Mattel Q3 2023 Earnings Call Transcript

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October 25, 2023

There are 11 speakers on the call.

Operator

Stock levels for your brands. Are you seeing retailers replenish in line with POS or taking a more cautious stance given the macro?

Speaker 1

Sure. In terms of retail inventory, I'll start by saying in the Q3, gross billings in POS were fairly well aligned And retail inventories remain below prior year levels. So at the end of Q3, retail inventory levels in dollars were down By double digit percentage. And as we said, predominantly current end of good quality. And We're working very closely with our retailers and believe we are very well positioned heading into the holiday season with respect to those inventory levels.

Speaker 2

And Meghan, just to add and following Arpine's question earlier, we Very long on the toy industry. Industry is resilient. Notwithstanding the decline this year, we've had over 10 years of growth And we believe as a category as a sector, it has very strong fundamentals in Playing into basic human behavior of play, being a strategic category to retailers, attractive and affordable price points And an industry that continues to perform and show resilience, especially in challenging economic

Operator

Okay. Thank you very much.

Speaker 3

Your next question comes from the line of Steven Lasek with Goldman Sachs. Your line is open.

Speaker 4

Hey, great. Thank you. Maybe on Hot Wheels, the category or the brand posted impressive year over year growth in the quarter north of 20%. Could you maybe unpack the drivers of that underlying performance? How much of it was category strengths versus market share gains versus perhaps Just timing of orders coming through in the Q3.

Speaker 2

This is Stephen. Vehicles continue to perform very Strongly growing 15% in line with POS. We continue to gain share versus Arcana 4 10 basis points, So meaningful growth in already a strong baseline for Matteo. The growth was primarily driven by die cast vehicles and new innovation. We talked a lot about the RC line and Skate segment, so that's great to see new parts of the category growing.

Speaker 2

We also Continue to leverage the core die cast vehicles. We target both kids and adult collectors. That's another segment that is growing well. We continue to innovate and expand into additional segments this fall, including the race reverse, the new character base Line, which is also very innovative and exciting to see. So this is all driving incredible performance And this is before the movie that is still being developed and is coming out and we are now developing What we hope will be an exciting project, Hot Wheels live action movie produced by J.

Speaker 2

J. Abrams, who as you know is one of the most prolific filmmakers Of our generation, he is a great partner, very excited and there's more a lot more to expect from Hot Wheels, Very strong driver. I also want to mention Matchbox, an important part of the vehicles category, which Did well in the quarter. Gross billings were stable, but POS was up double digit Driven by strength in the die cast segment. And there's another movie that we're developing for Matchbox with Skydance, Which is the producer of the Mission Impossible series and Topgolf.

Speaker 2

So another great partner and we are very excited also about this film project In the May.

Speaker 4

Great. And then just one for Anthony. Anthony on free cash flow. Is there any reason why the extra $25,000,000 in EBITDA guide for this year wouldn't flow down to free cash flow with the outlook for CapEx remaining the same, perhaps something on working cap Worth calling out or should we expect that to flow through?

Speaker 1

Yes, it's pretty much dependent on the timing of the Actions related to the upside around the Barbie movie and it's hard to say exactly when that's going to come through. So that's the reason that we didn't change that.

Speaker 5

Got it. Thank you.

Speaker 3

Thank you, Samu. Your next question comes from the line of James Hardiman with Citi. Your line is open.

Speaker 6

Hey, good afternoon. Thanks for taking my call guys. So if I think about sort of the implied 4th quarter guidance in that on the revenue side in that mid to high teens. Is there any way to think about what the growth in POS needs to be To allow for that reported number in the Q4?

Speaker 1

Yes, we haven't broken down to that level, but we had said that we expect growth in consumer demand in the 4th quarter for Mattel. We expect to outpace the industry, but we do expect gross billings to be ahead of POS and that's Because we're wrapping that retail inventory decline in the prior year. But we're expecting a strong 4th quarter With respect to consumer demand or POS.

Speaker 6

Got it. That makes sense. And it sort of leads to my next question. Obviously, We haven't even gotten to the holiday season. So a lot of the 2024 colors is way too early.

Speaker 6

But if I just think about 2023, right? It was a tale of 2 halves. First half, there was a lot of inventory drawdown. And so Your sales levels were way worse than POS. 2nd half is really about Barbie and the benefit that you're getting there.

Speaker 7

Is there any way to compare those

Speaker 6

two effects as we think Those two effects, as we think about lapping them, I think the big concern is that As you get to $125,000,000 of headwind that it's going to be real hard to lap that for the year, but just trying to make sure I understand the moving pieces. Thanks.

Speaker 1

Sure. A couple of points there. I would say the year is kind of unfolding as we expected. And we did Expect 2023 to revert to normal shipping pattern, 1 third in the first half, 2 thirds in the second half. That is what we're Seeing and that led to declines in the first half, growth in the second half with accelerated growth in Q4, given what we're Rafiq, in terms of the Barbie movie and economic, look, we expect this to be a catalyst For the brand and to benefit the franchise for quarters years to come.

Speaker 1

So we don't necessarily view it as, hey, something we're just going to wrap, So to speak.

Speaker 3

Your next question comes from the line of Linda Bolton Weiser with D. A. Davidson. Your line is open.

Speaker 8

Yes, hi. I was wondering if you could update us on your earlier comment about your Theory that consumers were not as strong in their buying behaviors maybe in the summer because they were saving up In order to spend more for Christmas. Can you update us on do you have any survey work or anything that updates us on how consumers might more recently be thinking about things?

Speaker 1

Yes. I'd say we don't have any new server week to point to, but I would say things are unfolding as we had expected. Q4 to date, POS is positive for us. And we continue to expect that Consumers will revert back to more historical shopping patterns and make their purchases closer to the holiday season. And with that, we would expect No, POS to accelerate as we progress through the Q4.

Speaker 8

Okay. And I was also wondering if you could say whether or not you looked at the Melissa and Doug Company that was sold. Did you consider looking at that or why or why not?

Speaker 1

Yes. I would say, look, we don't really comment on a competitor M and A. We are very focused on executing our capital Deployment priorities, which we've talked about in terms of investing to drive organic growth, maintaining that leverage ratio 2x to 2.5x in our investment grade rating and that gives us flexibility to consider M and A as well as share buybacks. We're very happy with our position in the ITPS category. We are a leader and the number one toy company globally and Fisher Price is the number one property in the category.

Speaker 1

So we love our position and the prospects for our business.

Speaker 8

Okay. Thanks very much.

Speaker 2

Thank you, Linda.

Speaker 3

Your next question comes from the line of Drew Crum with Stifel. Your line is open.

Speaker 9

Okay, thanks. Hey, guys. Good afternoon. Anthony, adjusted gross margin, any notable Wing factors to consider for 4Q and just want to confirm that 4Q gross margin should decline quarter on quarter versus 3Q?

Speaker 1

Yes. In terms of commenting relative to the prior year As we think about 4 quarter and when you do the math, it implies pretty significant gross margin expansion Q4 versus 2022, and there's a couple of reasons for that. One is the prior year was about 43% and it was negatively impacted from considering Significant inventory management costs. So we're wrapping that. And as I think about the current year, we'll benefit from scale, From our optimizing for growth program as well as cost deflation.

Speaker 1

We did see some deflation in Q3 And would expect to see additional deflation in Q4. So that gives us confidence in terms of getting to that Implied Q4 gross margin, which is more in line with historical levels as well.

Speaker 9

Got it. Okay. And then just to Circle back to the toy industry and your outlook now down mid single digits for the year. I think previously you were assuming down slightly. Is this adjustment based on a weaker 3Q relative to your expectations?

Speaker 9

Is it something you're anticipating for 4Q or a combination of the 2? And did I hear you correctly, Anthony, that you expect POS to accelerate in 4Q over 3Q? Just want to clarify that. Thanks.

Speaker 1

Let me clarify that quickly. So what I said is, 4th quarter to date POS is positive and from that level, we That is accelerate. It wasn't relative to 3Q.

Speaker 9

Got it. Okay.

Speaker 2

And Drew, what we're seeing is Year to date decline that was more than we expected at the start of the year. We believe it's Primarily driven by macroeconomic factors, inflation, higher interest rates and other Yes, elements that we all know and read about and experience. We believe consumers are returning to normalized shopping patterns Closer to the holiday season, so we expect to see some of that playing out in the Q4. We believe That the industry and our retail partners are well prepared for the holiday season. But that said, we now expect Given the performance to date, the industry to be down mid single digit.

Speaker 9

Got it. Okay. Thanks guys.

Speaker 3

Thank you. Your next question comes from the line of Eric Handler with ROTH MKM. Your line is open.

Speaker 7

Thank you and good afternoon.

Speaker 9

And I wonder if you

Speaker 2

could talk a little bit about your movie expectations and Obviously, a huge success with Barbie. And I imagine that makes it easier to green light some additional films. Obviously, Hollywood is closed right now because of the strikes. But do you get Should we be thinking about maybe it could be sooner than later before we see the next Mattel branded movies coming out or how should we think about that? Yes, Derek.

Speaker 2

The vision from the outset was to collaborate with leading filmmakers To make standout quality movies based on our iconic brands that will resonate in culture and appeal to global audiences. And I think it's safe to say that we managed to Achieved that with this movie and there is no question that the success of Barbie repositioned Mattel as an important player in Hollywood. The strength of our brands and cultural resonance of our franchises is an important factor Playing outside of the toy aisle and appealing to very broad audiences, we demonstrated our ability to attract, Collaborate partner and amplify top creative talent. And the other dimension that People didn't really fully appreciate and frankly we also to some degree were not didn't fully Recognizing that it actually happened is our marketing capability outside of the toy aisle. We are a company we are a creative company.

Speaker 2

We are an innovative company, but we are Also experts in demand creation. And we generate year in year out billions worth of demand to our product From the start. Yet here what we did, we leverage our capabilities and our retail reach and expertise To promote and market the movie together with Warner Brothers who did an excellent job, but we truly amplify that and turn it into a cultural phenomenon. So those assets, relationships and capabilities make us an attractive player and we believe that the success of the Barbie movie for All of those reasons will accelerate our strategy and not just in movies, but in other verticals, Given the strength of our brands and the fact that they resonate so strongly in culture. So we're very excited to be where we are.

Speaker 2

Clearly, it was a breakthrough quarter for our entertainment strategy, and we expect that it will Help us accelerate things in the coming quarters. Great. Thank you very much. Thank you.

Speaker 3

Your next question is from the line of Chris Horvers with JPMorgan. Your line is open.

Speaker 10

Thanks. Good evening. So my question is in the gross margin, there was 170 bps related to the Barbie movie. Can you talk about how what that broke down in terms of box office participation versus the Toy sales in the merchandise, 3rd party merchandise? And how are you thinking about that benefit in the 4th quarter?

Speaker 1

Sure. We're not going to break it down to that level, but let me comment on the impact. So within our gross margin bridge, You saw a 170 basis point mix benefit. That's not all Barbie related, but it's primarily related To our direct movie participation, movie related toy sales and consumer products all kind of bundled together. Also what we did say is for the full year, we expect those three items to deliver more than $125,000,000 of sales With a blended operating income margin of over 60% and the majority of all that Was recognized in Q3 and probably with a skew more towards the movie relative to the other items.

Speaker 10

So as we think about the Q4, how are you thinking about the sort of specific Barbie movie lift in terms of Top line and margin perspective. The participation point goes down, but Are you largely sold through directly toys directly related to the movie? And would you expect the merchandise portion to accelerate?

Speaker 1

Yes. I would say less margin accretion related to these items in Q4 than Q3.

Speaker 5

Okay. Thanks very much.

Speaker 2

You're welcome. Thanks, Chris.

Speaker 3

Your last question today comes from the line of Jason Moss with Bank of America. Your line is open.

Speaker 5

Hey, good afternoon. Thanks for taking my questions. I'm curious if you could help size up how much of a headwind destocking was to revenue in the first half of the year. The reason I ask is just because as we're thinking through our models for next year, is there an embedded uplift to revenue just because You'll be lapping over that destocking? Or is it the case that the reason there was that destocking was because, there was a restocking in the first half of 2022, so it was really more of a return to normal?

Speaker 5

Trying to figure out if there's like embedded revenue upside and what that could potentially be for next year?

Speaker 1

It's very difficult to say in terms of the impact in 2024. But you're right, in the first half of twenty twenty three, We saw most of the inventory correction happen at retail. And in the context of our full year guidance, It's 3 to 4 points of headwind. Again, most of that occurred in the first half of twenty twenty three. And depending on what retailers do going into 2024, again, sitting here today, Right.

Speaker 1

It's hard to say if there will be a bounce back relative to that destocking.

Speaker 5

Got it. That's helpful. And then when I look at Barbie in the first half of the year for worldwide gross billings, excluding FX, It's down a little over 20% or so in the first half of the year. And then we saw in 3Q, it went up 14% in the quarter. Is it fair to assume that a lot of that acceleration was driven by the Barbie movie?

Speaker 5

I'm trying to understand if The Barbie movie did drive that halo effect to all Barbie toys, not just the movie related SKUs. The concern being there that you may have to lap that next Since you won't have another major motion picture for Barbie. But I'm curious, I don't know if there was promotions that shifted or other things to consider and maybe it just wasn't all the movie.

Speaker 1

Yes. I think the way to think about Q3 and Barbie, first, in terms of the 14% increase in gross billings, I would say that's primarily attributable to the movie related items. But when you think about POS, Which was up low double digits as well, right? That's primarily driven by the improvement in consumer demand around toys. And as we think about the impact, the movie, we believe it's going to have a long lasting effect In terms of broadening Barbie's fan base, right, and that will be an important contributor to the brand.

Speaker 1

It's really part of our long term Franchise management strategy. And with respect to 2023 in aggregate, right, we expect Barbie to grow in Q4 And for it to be positive on a full year basis, which is part of the guidance that we updated today as well.

Speaker 5

Got it. That's very helpful. Thank you.

Speaker 2

Sure.

Speaker 3

This concludes our question and answer portion for today. I turn the call back to Iain Kries, Chairman and CEO.

Speaker 2

Thank you, operator, and thank you, everyone, for your questions. I would like to conclude the call by expressing our hope for the safety of Israeli and Palestinian children and families Caught in the Israel Hamas war. Since the attacks of October 7, the Mattel Children's Foundation has been focused on humanitarian work, Including cash and toy donations to shelters and hospitals to support children who are suffering. On a personal note, I would like also to thank all of those who have reached out to me directly to express their concern and condolences. We wish for a swift resolution to the war and more peaceful times in the future.

Speaker 2

And now, I'll turn the call back to Dave.

Speaker 7

Thank you, Inan. The replay of this Call will be available via webcast beginning at 8:30 p. M. Eastern Time today. The webcast link can be found in the Events and Presentations section of our Investors

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