analyst]

Okay. And then you shared some color on your thoughts around some of the headwinds that you have going into Q2 in terms of the top line. Are you giving kind of the commentary taking into account that there was a bit of a timing benefit in Q2 last year because of the Easter shift? Does that kind of add to the headwinds? Or do you think sort of the commentary you gave takes all that into account and the real headwind is sort of the store closures that were there over the course of April onwards?

[Mark L. Segal, CFO & Executive VP]

Yes. So as we said to you, we do expect sales to be down in Q2 year-over-year. Just keep in mind that Easter this year was April 12. Last year, it was April 21. So really, Easter is a little bit of a nonevent this year in terms of our quarter-over-quarter comparisons, Saba. It's not a material factor one way or the other. And we had built it into everything that we've already described to you.

[Sabahat Khan, Analyst]

Okay. And just one last one. On the cash flow, the balance sheet is still in good shape. But I just want to get an idea of your expected cash usage at least through Q2. It looks like you drew some amount down on the credit facility, but I just want to get your thoughts on cash burn over the next couple of quarters until you get into sort of the big selling season.

[Ronnen Harary, Co]

Okay. So let me just level-set everybody because I think it's important to understand structurally how our cash flow works. If you recall, our traditional cash flow profile is that we consume cash in Q1. We consume cash in Q2 as we build up for our seasonal peak. We then start selling in Q3 extensively. We convert inventory into receivables, and we start collecting cash in Q3 and Q4. And by the end of the year, we are solidly cash positive, and we don't see any change to that profile this year. The only nuance, which you actually did see in Q1, was that because we had such high inventory levels exiting 2019, we started to draw down on that, and we actually saw a contribution was the source of cash from working capital in Q1, which was larger than normal.But generally, our cash profile is, as I described, and I don't see it significantly changing, we did draw down, as you know, $350 million in the quarter on our revolver, which was kind of a preemptive measure, just to be safe given what was going on at the time. And we'll have a look at our cash flow, and we can either repay that or keep that, depending on what actually happens with COVID over the next 3, 6, 9 months. But we do expect to end the year in a strong positive cash position.

[Operator]

Your next question comes from the line of Jaime Katz with Morningstar.

[Jaime M. Katz, Equity Analyst]

First, I'm curious about how you guys are thinking about marketing expenses over the remainder of the year. Is there a better way to strategically put those dollars to work to facilitate sales? Or -- and do you think that, that sort of evenly eases back to a more normalized level over the course of the year? Does it sort of escalate towards the holiday season in advance of that key period?

[Mark L. Segal, CFO & Executive VP]

So I'll take that first, and then Ronnen will add in some commentary. Typically, marketing runs at around 10% of our sales, and we don't see that changing dramatically for 2020. It may be a little bit down from those levels. We are actually looking at our mix and shifting more dollars to where consumers are more active, online and e-commerce in particular. And as I said in my script, we are seeing rates coming down, and so we do expect to get some benefit of lower rates as other advertisers advertise less, especially on TV.

[Ronnen Harary, Co]

Yes. Thanks, Mark. I think that as you see consumer shopping pattern shift and change, we'll be matching our marketing to the way those habits are actually evolving. So you'll probably see more of a digital spend going into the third and fourth quarter. You'll see some extra spend targeted towards adults, and you will probably see less kids in the stores. You'll see more social media.What I'd say is more creative content created by our internal teams. And so we will be more earned marketing where we have to actually pay money upfront to create the content, but we have much more content out into the universe, especially on the YouTube channel. So you'll see a mix of different things. But I'm very proud of our marketing team. They reacted very quickly and creative teams have kind of wrapped it very quickly. And you actually think what -- if you look at the Spin Master universe, you'll already start to see some of the shift in marketing that we're doing that will give you a bit of a taste of what's going to come in the fall.

[Jaime M. Katz, Equity Analyst]

Okay. And then maybe because I'm a little bit newer to the Spin Master story, I think one of your competitors noted that Outdoor was a pretty strong category, and there was a shift to it. But is there something about your lineup, like is it more tilted to summer product with the swim category that has made that a little bit more difficult in this period for you than I would have thought?

[Mark L. Segal, CFO & Executive VP]

Yes. So our Outdoor was down 15.5% in Q1. There's a number of factors. We had some supply chain disruption. Just remember, the seasonality for Outdoor is different to toys because the first half of the year is typically bigger than the second half of the year because -- as we lead into the summer months. And in Q1, we had some disruption arising from the Asian COVID situation that arose. So we did see some disruption there. And then later in the quarter, we actually had a lot of closures around pools and outdoor areas and beaches, which affected demand for outdoor.But we are seeing Outdoor, which is mainly -- our Outdoor is mainly water-focused. The industry Outdoor is mainly more backyard-focused. So what you heard in Q1 was backyard was up in a big way, whereas water was actually down. What we're seeing now is that water has come back very strongly. And so we're seeing Swimways demand and POS actually going up quite significantly.

[Operator]

Your next question comes from the line of Adam Shine with National Bank Financial.

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

Maybe one question for Ronnen, one for Mark. Ronnen, usually, we start to have you guys building some of your H2 visibility somewhere around the June, July time frame as sort of retailers start to commit to you guys. Can you speak to whether COVID is changing some of that dynamic, bringing it forward a little bit, maybe otherwise extending it? And just as a follow-on, to the context with retailers, any material changes afoot as we move through the mid part of Q2 compared to what you might have seen amidst the initial scramble at the end of Q1?And then just for Mark, you've talked quite a bit on the supply chain side with respect to some of the distribution centers, storage capabilities. Maybe if you can elaborate a little bit on any thoughts around the manufacturing footprint. And whether any changes afoot there of any materiality might ultimately be best pursued next year rather than big moves out of China this year?

[Ronnen Harary, Co]

Adam, I think that -- I think that the buying patterns, primarily from the large retailers going into the back half of the year are actually very consistent with previous years, so we don't see any changes there. And I am personally encouraged by the resilience of the industry. I think that if we go back 6 weeks when COVID hit and everybody started working from home, the -- I would have thought the industry would have been fantastic even more than what it is and what we're actually seeing today. And your third part of your question was -- no, there was 2 parts of that. Does that answer your question, Adam?

[Adam Shine, MD, Head of Montreal Research & Research Analyst]

Yes, yes. I think the other part was simply around any changes to the dynamic in regards to what's been happening as we get into May. I mean obviously, as was alluded to previously, nonessentials out of Amazon were curbed for a few weeks in March and April, right? That's been freed up of late, but there still seems to be -- it's not like you're getting your Prime delivery a day or 2 necessarily. So...

[Ronnen Harary, Co]

No. Thank you. That was -- what I will tell you, I mean, in Europe, you still have a lot of store closures. So Europe is very different to North America, and they're slowly coming out of it. I think the biggest trend that we're seeing now, which is a really big shift, they're probably stay here for a long time, which is the online delivery and pickup. So there's a big surge right now, big demand and people just placing orders and literally pulling their cars out and the product that they put into the trunk and people are driving away. And so you see Walmart doing a big business in that area. So I think that's the biggest shift that we've seen. And I think that will probably continue.And that is actually causing us to actually think about how we actually do our mix of product, because, usually, the way you do -- you usually do things in assortments. And now to be able to facilitate the app store pickup from online ordering, you have to ship in solids. So it's a bit of a different configuration, but our team is already on that and making the changes so that can maximize the third and fourth quarter.

[Mark L. Segal, CFO & Executive VP]

So Adam, I'll just pick up from where -- I'll pick up from where Ronnen left off. I just want to add one point to what he said about the customers. We've worked really hard with our main customers to make sure that any of the issues that happened in Asia in Q1 related to COVID did not impact the second half of the year. The vast majority of the full product that -- and this pertains to tooling in particular -- that may have been disrupted in Q1 will still ship in Q3. And retailers are aligned with later setbacks on many SKUs. We're working very closely with them on that. There may be a slight shift to Q4 from Q3 where tooling or run rates won't allow us to maximize volume in late Q3 versus early Q4. But overall, that doesn't affect the second half of the year.And then in connection with your point about manufacturing, we have diversified out of China. We're in Vietnam. We're in India and in Mexico, as you know. Just given what happened this year, I would suggest that the pace of any further diversification might slow down a little bit in 2020. We're very happy with the way that the China manufacturing base has picked up following COVID. We're now back at almost full capacity or at full capacity in China and in Vietnam. We still have some issues in India and Mexico, which are closed or partially closed. But that's really immaterial and will not affect our supply in 2020.

[Operator]

Our next question comes from the line of Luke Hannan with Canaccord.

[Luke Hannan, Associate]

The one question I had -- actually, first, it's a housekeeping question, Mark. You gave some pretty good commentary on the POS data that you were seeing to date so far in Q2, but I just missed some of those figures. So do you mind repeating those?

[Mark L. Segal, CFO & Executive VP]

Yes. In Q1, globally, we were positive 10%, including Hatch. And excluding Hatchimals, we were at 19%. And in the U.S., we were at positive 11% including Hatchimals and 19% excluding Hatchimals. And we are actually seeing an acceleration in the U.S. to significantly higher rates than what I just described currently. The rest of the world is actually a little bit down, just given the closures we've seen in Europe and other countries, but the U.S. POS right now is extremely strong.

[Luke Hannan, Associate]

And then my second question is just on, I guess, how you view your overall financial health of your customers. I noticed that the provisions that you have for any doubtful accounts has really ticked up meaningfully from last year. And I know you mentioned Walmart, Target and Amazon represent the lion's share of where your sales come from. And I don't imagine that you anticipate any sort of credit issues there. But as far as the makeup of the rest of that receivables balance in your customer base, how do you view, I guess, their financial health in the near term?

[Mark L. Segal, CFO & Executive VP]

Okay. That's a great question. Thank you. As you mentioned, roughly half of our sales come from Walmart, Target and Amazon. So they're very, very strong from a credit perspective. No issues there. I would say to you, there are 2 areas that we are seeing pressure on our customers, which is the U.S. mid-tier department stores and so on, the small specialty retailers in the U.S. as well as the small specialty retail component in countries like Italy and France. But what I do want to say to you is that, and this is really important, we have global credit insurance policies, which are noncancelable. And so we are very well protected from a credit perspective, and we have very limited credit exposure. We do get requests sometimes for extended payment terms. And we typically don't agree to them, but sometimes for strategic reasons, we may want to help a customer or 2. But overall, it's really small and very immaterial, and we're in good shape from that perspective.

[Operator]

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

I have 2 questions, actually 2 topics, multiple questions. First, on Amazon, last day of March, there were 35 games in the top 100 sellers on Amazon, but none of them were Spin Master games. Does your portfolio just not lend itself well to selling on Amazon? Or is that part of the supply issue? Why don't we see your games as part of the top sellers on Amazon?

[Mark L. Segal, CFO & Executive VP]

Gerrick, to be honest, I can't talk to Amazon specifically. Maybe Ronnen has got some color on that. But what I can tell you is that, overall, Games & Puzzles in Q1 grew according to NPD at $200 million in total, and we grew our share commensurately with that. In fact, I believe we actually grew our share a little bit. We are the #2 Games & Puzzles player in the United States. And our demand and volume is extremely high as well as our POS, which is in the triple-digit range. So I can't talk to Amazon specifically. Ronnen, maybe you want to.

[Ronnen Harary, Co]

Yes, Gerrick, I think it's a great question, and we can potentially get back to you on it. But from a high level, I think that one thing you guys need to understand is the composition of our actual Games business. So the big percentage of our Games business comes from Cardinal, and Cardinal is a broad-based multiple SKU business. It's got tons and tons of SKUs and selected titles. And it's more about a big part of the business of the games is the basics like backgammon and chess and checkers and dominoes and poker chips and all that type of stuff. So I don't think you'd see that appearing as like the top titles. So they just have a very wide assortment with a lot of SKUs that at the end of the day add up to a lot of dollars.And then when you look at the Spin Master side of the business, our titles, like HedBanz is probably our top title. I would be surprised not to see HedBanz on the Amazon Top 30 list, but I'll look into that. And we have other titles that are decent. They're not as strong as some of our competitors, but they still sell. And when you add all the titles up, there's lots of titles up there, they add on to good sales. And then you also have things like Perplexus and stuff like that. So I think you have to look at our Games businesses and Puzzle business as something that's got a very wide breadth to it. Also the Puzzle business, a lot of our Puzzle business is sold at the value channels where you find puzzles for $2 or $4 or $5. And there's multiple SKUs, and there's so many different licenses. So it's really spread out over a very large assortment.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

Yes. Great answer. And mentioning the value channel, that's a pretty strong channel for you guys right now, is it not?

[Ronnen Harary, Co]

It's a fair question, Mark.

[Mark L. Segal, CFO & Executive VP]

I think the value channel is pretty decent.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

Okay. And then I want to ask about inventory. Your inventory is up 40%. I think you talked about it a little bit, but you kind of flitted in and out on the call. So I didn't catch all of what you said about why that inventory is up 40% and if it's all good inventory. And then you did have excess channel inventory coming out of fourth quarter. So is that pretty much cleaned up? Or is there -- are there still pockets of stuff?

[Mark L. Segal, CFO & Executive VP]

Yes. So we do -- we did actually exit 2019 with significantly higher domestic inventory than we had at the comparable period of 2018. So there was a big carryover that we had to deal with, mainly in our warehouses, because of the issues that we had in the second half. So we've been working our way through that in Q1. Inventory has come down quite significantly in Q1 and will come down further in Q2. The vast majority of that inventory is good, and we continue to sell it. But there were some markdowns and there was some margin compression as we actually work through some of that.The reality is that having the inventory in a way helped us because we were able to fill a lot of Activity, Games & Puzzles orders that otherwise might have been ordered FOB that we would not have been able to fill normally. We've worked very closely with the retailers to take inventory, especially in the COVID environment. It's helped us substitute where needed, especially in Games & Puzzles. We've actually been able to develop a lot of out-of-aisle features, which has helped us. I mean overall, Gerrick, our Q1 '20 domestic sales were up 20% over Q1 '19. And as I said to you, COVID has helped some categories like Activities, Games & Puzzles, and it's hurt in some categories where there've been less stores and no events. Now we want to shift as much as we can to the full -- from an FOB perspective, but we do see some continued pressure on margins in the second quarter. And what we're really essentially balancing off here is gross margin against cash and also inventory carrying costs as we seek to restructure our supply chain. So it's a bit of a mixed bag.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

Okay. So that explains the channel inventory, but the inventory in your books?

[Mark L. Segal, CFO & Executive VP]

I was talking about the inventory in our books. Yes. So at the channel level, it isn't significant issues at the channel level.

[Operator]

Your next question comes from the line of David McFadgen with Cormark Securities.

[David John McFadgen, Director of Institutional Equity Research]

A couple of questions, if I may. So when you first issued your 2020 guidance, you were calling for mid-single digit -- mid-single high-digit revenue decline. And it seems based on your commentary today on Q1, that's probably going to be too pessimistic. I don't know if you can comment at all about that given that you'd mature your guidance, but it seems that way. And then secondly, when we look to 2021, you say you'll end up the year with only 5 facilities, and most of the supply chain things will be behind you as you start into Q3. So could we expect a material rebound in the EBITDA margin? And to get back to 18%, would that be a little too optimistic?

[Mark L. Segal, CFO & Executive VP]

So David, look, we're not actually giving formal guidance at this time on our top line. I did give some commentary on the second half how I see it playing out when I answered Saba's question earlier. So we are actually confident for the second half, and we do feel good about it. But we don't know yet, just given what's happening with COVID. So we have to be somewhat cautious until we see some more substance behind how the second half plays out. We are cautiously optimistic about it. And we're also cautiously optimistic that by the end of the second quarter, we'll have our -- most of our supply chain issues behind us and we'll be then getting the benefit of these improvements over the second half of the year.And as you mentioned, we want to have significantly restructured North American supply chain by the end of 2020, where we have only 5 facilities, which will be down significantly from what we have currently, and that does allow us to be much more efficient. From -- going forward, we hope to recapture some of our margins as a result of that. But I don't want to be too specific about what that looks like here because there are obviously going to be puts and takes for 2021, which we are not commenting on at this time.

[David John McFadgen, Director of Institutional Equity Research]

Okay. And then if I can just ask one more. Can you give us an idea how PAW Patrol is doing so far in Q2 or how it did in April?

[Mark L. Segal, CFO & Executive VP]

So PAW Patrol for the year has largely been down in North America. In Europe, it's been stronger. But overall, PAW has been down from both a sales and a POS perspective. The good news is that, in the last couple of weeks, though, we've seen a fairly material rebound in PAW from a POS perspective, and so that's starting to trend more positively. The reason PAW is down for the year is really in relation to inventory carryover that we saw from 2019. The full TV driver for PAW Patrol, which was The Jet, did not do very well, not as well as we expected. And so that actually relate -- that caused some carryover into the first quarter. We also had our marketing start later in the first quarter. And probably most significantly of all, the reality is that a lot of PAW Patrol purchases are more events-driven around birthday parties or Easter or other kinds of events. And so PAW has suffered from COVID. But overall, long term, we still feel very comfortable with PAW. We're very excited about it, the new content that Ronnen told us about.

[Ronnen Harary, Co]

Just to build on that is that the Preschool category is down, David, across the board as a result of COVID. I would put it in the harder hit category side of the ledger. But from a franchise perspective, we're super, super excited about our new theme, which is Dino Island. I'm extremely proud of our team for producing in our seventh season such an incredible theme. Very excited for you guys to see it. It is probably one of our best productions to date. And we have a new character, which is Rex, who's a handicapped dog is coming, he's a great aspirational character. The Dino Patroller, which is extremely aspirational. We have a new headquarters, which is located on Dino Island, which is aspirational. We have the dinosaurs mixed in with the pups, which is a whole new unique world for kids who -- to really enjoy, and dinosaurs are classic play pattern for kids. So I think it's quite amazing that the team were able to blend those worlds together.And then looking forward, obviously, the movie for 2021, and that is currently on track. It's on schedule and working very closely with Paramount currently now and what are the marketing plans for that. Very, very engaged with their teams well in advance of the movie seem to market properly. And also realign all our licensees to make sure that they are getting all the collateral material so that they can start their product development processes early on now to make sure that, for fall 2021, we have a very fresh, new dynamic looking PAW Patrol line for the movie that's very different than the traditional TV theme line.

[Operator]

And your last question comes from the line of Brian Morrison with TD Securities.

[Brian Morrison, Research Analyst]

Just in terms of PAW Patrol, do you have any feedback from your buyers on the new theme? It sounds like you're pretty excited about it.

[Ronnen Harary, Co]

The Dino theme, it's got an incredible reaction in various puppies and dinosaurs together. It's extremely positive. Extremely positive.

[Brian Morrison, Research Analyst]

Okay. And I guess more of my focus, Ronnen or Mark, is as you have more cost of handling those inventories going through your system, I'm wondering what processes or safety measures you have in place as you reduce your DC, specifically in Q3 and Q4 of this year, just to ensure that we don't run into these inefficiencies once again.

[Ronnen Harary, Co]

Yes, that's a great question. I mean I personally, Brian, have been focused on this for like the last 10 weeks. It's occupying a lot of my time. And what we're doing is we are strengthening existing partners. So we have some very good partners in place, but we're strengthening those partners. And when I say strengthening, I'm talking about the amount of meetings we're having with them, making sure that the owners are engaged in our business now, they're actively coming to the meetings, making sure that we have people on site in those facilities that are Spin Master people. We basically retooled our whole customer-focused team. We've actually, I would say, done an internal organizational review, and we've reallocated 90 people at our company to actually to cross-functional consumer-based teams per account, per location on with [indiscernible]. We've also went to our certain partners that have been performing, and we've been consistent. We had to move them to [indiscernible]. We've let go of some of our poor performers from a warehouse perspective, and we have moved those to some of our stronger warehouse, third-party warehouses that were doing well last year, and we've given them the business.So we were relentlessly focused on this area with the management changes. [indiscernible] at least where we brought in people trying to add. We do see these type of matters in warehousing, in logistics, in supply chain. We brought back old people that either had [indiscernible] that were in operation with Spin Master that used other departments and we brought them back, especially in the whole area of we had [ key process ]. We have multi process, people with a long, institutional, deep and huge knowledge when it comes to inventories and global management and [indiscernible].I do want to say that it is our goal to end this year at a much lower inventory level. We're relentlessly focused on inventory. We were relentlessly focused on the supply of the shipment and the movements of the goods that we see suspicious. There's challenge last year in terms of ordering of patterns. It's not only on quantity, but it's just order-making and patterns in itself. And we have a solid opinion that we're not going to tolerate giving back problems. Sorry, we're not going to tolerate giving back profits as a result of operation launches. That is just not going to happen. It's not acceptable. Others do, and it's just not to be tolerated. So we are very focused on this. And I think we have the right team in place. I think we have the right visuals. I think we have the right external partners. I think the right overall company focus to make sure that we achieve our goals starting in the third quarter. And that's what the whole part of the company have been rallying behind 4 months in.

[Brian Morrison, Research Analyst]

So Ronnen, I understand the gist of the answer. I think one of our phones is breaking up more. But I guess the gist of the question is, these restructuring initiatives and efficiencies that you're taking on, when I look at the long-term EBITDA margin potential, not 2020, but 2021 and beyond, is your aspiration that you can get back to a 19% EBITDA margin or above based on the undertakings right now that you're enduring?

[Ronnen Harary, Co]

Well, I will say from a -- I'll take the first part. From an operation perspective, we want to get our percentages in line from that area of the income statement. They need to be back to normalized rates, and that's what we're very focused on.

[Mark L. Segal, CFO & Executive VP]

So Brian, I mean, long term, we -- our goal is to be in that 18%-plus zone. That's where we were in '17 and '18. And that's where we think we want to be. We've got a lot of levers to pull. And as Ronnen said, we do not want to have any dilution from warehousing and distribution. That's just basic table stakes for us. There are lots of other levers that we're going to focus on in terms of licensing and merchandising income and our product mix, our productivity, our -- all of our operating leverage issues that we're focusing on getting back to where we want to be. And certainly, 18% is the goal, the trajectory to get back there. We will not be there in 2020, obviously, but we want to be in a position where we have some very good trajectory to get back there into 2021 and beyond.

[Brian Morrison, Research Analyst]

Yes. I appreciate that. Not to nitpick here, Mark, but is it not 19% with IFRS 16?

[Mark L. Segal, CFO & Executive VP]

Yes. 2018 was 19.3%, including the IFRS adjustment. That's correct.

[Operator]

And there are no further questions at this time. I'll turn the call back over to Mark.

[Mark L. Segal, CFO & Executive VP]

Okay. Well, thank you, everyone. Much appreciate it, and we look forward to talking to you in August for our Q2 call. Thanks, everyone.

[Operator]

This concludes today's conference call. You may now disconnect.