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Operator: Good morning, ladies and gentlemen, and welcome to the Spin Master Corp. Third Quarter 2025 Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Tim Foran, Vice President, Investor Relations. Please go ahead.
Tim Foran: Thank you. Good morning, everyone, and thank you for joining our call. With me here today are our CEO, Christina Miller; and our CFO, Jonathan Roiter. For your convenience, the press release, MD&A and consolidated financial statements 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 and any other future events or developments. Forward-looking statements are based on currently available information and assumptions that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such assumptions will prove to be correct, and many factors could cause actual results to differ materially from those expected or implied by the forward-looking statements. As a result, you are cautioned not to place undue reliance on these forward-looking statements. For additional information on these assumptions and risks, please consult the cautionary statements regarding forward-looking information in our earnings release dated today, October 30, 2025. Except as may be required by law, Spin Master disclaims any intention to update or revise any forward-looking statements, whether because of new information, future events or otherwise. Please note that Spin Master reports in U.S. dollars, and all dollar amounts today are expressed in U.S. currency, unless otherwise noted. Also note that unless noted otherwise, all percentage growth rates refer to the 3 months ending September 30, 2025, relative to the same period in 2024. I would now like to turn the conference call over to Christina.
Christina Miller: Thank you, Tim, and good morning to everyone who is joining us today. In terms of an agenda for the call, I will start with a review of the quarter and how things are shaping up for the holiday season. Then I will provide a high-level overview of our strategy and priorities before passing it to Jonathan to provide a financial review of the quarter. This quarter, Toys, Entertainment and Digital Games once again captured the imagination of kids and parents, reflecting our focus on innovation and storytelling. However, underlying performance was not matched in our financial results, but this was anticipated. Toy revenues have been negatively impacted this year by the shift in retailer buying patterns stemming from tariffs. At the POS level, we performed significantly better in Toys in Q3 than our revenues reflect. Based on Circana, we grew our market share within key categories globally. Our overall POS was down 1% compared to an industry decline of 2.5% in our TAM as consumer demand declined in the U.S., notably in September. Spin Master Toys recorded positive POS. This was offset by a decline in Melissa & Doug. We grew our market share within Preschool, Infant, Toddler and Plush, driven by strong performance from Ms. Rachel and GUND. We were #1 in Preschool, where PAW Patrol remains a top property. Within Wheels & Action, our POS growth was 7x higher than the rest of the industry, driven by Monster Jam in vehicles and How to Train Your Dragon in action. Turning to Entertainment, we continue to create new and original IP. We delivered our first of five new PAW Patrol specials this quarter, and we greenlit our first original IP film. This is a major milestone for our Entertainment studio. The animated four-quadrant film is directed by David Soren. This adds to our upcoming feature film slate, including Paw Patrol: The Dino Movie next summer and the live action Bakugan movie in development. Within digital Games, we had a strong quarter with growth in Toca Boca and Piknik, driven by improved monetization of our platforms. Toca Boca conversion and average revenue per paying user were on track. Monthly active users were down. This was due to competition and our focus on higher spending markets. Piknik subscribers were up, as was retention and ARPU. We also benefited in the quarter from the delivery of Toca Boca Jr classic games to a third-party platform. Looking ahead to Q4 across our three creative centers, we are well positioned going into the holiday season. Within Toys, in Q3, we were the only manufacturer to have three new toys leading their super category in the U.S. per Circana. We also have a broad range of brands featured on the retailers' top toys list. In terms of consumer demand, Circana expects 2025 holiday shopping season to be less predictable and more spread out this year than ever before. Now turning to Entertainment, we're celebrating the holiday season with our PAW Patrol Christmas special. It is set to air in the U.S. on Paramount+, Nickelodeon and for the first time ever on CBS primetime on Black Friday. We've also secured international distribution on streaming platforms and other major networks. There will also be a theatrical screening in 3,600 theaters across 17 countries and territories. In Digital Games, we have a robust lineup planned for Q4 of new features, content releases and strategic partnerships, including the recent collaboration with Sanrio. Looking into 2026 and beyond, I believe we have a sound strategy focused on monetizing our core brands and franchises and developing new IP across our three creative centers. However, to date, our execution has not met our ambition. I see an opportunity to increase our baseline of success by focusing on consistent foundational improvements applying greater executional discipline and never forgetting that innovation is core to our DNA. Beginning with Toys, we have fantastic core brands, including PAW Patrol, Melissa & Doug, GUND and Kinetic Sand, we are investing to grow these brands through creativity and innovation. A great example is how we created an all-new brand with our digital pet, Bitzee. We have since extended the brand to Bitzee Hamster Ball and licensed versions with Harry Potter, Jurassic World and Disney with more to come. This approach to brand innovation and extensions drives reoccurring revenues and ultimately helps us grow market share. We are taking the same approach with Melissa & Doug, the market leader in early learning. The business is primarily evergreen, which is complementary to Spin Master's core toys. Melissa & Doug was in line with expectations in 2024, but it faced challenges in 2025 due to impact of tariffs and competitive pressure. We are executing on a plan to return to growth by driving more innovation and new introductions in 2026 in core categories where we have leadership share, including developmental toys, puzzles and pretend play. We are also moving M&D into adjacent categories, leveraging its strong brand trust with parents. This includes new extensions like Sticker WOW!, which has performed very well, as well as extending into partnerships and licenses, including Disney and Ms. Rachel. And we have begun international distribution of M&D using our global infrastructure and expertise to provide retailers with a curated line. Beyond our core brands, we are partnering with the leading entertainment companies and continuing to maximize existing long-term relationships. Our current TAM is $50 billion, and we still only have 4% of it. So there is a tremendous opportunity for growth. When we look further out, we are exploring opportunities to move into adjacent high-growth categories, focused on areas where we have the right to win and be an innovation leader. Within Entertainment, our focus is simple: Develop and own our IP, be platform agnostic and meet kids where they watch, play and engage. We're continuing to invest in PAW Patrol as a priority franchise and expand its universe. 2026 will see the release of the biggest movie yet. We're taking advantage of this across all business lines, including an amazing line of toys and products around the Dino Movie theme, a series of specials and new seasons of PAW Patrol and Rubble & Crew to build excitement for the movie release and a new digital PAW Patrol game. We're also building the next wave of original IP, including a big year for Unicorn Academy content in 2026 and a reinvention of Bakugan. Within Digital Games, we have taken deliberate actions to sharpen our focus and concentrate resources on our core two platforms, Toca Boca and Piknik. In Toca Boca World, we are strengthening the overall experience through investing in our tech stack, more frequent features and content drops and more timely strategic collaborations. This year, we've delivered more content, features than ever before. And as a result, we're seeing strength in the bottom of our funnel, specifically in ARPU. And we're bringing Toca Boca to retail, including a collaboration with MINISO in 2026. This is the first step in fully realizing the brand. Within Piknik, our efforts are centered on subscriber growth and retention. We are continuing to improve the user experience and adding more value to our bundle for parents, soon to include a new app in the reading category. We are diversifying and growing revenue by licensing gains to third parties. In summary, our focus across Spin Master will be ensuring creativity, storytelling and innovation return to being the core of our business. We'll support this by prioritizing funding for product development, innovation and the overall creative pipeline, being disciplined in our investments and putting engagement of kids and families at the forefront. We've been successful in establishing a presence everywhere kids are through our three creative centers, Toys, Entertainment and Digital Games. Now it's time to unlock the value across all three and realize the full potential of our brands. With that, I turn it over to Jonathan.
Jonathan Roiter: Thank you, Christina, and good morning, everyone. As Christina noted, our Toy POS was down only 1% in the third quarter. However, in large part due to the continued shift in retail behavior, stemming from tariffs, we saw a more negative impact on our reported Toy sales. In the third quarter, specifically, Toy gross product sales or GPS, declined 20% or $180 million. The primary drivers of the delta between our POS and our GPS performance were: First, we saw a decline of $160 million in FOB orders as retailers move more orders to domestic replenishment, primarily due to tariffs. And two, retailers globally have been managing their inventory tightly, which reduced domestic replenishment orders. This also applies to distributors in countries where we use third parties in certain cases, due to not wanting to carry high inventory in the current economic and geopolitical climate. Now some of the shift in retailer ordering is timing. We expect to recapture some of these orders in coming quarters via domestic replenishment assuming the current FOB to domestic ordering proportions remain in place. However, as I noted in our second quarter, a portion could be considered as lost sales as opposed to timing unless we were to see a restocking benefit next year. Positively, our belief is that retailers are now at a lean inventory level. So the industry should have a relatively healthy setup going into 2026. Our own inventories declined versus a year ago due to sell-through efforts, which reduced our inventory, excluding tariffs, by $36 million. Our reduced days inventory outstanding, combined with improved working capital management, helped us decrease our consolidated cash conversion cycle by 11 days. We've also continued to make strides in our supply chain diversification for the U.S. market. We expect China to represent approximately 30% of our U.S. cost of goods sold in 2026 compared to 64% in 2024. Melissa & Doug will still have a high proportion due to its high-quality wood products. As a premium brand in a price competitive market, quality and costs are the most important factors and further diversification will occur as these two can be maintained. Turning to our revenues. The decline of 17% was driven by the decline in Toy for the same reasons impacting GPS. This was partially offset by a strong increase in Digital Games for the reasons Christina mentioned. We recorded an incremental $10 million in partnership revenue in Digital Games in the quarter. The actual games launch is happening in the fourth quarter, but delivery and revenue recognition came through this quarter. As there is no associated platform costs with this revenue, this drove an increase in our gross profit margin. Below that, adjusted SG&A was stable versus last year with efficiency initiatives offsetting general inflation and higher royalties and IT costs. Adjusted EBITDA, operating income and net income declined due to the reduction in Toy revenues with margin compression, reflecting negative operating leverage. We recorded strong operating cash flows, driven in part by improved working capital management. CapEx increased by $11 million due to leasehold improvements, IT investments and an acquisition of certain Toy assets. On a year-to-date basis, CapEx has increased by $33 million, primarily due to leasehold improvements, IT investments and investments in Entertainment content. CapEx includes our new Los Angeles office and a Toy showroom, we anticipate approximately $7 million in CapEx related to this in both '25 and 2026. Additionally, following the acquisition of Melissa & Doug, we are upgrading our enterprise software across our global organization. We expect to spend $20 million to $25 million in CapEx this year and a similar amount next year related to this. In both cases, these initiatives are already in the capital intensity expectations we outlined earlier in the year. CapEx for these will complete next year, freeing up cash in 2027. As it relates to IT investments, we expect this to help us improve our demand forecasting and planning, operate more efficiently, including within our supply chain; scale our business without adding incremental cost; and lastly, optimize our cost structure. Our free cash in the quarter was focused on buying back our shares. Post quarter, we completed an acquisition of a digital reading and storytelling company for preliminary total considerations of $20 million, which includes significant contingent considerations. This is consistent with our focus on building core learning skills in our Piknik bundle to drive acquisition and retention. Reading is a critical learning skill and that their technology will be a valuable addition to Piknik. It is also an acquihire of a talented development team for our Digital Games business. We'll be able to provide more color on plans for this in the coming year. Looking ahead to the fourth quarter, due to the unresolved tariff situation, we have not reinstituted guidance for the year. However, as I noted, due to the timing of our orders, we're aiming for an improvement in our year-over-year financial results in the fourth quarter compared to what we saw in this quarter. Our adjusted SG&A is anticipated to be approximately $60 million less this year than what we had originally planned at the beginning of the year or what was reflected at the high end of our originally provided guidance range. This stems from efficiency initiatives we have undertaken, including M&D synergies as well as avoiding new headcount costs and reducing discretionary costs. Similarly, our CapEx is anticipated to be [ $40 million ] less than our originally budgeted plans for the year. This reflects our focus on returning to profitable growth, which enables us to invest in creativity and innovation while driving higher returns on our investment and delivering attractive shareholder returns. With that, operator, please open the line for questions.
Operator: [Operator Instructions] And your first question comes from Kylie Cohu with Jefferies.
Kylie Cohu: You mentioned that this holiday season is going to be unpredictable, choppy. I was just kind of curious what you've seen from retail ordering so far as well as consumer demand. You mentioned the Q3 POS, what we're seeing so far quarter-to-date? And then also how you're adjusting your marketing and promotional strategies to these shifts?
Christina Miller: Kylie, thanks for the question. I think the -- early on, what we're seeing in Q4 is strong POS in our key categories where, as we talked about in Q3, we're up significantly in Wheels & Action. We took some market share there, and that GPS is not necessarily the gauge for our Toy performance at the moment. In Preschool, Infant and Toddler, we continue to take market share. The category was down a little bit, but we continue to be the market leader there. In Activities, we're seeing a POS decline due to some underperformance in games in our arts and crafts. Though Melissa & Doug has actually done well in the latter category. Sticker WOW! has been a really top performer for us. So I think in the current environment, what we're seeing is there are some lower-priced competition that's doing well in the wooden toy category. And for M&D, we're improving our position in this category through innovation. And we're seeing that across the Spin Master products. It's really where we are driving innovation that we're seeing good performance in top new toys. Our Stack'd Bracelet Studio is another good example of that. As it relates to marketing, I think you see a couple of things, right? Across the top toys, all of the materials that have gone out by retailers were included in all of that. In some cases, we have some -- we have more top toys than most of the other manufacturers. So I think that that's a great starting point. As it relates to the marketing shift from Q3 to Q4, I think our spending is increasing in Q4 against our toys as the retailers continue to set.
Jonathan Roiter: Yes. Thank you, Christina. Maybe I would just add a couple of comments here. I mean certainly, it's too early in the quarter to shape up how the consumer is going to turn up. I mean, the next 10 weeks are critical in the year. We're certainly targeting an improvement in our year-over-year Toy results versus Q3. And we have -- we think we have the products -- the right products, the right price points, right? More than 50% of our products are below that $20 mark. But as Christina mentioned in her introductory comments, the industry believes this is going to be a little bit choppier season, so kind of saying that the consumer sentiment and intentions that this could be a less predictable and more spread-out season than we've recently seen. So while we're -- we think we have the right products, we know we have the right products. We're showing up at the right places. We have more products on the top -- retailer top list -- toy list than in recent memory. We have more new products leading super categories, as Christina mentioned, than any other manufacturer. We're also recognizing that this is a unique Q4, and that Q4 will be an important part of our year.
Kylie Cohu: Got you. All that color is super helpful. And I hate to be so shortsighted. But I guess just one follow-up from that would be, how are your average selling prices relative to last year and kind of your assortment -- how do you feel about your assortment in that lower-priced categories?
Christina Miller: I'd say that we feel comfortable at this point that we have about -- we have more than 50% of our price points below the $19.99 price point. And then even some of the higher, more giftable price points such as Primal Hatch and the new Gabby dollhouse, we're seeing early signs of good POS around that. And that, again, some great innovation and some great marketing around those items are definitely -- create a real giftable moment while we make sure we maintain that price point that is below $19.99 for a lot of items as well. So we feel good about the mix.
Operator: Your next question comes from Martin Landry with Stifel.
Martin Landry: I'd like to touch on Melissa & Doug quickly. The sales were down this quarter, and I think they've been down year-to-date as well. I'm just wondering, is it a function of losing shelf space at retail? Or is it a function of more slower velocities at retail?
Christina Miller: I think it's more than one thing, Martin. I think it's -- again, we are -- I think we're seeing that the tariffs have impacted Melissa & Doug, a little more than our core brands, just given that more of our toys were coming out of China through the course of the year. So I think that's one of the reasons. The other is that there have been lots of competition, lower price point competition in the marketplace that has, on the lower end, taken some of our share. So you see us -- we look at POS going into the fourth quarter, and we're seeing signs of recovery, and we're really confident about what's to come in 2026. But those two things, between the tariffs and the lower price competition, they ate some market share from us this quarter.
Jonathan Roiter: Yes. And Martin, what that lets you see is if you bifurcate M&D and if you bifurcate the legacy Spin -- legacy Spin POS, we're very pleased with that POS. And Christina kind of laid out the issues that we're facing with M&D this year. When we look forward into next year, we're really confident of the plan that we have to address the issues. We're seeing in some of the shelf space that we're in, higher productivity, in fact, than we had last year. And the innovation that's coming for next year, the new product categories, the new lines are -- there's a lot of excitement from the retailer perspective because it's different than what's the competitive landscape that's out there.
Martin Landry: Okay. That's helpful. And I'd like to hear a little bit about Black Friday coming up. Black Friday is bigger and bigger in terms of dollar spends for the holidays. What is your strategy? How are you preparing for Black Friday? Are you intending to be a bit more promotional than previous years? Just a little bit about your strategy ahead of that would be great.
Christina Miller: Yes. Martin, I would say that I wouldn't put it all on Black Friday, either. I think Cyber Monday becomes bigger and bigger as well. So I think ultimately, yes, the entire weekend will be a big moment across retail sales. And as we see the uncertainty, meaning when people are going to start buying, there's lots of reasons to believe that it will happen around that window. I think one of the things you'll notice is really how we have a solid plan in place around PAW Patrol in particular around that window with our new Christmas special airing. It will be airing on Black Friday in the U.S. on CBS, the first time it's in broadcast, will also be in theaters from a promotional standpoint. So I think you see us lining up all of the content marketing around these windows. It's not targeted towards one specific day. We're working with all of our retail partners globally to make sure that we are part of all of the initiatives that are ongoing and then we're lining up our media around that, both from an organic social standpoint as well as a traditional media standpoint. So I feel good about our plans for that window. And I'd say the extra special for this year about that day, in particular, would be PAW Patrol Christmas special airing in broadcast.
Operator: Your next question comes from Luke Hannan with Canaccord.
Luke Hannan: Jon, I wanted to follow up on something you had mentioned in your prepared remarks talking about the Digital Games business. I believe you had mentioned that there was an incremental $10 million of revenue that you recognized during the quarter from partnership revenue. So first, if you could confirm that? And then second, how much of that fell to the bottom line? And what are the opportunities that you have in Digital Games for future partnerships going forward?
Jonathan Roiter: Yes, sure. Thank you, Luke. So as you know, our Digital Games strategy really centers around two core platforms. Within one of those platforms, within the Piknik platform, we are developing apps that continue to drive up our subscriber base and driving revenue growth. In addition to monetizing the value through our own platform, we have the ability to partner with others, and we'll announce who that is in the fourth quarter when it actually goes live. So we sold it in Q3. We revenue [ rec-ed ] it in Q3. Ultimately, it goes live in mid-November, so we can obviously talk to you about that then. But we like these opportunities. We continue to believe there's more of these opportunities. Why we like it is, not only is it incredibly accretive to the point that I think you were asking where most of that revenue flows to the bottom line. There is some support costs that you have on a year-over-year basis for it. But why we like it, an additional reason is that it actually drives the awareness higher on our core Piknik platform. So we see a correlation when we launch these. This is not our first and it won't be our last. We see a correlation with increase in subscribers. So it really supports the whole ecosystem and allows us to re-plow some of those incremental dollars back into development, more apps that then makes Piknik even more attractive, et cetera. So it becomes this kind of virtuous circle.
Luke Hannan: Got it. I want to ask also about the Entertainment segment as well and specifically L&M opportunities. I think this will probably something -- probably be a topic that's more relevant when we get to the latter portion of next year and the third PAW movie is going to be released, but just want to get a better understanding of -- I know historically, it's a pretty lumpy line item to model, but you do have quite a bit in the entertainment pipeline. I mean, just broadly speaking, how should we be thinking about L&M opportunities over the course of at least the next couple of quarters?
Jonathan Roiter: Yes. I mean, look, it's a good question, a fair question. It's one where without -- the fact that we're not giving guidance, it kind of limits my hand to give a huge amount of detail around it, except to say that as we release content, so as there's more content being released, and as you know, we entered -- at the beginning of the year, we announced that we're entering into a heightened investment in additional content, and we're seeing it as an example, on Black Friday, the PAW show coming out on CBS, as well as in, I think, 3,600 theaters worldwide. So as we have more and more content being released, you naturally have L&M, which is obviously incredibly accretive, an important part of the Entertainment revenue stream and profit stream. So you can imagine that over time, that should correlate with the increased distribution revenue that we have as we release more and more content. Of course, there's some choppiness to it. And I think what we will do is really call out so it's really clear for you when there is these onetime benefits so that you're able to build that into your model.
Luke Hannan: Okay. Last one for me, and then I'll pass the line. But I just wanted to follow up on the commentary earlier on there being lower price competition in the wooden toy category. Is that from the other large player in the category? Or is that from other competitors?
Christina Miller: That's been from a lot of private label. So we're seeing at retail that some lower-cost private label competitors were coming in on some key items that were causing some pricing pressure.
Operator: Your next question comes from Adam Shine with National Bank.
Adam Shine: Maybe for you, Jonathan. The -- if we look at last week, we heard Mattel maintaining the guidance and certainly implying a big lift to their toy sales in the Q4. And I think even Hasbro followed up saying that even they're expecting some growth out of their toy business, I think ex licensing, in Q4. Can you give us a little bit of help in terms of -- I know it's going to be an improvement on Q3, as you said. I think the question is how big an improvement is? Is maybe Melissa & Doug a bit of a gatekeeper in terms of a little more optimism around growth? Any color around the cadence of toys in the Q4? And then also, if you don't mind, maybe also for Christina, how U.S. retailers have come back to you in terms of orders because certainly, Mattel and Hasbro acknowledged an acceleration of retail orders following some of the timing issues in Q3.
Jonathan Roiter: Yes. So -- thank you, Adam. Maybe I'll start with it. Look, I think you were really trying to assess kind of how does Q4 shape up and we have to kind of recognize that we're not giving specific guidance in that we are still -- and the reason for it is that we feel that we're still in a time of great -- a significant uncertainty in the market. And so being careful of how we manage expectations and how we set those expectations, I think that is the certain prudence on our part in terms of the statement that we made versus some of those peers that you've laid out. What I can tell you is when we look at the year-over-year Toy reserves compared to Q3, we certainly are targeting improvement. You'll recall that I think in Q2, I mentioned that GPS for Q3 was going to be around 36% of our GPS. So I think that's still -- we're still comfortable with that. We -- from an adjusted SG&A perspective, we certainly think those costs will be stable to slightly down as we look into the fourth quarter. So seeing a clear path to operating leverage in the fourth quarter. Going back to kind of the initial question from Kylie, we have we believe the right product at the right price point. We're hearing that from our retail partners. We're seeing, in some cases, higher productivity on shelf space than we saw early in the year. And now we have to wait and see how this ultimately plays out over the next 2 months.
Christina Miller: Yes. Adam, I just -- I go back to, I believe we're well positioned, right? When I look through the POS week-on-week, I see there being growth week-on-week on our POS. I see some key items moving through the register, and I'm confident that we have the ability to get product to shelf. So we have to see how the uncertainty plays out, but I still believe we're well positioned.
Adam Shine: Okay. I appreciate that. And then maybe one follow-up, Jonathan. You talked about the additional investments. I think you had talked about that, frankly, a few months back, so going into next year and the savings that will come. A number of questions that came up last week on those other calls spoke to, obviously, ongoing concerns about how the tariff implications going into next year? Are they at 2x to reflect upon in terms of the full year? And I think the commentary from other management teams has been no, don't think of it that way and acknowledge that we're continuing to push on our mitigation actions. So from your perspective, Spin Master has never been very aggressive on annual cost cutting. Can you maybe speak to -- you already talked about the progress on SG&A earlier in this call, but can you speak to further initiatives as you get more comfortable in the seat in terms of pursuing as a regular cadence going forward?
Jonathan Roiter: Yes. So -- sorry, we're just moving the phone. We need to invest in a more conducive conference call. Adam, I think how I would look at it is, one thing we called out in our prepared remarks is there is investments in our internal tech stack to help us be not only more effective around, say, supply chain planning, around our forecasting, but also be more efficient in how we operate internally. And you're going to start seeing some of those -- that heightened CapEx roll off at the end of next year. And then we'll ultimately leverage that -- there'll be some benefits that we can -- that we'll be able to leverage into the business. My philosophy, and I think our philosophy as a wider management team is that we grow the top line, and we deliver operating leverage. We make the right capital decisions to get the right returns and ultimately, we drive TSR. So like it all goes together, Adam. I think there's an opportunity to continue to -- we know there's an opportunity to keep driving operating leverage in this business and that's going to come through multiple levers that as we head into next year, we'll keep on executing against.
Operator: Your next question comes from Jaime Katz with Morningstar.
Jaime Katz: I guess I have a theoretical sort of follow-up to that last question, and the opportunity for operating leverage. If we can think about next year, and I know this is early, as maybe a flat sales year, given that we know ordering pattern is a little bit better now, would we still be able to think about capturing EBITDA expansion? Or is -- do we need to have top line growth to really offset the incremental tariffs we're looking at next year?
Jonathan Roiter: Jaime, look, this -- like let me break that down in a couple of different ways. I mean the first way is that this business, just structurally, there's operating leverage, right? So as you grow, structurally, we have a fixed cost base. And I talked about in the last question, some of the things that we're doing to take -- be even more effective with the current cost base that we have to grow -- to support a higher growth, higher top line. So this business fundamentally has a structure that has fixed cost leverage and therefore, operating leverage. When we look into next year, again, there's certainly not any guidance this year. We're not giving guidance now for 2026. But when we look at next year, having operating leverage is something that I think this management team feels confident that we can deliver. And when I look at my past life, like in the past life, I used to say like a business should be able to deliver 50 to 100 basis points in any given year, some years more, some years less. And I think that's kind of the range that there's no reason why this business doesn't do the same.
Jaime Katz: Okay. And then do you guys have any internal data that you want to share on what you expect the PAW Patrol contribution to be from the October and the holiday specials embedded in the fourth quarter?
Jonathan Roiter: Yes. I mean, I can take it. So the special itself is not a huge entertainment revenue driver, what it is, is a phenomenal marketing tool to keep PAW central in the hearts and minds of our consumer base. And we believe that there's a way to kind of replicate this on an annual basis as well. So this becomes a kind of perennial event. It's more next year, Jaime, to think about how the release of the movie, that happens in the third quarter. As you know, like if I take the PAW movie 2, when we released it, there was a $20 million production revenue release that we would have. So it's really a Q3 story next year. That continues in Q3, Q4 and then into -- a little bit into the following year.
Christina Miller: Yes. The one thing I would add to that is that when you think about the movie and even our Netflix distribution, really, it becomes about wider awareness for the brand and bringing brand health to the brand just to make sure that gross viewing minutes are up across the brand and that we're bringing more and more people into it on a regular basis. So it's really almost top of funnel for the Entertainment.
Operator: Your next question comes from Ty Collin with CIBC.
Ty Collin: Maybe just first one, I'm wondering if we could drill down a little bit more on the POS performance in Q3 by geography, just maybe the difference between North America and the U.S. versus international? And could you also just maybe clarify the comments made at the top of the call about how POS trends were in September?
Jonathan Roiter: Yes. So why don't I start off with that. I might have missed your second part of the question, Ty. So please don't hesitate to ask it again. Let's kind of bifurcate POS into, like you said, international and the U.S. We certainly took share in the U.S. from a POS perspective. And as I think in the prepared comments or in one of the questions, we talked about there's a little bit of bifurcation between M&D and what I'll call legacy Spin, where Spin, the POS was -- we're quite pleased with it in the third quarter. And we're addressing -- we laid out how we're addressing the M&D situation as we head into next year. And then internationally, that POS was not as strong as our overall share, overall versus the North American market. I missed your second part of your question, I apologize.
Ty Collin: Yes, sorry. The second part, I just wanted to clarify the comments made on how POS trended in September, specifically. I think there was a comment, I wasn't sure if I heard accelerating or decelerating in September specifically?
Tim Foran: Ty, it's Tim here. We just kind of called out that in September, yes, consumer demand in the U.S. specifically weakened. As you probably would have seen, there's macroeconomic uncertainties weighed on the consumer sentiment in the Q3. So as we indicated at your conference in July and August, I think our POS was kind of -- the market wasn't down as much, but it ended up being down about 2.5% for the quarter, and that was primarily due to deceleration for the TAM in September, specifically.
Ty Collin: Okay. Got it. And then just for my follow-up, circling back to Digital Games. So I mean, some pretty decent top line improvement even ex the $10 million in partnership revenues that you recognized in the quarter. I mean, was that driven by any specific changes or adjustments at the product level or to the approach around promotion and monetization? Anything to call out there in terms of how you approach that creative center?
Christina Miller: Yes, absolutely. I think one of the things is you see us really being focused this year on ensuring profitability as we go forward in Digital Games. And being focused on subscriptions in Piknik and on monthly active users and ARPU in Toca. So what was different, I think, is that our users -- we had more releases of features, collaboration -- and collaborations in that particular product. than we've had before. And we had a great -- just recently, we had a great collaboration with Sanrio. And we're seeing that the bottom of the funnel is performing really, really well, and we've had some focus on that as opposed and -- to higher spending markets.
Jonathan Roiter: We're really happy with the team in place. They're -- we're seeing an acceleration of growth obviously from last year. When I look at H2, certainly expect that double-digit growth for H2 as a whole. And when we look into next year, really excited about from the content that examples that -- accelerating our content and our partnership within Toca and then within Piknik, even adding more apps that will just drive a higher subscriber base, keep them longer, have a longer TAM, and provide more value ultimately to the consumer. So we're really excited with the Digital creative center and the team that we have there.
Operator: Your next question comes from David McFadgen with Cormark.
David McFadgen: A couple of questions. So I was just wondering what drove the Digital Games revenue up, despite the fact that MAUs were down? Like how did you just drive that increased monetization?
Jonathan Roiter: Well, there's -- so there's more than one lever, right? Look, so if we take Digital, there's more than one lever. There's top of funnel and then ultimately, if you use Toca, the conversion. So you have 50-plus million monthly active users, how many of those are actively participating in buying content? And then ultimately, what's the purchase price that they're buying? So there's more than one lever to play within Toca. Our focus this year has been very much, to be frank, focusing on that bottom part of the funnel. We're going to obviously shift towards having a more balanced approach in 2026. And then Piknik, there is subscriber growth and the same thing, you keep customers longer. And then there's ultimately a higher ARPU that you would have with those individual customers. And the last piece around the ability to further monetize the apps that we develop. But again, not just from a onetime revenue base, but more from the ecosystem supporting the overall ecosystem of Piknik and driving attention to it that would then ultimately feeds into subscriber growth. So multiple levers to play. This year, we've been very focused on ensuring the monetization and the unit economics are working, focus on that and then next year, continue to drive that top of funnel.
Christina Miller: Yes. I think we've been really levering up on our conversion for average revenue per paying user, and we're seeing the results of that. And that's very much coming through the content deliveries, the feature deliveries and the collaboration. So giving more relevant content to our fans more frequently that we know that they want, and we're seeing that performance. And then, again, as Jonathan was just saying, we're very much focused on the bottom of the funnel to make sure that we're seeing that conversion. And then the same thing with Piknik, we're seeing both retention and ARPU up. And we'll also benefit from diversifying our revenue, as mentioned earlier in the call by selling some of our games to a third-party gaming platform. So last quarter, we talked a little bit about the benefit of having focus in these key areas; here, you see us executing.
David McFadgen: Now based on those comments, it would seem that what we've seen in Q3 should continue into Q4 and then into '26, right?
Jonathan Roiter: I would -- well, I think -- yes, on the underlining elements of the unit economics. Remember that, that partnership revenue was about $10 million. And when we were thinking about our -- internally our planning, I mean, the ability to -- the revenue recognition happened in Q3 versus Q4. So I think you got to just keep that in mind as you're thinking about the overall growth for Digital. And I would just stand by kind of my previous comment, which we continue to expect double-digit growth in H2. But Q4, because that partnership revenue materialized in Q3 versus Q4, it's probably more like single digit. That doesn't take away our bullishness as we head into the long term with our Digital creative center.
David McFadgen: Okay. And that's helpful. And then just looking at the Preschool segment. So given the comments you made about Melissa & Doug, you lost some share, increased competition and so on, is it safe to assume that Melissa & Doug's revenue performance or the decline was greater than the overall Preschool segment?
Tim Foran: Well, the POS, yes, we indicated that Melissa & Doug's POS was down and Spin Master Toy's was up. So yes...
David McFadgen: Yes. I'm just talking about revenue in the quarter. Like I'm just wondering if Melissa & Doug's revenue decline was greater than the overall segment for Preschool.
Jonathan Roiter: Well, I would answer it this way. I would say that I would take a step back from the Infant, Toddler, Preschool category. We -- per Circana, we continue to be very stable in terms of our share. So that's at the macro because we always see more than one brand that we have, and we have multiple levers to play within that category. And that's how we look at it. We look at it from a portfolio approach. Some years, some will be up, some years will be down. Specifically with M&D, the narrative that we shared is that, yes, this year, there is heightened -- there's multiple factors at play. And this year, the revenue performance is not at the levels that we would like it to have. We believe that we have the plan in place. There's a new management team here, quite frankly, the leader of M&D has been with the organization for about a year, she's doing a phenomenal job. We have -- she has a great plan, and we have a great plan to execute next year to ultimately return that brand to growth.
David McFadgen: Okay. And then you called out a couple of buckets of CapEx or various CapEx initiatives. Can you just give us what you expect the total CapEx to be for 2025, including the spend on intangibles?
Jonathan Roiter: Yes. I think we -- I'm just going through. I think we gave the number that we said we think it's going to be around $70 million less than we initially expected, Tim, right? That's what I think we said -- sorry, $60 million or $70 million. So...
Tim Foran: Somewhere around $175 million, thinking about it, is kind of ballpark.
Jonathan Roiter: So less than what we initially thought. And so about $175 million this year.
Operator: Your next question comes from Brian Morrison with TD Cowen.
Brian Morrison: Lots of good color on the call here that's to be digested. I appreciate that. But I do want a point of clarification, Jonathan. In the prepared remarks, it says we're aiming for improvement in our year-over-year financial results in the fourth quarter compared to what we saw in this quarter. Can you just clarify for me because I haven't really digested. Does that mean that you think you're going to have better results relative to Q4 last year or for Q3 this year?
Jonathan Roiter: So when I said that, what I -- I mean, here was my thinking. We were down year-over-year revenue in Q3 by 17-ish percent, yes. And when I look at Q4, I see a marked improvement of that number. So I hope that provides a little clarity, Brian.
Brian Morrison: Yes. No, I'll play with the math. I now understand it. I guess just bigger picture -- a lot of the questions have been answered here, but bigger picture, I guess, Christina and/or Jonathan, you've been in the seat for, call it, a year or half a year to a year for -- depending on...
Christina Miller: No. 4 months and 6 months, but yes.
Brian Morrison: Okay. Half a year. You're making progress on core properties, your capital allocation, your cost efficiency, it seems like things are really starting to go the right way here. I'm just curious, to put you on the spot, do you have a north star here in terms of financial performance or like mid-cycle EBITDA? We get back to a normalized industry environment, what is reasonable in your view, you threw out -- prior to you arriving, the prior management team threw a $500 million in EBITDA ballpark. Like is that an achievable number in a normalized cycle for the industry?
Jonathan Roiter: Well, I mean, of course, $500 million is an achievable number. The question is time frame. Like -- so I don't know what was that, I would have to go back and look. So I mean, to answer your question directly, yes, and then it becomes time frame. We will see next year in February or March when we have our fourth quarter call, we'll be able to provide more insights into 2026 and how we see the long -- and then perhaps how we see kind of the long-term trends in this business. That -- going back to what we said before, like we fundamentally believe we can return this business to profitable growth. We have -- as we're starting to shape up our plans for 2026 specifically, seeing the phenomenal products that we have; seeing how this organization is coming together around everything related to PAW, supported by the movie; seeing the plan for M&D's turnaround; seeing the trajectory of the Digital Games business and seeing the focus on ensuring that we're really effective with both our OpEx and our CapEx. We're very -- I can only say we're really excited about the future and believe that we can provide attractive TSR to our shareholders.
Operator: Your next question comes from Drew McReynolds with RBC.
Drew McReynolds: Two for me. First on back to the Digital Games. Christina, you alluded to, and you've done so in prior quarters, competition on the Toca Boca World side. Is that just generally a generic comment with respect to all the proliferation of platforms out there? Or is there something more nuanced in that competitive dynamic? And then second question, I guess, for you, Jonathan, on the IT investments into the kind of better demand forecasting and planning, can you give us a sense of, I guess, how much this can move the needle in terms of your ability to essentially forecast and predict what is obviously a seasonal and somewhat lumpy business. Just want to see kind of where the yardsticks are currently and where they're going?
Christina Miller: Sure. Thanks for the question. Yes, I think on Toca Boca, what you hear us saying is, of course, there's, what you alluded to, the macro environment where we're always fighting for attention and there's lots of other games and platforms that are out there. But there are specifically some gains that are giving away an awful lot of free content on a regular basis that are driving some competition in MAU, and we are definitely focusing on both, driving MAU but as well as converting that. So I think our strategy is a little bit different, but there are competitors in the space, definitely competing with us for that top-of-funnel attention on a more free basis.
Jonathan Roiter: And Drew, on the IT side, we -- I think one of the catalysts to looking at our IT stack certainly was the M&D acquisition and seeing the benefits of having one platform and more up-to-date platform. We can't ever get away from this business being an H2 business. That is an underlining factor. What this will do, though, is allow us to make better and more -- and quicker decisions. And I think that's the key here. So to be able to better adapt to that H2 and quick -- in a quicker manner adapt to the trends in the second half, whether it be chasing inventory, hot products or whether it be adapting to a slowdown in any given product. It also allows the organization as a whole to work as one team. And we talked a little bit in our first call where we saw an opportunity of bringing the three creative centers to work stronger together and really unleashing the full potential of our owned IP by leveraging the three creative centers. This actually also will help bringing the team together, right, bringing clearer information so we can make better decisions at a holistic enterprise level. So it could also help drive that top line, which is ever so important.
Drew McReynolds: That's helpful. And then just the time frame for getting all of that done where you internally begin to see a big difference on what you described. Is that all kind of kicking off in 2026? Or is the real kind of flow-through benefit, I know it's ongoing, but is that a 2027 thing?
Jonathan Roiter: Yes. So like the -- I mean, the heightened CapEx and some heightened OpEx that we have is this year and next year. So you would imagine the benefits really start flowing through after that.
Operator: There are no further questions at this time. I would like to turn the call over to Christina Miller.
Christina Miller: Thank you. Thank you, everyone, for joining us. We appreciate your interest in Spin Master, and we look forward to speaking with you again in the new year. Thanks.
Operator: Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.