Mattel Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 14 speakers on the call.

Operator

Thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel's First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I will now turn the conference over to David Stepanovich, Head of Investor Relations. David, you may begin your conference.

Speaker 1

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer and Anthony DiSilvestro, Mattel's Chief Financial Officer. As you know, this afternoon, we reported Mattel's Q1 2024 financial results. We will begin today's call with Ynon and Anthony providing commentary on our results, after which we will provide some time for questions. To help supplement our discussion today, we have provided you with a slide presentation.

Speaker 1

Our discussion, slide presentation and earnings release may reference non GAAP financial measures, including adjusted gross profit and adjusted gross margin, adjusted other selling and administrative expenses, adjusted operating income or loss and adjusted operating income or loss margin, adjusted earnings per share, adjusted tax rate, earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted EBITDA, free cash flow, free cash flow conversion, leverage ratio, net debt and constant currency. In addition, we present changes in gross billings, a key performance indicator. Please note that we may refer to gross billings as billings in our presentation and that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise. For today's presentation, references to POS and consumer demand exclude the impact related to our Russia

Speaker 2

business, given

Speaker 1

our decision to pause all shipments into Russia in 2022. Our slide presentation can be viewed in sync with today's call when you access it through the Investors section of our corporate website, corporate. Mattel.com. The information required by Regulation G regarding non GAAP financial measures as well as information regarding our key performance indicator is included in our earnings release and slide presentation, and both documents are also available in the Investors section of our corporate website. The preliminary financial results included in the press release and slide presentation represent the most current information available to management.

Speaker 1

The company's actual results when disclosed in its Form 10 Q may differ from these preliminary results as a result of the completion of the company's financial closing procedures, final adjustments, completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results. Before we begin, I'd like to caution you that certain statements made during the call are forward looking, including statements related to the future performance of our business, brands, categories and product lines. Any statements we make about the future are, by their nature, uncertain. These statements are based on currently available information and assumptions, and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward looking statements. We describe some of these uncertainties in the Risk Factors section of our 2023 Annual Report on Form 10 ks, our earnings release and presentation and other filings we make with the SEC from time to time as well as in other public statements.

Speaker 1

Mattel does not update forward looking statements and expressly disclaims any obligation to do so, except as required by law. Now, I'd like to turn the call over to Ynon.

Speaker 2

Thank you for joining our Q1 2024 earnings call. We're off to a good start for the year with significant gross margin expansion, positive adjusted EBITDA, very strong improvement in free cash flow and are on track to achieve our full year guidance. Looking at key financial metrics for the Q1 as compared to last year. Net sales declined 1% as reported and in constant currency. Adjusted gross margin increased 8.30 basis points to 48.3%.

Speaker 2

Adjusted EBITDA improved $67,000,000 from a negative $14,000,000 to a positive $54,000,000 and free cash flow improved by $254,000,000 Gross billings increased in North America, Latin America and Asia Pacific with a decline in EMEA. Total company POS increased low single digits with improving trends through the quarter and growth in DALs, vehicles, games and building sets. Mattel maintained share globally and gained share in its 3 liter categories: dolls, vehicles and infant toddler and preschool as well as in games for Sukana. With our strong cash flow generation, we improved our financial position, ending the quarter with a cash balance of $1,100,000,000 after repurchasing $100,000,000 of shares in the quarter. Consistent with our stated capital allocation priorities, we plan to continue share repurchases in 2024.

Speaker 2

We believe the industry benefited in the first quarter from an early Easter. That said, this does not change our expectation that the toy industry will decline in 2024, although at a lesser rate than 2023. We expect to outpace the industry and gain market share in 2024. We are executing our strategy to grow Mattel's IP driven toy business and expand our entertainment offering. We expect to continue benefiting from innovation across the toy portfolio and market share gains, meaningful progress on entertainment projects following the success of the Barbie movie and greater efficiencies and productivity improvements with our optimizing for profitable growth program, which is targeted to achieve $200,000,000 of annualized cost savings between 20242026.

Speaker 2

On the toy side of the company, Barbie was the number one Dolls property globally and continued to gain significant share per selarkana. We kicked off Barbie's 65th anniversary celebration and are bringing new innovation to the brand such as the recently launched Mini Barbie Land segment. Hot Wheels led the vehicles category for Surcana with further expansion of its die cast line and new offerings for race reverse, RC and skate. Fisher Price is launching its new Wood segment next month, and this week we welcomed a new Head of Fisher Price based at our East Aurora, New York campus. Games performance was strong and UNO was once again the number one card game property for Turkana.

Speaker 2

Mattel Creations, our rapidly growing D2C channel serving adult collectors is expanding fan engagement. We recently hosted Mattel Creations Revealed, a 2 day virtual fan event featuring 6 hours of exclusive behind the scenes content and nearly 100 new collectible toys and exclusive consumer products with multiple same day sellouts. We also made progress in capturing value of RIP outside the toy aisle. Following the successful award season for the Barbie movie, highlighted by Grammy, Golden Globe and Oscar wins, its cultural impact continues to reverberate around the world. The film is a showcase for our strategy, bringing together the global resonance of our brands, our ability to attract and collaborate with leading partners and demand creation expertise.

Speaker 2

We continue to make meaningful progress advancing our theatrical slate of 15 announced films in development with more news to share soon. In television, Barbie and Stacy to the Rescue, an animated movie launched globally on Netflix. Season 2 of Barbie: A Touch of Magic premiered last week. Hot Wheels: Let's Race, our new animated series debuted on Netflix and became a top 10 program in 69 countries. In digital gaming, we announced a new licensing partnership with Take 2 Interactive to publish a new Barbie mobile game planned for release later this year.

Speaker 2

In location based entertainment, we announced a second Mattel Adventure Park through our licensing partnership with Epic Resort Destinations, which is scheduled to open in Kansas City in 2026. In closing, our Q1 performance was highlighted by significant margin expansion and very strong improvement in cash flow with positive consumer demand and improving trends. Mattel is in the strongest financial position it has been in years, and we are on track to achieve our full year guidance. Beyond this year, we expect to grow sales and earnings in 2025. We are executing our strategy to grow our IP driven toy business and expand our entertainment offering and are well positioned to create long term shareholder value.

Speaker 2

And now I will turn the call over to Anthony.

Speaker 3

Thanks, Anant. We achieved strong bottom line results in the quarter and are on track to meet our full year sales and earnings guidance. Net sales of $810,000,000 declined 1% as reported and in constant currency. Adjusted gross margin increased by 8.30 basis points to 48.3%, benefiting from lower inventory management costs, cost deflation and cost savings. Adjusted operating loss improved by $63,000,000 to a negative $23,000,000 driven by gross margin expansion.

Speaker 3

Adjusted EPS was a negative $0.05 compared to a negative $0.24 an improvement of $0.19 and adjusted EBITDA increased from a negative $14,000,000 to a positive $54,000,000 gaining $67,000,000 Gross billings in constant currency declined 2%, reflecting retail inventory reductions. POS increased low single digits with improving trends through the quarter. Dolls declined 5% with POS increasing high single digits. The gross billing decline was primarily due to Disney Princess and Disney Frozen, which had positive POS, but wrapped last year's inventory build supporting the launch. Barbie gross billings were comparable to the prior year with POS declining low single digits.

Speaker 3

Trolls, Monster High and American Girl grew. Mattel was number 1 in dolls globally, gaining over 5.50 basis points of share in the category in Q1 and Barbie was the number one property in dolls and also gained share per Surcona. Vehicles and Hot Wheels increased 4%. POS increased mid single digits with growth in consumer demand for each Hot Wheels, Matchbox and Disney Pixar Cars. Mattel was number 1 in vehicles globally, gained share in the category in Q1 and Hot Wheels was the number one property in vehicles for Surcono.

Speaker 3

Moving to infant, toddler and preschool, as discussed in our recent investor presentation, we are segmenting the category into 3 parts. The first and by far the largest is Fisher Price, the power brand which includes the core infant, little people and newborn product as well as the recently launched Fisher Price Wood. The second is preschool entertainment, which includes owned IP such as Thomas and Barney, Imaginext, which is our own form factor for action figures specifically designed for young children and partner brands. The 3rd and by far the smallest is Baby Gear and Power Wheels, which we decided to strategically out license or exit. Total infant, toddler and preschool category declined 11 percent with POS down high single digits.

Speaker 3

The gross billings decline was due primarily to Baby Gear and Power Wheels, which we have been out licensing or exiting and preschool entertainment. Fisher Price gross billings declined 1% due primarily to a decline in infant, partly offset by the launch of Fisher Price Wood. Importantly, Fisher Price POS increased low single digits. Mattel was number 1 in infant, toddler and preschool globally, gained share in the category in Q1 and Fisher Price was the number one property in infant, toddler and preschool per Surconum. Challenger categories in aggregate were comparable to the prior year as growth in games and action figures was offset by declines in building sets and other.

Speaker 3

POS declined high single digits due to action figures, partly offset by double digit growth in games and building sets. Looking at our Q1 performance by region. Gross billings in North America increased 1% with significantly lower closeout sales in the quarter. POS increased low single digits. EMEA declined 13% due primarily to the impact of retail inventory reductions and weakening of the Turkish lira.

Speaker 3

POS increased mid single digits. Latin America increased 1%. POS declined low single digits. Asia Pacific increased 15% driven primarily by gains in Australia, New Zealand and South Asia. POS declined low single digits.

Speaker 3

As noted on our Q4 call, we entered 2024 with retail inventory levels slightly elevated. This has been largely corrected as we ended the Q1 with retail inventory levels down high single digits in both dollars and weeks of supply. The reduction, which occurred earlier than the prior year, had a negative impact on our Q1 sales performance, particularly in EMEA. We believe retail inventory levels are now at appropriate levels to support the business going forward. Adjusted gross margin was 48.3% compared to 40%, an increase of 8 30 basis points.

Speaker 3

The significant increase in gross margin was driven by several factors. Lower inventory management costs, primarily obsolescence and closeouts, which contributed 2.30 basis points Cost deflation added 2.20 basis points. Savings from the Optimizing for Profitable Growth program added 120 basis points, favorable mix contributed 80 basis points, and foreign currency favorability and other supply chain costs added 180 basis points. Moving down to P and L, advertising expenses declined by $5,000,000 to 71,000,000 dollars and adjusted SG and A increased by $6,000,000 or 2% to 343,000,000 dollars The increase in SG and A was primarily driven by market related pay increases and investments, partly offset by cost savings. Adjusted operating loss improved $63,000,000 to a loss of $23,000,000 in the first quarter compared to a loss of $87,000,000 in the prior year, primarily driven by gross margin expansion.

Speaker 3

Adjusted EBITDA increased $67,000,000 to $54,000,000 benefiting from the same factor. Adjusted EPS improved $0.19 to a loss of $0.05 compared to a loss of $0.24 in the prior year. Cash from operations was a source of $35,000,000 in the first quarter compared to a use of $206,000,000 in the prior year, an improvement of $242,000,000 The increase was primarily driven by improvements in both working capital performance and net income. Capital expenditures were $30,000,000 compared to $43,000,000 a year ago and free cash flow was a source of $5,000,000 compared to a use of $249,000,000 in the prior year quarter. On a trailing 12 month basis, we generated significant free cash flow of $964,000,000 compared to $187,000,000 in the prior year, an increase of $777,000,000 dollars The improvement was primarily driven by working capital performance in part due to timing associated with seasonal working capital and incentive compensation payments.

Speaker 3

Reflecting our improved financial position and consistent with our stated capital allocation priorities, we repurchased an additional $100,000,000 of shares in the quarter, bringing total share repurchases since 2023 to $303,000,000 We expect to make further share repurchases in 2024 under our $1,000,000,000 multi year share repurchase program. Taking a look at the balance sheet. We finished the quarter with a cash balance of $1,130,000,000 compared to $462,000,000 a year ago, an increase of 669,000,000 dollars The increase reflects free cash flow generated over the past 12 months, partly offset by the use of funds to repurchase shares. Total debt of $2,330,000,000 is consistent with last year. Our debt portfolio is well positioned with no maturities until 2026.

Speaker 3

Accounts receivable were $673,000,000 comparable to the prior year and inventory was $669,000,000 a reduction of $292,000,000 from the prior year and a significant contributor to our free cash flow performance. Our leverage ratio improved further. Debt to adjusted EBITDA finished the quarter at 2.3 times compared to 2.9x in the same period a year ago. The improvement was driven by the increase in our trailing 12 month adjusted EBITDA performance. We are realizing benefits from our recently announced optimizing for profitable growth program targeting $200,000,000 in cost savings by 2026.

Speaker 3

In the Q1, we generated $17,000,000 of savings in aggregate with $9,000,000 benefiting cost of goods sold and $8,000,000 in SG and A. We are on track to achieve our targeted 2024 savings of $60,000,000 We are reiterating our guidance for 2024 including net sales in constant currency to be comparable to the prior year, adjusted gross margin to be in the range of 48.5% to 49% compared to 47.5 percent in 2023 adjusted EBITDA to be in the range of 975,000,000 dollars to $1,025,000,000 compared to $948,000,000 in the prior year Adjusted EPS to grow double digits to a range of $1.35 to 1 $0.45 compared to $1.23 in 2023 and free cash flow generation of approximately $500,000,000 We are operating in a macroeconomic environment that may impact consumer demand. The guidance considers what the company is aware of today, but remains subject to market volatility, unexpected disruptions and other risks and uncertainties. In closing, we are off to a good start with strong margin and cash flow performance and are on track to achieve our full year guidance. And now I will turn it over to the operator for Q and A.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from Alex Perry from Bank of America. Please go ahead.

Speaker 4

Hi. Thanks for taking my questions here. I guess just first, can you talk about how the point of sale sort of trended in the quarter versus your then what is sort of the expectation for point of sale as we move through the year? Is it still flat similar to your 4Q guide? Thank you.

Speaker 3

Sure. I can take that. And let me comment on the impact of the Easter holiday more broadly. First of all, the timing of Easter did not materially impact our year on year shipment in the Q1. POS, as we said, for the total company was up low single digits in Q1 with improving trends as we move through the quarter, including some likely benefit from the holiday timing.

Speaker 3

When you isolate our holiday performance by looking at our POS for the last 6 weeks through mid April, So that includes the Easter holiday in both periods. POS was positive. And year to date POS through that mid April point is now comparable to last year. And looking ahead and similar to last year, we expect our shipping trends in 2024 to align with the historical trends, which are about a third of our gross billings in the first half and 2 thirds in the second half.

Speaker 4

Perfect. And then just my follow-up is, you just talk a bit more about Hot Wheels and what's driving the growth there? Would you sort of expect that level of growth to continue as we move through the year? Thank you.

Speaker 2

Yes. Look, Hot Wheels has been just an incredible brand on a really great run. As you know, it's been growing now for 6 consecutive years and on track to grow again in 2024. The growth is driven by great product innovation. Diecast is growing.

Speaker 2

We're expanding into adult collectors. We're broadening distribution. We are expanding into the adult collector segment, more lines such as RC and Skate and more content coming on to Netflix. The new show, the new animated show on Netflix has been a top 10 program in 69 countries. So we continue to create more engagement and apply the playbook where we are bringing together brand purpose, consumer centric innovation, cultural relevance and a very strong franchise mindset to continue to grow outside of the toy aisle.

Speaker 2

And this is before the movie is even out that we're developing with J. J. Abrams And all of that ladders up to the vehicles category, which itself has been performing very strongly now for several years in a row and another movie in development with Skydance for Matchbox. So just a great category where we continue to gain share and outperform and over time and expect that to continue.

Speaker 4

Perfect. That's really helpful. Best of luck going forward. Thanks Alex.

Operator

Your next question comes from Arpine Kocharian from UBS. Please go ahead.

Speaker 5

Hi. Thank you for taking my question. I wanted to go back to the Disney Princess dynamics a bit. I think you mentioned inventory correction impacting sales. Was there anything else that you would call out in terms of what drove that decline?

Speaker 5

And then I have a quick follow-up.

Speaker 3

No, Arpany, it's primarily the wrap from the introduction last year, the pipeline fill. And importantly, the POS for the line is positive in the Q1 and we're very, very optimistic about the future for that line.

Speaker 5

Thank you. That's helpful. And then I wanted to ask you regarding buybacks. Cash flow showed nice improvement for the quarter. Could you maybe walk us through what needs to happen for you to pull the trigger on being a bit more aggressive on buybacks?

Speaker 5

Is it really absence of M and A? You've also talked about perhaps participating more in the economics of your theatrical slate. Do you have an update on that or anything specific you could share? What needs to happen for investors to see upside to buybacks here? Thanks.

Speaker 3

Yes. We're not giving specific guidance around our share repurchases, but I think it is that we continue to execute against our stated capital allocation priorities. And just quickly, they are first to invest to drive organic growth. Second, to maintain an investment grade rating and target 2x to 2.5x leverage and the third, given our improved financial position is to consider M and A and other corporate development opportunities. And 4th is share repurchases.

Speaker 3

And as you recall, we resumed repurchases last year in 2023. That was the first time since 2014 and we bought about $200,000,000 of our own stock. And then coming into this year, given our improved financial position, confidence in our strategy to create value. We did announce a new $1,000,000,000 program earlier this year. It's a multi year program.

Speaker 3

And I think importantly, we expect to fund that with free cash flow. And again, we did $100,000,000 in the Q1 and we'll continue to evaluate these capital allocation priorities. And between M and A and share repurchases, we continue to make those evaluations.

Speaker 2

And Alpin, I would add that while M and A is in terms of the allocation priorities is ahead of share repurchases. We actually did spend more than $300,000,000 to buy our own stock rather than an external acquisition. So we believe given the share price of the Mattel stock, this is a very good opportunity for us to where we can invest in ourselves and that is something we continue to evaluate as things evolve. But we do have the capacity, we have the cash and we continue to focus on long term value creation for our stakeholders.

Speaker 3

And just to add one more point, Arpine, we did mention at our Investor Day that we will consider targeted investments in our entertainment verticals that accelerate the strategy and potentially capture a larger share of the upside.

Speaker 5

Right. Thank you very much. Thank you both. Thank you.

Operator

Your next question comes from Drew Crum from Stifel. Please go ahead.

Speaker 3

Okay. Thanks. Good afternoon. So Anthony, just looking at adjusted gross margin closer and the various drivers behind the year on year improvement in 1Q, which would you expect to persist or which do you need to continue over the balance of the year in order to hit or outperform your guidance range 4? Yes.

Speaker 3

So let me comment on gross margin. Certainly in the Q1, we achieved significant gross margin expansion. We're up over 800 basis points. The 3 primary drivers being lower inventory management costs, cost deflation as principally ocean freight and savings from our optimizing for profitable growth program. Given that Q1 performance and our guidance, it does imply that the balance of the year will be about flat to last year and there are a few puts and takes in that.

Speaker 3

First, we expect to continue benefiting from cost savings and we'll also benefit from increased production levels or from absorption benefit as we wrap last year's reduction of owned inventory levels. And then going the other way, we'll wrap the Barbie movie benefit and we would also expect to see some inflation as we wrap the decline in ocean freight, account for the situation in the Red Sea and some continued upper pressure on our wage rates. So that's kind of how we balance it for the balance of the year. And at this point, we are reiterating our full year guidance, which is to be around 48.5% to 49%, so up 100 basis points to 150 basis points.

Speaker 6

Got it. Okay.

Speaker 3

Very helpful. And then, Ynon, just any updated thoughts around your expectations for Barbie in 2024 with a quarter in the books?

Speaker 2

Thanks. Yes, look, Barbie is an incredible brand. It's never been more relevant or connected to pop culture than it is today. The movie definitely broadened the aperture and brought more demographics, broader audience and created more opportunities and Barbie continued to gain significant share in the doll category and overall in the industry. We did as you know, we are celebrating the 60pth anniversary for Barabay.

Speaker 2

We have multiple activations. We're launching 3 new segments that we talked about at Investor Day, we expect more shelf space in the second half, we are expanding into the adult collector line, targeting pop culture fans, older kids and continue to cater to the core kids demographics with more content on Netflix, both a series and a movie on Netflix. There's also the new mobile game that we are publishing or take 2 is publishing as part of our relationship with us. So there's a lot going on around Barbie. We did say that Barbie will be marginally down for the year given the incredible performance last year, but with the strength of the brand and all the various activations and all the new lines that we're launching and everything else around it, we expect it will continue to grow and go from strength to strength beyond 24.

Speaker 2

And that's we've always said this is not about managing the brand quarter by quarter or even year by year. It's about long term growth and expansion and we just couldn't be more confident and proud of where Barbie is today and where it's going from here.

Speaker 6

Okay. Thanks guys.

Speaker 2

Thank you, Drew.

Operator

Your next question comes from Fred Wightman from Wolfe Research. Please go ahead.

Speaker 6

Hey, guys. Thanks. Just maybe to follow-up on that, you just said that you're still expecting Barbie to be down marginally for the year. Was there any change to the other Power brand outlook for either Hot Wheels

Speaker 4

or Fisher Price?

Speaker 2

No change in what we said at Investor Day. We expect Hot Wheels to grow and Fisher Price to be comparable. But remember, Fisher Price, this is the power brand as we now define it. It includes infant partner sorry, Fisher Price, the brand to grow, the category to be comparable Fisher Price to grow. And this is Fisher Price as we define it now with infant toddler segments with little people and with the new Woodlife that we're just launching this year.

Speaker 2

So we as you know we're now executing a new strategy on the infant or the preschool category. We just announced a new leader for Fisher Price and this is the one category that we focused on during Investor Day to talk about our evolved strategy and there's a lot of new new within Fisher Price and the way we are managing now the category. So all in all, Hot Wheels to grow, Fisher Price to grow, Barbit will marginally decline within the Power Brands.

Speaker 6

Okay, great. And then just thinking about the cadence of the year, Anthony made a comment that it's going to be back to historical norms. I think that's what you guys had said previously. But you also made a comment you the first half to benefit from restocking. Is that still the plan?

Speaker 3

Yes, we haven't gotten that specific. Certainly, our Q1 was negatively impacted by the reduction in 2024. And looking ahead, we will wrap last year's retail inventory decline. So there should be some tailwinds ahead in that respect.

Speaker 6

Great. Thank you.

Operator

Your next question comes from Kiley Koo hoo from Jefferies. Please go ahead.

Speaker 7

Hi there. Thank you for taking my question and congrats on the strong quarter. I was hoping you could kind of double click on the optimizing for profitable growth program. I was kind of wondering how you plan on leveraging AI over the next 24 months, specifically in regards to this program?

Speaker 3

Sure. So, you mentioned the optimizing Profitable Growth program. Again, this is a new program that we announced coming into 2024, a 3 year program with a $200,000,000 cost saving target by 2026. And we have quite an extensive look at AI, right? And we are looking at, I would say, use cases within the company, where it can apply for us, whether it's things like translation, that's just one example.

Speaker 3

But I think there may be good applicability and that is certainly within the scope of our program as we look to further efficiencies that would leverage our global scale, AI is certainly one of them and other cost saving opportunities, particularly within our supply chain as well. And this does include plants we disclosed recently to eliminate one of our plants in China. So it's a very comprehensive program. And I would say given our track record, we're very confident in our ability to deliver.

Speaker 2

And Kalia, I would add that we are looking at AI broadly in terms of integrating more capabilities into different type of analytics as well as product development and also product integration. So we have a team that is dedicated to that and we are looking to leverage the technology in the broad sense of the word, not just in terms of achieving or driving this cost saving initiative.

Speaker 7

Great. That's super helpful color. And then I guess my follow-up would be around LUKOIL-one hundred and sixty 3. Do you have anything to share about the success of the UNO app? Some data you've looked at like users are up or anything else about upcoming launches?

Speaker 7

I know you mentioned the partnership with Take 2, but anything about MATELL-one hundred and sixty three would be great.

Speaker 2

Look, broadly speaking, the goal for our digital gaming strategy is to extend the physical play to the virtual world by creating digital games and experiences that drive sustained engagement for fans of all ages, leveraging our brands. What is important about Mattel 163 is that it's a showcase. Much like Barbie, the Barbie movie was a showcase for the potential in films, Mattel 163 is a showcase with the potential of brands to expand into digital games. We did share that in 2023, we reached almost $200,000,000 at very high margin with just 3 games and that clearly speaks to the potential of our brands when executed well and our partners did a very good job in collaborating with us and marketing and creating games that create high engagement. We haven't announced any new games, but this remains a priority, and the new game with Take 2 will be another important partnership.

Speaker 2

And in addition to that, we are looking to do more self publishing of mobile games based on our IP, where we have a higher level of participation economically into the success of our games based on strong brands. And just to emphasize the importance of big brands to drive consumer engagement, reduce your marketing costs and potentially create a highly accretive business that is driven by strong brands.

Speaker 7

Great. Thank you so much.

Speaker 2

Thank you.

Operator

Your next question comes from Megan Alexander from Morgan Stanley. Please go ahead.

Speaker 8

Hi, thanks very much. Don't want to beat a dead bush here, but can we just go back and wanted to ask a little bit more about just the cadence of the year. I think at the beginning of the year too, you'd expected shipping to align with historical trends. Maybe you could quantify for us what the destocking headwind in the Q1 was and whether it was in line with your expectations? I think you commented a 3 to 4 point destock headwind last year.

Speaker 8

So is that something that we should expect benefits the 2nd quarter?

Speaker 3

Yes. I think looking ahead, right, there should be tailwinds with respect to lapping some of the retail inventory decline. So as you referenced, last year, fairly significant retailer inventory decline. We came into 2023 with levels elevated and we guided a 3 to 4 point impact. We made great progress in 2023, but we still ended the year with retail inventory slightly elevated.

Speaker 3

So the impact in 2024 significantly less of a negative and therefore a tailwind with respect to gross billings. And when we gave our guidance for 2024, right, we said that we expect POS to be flat for net sales to be comparable in constant currency. So there is a plus and a minus there. One is the plus is the wrapping of last year's retail inventory declines and the offset to that is the wrap of the Barbie movie related benefits. So yes, a tailwind in 2024 and it's reflected in the guidance and it's really kind of so far unfolding as we expected.

Speaker 8

Okay. That's helpful. Thank you. And then just on the gross margin performance, is there any way within that mix benefit to quantify the tale from the Barbie movie, whether it was streaming new partnerships, it seems like you're still rolling out new partnerships related to the movie. So I know there's a lot that goes into that mix line.

Speaker 8

Any way to quantify what was pure Barbie movie related within that?

Speaker 3

Difficult to dissect it, but overall that 80 basis point favorable mix is the result of the higher margin licensing business including Barbie growing faster than the toy business. And we're also seeing some benefit related to the movie as we move into 2024, but certainly not as significant as last year.

Speaker 5

Okay. Thank you.

Speaker 2

You're welcome.

Operator

Your next question comes from Eric Handler from Roth and Kilometers. Please go ahead.

Speaker 6

Good afternoon. Thank you for the question. Anthony, I wanted to just talk a little bit about the cash flow statement. Your cash flow from operations was nicely positive. I think that's the first time that's happened since 2014, huge swing year over year.

Speaker 6

Yes, net income loss came way down, but there was also a pretty significant working capital benefit. If you're keeping your free cash flow guidance unchanged around $500,000,000 no change to CapEx, does that mean the working capital benefit that you received in 1Q will progressively unwind in the back in the remaining quarters of this year? How do we think about that?

Speaker 3

Yes. There are a couple of points. One is there is some timing inside of our working capital performance and I'll point to 2 things. One is related to incentive compensation. We didn't accrue incentive comp for 2022, we did for 2020 3 and we're going to pay out the 2023 incentive in the Q2 of 2024.

Speaker 3

So we ended the Q1 with accrued liability with respect to that program. That was a benefit. There's also some timing related to our inventory performance. Our owned inventories were down significantly in 2023. We're going to maintain those levels in 2024, so less of a benefit.

Speaker 3

So those kind of will unwind as we go through the year, which is why we're still guiding to that $500,000,000 $20.24 free cash flow generation.

Speaker 6

Very helpful. And then secondly, I imagine Barbie held up pretty well in the home entertainment window. Wonder if you're willing to sort of parse out the impact of ongoing Barbie movie contributions and how do we think about that for not just 1Q, but the rest of this year?

Speaker 3

Yes. I would say it's not material to our overall results. There is some carryover benefit. But again, I wouldn't say it's material.

Speaker 2

Thank you.

Operator

Your next question comes from Christopher Horvers from JPMorgan. Please go ahead.

Speaker 9

Hi, good afternoon. It's Christian Carlino on for Chris. Could you speak to how retailers are planning early holiday orders? And are they looking for more value? And do you expect the ASP or deflationary pressure in the category to continue at retail?

Speaker 3

Yes. It's hard to get too specific at this point in the year. We are certainly engaged with all of our major retailers around planning for the upcoming holiday season around product, price point, shelf space, promotions, advertising. So it all goes into the plan. And we believe we have a robust plan with those with our retailers and are optimistic regarding the holiday season, but too a bit premature to talk about specific orders.

Speaker 2

One thing I would add when it comes to pricing is that we have such a large portfolio and such a broad range of product that we really cater for all level of pricing and this is one of the strength of managing a large portfolio like ours that we really can partner with the retailers at different price points and offer something for consumers at all price levels.

Speaker 9

Got it. That's helpful. And were you able to recapture any of the fixed cost absorption impact in the Q1? And how should we think about the phasing of that over the year now that we're back to normal seasonality and POS trending in line with shipments?

Speaker 3

Yes. I think it's more in the year to go period and not so much in the Q1. So as we ramp up production going into the 2nd and third quarter, that's when we should see that absorption benefit.

Speaker 9

Got it. Thank you very much. Your

Operator

next question comes from Steven Laseznik from Goldman Sachs. Please go ahead.

Speaker 10

Hey, great. Thank you for taking the questions. Maybe just a follow-up on the retail sentiment at the moment. Ynon, I'm curious if you could just maybe talk a little bit more about what you're hearing from your retail partners on the consumer and the demand side of the equation at the moment. And Adam, like compared to what you expected coming into the year, any pockets of the industry that are maybe outperforming or underperforming your expectations so far?

Speaker 2

Look, I would say so far things are in line with expectation. Retailers are leaning in. We always talk about the importance and strategic value that retailers are putting on this category because it's experiential, it drives food traffic, the items are affordable and you play into a fundamental human behavior that or play that is not going away, especially when it comes to big brands and quality products. What we've seen so far is that as we've said in the prepared remarks is that we believe the industry benefited from in the Q1 from an earlier Easter and year to date through mid April has been comparable to last year, but we do expect some decline in 2024, although at a lesser rate than last year. The decline is due to the same factors that impacted 2023 in terms of a lighter theoretic theatrical film slate and the impact of a shift in consumer spending towards products so towards experiences and services, but that trend is moderating and we believe it will further improve and that the industry will return to growth and continue to grow over the long term.

Speaker 2

We do expect to outperform the industry. We did see positive consumer demand with the improving trends that we talked about. We expect to outperform the industry and gain market share for the full year.

Speaker 10

Got it. Thanks for that color. And then maybe just a follow-up, to the extent you're willing to expand on the M and A point, is there any type of asset or features of assets that you're particularly considering at the moment or think would be best suited for Mattel strategy at this point? I think in the past you said you're not looking to do something that would surprise the investment community. Any sense of what that means?

Speaker 2

What we did say is that to the extent we are looking at M and A opportunities, we would expect them to be additive and very much in line with our strategy and where we can accelerate our strategy. We did say that when we look at acquisitions, we are very mindful of the risk in implementing an acquisition successfully and if we do something, we would expect it to be accretive, additive, strategic, and we always use the term obvious in that we wouldn't expect the market to be surprised not by the type of asset and not by the price we would pay in terms of being disciplined financially and commercially. We work very hard to put the company on very strong financial footing. The company today is in the strongest position it's been in terms of balance sheet, cash generation, leverage ratio at investment grade. So we covered the long distance and we wouldn't risk that.

Speaker 2

And so the message is we're being very thoughtful and prudent. And as I said before, the fact is that so far we chose to spend $300,000,000 on our own stock rather than buy other assets. And so we are taking everything into consideration all under the heading of long term value creation for our shareholders and adjust that for risk.

Speaker 9

Great. Thank you.

Operator

Your next question comes from James Hardiman from Citi. Please go ahead.

Speaker 11

Hi. Thanks for taking my call. So just wanted to connect some of the dots that you guys have given us here. So you guys put up a flattish top line in the Q1. Full year guidance is for flattish top line.

Speaker 11

Obviously, we shouldn't expect it to be flat every quarter. But Anthony, you talked about 2 issues that are going in opposite directions, right? You're lapping the retail inventory decline and then you're which should be a benefit and then you're lapping the Barbie benefit, which should be a headwind. Am I reading too much into this to think that the bigger piece of that benefit will come in Q2 and the bigger piece of that headwind will come in Q3. So we should see a growth in Q2 and a decline in Q3.

Speaker 11

I'm just looking at consensus numbers. The Street is assuming that Q3 is going to be down pretty meaningfully. I'm just wondering if you think you can if that's right and if you think you can offset that with some growth in Q2?

Speaker 3

Yes. Without getting too specific on any given quarter, certainly the Barbie wrap will be predominantly in Q3 and to a lesser extent in Q4. And directionally, the benefits of the inventory retail inventory wrap probably should be more Q2 than Q3.

Speaker 11

Got it. And then I guess just more broadly, I mean, literally nothing changed in your guidance. I don't want to assume that everything has gone as planned over the past 3 months, but you did meaningfully beat our estimates, at least on the bottom line. I think sales were a little worse, but certainly margins were significantly better. I'm curious if you think just the Street was mismodeling the Q1 or whether the Q1 was actually in some ways better than you would have expected and maybe it was just some timing as to why that didn't flow through to the full year.

Speaker 11

Just try to sort of tease out how much of the beat versus our expectations and the non raise is conservatism versus timing versus just we weren't thinking about it right? Thanks.

Speaker 3

Yes. So as you know, we don't get too specific on any individual quarter. I mean, we certainly saw strong margin gains in the Q1. And we are reaffirming our full year guidance, right, for net sales to be comparable on constant currency, for adjusted gross margin to be up 100 basis points to 150 basis points. So again, we're off to a good start there.

Speaker 3

And EBITDA $9.75 to $1.25 and for EPS to be up double digits. So again, off to a good start and confident that we will get to achieve this guidance.

Speaker 2

And I would add, James, that in the context of a soft industry, we look to continue to gain share as we said. And the emphasis for us this year is about profitability, gross margin expansion and free and strong cash generation to continue to strengthen the company and position it for long term growth and we expect to resume growth at the top line and bottom line, but just emphasizing the top line in 2025.

Speaker 4

Got it. Thanks guys. Thank you.

Operator

Your next question comes from Linda Bolton Weiser from D. A. Davidson. Please go ahead.

Speaker 12

Yes. Thank you. So, I was curious, I just I noticed in your results, I think, unless I missed it somewhere, that American Girl sales were not really broken out separately. And also you moved Imaginax out of Fisher Price into the kind of other category. So maybe you could just kind of comment if there's any meaning behind those things.

Speaker 12

Is Imaginax going to be discontinued? Or is it just going to be out licensed or what exactly? And then American Girl, what are the plans there? And how did it do in the Q1? Thanks.

Speaker 2

Hi, Linda. Yes, we did as you know made American Girl now part of North America commercial so it's not isolated or not segmented out as before. It's part of our North American business But we did say that we are progressing our strategy on American Girl and grew in the Q1. It is a valued asset within our portfolio with significant fan base and great product and we feel very good about it and was good to see growth in the Q1. We outpaced both large doll and fuddle doll categories in the U.

Speaker 2

S. Led by the core 18 inches business which was up double digit. So we are encouraged by the strong start of the year and confident in the future of this Treasure Brands with more innovation and more execution continued improvement of our retail footprint and flagship stores. Imaginext is now part of the preschool entertainment. This is the part of the impact of the preschool category that is driven by brand and character versus Fisher Price, which is more product driven.

Speaker 2

And it will now be when we talk about the category infant only preschool category,

Speaker 11

we will

Speaker 2

talk specifically about Fisher Price as the power brand that as we said earlier include infant partner, Little People and the new Wood line. We'll talk about preschool entertainment and separately as you know there is the 3rd bucket of baby gear and power wheels which we are exiting or out licensing that you will see declining over time.

Speaker 12

Okay. And then I was just curious, you had mentioned, you referred to your one, your manufacturing plant closure in China. And I was wondering, can you comment on your percentage of manufacturing in China, how it stands today versus say 3 5 years ago? And kind of what is the longer term plan for that? Just a lot of investors are asking about different exposures to China, both on the manufacturing side and what that could mean.

Speaker 12

So what are your thoughts on that topic? Thanks.

Speaker 2

Yes, really today we are at about 50% of products that are being made in China. Industry average is between 80% to 85% and we now are 50% and declining. It's on the way down and this is not it's not so much about geopolitical risk as such, but more about diversifying our footprint and working in different countries and continue to optimize our footprint in terms of cost, fulfillment, services by different suppliers and part of our journey to continue to strengthen our supply chain, which is now a competitive advantage for us, but we believe we can continue to improve it even further. And as you know, about 70% of our Optimizing for Profitable Growth program will come from cost of goods sold, which is directly driven by the performance and improvement that we're driving in supply chain.

Operator

Our last question comes from Jamie McCatz from Morningstar. Please go ahead.

Speaker 13

Hi, guys. Thanks for squeezing me in. I'd be curious if you have any insight into demand across price points? Are there different demographics that you're seeing that are really struggling to convert the sale? Or is there anything else consumer wise that might be helpful to understand?

Speaker 3

Yes. I would say it's too early in the year to comment. We're not seeing any specific trends in that regard. And as Anand stated a few minutes ago, our portfolio is well positioned to compete across all price points from a single die cast car to a Barbie dream house, right? So we have a great portfolio and we are developing our plans with our major retailers and look forward to executing the season.

Speaker 13

Okay. And then just because you haven't discussed it in the past, now that there is another adventure park coming out, are there any economics of that that you could share with us? I just I don't know how many locations that could ultimately be or what that total addressable market is. So any insight on that would be helpful.

Speaker 2

Yes, we haven't broken down the economics, but we did say this is a capital light approach where we license our brand and participate in different forms in the economics of the park and of course can sell product there. This is a highly accretive business line, especially given the strength of our brands. And we do look at this area as an important growth lever and expect to have more location based entertainment opportunities in addition to the 2 parks that we already announced and the other executions we talked about during the Investor Day such as the Master Truck tour and other opportunities. But this is a strategy to take strong brands that drive engagement and have a large fan base and capture value outside of the toy aisle in highly accretive business opportunities.

Operator

That concludes the question and answer session. I will now turn the call back over to Ynon Kreese for closing remarks.

Speaker 2

Thank you, operator, and thank you, everyone, for joining us today. As we said, we are off to a good start for the year with positive consumer demand, significant gross margin expansion and very strong improvement in cash flow which is exactly in line with what we were aiming to achieve. We expect to outpace the industry and gain market share in 2024 and are on track to achieve our full year guidance. We continue to successfully execute our strategy to grow our IP driven toy business and expand our entertainment offering and are very well positioned to create long term shareholder value. Thank you for listening today.

Speaker 2

Of course, we'll follow-up over the next few days and answer any more questions, but we appreciate the time. And now I'll turn the call over to Dave.

Speaker 1

Thanks, Ynon, and thank you everyone for joining the call today. The replay of this call will be available via webcast beginning at 8:30 pm Eastern Time today. The webcast link can be found in the Events and Presentations section of our Investors section of our corporate website, corporate. Mattel.com. Thank you for participating in today's call.

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Earnings Conference Call
Mattel Q1 2024
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