Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
Ladies and gentlemen, thank you for standing by and welcome to the Mattel incorporated third quarter 2019 earnings Conference call. At this time, all participants I know listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero I when I look to hand, the conference to your speaker today, David Sporting events, Vice President Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone.
Joining me today are you know in cries, Mattel's, Chairman and Chief Executive Officer, Richard Dickson, Mattel's, President and Chief Operating Officer, Joe you in our hotels Chief Financial Officer.
As you know this afternoon, we reported until 2019 third quarter financial results.
We will begin today's call with the non and Joe providing commentary on our results.
Then we will provide time for a non Richard in Joe to take your questions.
To help guard our discussion today, we are provided you with a slide presentation.
Our discussion slide presentation and earnings release reference non-GAAP financial measures, including gross sales.
Adjusted gross profit and adjusted gross margin.
Adjusted other selling and administrative expenses adjusted operating income in loss adjusted earnings and loss per share.
Earnings before interest depreciation and amortization or EBITDA.
Adjusted EBITDA in constant currency.
Please note that the sales figures reference on this call will be stated in constant currency.
The information required by regulation G. regarding non-GAAP financial measures is included in our earnings release and slide presentation and both documents are available in the Investor section of our corporate web site corporate Dot Mattel Dot com.
Before we begin I'd like to remind you that certain statements made during the call may include forward looking statements relating to the future performance of our business brands and product lines.
These statements are based on currently available information and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ materially from those projected in the forward looking statements.
We describe some of these uncertainties in the risk factor section of our 2018 annual report on Form 10-K , our 2019 quarterly report on Form 10-Q , our earnings release and the presentation accompanying this call and other filings we make with you actually see from time to time as well as in or other public statements.
Michelle 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 tween on.
Thank you everyone for joining our third quarter earnings call.
We had another strong quarter as we continue to make consistent progress in our strategy to transform a tail into an IP driven high performing toy company.
Before we get into further detail on our results for the quarter I.
I would like to briefly discuss the two other announcements we made today.
As you know in August this year, but there was made aware over whistle blower letter.
The letter, which had been sent to our external auditors Pwc questioned whether there were accounting errors in historical periods and whether Pwc was independent.
In response, Mattel's Audit Committee launch an independent investigation into the obligations.
That investigation is now complete.
And you determine that in terms of financial impact income tax expense was understated by how do the $9 million in the third quarter of 2017 and overstated by a how did the $9 million in the fourth quarter of 2017 with no impact for the full year.
Accordingly, we will amend our 2018 Form 10-K to restate the last two quarters of 2017 and certain related information.
Please refer to the press release for more detail.
The error was non cash did not affect operating income or EBITDA and had no impact on a full year financials for 2017 or subsequent periods.
As a result of the investigation. The company has also determined that it has certain material weaknesses in its internal control other financial reporting.
The company is taking remedial actions to address these issues as well.
Asked the question of Pwc is independence. The audit committee concluded that the objectivity and impartiality or Pwc has not been impaired and that pwc kind of continue as our independent auditor.
Pwc agrees with that conclusion.
We also announced today that our Chief Financial Officer, Joe you to an hour would be leaving the company after a transition period of up to six months.
We are conducting a search for his successor as CFO .
We appreciate Joe's important contributions to the company since he joined two years ago and look forward to continuing to work with him during the transition period.
With that let me now turn to Mattel's performance for the quarter.
We remain focused on execution and are on track to achieve our goals to restore profitability and regained topline growth in the short to midterm and to capture the full value of our IP in the mid to long term.
Some of the more notable financial highlights compared to last year into the following.
Gross sales are up 3% as reported and up 4% in constant currency.
Adjusted gross margin improved 390 basis points.
Adjusted operating income improved $21 million.
Adjusted EBITDA improved $50 million.
And adjusted EPS improved by eight cents.
Year to date.
Operating cash flow has improved by $218 million.
Progress instructions simplification has significantly exceeded our original target.
As of the end of the third quarter, we achieved $826 million run rate savings and expect to exceed $854 million by the end of 2019.
This was the fifth consecutive quarter, where we achieved year over year improvements in profitability across all key metrics.
This was also the second quarter in a row, where we achieved revenue growth as reported in the third quarter in a row in constant currency.
It is worth noting that the last time, we saw back to back quarterly revenue growth was in 2013, which was our record revenue year.
Based on the performance to date and the momentum exiting the third quarter, we are raising our guidance for the year and now look to deliver adjusted EBITDA in the range of $400 million to $425 million.
Looking at gross sales in constant currency in the quarter. We grew in five out of the six categories, where we operate.
This includes the dogs and vehicles categories, where we are a global leader as one is the action figures building sets and games categories, where we are a challenger.
Those category was up 7%.
Bobby gross sales increased 12%, marking eight consecutive quarters of growth for the brand.
There was strong consumer demand globally across the Bobby line with excellent product marketing and retail activation.
Polly pocket, which was relaunch in 2018 and competes in the small don't segment also achieved double digit growth.
American girl launch several growth initiatives at the end of the third quarter and whereas sales for the quarter were down 14%. This is a significant reduction in the rate of decline compared to the first half of the year.
And we continued to leverage our creative and innovative capabilities with the introduction of two new lines, the Bts incredible World Dolls.
The Bts partnership is a great example of how much pelican identify cultural trends and rapidly bring them to market around the world.
Credible World has had an overwhelmingly positive response, demonstrating once again mattel's thought leadership groundbreaking creativity and suicidal impact.
Our infant toddler and preschool category was down 10% largely due to expected revenue declines in Fisher price friends.
Sales in Fisher price score the largest component of the category continued to improve and what down less than 1%, including the 3% impact of the incline slipper recall.
This is compared to last year's decline of 6%.
We achieved positive sales growth internationally and are confident about the continued improvement and progress in Fisher price score.
Fisher price, France was down as we continue to rightsize, our third party licensing portfolio.
Power wheels was also lower due to the declines in certain license products.
Thomas and friends declined as we're simplifying the product range and look to turn the business around in 2020, when we celebrate the brands 75th anniversary.
Our vehicles category grew 15% driven by a 27% increase in hot wheels.
The growth was partially offset by the decline of Disney's cars, and Universal's Jurassic World vehicles post the movie launch years.
Hotwheels continued to remain the industry would either and he is on pace for record sales this year.
Hotwheels monster trucks are performing exceptionally well.
This is a new segment of the brand and the consumer response to the product line as well as live events has been very strong.
And we have expanded distribution of our innovative heart was a de lines to target following its second quarter launch at Apple stores and its debut on Amazon During Prime day.
This is a great example of our ability to innovate classic product lines and provide unique experiences combining physical and digital play.
Action figures building sets and games together grew 13%, marking the third consecutive quarter of double digit growth for these challenger categories.
Action figures was driven by toy story, four which continues to do very well following the movies release.
Mega had another positive quarter in the building sets category, providing innovative product offerings and competitive pricing, while expanding its global retail distribution.
Our games category grew across all regions driven by card games with Hunan and face then.
We are confident about the trajectory of our performance in this area.
And while not in the quarter, we have seen a very positive response to the launch of on the Braille in partnership with the national for duration of the blind, reflecting our values of inclusivity and our ongoing commitment to purposeful play.
Looking at gross sales in constant currency by geography, we saw growth in three out of four regions.
Overall growth has been broad based across channels customers and brands.
North America was down less than 1%, including the 1% impact of the inclined slipper recall.
The international segment was up 13%.
EMEA grew 15% versus a decline of 8% in December quarter last year.
This is despite the industry being down in the region. This year.
Well European retail in general continues to face several challenges.
We are gaining share through successful partnerships execution of our channel strategies and improved omnichannel capabilities.
Latin America continued its strong growth and maintained its leadership position with sales, increasing 10% driven by the regions largest markets, Mexico and Brazil.
Asia Pacific was up 15% versus last year's decline of 38%.
This was achieved through growth across our top three countries, Australia, China, and Japan as well as through strong results in southeast Asia.
Tariffs have had a de minimis impact when our results and are not expected to have immaterial impact for the rest of this year.
We have worked very closely with our retail partners to prepare for the potential implications of tariffs in the short to midterm.
We continue to monitor trade negotiations and assess the potential effects on the industry retailers and consumers.
As we approach this holiday season, we believe were well positioned across all our categories in regions with innovation throughout the entire portfolio.
We have increased our presence on many of these years holiday top toy lists and have several new products brand launches in marketing campaigns to amplify retail executions.
We have also continued to make strong progress in our mid to long term strategy to capture the full value of our IP with three key developments on this front.
We announced a live action film with Paramount and multiple Academy Award winners Axa, Tom Hanks and screenwriter Akiva Goldsman to develop a feature film based on major Matt Mason.
We also announced a partnership with Academy Award nominee, Daniel cooler and production companies, 59% and valuable resource.
Two coproduce a live action film based on Barney Mattel's iconic purple dinosaur.
This is the eight theatrical movie project that Mattel films has announced.
Additionally, we reached an agreement with Netflix for the production and distribution of a masters of the universe animated series to be produced by actor and filmmaker Kevin Smith.
In closing our third quarter performance demonstrates the continued momentum of our multiyear turn around and consistent progress in transforming the tail into an IP driven high performing public company.
We are executing very well when our strategy to restore profitability delivering the fifth consecutive quarter, where we achieved improvements in reported operating income it'd be that gross margin and S.
We are starting to see positive revenue trends with growth for the second quarter in the ROE as reported and for the third straight quarter in constant currency.
And we continue to make meaningful progress in laying the groundwork to capture the full value of our IP.
We are encouraged by this momentum as we remain focused on execution and the creation of long term shareholder value.
Now I would like to turn the call over to Joe who will cover the financials in more detail and give you updated guidance based on our recent performance.
Thank you and on and good afternoon, everyone I'd like to provide you more detail on our third quarter results and updates to our 2019 full year guidance as a non shared grew sales were up 3% year over year as reported and up 4% in constant currency.
We also drove meaningful growth this quarter in five of our six categories and increase hills in three of our four regions.
Our 3% growth in the quarter included a 1% to 2% benefit from increased direct import sales.
This benefit effectively shifted sales from the fourth quarter into the third quarter, we still had growth even absent this shift.
As always we work closely with our retail partners throughout the calendar year and make adjustments based on market conditions.
We believe growth in direct imports reflects retailers confidence in our product innovation and service levels as well as their improved visibility into the retail environment post toysrus.
Reported gross margin was 46.3% of net sales up 370 basis points from the 42.6% in the third quarter of 2018.
Adjusted gross margin was 46.9% of that sales up 390 basis points from the 43% in the third quarter of 2018.
The significant improvement in adjusted gross margin was primarily driven by structural simplification savings.
Advertising as a percent of net sales was 11.5%, which was flat year over year. We continue to apply a disciplined approach to advertising focusing on greater utilization of digital platforms in content.
Reported machine, a was $366 million, an increase of $40 million or 12% year over year.
While we realized incremental structural simplification savings of $23 million and incurred lower severance and restructuring expenses versus Q3 2018. These benefits were more than offset by several factors.
There was a 47 million dollar increase incentive compensation due to improved business performance year to date. Accordingly, we are recognizing our full year incentive accrual expense more evenly between the third and fourth quarters relative to 2018.
Additionally, Q3 2019 did not have the benefit of the $13 million of Toysrus bad debt recovery that we booked in Q3 2018.
And we booked $3 million of additional fulfillment and legal fees this quarter associated with the in claims sleeper product recalls.
To date, we've expense $8 million are best Genie related to the recalls.
Year to date across the piano in total weve expense $34 million related to the recalls before taking into consideration the $30 million to $35 million in revenue reduction.
To the extent there are additional recall related cost in the future we will provide updates accordingly.
Adjusted as she nay was $351 million, an increase of $51 million or 17%.
The year over year increase in adjusted machine, a was due to the incentive compensation accrual timing and the absence of the 2018 tier you bad debt recovery, partially offset by the $23 million of incremental realized savings from structural simplification.
Adjusted operating income was $174 million, an improvement of $21 million or 14% compared to the prior year.
Year to date adjusted operating income has improved $272 million over last years, adjusted operating loss of $225 million.
Adjusted EBITDA was $248 million, an improvement of $15 million compared to the $232 million in the prior year.
Year to date, adjusted EBITDA has improved $252 million over last year's $16 million.
The improvement in both adjusted operating income and adjusted EBITDA year to date was driven by revenue growth and structural simplification savings, which improve both margin and as Genie.
Before moving onto the balance sheet I'd like to note that separate from the whistleblower matters. We also elected to revised 2019 in prior periods for certain unrelated immaterial out of period adjustments, which do not require us to amend previous filings. Nonetheless, these adjustments will be reflected in the two.
How's the 19th third quarter Form 10-Q , and the amended 2018 Form 10-K , as well as the financial history page on our Investor Relations website.
Moving onto the balance sheet, we ended the third quarter with the cash balance a $218 million and our cash position net of short term borrowings improved by $54 million versus 2018.
We ended the third quarter with $230 million of short term borrowings under our ABL credit facility.
Accounts receivable decreased 2% despite higher sales in the quarter and resulted in a four day reduction in days sales outstanding to 78 days.
Owned inventory decreased 3%, we continue to tightly managing our inventory and partner with our retailers to ensure that they also have the right inventory levels. We believe our owned inventory in our retailer inventory levels are well positioned for the remainder of the year.
Moving on to cash flows year to date cash flows used for operations improved by $218 million to $514 million, primarily driven by a lower net loss, excluding the impact of our noncash charges.
Year to date capital expenditures are $76 million compared to $111 million last year.
As a non said at the ended the third quarter, we've already achieved $826 million, a structural simplification run rate savings exceeding our target of $650 million well ahead of schedule and we expect to achieve more than $854 million a run rate savings by the end of 2019.
Some of the savings we previously expected to realize in 2020 will now be accelerated into the 2019 PNM.
As a result, we expect to benefit from $303 million of realized structural simplification savings this year.
$272 million will benefit adjusted EBITDA.
We're also continuing to implement our capital light model, which includes not only the optimization of our manufacturing footprint, but our entire supply chain.
We will share key developments as they are executed subject to competitive and confidentiality considerations.
And third quarter capital light resulted in $16 million, a severance and restructuring expenses, we expect additional implementation costs to impact the piano in Q4 with benefits beginning in 2020.
We continue to make strategic investments to grow the business and improve profitability.
In the third quarter, we spent $23 million when strategic investments compared to $9 million in the prior year.
Investment is classified as operating expenses were $18 million, a 9 million dollar increase over the prior year. These were primarily related to our IP transformation and brand growth opportunities.
Year to date, we have spent $50 million on strategic investments compared to $27 million in the prior year.
Year to date investments classified is happening expenses were $36 million, a 9 million dollar increase over the prior year.
Clearly the year to date results demonstrate meaningful progress across all of our financial metrics with that in mind, Let me provide you with our improved guidance for 2019.
Starting with gross sales for the fourth quarter, we expect gross sales to be down slightly due to the continued foreign exchange headwinds fewer holiday shopping days compared to last year, a more competitive marketplace and the timing impact of direct import sales in Q3.
For the full year, given our positive revenue performance year to date, we are raising our original guidance and now expect full year gross sales in constant currency to be up slightly versus the prior year.
Given a low single digit negative impact from foreign exchange, we expect full year gross sales as reported to generally be flat versus the prior year.
Achieving this will be a major accomplishment and an important milestone in the turnaround after five consecutive years of revenue decline.
Sales adjustments are not expected to change significantly and we'll continue to be inline with the prior year as a percentage of sales.
We expect adjusted gross margin for the full year, two improved by approximately 100 basis points above our year to date margin of 42.9%. This is driven by additional realized savings from structural simplification and lower anticipated inflation.
Advertising expenses for 2019 will increase year over year and are now expected to be roughly 12% to 13% of net sales.
In the fourth quarter, we expect a significant increase in the dollar amounts and percentages spend driven by the timing of strategic investments related to digital content.
Adjusted as she ne is still expected to be down both on a dollar in a percentage of net sales basis.
The expected savings from structural simplification and the benefit of $32 million of Toysrus net bad debt expense recognized in 2018 will be partially offset by our annual merit increase and general inflation.
In addition, we anticipate incurring higher incentive and equity compensation driven by improved business performance.
As a result of these factors we expect the total adjusted as she needs for 2019 to be just over $1.3 billion, a 75 to 100 million dollar reduction from last year.
Given the positive factors I just discussed we are raising our adjusted EBITDA guidance to $400 million to $425 million. This would more than double 2018 adjusted EBITDA.
The increase in adjusted EBITDA guidance is driven by structural simplification savings, which improved gross margin and SGN a.
As well as increased revenue.
Relative to original structural simplification target the program is delivering both greater savings in total and more realized savings in the 2019 PNM.
Additionally, while we are experiencing product cost deflation, we expect it to be lower than our original guidance.
These benefits to adjusted EBITDA will be partially offset by higher advertising expenses as well as additional SGN, a primarily driven by higher incentive compensation.
Adjusted operating income for the full year is now expected to be positive at yearend.
Looking beyond operating income interest expense is still expected to come in marginally higher than in 2018.
And as it relates to taxes the guidance. We discussed earlier. This year has not changed we still expect income tax expense of approximately $75 million to $100 million.
Turning to the balance sheet and cash flows as we restore profitability. We continue to expect to achieve positive cash flow from operations. This year for the first time in three years.
We still expect the change in networking capital to be approximately neutral.
Capital expenditures are expected to be in line with 2018.
We remain confident in our capital structure, which includes the ABL credit facility and that we have sufficient liquidity to both run the business efficiently and to make strategic investments to grow.
At the appropriate time subject to market conditions, we plan to return to the debt market to refinance the $250 million a senior notes maturing in October 2020.
Turning to strategic investments, we still plan to spend approximately $100 million as originally guided with roughly 70% now expected to be operating expenses.
In closing the company's great performance in the third quarter and year to date, along with our ongoing consistent execution will allow us to continue to drive value on a going forward basis.
Thank you Joe before we begin today I want to point out that we will not be addressing detailed accounting questions related to the whistle blower investigation at this time.
We will file an amended 2018 10-K addressing these accounting matters as well as the 2019 Q3 10-Q honor before the November 12 filing deadline for the 10-Q.
As he not mentioned information regarding the accounting matters can be found in the press release made available today, we will schedule a call to answer any questions. You may have addressing the amended 10-K after its filing.
We will now open the line for questions.
Thank you.
Ask a question you'll need to press star one.
So let's try a question press the pound key piece standby, we compared to Q1 day roster.
First question comes from Greg Badishkanian with Citi. Your line is open.
Hey, guys, it's actually Fred Whiteman on for Greg I was just hoping you could dig into the direct import business from the quarter I think you pulled out a 1% to 2% benefit can you talk about why you might be seeing such different trends in the direct business versus some of your peers from the market.
Hi.
We are focused on our own execution and our own dahmer's and we did see.
We did see strong performance in direct.
Direct imports.
As we said in the prepared remarks.
We always work closely with our retailer throughout the calendar year and made the adjustment based on these on the changing.
Market conditions.
We do believe that growth in direct imports reflect.
Thanks retailer is confidence in our product in our innovation and service levels.
Also the had improved visibility into the retail landscape post the post the tours of our situation.
So all in all.
We did see an increase.
And believe whereas suited to continue to support this part of the business.
Okay. Thanks, and then I understand that you're starting to lap. Some tougher compares and you did talk that some of the pull forward into threeq, but if we just look at the implied guide for Fourq you was there anything in the market, that's giving you some caution or.
Just seem to imply some pretty significant declines.
So is so you've got to remember from an industry perspective, you know we all of the all of US are facing the fact that they're going to be fewer shopping days. This year from us as a company I'll remember we're in the midst of turning around American girls, we feel the slight negative pressure in regards to our overall numbers because of American girl.
Then from a fourth quarter perspective, we did see that one or two percentage hundred basis points shift from fourth quarter to third quarter on T.I. and then finally, he just have the impact of foreign exchange.
Perfect. Thank you. Thank you.
Thank you next question comes from Felicia Hendrix with Barclays. Your line is now open.
Hi, there. Thanks, so much but just wondering I didn't I don't think I heard you guys go through on any Pos.
At our detailed so maybe you can kind of walk us through that by segment would be helpful.
Yes.
Sure I could start Joe you can chime in.
In General we were really pleased with our POS we particularly we're very excited with our strengths in the doll portfolio.
POS was up high single digits.
In that in that category clearly led by the success Barbie, which has been really terrific on.
The balance of the portfolio also within vehicles, we had very strong performance in hot wheels.
As we said 27%.
And.
The overall category.
4%.
Let's see as we continue to move for the quarter on.
POS he combined action figures building sets games, our Pos was up high single digits.
Which is also really exciting in the context of a challenging categories.
And I think in context of are challenging category, which is.
Infant toddler in preschool, while we were down we really feel very good about the Fisher price core business, which outside of the.
Recall was a good performer in fact would have been up.
Single digits without the recall so all in all.
Yep.
No I was just wondering is that is that global or is that.
Domestic.
All of this because their old.
Yes, that's all global.
Global Okay. So just it looks like a lot of your your growth came more from international in the quarter than than domestic same as last quarter, but just kind of trying to understand more that domestic picture and then also hot wheels. He didn't give us the Pos there.
Sure let me cover on.
A hot wheels piece of our business.
Hotwheels was very very strong globally up.
15% in our in sales and POS was up high single digits.
For the quarter, our North American business was down less than 1%.
Which also included the impact of the.
The Fisher price recall.
Right So npos.
Pos in North America.
Was.
Own low single digits as a whole.
Okay. Thanks.
All right.
Yes, Oh actually business very in line with our expectation.
Okay great.
And then and then in non just getting back to the T. I can you just help us understand typically in your third quarter what percentage of your business is de I versus what it was this year in the third quarter.
We don't provide this.
This information specifically, but I can tell you there was no surprise and no disruption.
This was inline with expectation and.
And as we because really we were planning for for the quarter.
Okay.
Okay. Thank you.
Thank you. Our next question comes spent 10 content with Wells Fargo. Your line is now open.
Thank you, yes, just a couple gentleman I wanted to follow on on that the here.
And on or Joe whoever wants to take this.
The the shift was it all driven by U.S. year over year, the increase Sunday I can you say that and then.
I think quantification that you can give us the impact to gross margins from that.
Well the so so.
There was no sort of.
Regional basis on the D. I. It was basically up just basically 100 to 200 basis points.
You know, it's a shift from fourth quarter to third quarter the impact on the margin.
It's pretty immaterial on it from a gross margin basis.
Remember this this comes from the detailed planning that goes on by the commercial organization with all of our retail customers to understand whether they want direct or whether the direct imports or whether they want to go trade.
And everybody understands the difference that when you go direct you're taking on on the inventory risk, but you're getting a slightly higher margin on it. So we work closely with our retailers to maximize the profitability and growth and we we had no unusual trends and.
Pretty consistent on a year over year basis, and so we feel pretty good about where we are.
Sure.
I would also just want to address so im just one comment that the shift of 1% to 2% in the quarter from the fourth quarter to the third quarter.
Obviously helped the growing gross sales, but we would have grown anyway without it because our growth as you know.
As reported is 3% than 4% in constant currency. So this is not in itself.
The reason that we.
Showed growth in the quarter.
Okay. Okay.
Then a couple of housekeeping if I may gentleman.
Richard just wanted to double check in response to Felicia's question. The infant toddler preschool can you repeat that pls number on a global basis.
Sure.
The let's see infant toddler preschool P Oh, yes.
Hey, Pos we were down low double digits worldwide. Okay.
Okay, Okay and then.
Just a couple more housekeeping gentleman.
Anything you can tell us about the contributions to dolls of the.
The kids yourself and then.
Sales any thing similar there to the Star Wars contribution in the quarter.
Sure you know we continued to show strength in the doll portfolio.
As indicated certainly by the high single digit growth for the category and of course, largely led by the momentum that we have on Barbie.
You know our current trend has been really phenomenal were in our eighth quarter of consecutive growth year over year by the way seven of those quarters have been double digit and largely led by.
Product in positioning, which we're really very very pleased with linking Barbie to pop culture.
The continued growth that we have across the product portfolio extensive in every segment family segment state fashion dolls, even our collector business has been very very strong overall in the other dolls category as in non mentioned, we're very pleased with Creatable world, which were.
As a phenomenal launch in fact over the first few days of the launch we had matching impressions to that of Barbies Sixtyth celebration, so real valid indicator of not only our ability to launch new brands.
And garner great PR, but ultimately lead through innovative new brands Polly pocket continues to be one of our fastest growing doll brands.
Actually the third fastest growing now brand per global NPD and Bts as we mentioned as well is really an exciting new part of our portfolio. The band is back on the road actually and has been touring and its third leg. We just released the mini vinyl collection, it's doing very well.
At retail and.
Exceeding our expectations in that particular category a real quick mentioned, obviously you asked about hot wheels.
We're incredibly proud of the momentum.
We continue to have on hot wheels, as we reported gross sales of 27% to really impressive stat. When you consider that we're up against the Fiftyth anniversary from 2018, so real indication that we're going from strength to strength.
And it's really on a global basis, so very very pleased the marketing on that brand has been phenomenal one of the key events called alleges tour. It continues to be incredibly successful in its second year, an awesome new product line.
Probably the one of the most exciting sets new colossal crash downhill racing go also in monster trucks.
As part of the drivers for for this year. So all in all really powerful momentum on our most powerful brands.
Okay No no. Thank you appreciate that but just any.
You guys are done a great job. So congrats there, but again that bts as new Star Wars, you know that had to be on shelf by October four so.
On the on the die cast vehicles, there any any color you can give us on those two properties in particular.
Now we feel good to the detail at that level.
But as I mentioned, we're very excited about the products and the marketing across our portfolio and in particular in the Dol and vehicle category.
Okay. Okay, gentlemen, thank you very much.
Thank you.
Thank you. Our next question comes from William Beta with Bank of America. Your line is now open.
Good afternoon.
My first question is you mentioned that you didn't expect much impact from the tariffs.
Wondering whether this was just due to the timing of when for a and for beer came in or whether this was due to negotiations with both your retail partners and your manufacturers.
Well, so we have a combination of things going on so remember list three.
Through this three it's been de Minimis for US you know, we've really had nothing.
Any impact from it.
In regards to going forward you know, we're not sure. It's ultimately going to end up in whether the December dates still going to hold but we have done a lot of work with our retail partners to figure out ways to potentially mitigate.
You know the tariff if it does come into place us we feel very good about the proactive.
Reaching out to our retail partners and how to figure out how to minimize this to the extent possible. So we feel as good as we can going into something that's still an unknown in Kentucky constantly shift.
But to date you know through list for you, which impacts us is basically de minimis.
Okay, and then just one follow up.
You guys, you've obviously done a great job cutting costs.
For European Al.
You guys think about what the gross impact of tariff if they continue to go on as they are now currently sitting I mean based upon your conversations do you have some sort of a big ballparks guess on.
You could mitigate through actions.
You know, we we've not given that number out it's just because it's such a moving target like you said you can get carve outs as things and stuff so rather than get into the specifics of the actions we would take to help mitigate the impact we just would wait and see sort of what the ultimate rule if.
It does come out and then we can address it at that time.
I would add I would just add that.
That's what Joe said that.
We believe we aren't in a relatively better positioned than the overall industry average.
With less than two third of our tours that sold in the U.S. imported from China versus an industry average you have around 85%.
We have developed contingency plans and have worked closely with the retailers to ensure that were aligned on our approach to mitigate that tariffs.
As you know we are in the thick of designing.
An organization that is that this would become more flexible and can respond to exogenous changes, whether it's about china or tariffs or any other.
Parameters the change in our landscape and as it relates to two parents will do have several mitigating.
Factors that will or actions that we can take.
So just price increases working with alternative suppliers.
Working with our product development and procurement teams to optimize our product mix and sourcing options and also transition to.
Different manufacturing structure as I said to give us the flexibility and mobility.
Due to optimize outcome for us.
Yes, no I asked because the tone of your commentary as much more positive than others in the industry sounds good alright. Thanks for taking my question.
Thank you. Thank you. Thank you. Our next question comes from Michael Swartz with Suntrust. Your line is now open.
Hey, guys good afternoon.
Just.
I wanted to ask a question quickly or as it relates to your guidance it looks like EBITDA coming up.
Big part of that was a shift in.
Realized savings some of that stuff from 2020 coming into 2018, it looks like it's about $30 million to $35 million versus what you'd expected prior maybe give us a little color on I guess, what's behind that shift and while I guess why it accelerated faster than you.
Anticipated.
I mean this shift is really totally focused execution I mean, we meet on structural simplification savings every week and our sole goal is to look at each one of these workstreams and figuring out how to accelerate it.
Sooner rather than later and whats standing in its way I mean, it is a discipline debt and not and I have partnered on since we started this program and we feel very good about where its ending up and the execution we've gotten done today.
Great and I would say sorry, Michael just to say that this is a project that has a lot of.
Support and ownership by every constituents in the company.
And as you know.
After we exit.
To the 2019, there would be more savings coming from our capital light model.
So we're not done optimizing and driving efficiencies in the in the operations.
And it just.
Maybe for you in your non just with regards to the Masters. The universe series for for Netflix that you announced could you give us maybe a little bit of color.
On timing of that project in and maybe how the economics will work.
Yes, I can get into the specifics on this one show but in general.
As you know this this is part of our mid to long term strategy and.
It's exciting to see the progress and the momentum we have.
In all of those deals, but it is meant to be more mid to long term.
With that said.
The way the way. These deals work is that we do not take any financial risk.
For the most part we would be in profit as we enter any of these any of these shows.
Or projects.
We typically control and have creative control on negative control in other words.
Arthur cannot do anything or any material take any material decision to make any material change to the.
For the credit framework of the property.
Our approach is to partner with the best creators out there for project praise Shandra and also with the best distributor for a project by John right and in the case of.
Films or television.
We typically would get.
A license fee.
That is tied into the property itself.
We have produces fees and this also different forms of upside participation.
Genomically in the event of.
The event of success with escalators. So all in all we believe we have a very balanced model in terms of.
Risks and rewards.
And this is before you even get into the benefits we can drive from.
For me.
Other from Liftings toy sales and consumer product sales.
And you will see as we've said before you will see more projects coming both on the on the film side as well as a pizatti content.
Thank you.
Thank you.
Our next question comes from the Linda Bolton Weiser with D.A. Davidson. Your line is how open.
Yes. Thanks.
Just two questions first of all I think when you were talking about your outlook for the fourth quarter. You did mention in your list of items like competitive environment. So can you just give a little more color.
Exactly what youre, referring to there and then secondly.
You know.
Well done a lot so far you've done the.
The cost savings you started the process of turning around American girl.
Set the stage for these movies et cetera, what what's the next phase.
Is it pursuing three categories, you're not in isn't doing more Ali.
Yes.
Entertainment Media side can you just talk about kind of big things there in your mind kind of going forward.
Okay, let Joe answered the first.
Richard will answer the first question well, we'll all answer I'll start.
Anyway chime in.
Linda.
As always.
This is a highly competitive.
Category business and the industry is always launching new innovation and ideas you know as we approach the holiday season, we really do you believe in our trends are suggesting that we are well positioned across our categories in regions with a great degree of innovation driving the success so far.
Across the portfolio.
We've increased our presence on many of the holiday toy lists which drive consumer interest in retailer credibility, we've got great new products with in brands and new launches marketing campaigns and amplified digital dialogues.
Ultimately.
By our demand creation model and retail executions. Most importantly, we work really closely around the world with our retail partners, our sales organization and retailer.
Partnership is by non best in class optimizing the various different demand creation and new product levers.
To drive the business and while we obviously compete.
In a more competitive.
Industry in category, the new entrance to date.
The digital dialogue that we have in the credibility that we have going into the fourth quarter is encouraging.
So we're we're bullish as we head into the last lap here and hopefully consumers will be as excited as we are about our portfolio.
And Linda as it relates to your second question.
You know, we laid out very clear and very focused strategy.
That has two phases.
Short to midterm and mid to long term in the short to midterm priorities was to restore profitability and drive topline growth and I think it's fair to say after five consecutive quarters of improving profitability and out three consecutive quarters of driving topline growth in constant currency.
As reported.
You know things are working.
Turnaround is working and we are able to now show consistent methodical progress quarter after quarter after quarter and that remains our focus is to focus to continue to drive.
Performance across these two.
Two priorities.
At the same time as you know we are positioning the company to be able to capture value from our incredible.
Incredible.
Catalog of franchises.
I think.
That is obviously a lot of momentum there, even though it's meant to be more long term or mid to long term.
There is a lot of interest wearable to enter big.
Big projects with some of the world's most creative.
Hi, Alan.
In each of the genres, where we operate.
So it is exciting.
There's a lot going on there's a lot that going on behind the scenes. There's a lot going on that we haven't been able to share with you but.
Our focus is to remain.
Very diligent and execute to the strategy quarter after quarter after quarter.
We're not celebrating victory, we have still an important quarter ahead of us we want to dwell for the year and after that.
After the end of the fourth quarter will enter another here, but I think it's fair to say that we are now in a much much better position.
Then who were just a few quarters ago everyday that goes by improving our cash position.
As we said we are.
Going to be free cash flow positive from operations this year, and we're not far from being free cash flow positive.
Paul.
And when that happens you know this would be an important juncture.
Tomorrow the this the turnaround.
We are.
Confident about four weeks and remain focused on execution.
Thank you.
Thank you next question comes from Jamie Katz with Morningstar. Your line is now open.
Good afternoon, I want to carry a little bit out on the infant and toddler Katich Cory I know it was mentioned that there you're looking for I turned around in that business and 2020 and I was wondering if there was some insight into efforts you might be taking now.
Give us a little bit of confidence that the fact that might improve and whether there might be some benchmarks. We can sort of look forward to follow the progress. Thanks.
Sure. So look it is.
It is a tough category.
You could look at the MPD data and it certainly the biggest category out there, but it's also one of the toughest categories out there.
On Fisher price, which is the largest brand within the category.
You can see the improvement and the conversations that we've had started to form formulate in proof points. We are on track for the stabilization of Fisher price and we're really starting to see some part of it positive signs for the brand globally as I mentioned, if you exclude the recall, we actually would be up.
Single digits in in Fisher price, which which would have been a great report, but unfortunately, we obviously have had that recall, but we continue to strive.
And make some progress.
If I tell you.
There are lot indications, but what I would look at it.
His product performance, we're seeing great traction on some of the new product innovation launches that we that Lincoln malls in particular.
Off to a really strong start in the third quarter and its responded incredibly well to retail promotions in most major market.
We have a variety of other segments that we launched this year that are getting traction and as we head towards the fourth quarter, our new brand platform that we recently launched let's be kids.
In the U.S., which started at the end of September has gotten great traction to hero brand film with seven different products spots, we've gotten some really terrific retail partnership and Activations that will continue.
Around this campaign.
Terrific retail payment events happening at Wal Mart.
And certainly target and great programs at Amazon as well as well as our partnerships throughout the world you know within the infant preschool category are challenging.
Brand is Thomas which we talked about you know actively working to improve the product portfolio. One of the indications that this is we're rolling out a singular core system a play.
Which combines both push along the motorized play on a single track system. It's a lot of detail and I recognize that in the answer but truth be told we had various different track systems for Thomas and we believe ultimately actually.
Distracted the consumer from the actual system a play so we're working very hard at strengthening the product portfolio as well is continuing to build up our retail presence in merchandising and new content as he non mentioned 2020 marks Thomas' 75th anniversary. So you could look for redefining content.
New product.
And some great reveals that will share.
As time as time suggests but ultimately we believe in the category Fisher price is a leading brand within the category and and we will certainly report at the end of the year, how our products and our portfolio performed.
Thank you and then you could have any projection for where you expect owned inventory to be towards year end I know it was down sort of mid single digit.
Quarter year over year.
Do you expect that to be down similarly at yearend.
I mean right now we're looking at inventory to be Creo, possibly flat on a year over year basis, it's hard to predict exactly because as you start closing out the year you start positioning yourself for the first quarter and so we want to make sure that our retailers who have the optimal inventory they need to kick off the new year, along with the optimal inventory to close out of this.
Here is strong so it's a balancing act, but we are something that as you see over the last couple of quarters have really been focused on managing inventory not only at our own locations, but at our retail locations and feel very very good about our positioning for the bank headquartered here.
Thank you.
Thank you I final question comes from our Bank Korean Yes. Your line is now open.
Hi, Thank you.
On clean comp if you still grew about 2% in Q3, excluding sales perchlorate I'm trying to understand what was corresponding global constant currency. Pos I don't think I heard overall constant currency global Pos number apologies.
Well.
Yeah. We did we did not give that number we gave the global Pos numbers, but not anything in constant currency.
Okay.
So what I think.
Overall.
Okay, and it's Richard overall, our global Pos in the third quarter was down low single digits worldwide.
We had.
Except performance dolls high single digits as we mentioned.
Vehicles.
Mid low single digit.
Action figures were up high single digit.
Yep.
Hey by the way those are constant currency my correction here so the Pos retiring.
Yes, okay.
Right and then okay.
Oh I'm sorry.
No go ahead.
And I had a quick question right on I mean, given the potential terrorists enactment is there any change to your asset light manufacturing strategy I guess, what I'm trying to understand it does it still makes sense now to not own manufacturing in places like Mexico.
So we are taking a comprehensive look.
Without being.
You know prescriptive about.
You know about the certain actions.
We did say before that in some cases, it would make sense to retain ownership of some factories.
One obvious example is hot wheels.
For the simple fact that there is no one else in the world that can create manufacture 550 million die cast cars, a year without the level of quality and price.
So we are taking a holistic approach.
The objective is to two to have a modular flexible model that will allow us to respond to changing conditions and as I said you know it's not this is not just about.
Tariffs or about China. This is generally to be able to respond and create an agile.
Competitive dynamic.
Organization that can optimize different scenarios.
We have an excellent world class supply chain team.
Right now in place, we feel very confident about the direction, we are heading without.
In supply chain, we see supply chain not not just as an opportunity to reduce cost, but also to drive topline.
And we are hearing.
We are getting accolades from our our retail partners about the improvement in service levels and quality of performance that.
People at the event been here before me say that you know we haven't delivered in years.
So we feel that this is now becoming a competitive advantage.
You know not that's only go we used to be criticized that with too big to two bureaucratic too slow to too costly.
We believe that size and scale is an opportunity is an advantage.
And shouldn't be.
The traction and obviously, it's about the way you manage and leverage or scaling capabilities and we believe we're heading into right direction. We're not done there's more work to do but we clearly heading into right direction.
Thank you very much.
Thank you.
This concludes today's question and answer session I would now like to turn the call back over to in unconscious for any further remarks.
Thank you operator, and before we conclude the call I just want to self you a few additional words.
You know we provided today quite a lot of information for you to digest.
But when a very strong quarter.
The conclusion of the whistle blower investigation and the announcement of a CFO transition.
I want to take this opportunity to thank Joe again for his important contributions to the company and look forward to continuing to work with them during the transition period.
I also want to emphasize that entire Mattel team remains focused on our strategy is to restore profitability regain topline growth and ultimately capture the full value of our IP.
You know our improved 2019 guidance demonstrates our confidence in the business and continued momentum that we are we're driving.
We are encouraged by these you know this progress and remain focused on execution with and the creation of long term shareholder value.
And with that.
Thank you all are transferred over to Dave.
Thank you in on and thank you everyone for joining the call today.
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Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.