Spin Master Corp

TSX:TOY

Earnings Call Transcript 2021-Q2

[Operator]

Thank you, and good morning, everybody, and welcome to Spin Master's Financial Results Conference Call for the second quarter ended June 30, 2021. I am joined this morning by Max Rangel, Spin Master's Global President and CEO; and Mark Segal, Spin Master's Chief Financial Officer. For your convenience, the press release, MD&A and unaudited condensed consolidated interim financial statements for the second quarter 2021 are available on the Investor Relations section of our website at spinmaster.com and on SEDAR. Before we begin, please note that remarks on this conference call may contain forward-looking statements about Spin Master'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 the 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 the cautionary statements regarding forward-looking information contained in the company's earnings release dated August 4, 2021. 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 now like to turn the conference call over to Max Rangel.

[Max Rangel, Global President, CEO & Director]

Thank you, Sofia. Good morning, everyone, and thanks for joining us today. This quarter marks our second consecutive quarter of increased profitability for Spin Master, resulting in a very strong first half. For the quarter, gross product sales grew over 27% and total revenue climbed by 39% to over $390 million. In reflecting on our performance, what stands out is the diversity of the growth we saw across all our creative centers and all our geographies, the efforts we've made to grow our global footprint, develop our entertainment capability as well as the early investment we made in digital games through the acquisition of Toca Boca and Sago Mini are paying off. Approximately 20% of our Q2 total revenue resulted from digital games and entertainment. Much of the success we are seeing is due to the passion that our global teams have for our vision of creating magical experiences for children and their families. I want to thank all our employees around the world who have helped us achieve and exceed our revenue and operational targets, while working under very difficult circumstances caused by the pandemic. Digital gains growth was driven primarily by the Toca Life World platform and our Sago Mini subscription base. The sharp increases in growth we experienced starting in Q2 2020 have been sustained. Kids are spending more time socializing with their friends in these expansive digital playgrounds through the new content releases and tools that allow them to create, connect and share. Toca Life World is a game that regularly evolves with new content, new playgrounds and creator tools that allow kids to personalize their experience and kids are playing and creating games, videoing themselves and streaming these videos on to TikTok, Twitch and YouTube for others to watch. Toca Life World has seen explosive growth in consumer engagement, and we believe this is a major factor behind its growth. Toca Life World has now over 38 million monthly active users and the entire Toca World ecosystem has over 57 monthly active users compared to 33 million last year. We are seeing growth in core markets such as the U.S. and Western Europe, but also increasingly in countries such as Russia, Mexico and Brazil, and in Eastern Europe as well. The Sago Mini subscription business also grew to over 294,000 subscribers across Sago Mini World, Sago Mini School and Sago Mini Boxes compared to 184,000 last year. The continued expansion of our monthly active user and subscriber base provides us with a tremendous asset to develop a direct relationship with the consumer, further deepening our relationship with them and expanding their loyalty with our digital games offerings. We are continuing to make progress on the opening of Noid, our new studio in Stockholm that will actually focus on developing digital games, leveraging Spin Master's own IP. We have already hired a General Manager and some key talent and are actively recruiting in Stockholm well known for its density of game development talent to complete the team. We expect Noid to be operational by the end of 2021, and we'll begin developing digital games during 2022 for launch in 2023. One of our key 2021 priorities is to accelerate digital games through acquisitions.Parents and teachers are increasingly turning to engaging digital solutions when it comes to education. We see an opportunity to expand our presence in the digital games edutainment market, an area that has been the primary focus of Sago Mini. This past quarter, we took a step forward in this direction with the acquisition of Originator Inc. Originator is a digital game studio based in San Francisco and is a creator and publisher of entertainment, education mobile apps for kids and families, all of which have reached the #1 position in their categories in the Apple App Store. This acquisition will complement Sago Mini's edutainment offering, whilst leveraging our substantial subscription user base to extend the Originator apps to new audiences. We continue to actively look for further accretive digital games acquisitions and investment opportunities globally. Now turning to our entertainment creative center. Telling stories and creating engaging and enduring characters that resonate with kids around the world is important to us regardless of what screen kids are watching. We are rapidly approaching a major entertainment milestone with a highly anticipated release of our first-ever feature film on August 20. The excitement for PAW Patrol: The Movie is really building. On August 20, the film will be unleashed in theaters, distributed by Paramount Pictures and on Paramount Plus streaming in the U.S. Paramount has begun an extensive global marketing campaign and in partnership with Viacom, we have over 200 consumer goods partners, leveraging the PAW Patrol: The Movie and franchise. In addition to our feature film debut, the entertainment team continues to work on the development and production of new content. PAW Patrol would be entering its 9th season on Nickelodeon in September and continues to be rated as the #1 preschool property broadcasting in 160 countries into 350 million homes. We continue to take our multipronged approach to our entertainment content creation led by exceptional storytelling that we know will resonate with kids globally. The team has a rich slate of new entertainment series and feature films in development, and are on track to produce and introduce 1 to 2 new entertainment properties a year. We continue to expand our distribution strategy to ensure that we touch multiple screens and platforms to reach kids wherever they are consuming content. Finally, within our toy creative center, as mentioned earlier, our retail customers have responded positively to our portfolio propelling our gross product sales well above the same quarter last year. Gross product sales in the quarter grew to over 20% -- 27%, I'm sorry. This increase was driven by Pre-School and Girls and Boys and can be attributed largely to our evergreen brands, including PAW Patrol and Bakugan as well as Kinetic Sand and Activities. Mark will provide more detail on our category performance. I will now provide perspective and details on our POS. When we look back to last year's second quarter, we were at the height of COVID lockdowns globally. Kids weren't going to stores with their parents, weren't going to school in most cases, and the transitional social gatherings like birthday parties were not permitted. As a result, impulse rate related items and those more aligned with social play experience a negative impact to POS. A year later, we've seen these lines rebound. According to NPD, in-store sales in the U.S. have not only recovered from '21, but are ahead of 2019. Toy industry growth continues, but is slowing as we lapped the first full COVID quarter in 2020. Our data suggests that globally, the toy industry saw mid-teens on a quarter 2 year-to-date basis, which has slowed since Q1 in comparison to our global POS share and growth is flat on a year-to-date basis. Internationally for NPD, our Q2 POS is up 10% year-over-year, well ahead of the industry. On a year-to-date basis internationally, we are ahead of industry growth at 8%. In the U.S., our POS declined 12% for the quarter due to retail inventory gaps in Q1 and Q2 that we described in May. We expect that through Q2, we saw continued in inventory at retail, but we are now seeing strong signs of recovery with in-stock levels rising, which will improve further as the new fall line arrives at retail. Despite lagging the industry growth rate in the U.S., momentum continues to accelerate on our core and franchise brands. PAW Patrol in Q2 was up 5% globally and flat in the U.S. Year-to-date per NPD was up 17% globally and 14% in the U.S. This bodes well for the health of the franchise long term and in advance of the movie launch later this month. Bakugan continues to drive the battling Toy segment and has grown by over 50% year-on-year every week. POS for Bakugan in the second quarter increased 62% on a global basis and over 80% in the U.S. per NPD. Bakugan's strong growth in the quarter was driven by an integrated content and marketing plan that included an innovative new gaming experience in Roblox, which has now seen over 68 million plays since April. The combination of the new Netflix content, media and Roblox gaming yielded significant POS list that is driving Bakugan's growth. Bakugan will go into deeper metaverse's fall with -- and will become the first-ever property to premiere a full-length series episode of Roblox. An interesting data point in the Boys product category is Deck Tech. According to NPD in Q2, POS increased 76% globally and 49% in the U.S. in anticipation of skateboarding making its Olympic debut, which is sure to incite more skateboarding and fingerboard fandom. From a DC comics license perspective in Q2, our DC Universe POS was up 41% globally and up 15% in the U.S. We have successfully implemented price increases for our full line effective July 1, that provide a partial offset to the sharply rising input in ocean freight costs that we are seeing. In addition, we are seeing logistics disruption driven by congestion in key ports combined with rising COVID cases in some areas of Asia. The supply chain team is doing tremendous work with our partners for manufacturing to logistics, to our retailers to ensure we deliver product to meet demand. These macro supply chain and cost pressures are meaningful, but given the actions we have taken and continue to take, we believe we can meet our full year customer commitments. As a reminder, approximately 20% of our revenue that comes from digital games and entertainment is insulated from the impact of supply chain disruption. Mark will speak to this in more detail in a moment. As you know, Spin Master is renowned for its innovation. While we have successfully built evergreen brands like PAW Patrol, Bakugan and Kinetic Sand, what sets us apart is our innovation mindset and our ability to surprise kids with magical experiences. This season, our team of designers have created a terrific line that will spark imagination, while leaning into current trends and evolving play patterns. Some of the most innovative items launching this fall include Purse Pets, an interactive fashion accessory that you can wear and play with. Our new Sonic Fin Football, which was featured on The Today's Show with our ambassador NFL Quarterback, Russell Wilson. A new fashion forward Plush line from GUND P.Lushes has shown very strong POS so far. We believe we have several strong top-toy contenders. In addition to our intellectual property, we are also launching several newly acquired licensed toy lines in the back half of the year in addition to Monster Jam and DC Comics, which continue to perform really well. Our toy line of Gabby's Dollhouse, a top 10 preschool show in Netflix has already debuted at retail and initial POS results show strong pent-up demand for the toys. Our take on Wizarding World in partnership with Warner Brothers is also hitting shelf this month. From an interactive Hedwig to a Hogwarts castle replica, our new range of toys celebrates and reimagines the beloved characters from the Harry Potter film series. Finally, this fall, we are launching our line of action figures, playsets and roll play items from Riot Games, League of Legends, the most played PC-based game in the world. We are excited to move into this category to leverage the attention of this loyal and international fan base and capture our share of sales in this rapidly growing kidult market.We continue to evolve our approach to marketing, starting with a focus on consumer centricity to enable an insights-driven approach. We expect consumer behavior to continue to be dynamic through the balance of 2021. We're keeping an eye on the following key trends. First, the economic recovery. While there is no expected future of COVID-related stimulus, the U.S. child tax credit and lower unemployment could contribute to higher consumer spending. We are focused on marketing spend to capture interest in new items and increase presence in our brands. Across much of the world, children will return to school this fall, which will see a return to word-of-mouth on the playground and a craving for newness. We are focused on early execution around the back-to-school season leading into holiday. We will benefit from the return to physical retail as we are overindexed in brick-and-mortar. We will continue to make our spend against both kids and shoppers in line with shifts we've made last year to support an omni-channel experience. For many families, there won't be a full return to work with parents, increasingly given hybrid work options. For those still working from home, they'll need toys to keep kids occupied. To get strong early promotion in 2020, we expect retailers to begin early price promotions. If in-store traffic growth continues, the season could extend later into December with last-minute shoppers having the option to buy in store. We are continuing to build our digital-first in-house capability with 50% of our U.S. marketing focused on digital channels. We have an e-commerce omni-channel focus, evidenced by our substantial increase in e-comm marketing spend with a strong physical retail program to complement it. We are focusing on creating innovation on programs like Bakugan and Roblox, life selling commerce, experiential retail, TikTok co-creation and location-based mobile advertising. To conclude, we are extremely proud of our global Spin Master team. Our founders have set a clear vision for our future as a fully imagined children's entertainment company, and this vision is being realized. We are very well positioned entering the back half of the year with an amazing toy lineup, strong momentum on our digital games offering and the highly anticipated release of our first feature film in less than 3 weeks. Looking to the future, we are ready to adapt to the changing dynamics of play through innovation, customer-driven decision-making, partnerships and a relentless drive to reimagine where imagination can take us. With these goals well in our sights, we will deliver profitable growth and continued value for our shareholders. I will now turn it over to Mark to provide some further details.

[Mark L. Segal, CFO & Executive VP]

Thank you, Max, and good morning, everyone. We started 2021 with strong financial results and extended these improvements through the second quarter. Q2 reflected the continued strength of our diversification efforts with very strong digital games and entertainment growth, significant improvement in gross margin and continued operational improvements. These factors combined to produce a $60 million improvement in our Q2 year-over-year adjusted EBITDA. In addition, we continued to strengthen our balance sheet ending Q2 with net cash of $311 million. Our core business is healthy, and we continue to actively leverage our assets to deliver value to shareholders. Gross product sales in Q2 rose 27.2% to $359 million with a favorable foreign exchange impact of $6.5 million. On a constant currency basis, gross product sales were up 24.9%. Total revenues, including other revenues, climbed by 39% to $390.8 million, up from $281.1 million. Other revenue for the quarter grew $35.9 million or 126% to $64.4 million. Both primary components of other revenue, Entertainment and Licensing and Digital Games were up strongly. Entertainment and Licensing grew 50%, driven by growth in TV distribution revenue as well as Licensing and Merchandising income. In Q2, Digital Games revenue increased 262% to $36.9 million, driven primarily by growth in Toca Life World and our Sago Mini subscription base. On a year-to-date basis, Digital Games revenue grew 315% to $71 million from $17 million for the same period last year. The gross product sales increase was driven by all geographic markets and exceptional sales growth in both Pre-School and Girls and Boys. On a geographic basis, the rest of the world was the strongest growth region as gross product sales rose 58.2%. And in Europe and North America, gross product sales were up 23.7% in both regions. International gross product sales for the quarter represented approximately 30% of total gross product sales, up from 28%. Our Pre-School and Girls segment grew by $56.1 million or 60% to $149.6 million in Q2, driven primarily by strong sales of PAW Patrol, Gabby's Dollhouse and Present Pets.PAW Patrol is performing well, accounting for a significant portion of the growth. Retailers are extremely enthusiastic about the movie toy line, while the core line continues to perform. In Boys, gross product sales were up approximately 44% driven by higher sales of Bakugan, Monster Jam and Tech Deck. This increase follows a year where we saw a decline in action figures and collectibles, which was affected by restrictions from COVID. Gross product sales in the Activities, Games & Puzzles and Plush category declined slightly by 1.8% to $98 million. The decline was driven primarily by the Games & Puzzles portfolio which had unprecedented growth in Q2 2020 during the height of the pandemic.Relative to 2019, our Games & Puzzles business is strongly up. Sales of Kinetic Sand, Orbeez and Influencer, all positively contributed to sales. Included in Activities, Games & Puzzles and Plush, gross product sales of Rubik's products of just under $5 million and $7 million on a Q2 and year-to-date basis, respectively. From a channel perspective, retail is experiencing a shift back to in-store and online growth, while still strong, is moderating. As Max mentioned earlier, industry in-store sales in the U.S. have not only recovered in 2021, but are ahead of 2019 levels by 30%. Overall, on a year-to-date basis, our e-commerce POS is up 5% compared to last year. Looking over a longer period, e-commerce sales in Q2 2021 are 84% ahead of where they were in Q2 2019. Sales allowances in the quarter were 9.1% of gross product sales, down 140 basis points from 10.5% last year. Our improved inventory management led to reduced markdowns. In addition, year-over-year operational improvements drove significant reductions in noncompliance charges over last year. These improvements were offset to some extent by continued growth in Europe, which has a higher overall sales allowance rate than the global average. On a year-to-date basis, sales allowances are 11% versus 12.7% last year. Historically, we have operated in the 10% to 12% range. We expect to be within that range, but towards the upper end of the range for 2021. Gross profit for the quarter was $209.9 million or 53.7% of revenue compared to $118.2 million or 42%. This significant improvement in gross margin is a result of the growth in digital games and entertainment and licensing as well as the year-over-year cost reductions from our operational improvement initiatives. These cost reductions include lower scrap and obsolescence, reduced closeout sales, reduced reconfiguration costs and lower sales allowances. In Q2 2020, we identified approximately $13 million in costs within gross profit, which related to inefficiencies from our operational issues, which have now been remediated. Selling, general and administrative expenses decreased as a percentage of total revenue to 38.2%, down from 40.8%. The 260 basis point improvement was driven by a significant reduction in distribution costs, which declined by $5.1 million to 3.5% of total revenue compared to 6.7%. Offsetting these improvements was higher marketing, selling and administrative costs. Marketing costs increased $15.8 million to 7% of revenue, which represents a more normalized level of marketing spend for Q2 when compared to 4.1% last year as a result of COVID. We now expect our full year 2021 marketing spend to be at approximately 10% of revenue, in line with 2018 and 2019.We will invest in marketing strategically to support sell-through, share growth, brand momentum and channel country mix goals. Selling costs as a percentage of total revenue declined from 7.3% of revenue to 6.2% due to a lower proportion of licensed product in our mix this quarter. Administrative expenses increased over last year by $22.3 million or 40.4% to $77.5 million. The increase was primarily due to personnel-related costs including higher incentive compensation accruals driven by improved operating results as well as higher professional service expenses. Administrative expenses as a percentage of total revenue increased slightly to 19.8% from 19.6%. Adjusted administrative expenses increased by $19.5 million to $72.9 million. Adjusted administrative expenses as a percentage of total revenue decreased to $18.7 million from -- sorry, 18.7% from 18.9%. In Q2, we recorded net income of $33.5 million or $0.32 per diluted share compared to a net loss of $14.9 million or a loss of $0.15 per diluted share. Adjusted net income in the second quarter was $41.6 million or $0.40 per diluted share, an improvement of $51.1 million when compared with an adjusted net loss of $9.5 million or $0.09 per share. Adjusted EBITDA was $81.8 million in the quarter compared to $21.5 million, an improvement of $60 million. The significant increase in adjusted EBITDA was driven by higher gross profit and lower distribution costs, partially offset by higher selling, marketing and administrative expenses. Adjusted EBITDA margin was 20.9%, up from 7.6%. From a tax perspective, we had an income tax expense of $11 million in the quarter at a rate of 25%. Free cash flow was $62.5 million compared to $40.2 million, driven by higher cash flow from operations. Inventory at the end of the quarter was $135.7 million, down by $18.6 million compared to $154.3 million in Q2 2020. Regarding acquisitions, as Max mentioned, we acquired Originator during the quarter for $15 million plus further performance-based payouts, assuming certain financial and operating performance thresholds are met over the next 5 years. Originator will continue to operate from San Francisco and will be reported within our digital games creative center. Turning now to our view for 2021. We are holding our gross product sales growth outlook for the full year at high single digits, consistent with our guidance in May. Whilst we have continued optimism for 2021 based on orders on hand and retailer demand, we are seeing some headwinds, which require us to be cautious about our expectations for growth. A significant headwind we are experiencing is from the global delay in shipping caused by a variety of factors, including logistics disruptions from COVID-related shutdowns at key ports in China, the ripple effect of the Suez Canal blockage and from COVID-related labor shortages in certain areas in Vietnam and China. All of which has resulted in a shortage of empty ocean containers in Asia, which is disrupting and delaying customer pickups. We are working hard to mitigate this. Our efforts include sourcing products earlier, increasing the number of ocean carriers we work with and utilizing more ports to expedite the delivery of our product. We continue to anticipate some port congestion and ocean container capacity constraints for the second half of 2021. From a timing perspective, we are working extremely hard to ensure full product availability during the holiday season, and we're doing all we can to meet demand. We anticipate experiencing some shifts in timing of revenue between Q3 and Q4. Overall, given all the above, we want to maintain a cautious bias when it comes to GPS growth expectations. Turning to total revenue. We continue to see an acceleration of our momentum in entertainment and in particular, digital gaming. Based on this momentum, we are pleased to raise our guidance for total revenue and now expect it to increase mid-teens compared to our prior outlook of low double digits that we shared in May. Regarding the PAW movie, in May, we advised you that in Q3, we expect to reflect in our results, the distribution revenue received from Paramount and a portion of the amortization previously capitalized. Our previous guidance was based on the release schedule that provided for an exclusive theatrical period followed by the subsequent release on other delivery platforms. Due to the uncertainties of COVID, the shift was made in Q2 in the movie's U.S. distribution strategy to a simultaneous release in theatres and on Paramount Plus. As a result, we now expect distribution revenue of approximately $23 million in Q3 compared to $13 million previously advised, as well as approximately $22 million of amortization of the capitalized intangible assets compared to $12 million previously. The net impact of this distribution strategy change on our gross profit will not be material, but it will positively impact Q3 adjusted EBITDA by $10 million. Consistent with what I described in May, both Licensing and Merchandising revenue from the movie will continue to flow into Q3 and Q4 and into 2022. And depending on movie's ultimate box office performance, we could see additional revenue in late 2021 and possibly in 2022. Turning now to profitability. Consistent with what is being experienced across the toy industry and many other industries, we continue to see increases in input costs, primarily from plastic resin, paper and cardboard packaging and more recently from electronic chips and particularly ocean freight, which has nearly doubled as a percentage of our COGS compared to prior years. These cost increases accelerated significantly in the latter part of Q2. In early May, we advised you that we have implemented cost containment and productivity programs to offset cost increases. But when necessary, we were implementing price increases to help us offset inflationary pressures. These price increases became effective early in Q3 as planned. Normally, if we were raising our guidance for total revenue, we would also expect to raise our EBITDA margin guidance. Gross profit and adjusted EBITDA are benefiting from the remediation of our operational issues and the positive mix effect of digital games and entertainment revenue growth. However, given the incremental cost pressures the industry is experiencing and which are expected to continue, we're maintaining our adjusted EBITDA margin guidance, and we continue to expect our 2021 adjusted EBITDA margin to be towards the higher end of the mid- to high teens range. Capital expenditures and our effective tax rate are expected to be consistent with previous guidance. To conclude, we have advanced our strategic initiatives and made great progress across all 3 creative centers, continuing to demonstrate our ability to produce compelling entertainment and digital content, magical toy experiences and to be a great partner for the licensed toy lines. We have built a strong and focused global platform, and are incredibly proud of the effort and results that our employees have delivered. We are committed to our long-term financial framework for value creation underpins our formula for innovation and global growth across toys, entertainment and digital games. Our solid financial position, together with the achievements of our operational improvement initiatives, sets a very solid foundation for growth for 2021 and beyond. That concludes the formal part of our call. We will now be pleased to take questions. Operator, please open the line.

[Operator]

[Operator Instructions] And your first question comes from the line of Brian Morrison from TD Securities.

[Brian Morrison, Research Analyst]

First question for Mark. You kind of answered it, but just on guidance. I understand gross products will be flat. And with the total revenue increase, I would have expected a higher -- a commensurate increase in the margin. But just walk me through the guidance, it seems like a conservative view taking into account for maybe logistic headwinds because you are putting in a higher margin digital and licensing revenue there it seems?

[Mark L. Segal, CFO & Executive VP]

Yes. So Brian, as I just described, we maintain a cautious bias just given what is actually happening out there in the industry. And in Asia, we were experiencing pressures on ocean container capacity. And for that reason, we -- despite the fact that we have strong orders and a great full lineup, we wanted to maintain a cautious price on our top line and gross product sales. We are going up on total revenue due to digital games and entertainment strength. But we are maintaining our EBITDA margin guidance because of the inflationary cost pressures that we're seeing most recently on ocean freight and on electronic chips. So given all those uncertainties, Brian, we thought it would be prudent to maintain a cautious bias in terms of guidance on those 2 metrics.

[Brian Morrison, Research Analyst]

Okay. And second question for Max. I think I understand it, but I think it would be helpful to make sure it's clear. You've got this negative 7% POS decline in the quarter. And it sounds like you had loaded inventory available last year versus a constraint this year, maybe some timing of the PAW Patrol movie. But can you just provide some color relative to the industry, your expectations for the second half. And I realize it's early, but can you provide some early PAW Patrol movie POS presale data, anything on that front?

[Max Rangel, Global President, CEO & Director]

Absolutely, Brian. So I want to give you a context for POS, and I'll start with global and then come down to the U.S., which is the numbers you're alluding to. Globally, we are outpacing category internationally, and actually grew share in 7 of 11 countries. And as you actually have pointed out, U.S. is our single largest opportunity. From a category perspective, total POS, 6 of our 9 total global franchises or brands are growing ahead of industry outside the U.S.As you pointed out, inventory challenges are the single biggest reason for the lack of progress in the U.S. during quarter 2 at large, and it's something we have shared with you in May. And so I think we're at that point where inventory is beginning to look better, and we're seeing tremendous growth on PAW Patrol. Let me get into that in one second. Now it's not just within the U.S. that you have PAW Patrol. I think there are other things happening that are noteworthy performances we want to highlight. And I want to just bring you up to speed on that. So Bakugan is one, right. We mentioned that in the prepared remarks. That franchise is growing very aggressively. Tech Deck is growing incredibly aggressively in the U.S., 49% growth in Q2. Our DC Universe products are growing tremendously in the U.S. as well, 15%, Batman being the star performer. Kinetic Sand continues to grow in the U.S. as well. And what you see there is just declining category performance, but we're growing share. We now have 2 items of the top 5 in the U.S. art and craft category. And so we're feeling very strongly about that. And then finally, PAW is 14% in the U.S. year-to-date. And what's really most exciting is that what's driving that is strong awareness increases and penetration increases in households, which is great news ahead of the movie. Now as you ask about the movie effect, obviously, early days, but early POS rates are very positive. And so right now, we have basically our trains set at Walmart and the numbers at Walmart are very, very encouraging. And last week, we said our stand in target. And it's too early to tell. We haven't even gotten the read yet. So, so far, we're looking very, very good from a PAW Patrol early days, anticipating the movie.

[Brian Morrison, Research Analyst]

So overall, fair to say that you'll be -- by the end of the year, you should see POS in line with the industry average, is that fair?

[Max Rangel, Global President, CEO & Director]

Yes, we -- and that is our expectation, and so that's what we're gearing up to. And we have, obviously, marketing lined up to basically drive that demand. We have more marketing in this back half than we did a year ago. We're actually going back to our more normal levels of investments. And in some lines, we actually have focused. So we are not spreading the peanut butter too thin. We are going after our franchises and core brands more aggressively. And so we expect performance to come back in the second half as we actually had basically guided back in May. We are continuing to see some really good performance in some of our bigger e-commerce accounts as well. So we're growing share first half to first half last year, the biggest pure-play customer and also at one of our other customers that is omni-channel. So we're seeing that continue. We made some interventions in Q2, and so our share has really grown. So we're feeling very bullish about that.

[Operator]

Your next question comes from the line of Steph Wissink from Jefferies.

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

I wanted to follow up on Brian's question on EBITDA. Mark, maybe this is a good one for you. Just to help us bridge the EBITDA guide because you're guiding to margins, so you're raising sales, holding the margin rate at that upper end, which does imply EBITDA dollars are going to be going up versus the prior model. So I wanted to just make sure that, that's exactly what you're saying. And then secondly, just to help us think through the reference you made to the timing of the PAW Patrol movie rev rec, and it sounds like it's going to hit EBITDA by $10 million in the third quarter. But maybe just help us think through the balance of Q3, Q4?

[Mark L. Segal, CFO & Executive VP]

Sure. Yes. So Steph, we do guide to margin, as you say. So to the extent that our total revenue goes up, you would expect dollars to go up as well. But obviously, the situation is quite fluid because of the digital games and entertainment growth and the margin -- positive margin impact of that is being offset to some extent by the inflation that we're actually seeing on ocean freight and plastic resin and packaging and other areas. So the situation is quite fluid and nothing has really stabilized completely yet, which is why we're maintaining somewhat of a cautious bias on margin. In connection with the PAW movie, essentially what -- because of the change in distribution strategy, we're actually recognizing more distribution revenue and higher amortization in the third quarter. It's really just a timing issue, although it does have a positive benefit in Q3 of $10 million on adjusted EBITDA. Some of the -- some of that incremental EBITDA was actually going to flow through in Q4 and in prior quarters. So it's really just coming -- sorry, later quarters. So now it's really coming forward into Q3 because of the simultaneous release of the movie in theaters and on streaming with Paramount Plus in the U.S. In connection with Licensing and Merchandising, there's no real change on the movie Licensing and Merchandising impact that will flow through in Q3 and Q4 and also 2022. And then, again, to the extent that the box office is really higher than expectations overall, there might be some upside in terms of income that we could see from that. But Steph, that is something that we haven't necessarily built into our models, and I'm encouraging you not to do that yet because we just don't know how this is going to play out. But it does represent upside ultimately, to all of our models, if it was to be really successful at the box office.

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

Okay. That's great. And then my last question is just on advertising and marketing, and marketing budget for the year, it sounds like it's going to be closer to that 2018, 2019 level. And your business has actually gotten somewhat more profitable since 2018, 2019, especially with your operational improvements. As you realize upside, how do you balance passing that through to the bottom line versus reinvesting into areas of marketing and development to just continue to fortify the innovation pipeline?

[Max Rangel, Global President, CEO & Director]

So Stephanie, we are, as I suggested, and I'll get into more color. So we are indeed investing in a few new lines that we're bringing to market, particularly in the Dolls segment, right, something that we don't have that we have to invest. And so we are reinvesting some of that margin, as you suggest, in things that we're bringing new to market. So we're excited about that. Similarly, we have a few lines that we are bringing like Gabby's Dollhouse that has basically incremental marketing that we need to now invest and we're excited about that and it has begun to do really well in retail. It's beating our expectations handily. So we have actually flown marketing dollars to that. And then importantly, some of these items are now making it to Europe as well. So we are strengthening our European marketing. We are doing very well in Europe. We're growing in most European markets. And so marketing has to flow so we can continue that momentum. And then as we look to '22 and beyond, you are correct, we are strengthening our innovation ideas and bringing them to market next year, not just for the spring but fall and even into '23 with incremental investments as well. As we talked earlier, and Mark reiterated, our Noid studio is coming up, and we are excited about that. There are some properties that actually will have multi-creative center impact. And so we are going to gear up and invest in that as well. So I hope that gives you color beyond just the high-level numbers that we have on your P&L.

[Operator]

Your next question comes from Sabahat Khan from RBC Capital Markets.

[Sabahat Khan, Analyst]

I know you mentioned the DC Comics progressing well in the U.S. earlier, particularly the Batman platform. Do you have any insight, I guess, into the movie pipeline or the opportunities there into kind of the next couple of years for the remainder of that license?

[Mark L. Segal, CFO & Executive VP]

Sure, Sabahat. I'll take that one. Actually, 2022 is going to be a big year on the DC front. There are actually 4 movies that are scheduled to come out from a new content perspective. You've got the Batman movie that's scheduled to come out in March of 2022. You've got Black Adam in the middle of 2022. And then towards the back end of 2022, you've got the Flash and Aquaman that are coming out. So 4 movies associated with the DC slate in 2022. And obviously, we're very excited about all of those and our toy lines are associated with those, and we feel good about that license overall. Max, is there anything you want to add?

[Max Rangel, Global President, CEO & Director]

I think you said it well. We're going for -- we have great toy lines for that. So we're excited.

[Sabahat Khan, Analyst]

And given, I guess, those all sound like there are in the Boys category, I guess, those would be sort of within the framework of the license that you have?

[Mark L. Segal, CFO & Executive VP]

Yes, those are within the license, and they would be in the Boys category that we reported.

[Sabahat Khan, Analyst]

Okay. Great. And then in the quarter, I think what stood out was the POS related to Bakugan. I guess, is there anything -- is this a new product line? Is it content behind that? Maybe some color on what's driving some of that growth in that platform?

[Max Rangel, Global President, CEO & Director]

Yes. So great inferences, Sabahat. So we actually had content drop in Q3. That was really, really successful. And as it dropped, it was basically done concurrently with activation in Roblox and activation in YouTube. And so the combination of all these Netflix,Roblox are marketing innovation truly propel a lot of users to engage with the brand. The engagement went up significantly, and we're super excited. And as we actually just mentioned earlier, we are releasing our new series on Roblox, which is new for us and for a lot of the market. And we got a lot of play patterns that we're actually getting back into to supplement obviously, with toys, all that great content and engagement by the new audiences that we brought to the franchise.

[Mark L. Segal, CFO & Executive VP]

And just to add to that, Max. Sabahat, as you know, Bakugan is a game and a toy that actually thrives on kids playing together. And so as COVID restrictions have eased and kids are socializing more, that's also helped. And the new toy line has received a great reaction and kids getting together word-of-mouth is definitely improved as well.

[Max Rangel, Global President, CEO & Director]

And just to reflect on Stephanie's question, Sabahat, just to build on your question too, we actually have had great investments in marketing on Bakugan and we've had great list on ROIs. So that gives us confidence to continue to invest on that franchise as we get into Q3 and beyond. So we're excited.

[Sabahat Khan, Analyst]

Great. And then just one last one for me. I guess with some of the concerns around trade and supply chain issues in H2, are you taking some litigation measures like getting deliveries earlier, bringing more product to your domestic warehouses. Just any color around how you're looking to prepare for the holiday season?

[Mark L. Segal, CFO & Executive VP]

Sabahat, we're doing whatever we can to make sure that our toys get to our customers and the kids can buy them when they want to buy them and parents. So we're definitely doing everything we can working with other carriers, moving things around, using other ports, working with logistics carriers wherever we can to move the goods, including potentially bringing some goods in on a domestic basis a little earlier. But it's a very fluid situation right now. And all I can say to you is that our supply chain team is extremely focused on doing all we can to make sure goods are on the retail shelf when we actually want them to be. Do you want to add anything?

[Max Rangel, Global President, CEO & Director]

I would add is basically it's an all hands on deck. It's a daily effort between our teams, our retailers' teams, our suppliers and basically weekly connections with the leadership of all those stakeholders so that we make sure we bring products to America and to Europe, particularly.

[Mark L. Segal, CFO & Executive VP]

Sabahat, the one thing I would add, just in addition to this is that because of the fluidity of the situation, I do see a potential shift in revenue between Q3 and Q4. Obviously, from the perspective of the retailer, retailers look at this in the context of fall as opposed to Q3 and Q4. But obviously, from our perspective, we report the quarters. So there might be a shift from September into October in terms of some revenue shifting into Q4 as things move late September, early October. So just keep that in mind.

[Sabahat Khan, Analyst]

And just on the shipment issue, I think a few years ago, you guys had about 2/3 of your products selling FOB where retailers picked it up in Asia. Where does that stand today, I guess, post pandemic?

[Mark L. Segal, CFO & Executive VP]

Yes. So 2020 was not a good reference point because of the inventory issues that we had in 2019. So what you're seeing in 2021 is a shift back towards FOB overall. Now keep in mind, the U.S. market is always more FOB and Europe is much more domestic. But what we're seeing right now is a shift back towards FOB, which is typically where we have been as a company, not as much as the 60-40 that we used to see, probably more in the low to mid-50s FOB as a percentage. And for the year, I suspect that will be somewhere around 50-50 for the year, maybe a little bit more weighted towards FOB, but in that order of magnitude.

[Operator]

Your next question comes from the line of Martin Landry from Stifel GMP.

[Martin Landry, Managing Director of Equity Research]

You've talked about supply issues and challenges. I'm wondering for your PAW Patrol movie team toys, I know you expect it to be at retail in -- on August 1. And I visited a retailer -- a large retailer in Canada, and I couldn't find your toys and I can't find them on the website as well. Just wondering, do you have some delays in Canada for your PAW Patrol movie team toys?

[Max Rangel, Global President, CEO & Director]

So I think all those toys -- Martin, are underway in some other retailers, as we described earlier, they already are set on train displays or on basically encaps. And if you go to other pure-play, you're going to find the toys as well. And you're going to find a couple of handfuls of key items that we're launching, already feature and selling. So you can order them obviously online. So I am very well aware that those actually are in their warehouses and making their way to the retailer shelves. So apologies that you couldn't find it. Everyone is really working hard to get them to you. And so -- and if you need them before you actually get back to the store, I think we can help on that front.

[Martin Landry, Managing Director of Equity Research]

And my other question was on your point-of-sale metrics. You do a really good job flushing out what's been the drive or working really well and growing well. But what's the -- what's dragging a little bit your global point of sales, they're down 7% year-over-year. Does it have to do with Activities & Puzzles being due to hard comp or anything else?

[Max Rangel, Global President, CEO & Director]

Yes. So I think what we need to really level set here is, and I think it took me -- it's taken me a couple of months. We play in part of the market in categories that are smaller than, obviously, some of the larger super categories in the space that are growing. So if you look at the where we play and where our share is more develop, we're now benefiting when you look at total Spin Master share from just basically our, if you will, where we play perspective. Once -- and we remain very focused on every brand and making sure every brand is growing share. And that's why we talk about 6 out of 9 brands growing share. But when you aggregate it and you look at the whole toy world and how it reports, then you can see the weighted average of our play and our performance be basically not necessarily recognized from a total Spin Master share performance. I hope that makes sense, but that's really one of the things that is hurting us. And as you well point out, we have an over development in Games & Puzzles, and Games & Puzzles is one of the largest declining segments in Q2 given the year ago base. And for us, in that category, it's even more pronounced because in the year ago base period, we had basically some promotional items that we were selling at that time, which we don't have this year because they were basically being liquidated. So I hope that explains a bit of the context. We've talked about basically Kinetic Sand and how well we do from a share perspective, but that category as well from a year ago pandemic base is also not one of the fastest-growing categories. So I hope you get the -- where we play and where we put effort in investments, may not be in the larger categories and the ones that are growing fastest. And so I think if you look at it in that context, hopefully, the math squares for you.

[Operator]

Your next question comes from Jaime Katz from Morningstar.

[Jaime M. Katz, Senior Equity Analyst]

I'm hoping you guys could share your updated expectations for gross margin. Obviously, you've made a lot of progress year-to-date on the gross margin. But as the FOB domestic mix shifts ahead and then digital or digital and entertainment versus the traditional sales channel shift as well, should we be thinking that the opportunity to the gross margin is a little bit better than maybe it has been in the past?

[Mark L. Segal, CFO & Executive VP]

So Jaime, historically, if you look at the company, we've been in the high 40s overall, 49%, 48% in that range. And we've always targeted to be north of 50% at a minimum and continue to grow from there. We had an exceptional quarter in terms of our gross margin and over 33%, on a year-to-date basis we're just over 51%. Gross margin is improving and has improved because of all the operational initiatives that we have implemented as well as digital games growth and entertainment growth which are gross margin accretive as well as product mix. Product mix has been a big factor as we ship more products where we own the IP that has a positive impact on gross margin. And so I will say to you, we're going to continue to focus on that. I don't believe we'll be able to keep the rate at the same level that we were at in Q2 for the balance of the year. But certainly, our goal is to be well north of 50% and to continue to grow from there. And we focus on all of the levers that are driving gross margin, whether it's value-based pricing, lower sales allowances, increased digital games and entertainment content, productivity programs in Asia, volume rebates, cost engineering and all of those factors that drive higher gross margins. But the cautionary reality that we're dealing with right now is that there is inflation on all of the inputs into COGS, whether it's plastic resin, whether it's paper, cardboard packaging, chips and ocean freight. And so we just have to maintain reasonably cautious expectations around where our gross margins are going to be at this point until things settle down.

[Jaime M. Katz, Senior Equity Analyst]

Of course. And I think in the prepared remarks, there were some comments about potential early price promotions or last-minute shoppers. Is there anything in the purchasing pattern from consumers now that would indicate that things are moving that way? Or is that more just surrounding uncertainty in the environment right now and what issues may surface?

[Max Rangel, Global President, CEO & Director]

So I think Q3 -- Jaime, so I think if you look at Q2, and we talked about the overall market being 15% versus being 30% in Q1, and as we go into Q3, what would be the impact of that. We're seeing because of the programs we have and how we actually share with you the fact that we're trying to lean into, for example, some things with back-to-school. And so our Sonic Fin Football program is off the gate and basically trying to reach that audience and get behind that period before the holiday. So we expect that it will not just pick up on Q3, but it also will have residual purchases back in Q4. That's just one example. The same is true for Tech Deck. And then the same is true for PAW Patrol, right. So as PAW Patrol has now hit the retail stores and the movie will start to play and streaming will continue to get kids engaged, and kids actually keep rewatching that video, we expect that, that repurchase will once again happen. So we're seeing right now, really, these are early days, tremendous momentum in our POS and PAW Patrol, on particularly the low price points. And so as a more expensive price point come closer to the holiday, you can imagine that, that will continue to fuel our POS momentum into late Q3, early Q4 and prior to the holiday.

[Operator]

Your last question comes from the line of Gerrick Jon from BMO Capital Markets.

[Gerrick Luke Johnson, Senior Toys and Leisure Analyst]

Can you talk about what drove entertainment licensing growth? I'm not sure you wanted to detail in there. Was there some early CP revenue from the PAW Patrol movie? And then my next question is on your own inventory, on your balance sheet down 12%. I would assume with price increase -- your cost increases, the units are actually down probably a little bit more than that. Is that sufficient to help hit your back half gross product target, which seems to be about flat year-over-year?

[Mark L. Segal, CFO & Executive VP]

Yes. So I'll start with the second part of your question first, Gerrick. Yes. So inventory was down around 12%, even though our sales were up 27%. So good inventory management and good results from a working capital perspective. We did see some inflation starting to creep into Q2, which will obviously affect costs ultimately and we'll see more in the second half of the year. So that will actually drive up inventory, carrying values even if units are flat. And so we do expect our inventory levels to increase year-over-year at the end of 2021. I think we actually ended 2020 a little bit too clean in many areas, and that's part of why we've struggled with POS in the first 6 months of the year because particularly in the U.S., we actually really were very low at retail and in our own warehouses on the inventory levels. In connection with entertainment and licensing, we're seeing both our TV distribution revenue. As we're delivering our new shows, we have new shows on PAW Patrol, Mighty Express, Bakugan and others all delivering, which is driving TV distribution revenue up. And then also because of the strength of PAW Patrol, in general, it's not just toys that are strong, but also the Licensing and Merchandising program globally is driving increased Licensing and Merchandising revenue in PAW Patrol and that's driving up entertainment and licensing within other revenue. Just keep in mind, we have over 200 partners around the world that are selling PAW Patrol licensed product. And with the movie coming along in Q3, we're obviously excited about Licensing and Merchandising for Q3 and Q4 as well, but we did see strength in Q1 and Q2. I think that's our last question, operator. So let me just say thank you to all of you for participating this morning. And Max and I look -- and Sofia look forward to chatting with you again in November for Q3. Thanks, everyone.

[Operator]

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