Q4 2019 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to Mattel's fourth quarter 2019 earnings Conference call.
This time, all participants are any listen only mode.
The speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.
I would now like to him to conference over to your host VP of Investor Relations, David Sporting coverage. Sir. Please go ahead.
Thank you operator, and good afternoon, everyone.
Joining me today are you don't cries, Mattel's, Chairman and Chief Executive Officer.
Sure Dickson Mattel's, President and Chief operating Officer, Joe You know, our hotels Chief Financial Officer.
As you know this afternoon, we reported Mattel's 2019, full year and fourth quarter financial results.
We will begin today's call with United Joe providing commentary on our results.
Then we will provide time free non Richard a Joe to take your questions.
To help guide our discussion today, we have provided you with a slide presentation.
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 free cash flow 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 like to remind you that certain statements made during the call may include forward looking statements related to the future performance of our business brands in 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 over amended 2018 annual report on form 10-K.
Our 2019 quarterly reports on form 10-Q.
Our earnings release and the presentation accompanying this call.
In other filings, we make with the FCC from time to time as well as in or other public statements.
I would tell 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 even on.
Thank you everyone for joining mattel's fourth quarter and full year 2019 earnings call.
Our results reflect significant improvement across the business as we continued to make consistent meaningful progress on our strategy to transform a tail into an IP driven high performing play company.
We remain focused on execution.
And I went on a way to achieve our goals to restore profitability and regained topline growth in the short to midterm and are on track to capture the full value of our IP in the mid to long term.
Mattel exceeded its 2019 guidance significantly improving profitability and stabilizing the topline a major accomplishment after five years of revenue decline.
Key highlights of the 2009 P. in full year financial performance compared to last year include the following.
Gross sales were flat as reported including a negative $92 million foreign exchange impact and up 2% in constant currency.
Adjusted gross margin was 44.9% of 400, an 80 basis points improvement.
Adjusted SGN, a was reduced by $86 million.
Adjusted EBITDA was $453 million, an increase of $253 million for 126%.
Adjusted you P.S. improved by 85 cents.
Operating cash flow was how did the $91 million an improvement over 200, an $8 million.
And we achieved positive free cash flow for the first time in three years, an improvement over $244 million.
In addition to the strong financial performance, we made significant progress in reshaping our operations and strengthening the balance sheet.
We successfully completed destruction simplification program and reached $875 million of run rate savings exiting the year exceeding our savings target by $225 million.
As part of the capital Light program in 2019, we closed three owned plants in Mexico, China and Indonesia.
And we recently announced the closure of our manufacturing operations in Canada by the end of 2020.
In addition, we refinanced our next to that maturities, improving our near to medium term liquidity and giving us additional financing flexibility.
Looking at full year gross sales in constant currency.
We grew in five of the six categories, where we operate.
These include dogs in vehicles, where we are a global leader as one of this action figures building sets in games, where we are a challenger.
And while our infant toddler and preschool category was down we stabilize the largest component of the category Fisher price score.
We also performed well in the fourth quarter and grew in four of the six categories.
As expected gross sales were down 3% as reported including a negative $12 million foreign exchange impact and down 2% in constant currency.
From the perspective about three operating segments, we increased full year gross sales in constant currency in both North America and international while the American Girl segment declined as expected.
The latest marketshare data demonstrates mattel's strong topline performance across the breadth of our categories and operating segments.
According to NPD, but that remains the number one global public company in 2019.
We outperformed the industry and increased global market share in the all important fourth quarter.
This speaks to the power of our brand portfolio product innovation and global commercial execution.
Moving to 2019 category performance.
Don sales declined 5% in the fourth quarter, but ended the full year up 2%.
The fourth quarter decline was primarily driven by American girl.
Bobby continued to demonstrate its resonance with consumers and its competitive edge and grew 3% in the quarter, making it the ninth consecutive quarter of growth.
For the year Barbie sales grew 9% to $1.2 billion, achieving the highest fully agree ourselves in the last six years.
Barbie continues to perform very well with almost all product lines showing growth versus last quarter and last year.
As expected American girl decline in the quarter end the year, albeit at lower rates than in 2018.
We continued to execute them the key pillars of the brand transformation strategy, which includes.
Evolving American girls web site into a digital flagship.
Creating unique and ownable retail experiences at the flagship retail locations.
Developing a more robust product line architecture.
And implementing a revised content strategy.
Well look forward to sharing more detail on the American Girl strategy next week in New York at Toy Fair.
The infant toddler and preschool category was down 9% in the quarter and 10% for the year, primarily due to the decline of Fisher price friends.
Fisher price and Thomas in France was down 3% in the quarter and for the full year, a significant improvement from last year's 13% decline.
We saw continued improvement and civilization Fisher price score, which was flat in the quarter versus a decline of 12% in the same period last year.
And was down less than one person for the year versus a decline of 10% in 2018.
In North America Fisher price core grew by 2% in the fourth quarter and was flat for the year.
We achieved this positive momentum thanks to the success of new innovative product lines and key marketing initiatives such as the let's be kids brand campaign that has been very well received.
As expected Thomas in France continued to be challenged.
The brand celebrates its 75th anniversary this year and we strongly believe in this multi generational franchise and its value as a global IP.
We are actively working to simplify the product range as we step up the turnaround initiatives.
The vehicles category continued to grow and was up 1% in the corner and 6% for the year.
Global sales were driven by another record year for hot wheels, which eclipsed its prior all time high in 2018, when we celebrated the Fiftyth anniversary.
Hearth when sales were up 8% in the corner and 14% for the year.
Growth was driven by multiple product lines, including basic cars in our new Monster truck line, which had a strong inaugural launch here.
Matchbox also grew in the quarter and theater as we continue to build out the vehicles portfolio.
It's worth noting that Matchbox was recently inducted into the National Toy Hall of Fame.
Overall vehicles category growth was partially offset by the expected declines of this these cars and Universal Jurassic World vehicles post the movie launches.
Action figures building sets and games are challenger categories, together grew 10% in the quarter and an impressive 15% for the year.
Each of the three categories finished up double digits for the year.
Action figures did very well driven by toy story four.
Mattel's innovative product line in partnership with Disney Pixar led toy story to finish the year as the number two industry growth property in 2019 per NPD.
The Jurassic World line went down in the non movie year continues to perform and is establishing itself as the year round evergreen dinosaur line in the toy.
Bidding sets delivered another strong quarter and growth year.
The Mega turnaround plan is working with a combination of product innovation competitive pricing and expansion of global retail distribution.
Games continued its strong growth with sales up double digits, both for the quarter and for the full year.
2019 marked the fifth consecutive year of worldwide growth and the sixth consecutive year of growth in North America.
Globally, who know finished the year as the number one card game property and the number one growth card game property per NPD.
The only mobile App has more than 85 million downloads since it launched a year ago and over 1 million daily players.
Beyond the financial performance, we are proud that our product innovation has been recognized by the industry.
Bobby was named marketer of the year by AD age incredible World was named as one of time magazine's best inventions of 2019.
We also received 12 prestigious tours of the year Award nominations from the Tory Association.
This marks the highest number of nominations for the company ever.
And demonstrates that Mattel continues to lead the industry in pushing the boundaries with compelling toys and experiences that would bring to the market.
Moving to operating segment performance.
We delivered strong results in both North America, and international with growth in every region compared to 2018.
Well North America declined 1% in the fourth quarter.
Grew 1% for the full year and international was flat in the fourth quarter and grew 6% for the full year.
North America performed well, considering the competitive landscape, especially in the holiday season.
According to NPD Mattel gain market share overall and online in the fourth quarter and remains the number one public company in the U.S. for 26 consecutive years.
EMEA, our largest international region continued to perform exceptionally well and outpaced the industry.
Well European retail in general continues to face challenges, our sales increased 2% in the quarter, an 8% for the full year.
According to NPD Mattel gained share in Europe in both the fourth quarter and the full year.
Latin America sales were off slightly for the quarter down, 1% and up 5% for the year.
We gained share and maintain our number one leadership position for the fourth consecutive year. According to NPD.
Asia Pacific was down 1% in the corner and up 3% for the year.
We continue to make progress in China and across the region.
We are seeing promising momentum in Australia, one of our key Asia Pacific markets, where we gained market share for the full year. According to NPD.
As part of how we think about the future we have been designing and restructuring an organization that is flexible dynamic and better able to respond to changing market conditions and exogenous factors that affect Mattel as one of the industry as a whole.
With that in mind. In addition to the strong commercial performance in 2019, we have continued to make significant progress in reshaping and upgrading our operations.
The structural simplification program has been a resounding success significantly outperforming our original targets.
What we formally conclude that the program at the end of 2019, its benefits will have a lasting impact on our business.
Taking a look at what we achieved in less than two years.
We delivered over $875 million in run rate savings.
$225 million or 35% more than our original target.
We reduced non manufacturing workforce by 29%.
We cut capital expenditures by more than 60% from $297 million to a harder than $16 million, which is our lowest level of capex in more than nine years.
What we still made strategic investments of more than $150 million in the period.
We may transformative improvements in our supply chain, including the implementation of an automated online ordering system optimizing minimum order quantities and using new predictive algorithms to improve demand and supply forecasting.
We have also made progress towards reducing complexity in the system and eliminating unproductive SK use.
We expect is 30% sq reduction by the end of the year.
As a result over the two years structural simplification period, adjusted gross margin improved seven had within 10 basis points to 44.9%.
Adjusted operating income improved by $359 million.
Adjusted EBITDA increased by $327 million.
Adjusted EPS improved by 90 cents.
Cash flow from operations improved by $289 million.
And free cash flow improved by $389 million.
We also continue to make strong progress in 2019, when our mid to long term strategy to capture the full value of our IP.
During the year, we announced five additional theatrical films and now have a total of eight movies in development in partnership with major studios highly regarded talent and leading industry players.
These are Barbie and hot wheels, with Warner Brothers view Master and American girl with MGM.
Magic eight ball with blood House, Barney with 59% in about a Parisa pictures major map Mason with Paramount, Tom Hanks and that give a gottesman.
Masters of the universe with Sony and an additional partner as part of a new structure, we will share more details in the coming weeks.
In the fourth quarter, we announced a second animated adventure series with Netflix he men and the masses of the universe.
This is in addition to the previously announced series masses of the universe revelation.
And today, we're happy to announce the Thomas in France children series would be available on Netflix in the United States starting this March.
In the coming quarters, we expect to announce additional film and television projects in line with our strategy.
We also recognize our responsibility to be a global corporate citizen and positive environmental store, it which is a priority for the entire organization.
Last spring, we established an environmental sustainability council dedicated to actively advancing our sustainability efforts in several areas, including materials innovation.
He may 2019, we announced a new sustainability goal to achieve 100% recycled recyclable.
Biobase plastics materials in both product and packaging by 2030.
We are already making progress towards this goal.
We recently announced two lines of Mattel's iconic products Fisher price rocket stack in three preschool building sets by Mega blocks automate from sugarcane based plastics and package in 100% recycled or sustainably sourced material.
Expect more to come in this area.
In closing.
While we continued to make strong progress in restoring profitability.
This was also an important here in terms of sales performance.
We managed to deliver a topline momentum.
Within our global leadership position for the full year and increase our market share in the all important fourth quarter.
We have achieved this with a 29% smaller workforce, while reducing capital expenditures by more than 60% compared to where we were less than two years ago.
This is a major accomplishment.
And speaks to our renewed operational excellence the quality of our assets in the resilience of the organization.
Before I turn the call over to Joe I would like to briefly comment on the Corona virus.
As you are aware the situation remains fluid and were monitoring any developments closely.
Our thoughts are we those affected and were taking all necessary actions to protect the health and safety of our team around the world.
With that Joe will now cover the financials in more detail and provide guidance for 2020.
Thank you and done and good afternoon, everyone I would like to provide more detail on the fourth quarter results and summarize the full year performance before moving onto our 2020 full year guidance.
As Nance said, we did very well in 2019 and exceeded our guidance significantly improving profitability and stabilizing the topline.
We performed well in the fourth quarter and grew market share in this highly competitive period.
For the year gross sales were flat as reported and up 2% in constant currency and is expected gross sales for the quarter were down 3% as reported and down 2% in constant currency.
Turning to Pos excluding T R U for both the quarter in full year total Mattel worldwide Pos was flat.
To give you a little more color on Pos for our power brands I'd like to share the following highlights.
Barbie Global Pos was up high single digits in the quarter and double digits for the year.
In North America, Barbie, Pos was up low single digits in the quarter and up high single digits for the year.
Meanwhile, internationally Barbie Pos was up double digits in the quarter and up double digits for the year.
This mark the 15th consecutive quarter of international Pos growth for Barbie.
Hi wheels, Global Pos was up double digits in the quarter and up high single digits in the year.
In North America Hot wheels, Pos was up double digits in the quarter and up mid single digits for the year.
Internationally, how wills Pos was up double digits in the quarter and up double digits for the year. This marks more than 15 consecutive quarters of international Pos growth for hot wheels.
Fisher price core global Pos was flat in the quarter and down high single digits for the year in North America Fisher price core Pos was up low single digits in the quarter and down high single digits for the year.
We are encouraged by the improved performance in the fourth quarter compared to the first three quarters.
And internationally Fisher price core Pos was down low single digits in the quarter and down mid single digits for the year.
Moving on to retail inventory compared to the prior year retail inventories were higher.
We expect this could have up to a mid single digit impact to our first quarter sales.
We believe that this inventory consist of healthy carry forward product.
The expected impact to the first quarter sales has been reflected in our full year revenue guidance that we will talk about shortly.
Fourth quarter reported gross margin was 48.4% of net sales an increase of 180 basis points versus the prior year.
Adjusted gross margin was 48.9% of net sales an increase of 230 basis points versus the prior year.
For the full year reported gross margin was 44%.
An increase of 420 basis points versus the prior year.
Adjusted gross margin was 44.9% an increase of 480 basis points versus the prior year.
These significant improvements in reported and adjusted gross margin for the quarter and full year are directly attributable to structural simplification and accelerated savings from capital light, partially offset by product cost inflation.
Moving on to advertising.
First quarter advertising expenses totaled $227 million or 15.4% of net sales. This compares to 13.5% in the year ago period.
The year over year increase was due to strategic advertising investments in the quarter as we discussed on the third quarter call.
For the full year advertising expenses were $552 million or 12.2% of net sales in line with our guidance.
Reported as she named for the quarter was $418 million, an increase of $20 million versus the prior year. The increase was primarily driven by $26 million asset impairment charge and higher married expenses, partially offset by structural simplification savings.
The asset impairment was a noncash charge related to the continue declining performance of our American girl retail stores, albeit at a slower rate of decline.
We also incurred an additional $3 million of expenses associated with the inclined sleeper product recalls in the quarter.
For the year, we incurred $10 million of recall related expenses in SGN, a at a total of $38 million across the piano before taking into consideration the $30 million to $35 million of revenue reduction.
Adjusted as she need for the quarter was $384 million, a decrease of $9 million versus the year ago period structural simplification savings were partially offset by higher merit and other in period expenses.
For the year reported SGN, a was $1.4 billion $119 million decrease versus the prior year.
The decrease was driven by structural simplification savings lower severance and restructuring expenses and the absence of the 2018 T. R U liquidation.
These were partially offset by higher incentive and merit expenses asset impairment charges and recall related expenses.
Adjusted as she needs for the year was $1.3 billion, a decrease of $86 million versus the prior year.
Similar to the fourth quarter structural simplification savings and the absence of the 2018 TR you liquidation were partially offset by higher incentive and merit expenses and other in period expenses.
For the quarter reported operating income was $68 million, a decrease of $38 million versus the prior year.
This decrease was due to lower sales and higher advertising and as she any expenses, partially offset by gross margin improvements.
Adjusted operating income for the quarter was $109 million, a decrease of $2 million versus the prior year due to lower sales and higher advertising expenses, partially offset by gross margin improvements and lower as Genie expenses.
And for the full year reported operating income improved by $274 million to $39 million compared to last year's reported operating loss of $234 million.
Adjusted operating income for the full year improved by $269 million to $156 million compared to last years, adjusted operating loss of $113 million.
For the year the increases in reported and adjusted operating income were primarily driven by higher gross margin and lower SGN, a expenses, partially offset by higher advertising expenses.
For the quarter.
Adjusted EBITDA was $185 million.
Flat to the prior year.
Structural simplification and capital light savings were offset by higher strategic investments lower sales product cost inflation and other as Genie expenses.
For the full year adjusted EBITDA was $453 million, a significant improvement more than doubling last years, adjusted EBITDA of $200 million structural simplification encapsulate savings and the absence of the 2018 T. R. U liquidation were partially offset by product costs.
Deflation strategic investments higher incentive compensation and merit expenses.
Moving to taxes last year, we discussed the challenge in estimating our full year tax expense given the changes in the U.S. and global tax laws and the impact of valuation allowances, primarily against us deferred tax assets.
In 2019, we benefited from favorable discrete one time tax items, including the release of foreign valuation allowances and the reassessment of certain tax liabilities. As a result, our 2019 tax provision was much lower than anticipated with $9 million booked in the quarter.
And $55 million booked for the year.
Please note that going forward, our overall effective tax rate may vary significantly from quarter to quarter due to the level and mix of income or losses in our foreign jurisdictions and due to the full valuation allowance on our U.S. deferred tax assets.
In terms of cash flow and balance sheet as Anand said the main highlight for the year is that we achieved positive free cash flow for the first time since 2016, improving by $244 million versus the prior year.
Operating cash flow also ended the year positive, finishing at $181 million or an improvement of $208 million.
Additionally, net accounts receivable held steady at 57 days sales outstanding which is flat versus last year.
Owned inventory continued to decrease down $47 million versus the prior year, we continue to work to optimize inventory levels with our retail partners.
And capital expenditures, which totaled $116 million for the year decreased 24% compared to $152 million last year, primarily as a result of reduced tooling cost.
These savings were achieved while still investing in the business.
We ended the quarter with no short term borrowings under our ABL credit facility and finally, our previously announced refinancing of our two debt maturities and the extension of our E. B L maturity date significantly improved our near term liquidity, giving us additional financial flexibility going forward.
Our next debt maturity is now not until 2023.
The primary reason for a significant improvement in profitability has been the success of our structural simplification program.
And while we have concluded the program, we will continue to make progress in reshaping our operations and benefit from the run rate savings realized to date and going forward.
For the year, we realize $366 million of penal savings with $333 million of that reflected in our adjusted EBITDA.
Over the two year program, we delivered $875 million in run rate savings $225 million more than our original goal.
$21 million more than the $854 million of run rate savings, we reported on our third quarter call.
In 2019, we accelerated the execution of a portion of the capital light program and realize $15 million the savings in the 2019 PNM.
We will continue to share key developments as they are executed.
Subject to competitive and confidentiality considerations.
In the fourth quarter, we continued to make strategic investments to grow the business and approve future profitability.
For the full year, we invested $88 million of which $63 million or 73% impacted operating expenses with the remainder as capex.
Investments in the quarter were primarily related to advertising investments and IP transformation initiatives.
Over the two year program, we invested $151 million out of a target of $170 million on strategic investments.
This was approximately split 35% on IP investments, 15% on digital advertising, 15% on local business investments and the remaining 35% on other investments such as product innovation and content development.
Closing out my 2019 remarks, it is clear that we've made substantial progress across all key financial metrics and we expect this momentum to continue into 2020.
Before we move on to 2020 guidance given the dynamic circumstances of the Corona virus. Please note that the guidance, we're going to share with you today excludes any potential impact of the Corona virus on our results.
Now turning to our 2020 guidance for the full year, we expect gross sales as reported to grow 1% to 2.5%, including a minor foreign exchange impact.
Margins to expand as we continue to reshape our operations and benefit from our structural simplification and capital light programs.
Adjusted EBITDA to grow to an expected range of $575 million to $600 million.
And operating and free cash flow to continue to grow along with our cash balance.
Let me provide some more detail on our 2020 guidance assumptions.
The 1% to 2.5% sales increase is driven primarily by mid single digit growth in our own brands, partially offset by declines in license brands.
At a higher level our category assumptions in constant currency are as follows.
We expect continued growth in the Dallas category, driven primarily by Barbie as the brand continues to innovate and build momentum globally coming off the sixtyth anniversary.
We are planning to expand the rest of our doll portfolio with a number of new offerings throughout the year.
The growth in the category is forecasted to be partially offset by American girl. We are looking to reduce the rate of revenue declined at American girl in 2020, as we continue to turn the business around.
We expect continued growth in the vehicles category.
Driven primarily by hot wheels momentum as well as Matchbox, which should benefit from this year's Topcon Maverick die cast license.
The growth in the category is projected to be partially offset by declines in entertainment licenses.
We expect the infant toddler and preschool category to be down slightly versus the prior year.
Fisher price in Thomason friends is forecasted to be up driven by growth in Fisher price core the largest component of the entire category.
This is expected to be partially offset by a smaller decline in Thomas.
Fisher price friends is planned to continue to decline as we choose to exit underperforming licenses within the portfolio.
And we expect our combined action figures building sets in games categories to be down slightly.
We anticipate action figures to be down as a result of toy story four moving further away from its theatrical release and the end of our DC action figure license offset partially by growth from minions and Minecraft.
We expect to see solid growth in building sets as we continue to refine and innovate the line architecture optimized pricing and continue to expand our global retail distribution.
Games is forecasted to be up as we innovate and introduce new games and continue to leverage our existing portfolio.
And finally, we will be launching our push business within this challenger category with licenses for minions, Disney Pixar and Star Wars, including the much anticipated baby Yoda.
Turning to the rest of the piano sales adjustments are forecast to be in line with the prior year on a percentage basis.
We expect adjusted gross margin for the full year to be 150 to 200 basis points higher than the full year 2019.
This improvement will be driven primarily by realization of the remaining run rate savings from our structural simplification program and incremental savings from our capital light program as well as a reduction of royalty expenses. These benefits will be partially offset by product cost inflation of about 100 basis points and the negative impact.
The foreign exchange.
Advertising expenses are expected to be flat as a percentage of net sales versus the prior year and within our normalized range of 11% to 13%.
Adjusted EPS Gionee is projected to be lower year over year by approximately $30 million to $50 million.
The primary drivers of the year over year improvement are the realization of the remaining run rate savings from our structural simplification program as well as lower planned incentive compensation as we reset our operational performance targets for 2020.
These favorable impacts will be partially offset by annual merit and benefit increases along with general inflation.
With expected revenue growth margin expansion and lower SGN a expenses, we forecast adjusted operating income for the full year to significantly improve versus the prior year.
Looking below operating income, we expect interest expense to be relatively flat to 2019.
Tax expense for the year is expected to be approximately $75 million to $100 million, reflecting better operational performance and assuming no discrete tax items compared to 2019.
In order to help build your as reported models, let me provide the following information.
Depreciation and amortization is expected to decrease as a result of our structural simplification and capital light efforts over the past few years.
Share based compensation is also expected to decrease to approximately $50 million.
Severance and restructuring expenses are planned to be roughly flat at $60 million as we continue to reshape our operations.
Costs related to our 2019 inkling sleeper product recalls will be included in adjustments between EBITDA and adjusted EBITDA, which is consistent with last year.
In summary, we expect our adjusted EBITDA to increase from $453 million in 2019 to a range of $575 million to $600 million in 2020.
The primary drivers are the realization of $92 million of carryover structural simplification savings from 2019.
Proximally $50 million of capital light savings.
As well as revenue growth and lower incentive expenses.
Partially offset by inflation increases.
Merit expenses and the negative impact of foreign exchange.
This marks a significant increase over 2019 had another indication of our commitment to restore profitability.
Turning to the balance sheet and cash flows capital expenditures are forecasted to be up year over year.
We expect net working capital to be roughly flat compared to 2019.
And we expect operating cash flows to continue to improve and we project a second consecutive year of positive free cash flow.
Increasing cash generation will improve our financial standing.
Including strengthening the balance sheet, improving our leverage ratios and giving us additional financial flexibility.
You should consider the following factors that will impact quarterly phasing of expenses, but will not impact full year guidance.
Starting with advertising expenses as a result of a system implementation to track advertising at a greater level of detail during the interim periods, we have improved visibility into the anticipated timing of advertising expense.
As a result, we expect to see a moderate shift in advertising expense to the second half of the year from the first half of the here.
Incentive compensation is planned to be lower in 2020.
As we have in prior years, we will continue to adjust the incentive accrual each quarter based on our expected performance for the full year.
Given our more consistent results in the past few years. This may result in a higher accrual during the first two quarters. As a result, we expect to see an increase in SG nay of approximately $15 million to $20 million in the first and second quarter. Two did this change, but lower overall for the full year.
Additionally, you should consider the following factors that will impact the quarterly phasing of our 1% to 2.5% full year revenue growth.
As I mentioned before the increase in our retail inventories could have up to a mid single digit impact to our first quarter sales, but the full year impact has already been reflected in our full year revenue guidance.
We also have a leader theatrical release date for the minions movie compared to last year's Toy story, four which is expected to decline post its theatrical release year.
I want to reiterate that the guidance, we just provided excludes any potential business impact of the Corona virus.
With that said here's what we currently no.
While consumer sales in China are currently being impacted given that are in country revenues represented only 2% of total Mattel revenues in 2019, the potential impact of loss, China consumer sales on the company should be limited.
As it relates to our supply chain, while none of our manufacturing is located in the woo Jeon province, the ability of the manufacturing workforce to return to work after the lunar new year holiday is being impacted by government guidelines.
Mattel's factories and those of our third party vendors, who originally scheduled to resume production on February Threerd. Currently manufacturers are being advised to not resumed production until February 17th.
At this point in time, we do expect production delays in Q1, which may impact first quarter results, but remember that historically Q1 is a seasonally small quarter for both production and revenue.
We haven't place a global team that is actively working on contingency plans to mitigate the potential impact to our supply chain customers and employees, we're taking steps to minimize this disruption, including resourcing priority skews balancing owned inventory across geographies and optimize.
I think transportation.
The full magnitude of the impact of the CRO to virus on our full year results will be primarily determined by the duration of the outbreak.
We will continue to assess this fluid situation and update you as appropriate.
In closing in 2019, how methodical execution of our strategy to restore profitability generated significant improvements across key metrics, including margins operating income EBITDA and cash flows.
Our 2020 guidance reflects a continuation of these improvements we are extremely pleased with our results to date and are very proud of the efforts made by the Mattel team.
With that I'll turn it back over to another.
Thank you Joe.
In conclusion.
2019 was an important inflection point in our 10 around.
We stabilize our topline after five consecutive years of revenue decline.
Continued to significantly improve profitability and achieved positive free cash, though for the first time in three years.
We are very encouraged by the consistent progress the company's making and expect to continue to build on this momentum.
We remain focused on the execution of our multiyear tenor on strategy to transform it into an IP driven high performing poorly company and create long term shareholder value.
I look forward to seeing many of you next week at New York Toy Fair and sharing additional details on our strategic roadmap going forward.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound.
Hi, good enough star one on your telephone to ask a question. Please standby, while we compile the culinary roster.
First question comes from a lot Michael.
Second question. Please.
Great. Thank you very much for the question I just have to the first is on the $50 million of capital light savings for 2020.
Just to account for the factories that you guys have closed this year, including the Canadian factory or or do you expect more to come and then second just as a bigger picture question.
Where do you see or.
Mid to long term EBIT margins.
Going over the next few years. Thank you.
Yes.
Sure in regards to your first question on the factories in the 50 million includes the three factories, we've already shut down there's partial state savings from Canada, but the full savings won't happen until 2021, when it's fully shut down.
And then on the next one in regards to margins you see the improvement we made for you know in 2019 getting to know basically 45% and talking to you about another 150 to 200 basis points improvement.
Going into 2020, we are on that that trend to try to get it up to the high fortys as much as we can so we've said that consistently and I think you seem to progress today.
Great. Thank you Joe.
And Mike and I would add that we said before this we're looking to restore historical performance levels for the company, we haven't put the timeline on it but this is the direction we heading towards.
Great. Thanks.
Yes.
Thank you very next question comes from drew Crum of Stifel. Your line is open.
Okay. Thanks, guys good afternoon.
Commentary on retail inventory I need brands or regions, you can speak to where you are seeing elevated level.
Then separately, you're making progress with operating cash flow and projecting further improvement for 2020.
Can you remind us or discuss what the priorities for use of cash are going forward.
Yeah.
Yes sure in regards to the retail inventories were very comfortable with our retail inventory position you know given our Pos there's really not any.
We've been we have squeeze such great partnerships with our retailers that we have all good inventory out there so that really anyone pocket.
In regards to your second question was in regards to investments uses of cash yeah. Our uses of cash I mean look the big things is we have continued to invest back into the business you know full automation or not as mentioned what we've done in supply chain. We talk to you about what we've done for our designers.
Global procure to pay things like that.
In addition, this second thing is we want to continue to try to Delever the company and try to get back to investment grade. So I think those would be our two primary uses of cash and short term.
Yes.
Yes.
Yeah.
Yes.
Yes.
Thanks Drew next question.
Next question comes from Tammy Korea.
Hey, P. Morgan your line is open.
Hi, Thanks for taking my questions. So my first question is not bigger picture.
Could you share your thoughts on the outlook of the U.S. toy industry and.
Do you think between that she can grow in tiny tiny falling.
A couple of.
Decline and then my second question.
Really the appeal as.
Could you provide some color on Pos trends.
That you're seeing quarter to date maybe.
Some of your major brands like Bobby in Hot wheels.
Yes.
Yes, Hi, Tommy this is a first call so welcome.
Yes so.
Our our view on.
On the industry is does the fundamentals look going forward remain very solid.
Dangerous the industrial was down in 2019.
There are few specific factors that impacted the year.
The first one happened in the first half where we comp.
The 2018 towards a roster liquidation.
That drove the first couple of 19 down 6%.
The third quarter was up.
Driven primarily by toy story, our own toy story.
Some other how properties fourth quarter was down.
Was down 3%.
And the reason for that we believe was driven primarily by the shorter holiday season.
As a smaller number of new no big launches so.
This is really what impacted 2019.
If you look at some of the research out there and to be fair it's not.
As of June or July of last year. So it's not completely current but you reminder, put out pretty comprehensive.
Studied that we refer to the looked at 32 countries that make about 80% of the global industry they've done in store checks enriching analyses to talk to move to retailers to consumers the look of macroeconomic data.
They have insights from.
Various guns constituencies and they say they think that the industry will continue to grow.
4.6%.
Okay got for the next five years, they did not obviously a factor the Corona virus. So you got to put on our streets on that but fundamentally.
You know we believed the industry is in a solid position and we expect it to continue to continue to to grow.
Yes.
Got it thank you.
They tell me this is Richard again welcome to the call I'll pick up the POS question that you had.
Overall, we outperformed the industry and increased global market share in the fourth quarter. We really were very pleased overall in our portfolio with Pos there were some real stars of course, Barbie really had a fantastic year in Pos.
As well as hot wheels. These are two of our key brands that have had consistent momentum, but across the board were feeling consumer take away very strong very confident in our lineup of 2020.
Certainly our performance in 19, so we look forward to sharing a lot more detail with you strategically and in the gallery will you'll really see the products.
Coming out for 2020, we can answer more questions there specifically.
Got it thank you so much.
Thank you. Our next question comes from arching.
Carried out could you be yes. Your line is open.
Thanks, very much I have two other quick one could you help me understand why inventory at retail up if shipments were down in Q4 persist Pos that was flat then I've quick follow up.
Sure. So look first and foremost you know our sales were in Q4 as expected as we talk to you about on a third quarter call and if you go back to announce remarks. He discussed with the fact that we've made tremendous amount of investments and our supply chain, which leads to better forecasting that better forecasting accuracy has led to.
Our inventory declines and given the partnerships that we have with our retailers.
On joint business plans, we believe the inventory levels at retail already at the right level given the Pos that we have today.
Okay. That's actually takes me to my follow up which I think with us, but I'm going to try to ask it again.
He additional color you could provide on Pos so far into the quarter and I'm also particularly interested in sort of how youre going to potentially navigate what could be a supply chain disruption in terms of Easter volumes.
Whether that product is already at your warehouses.
How are you can navigate that point looking to.
Early.
With that obviously to ship.
Correct.
Right. So so look we haven't really given any guidance in regards to how january's joint et cetera.
20 farewell talked about strategically, but look we've had great performance.
Exiting 2019, and we believe 2020 is going to be a good year in regards to disruption.
With the Corona virus I mean look it's still you know we have to its a wait and see you know the 17th the beginning of next week, we can see a production starts if it doesn't then we have or looking for alternative plans. We just have to give you an update that once we have more information.
Okay. Okay.
And then at a very very quick follow up I, just want to kill it little bit closer at the top line guidance I think toy story is obviously tougher comps by my calculation at least about two points of headwind year over year, and then you're obviously guiding Fisher price will continue to decline, but declined last for the year doesn't that mean that you need better than 2% to 3% increase.
Dolphin vehicle combined to get to around one or 2% growth for the here I guess could you dissect the little bit that that Matt. Thanks.
Well look I think you're trying to get to the unbundling of it but remember the owned brands that we have we gave we gave you the guidance that there'd be up mid single digits and what that means is what you pointed out which is on the license properties. So those are the ones that are creating the negative impact a great example would be Fisher price friends. You know, we've said that we've been.
Visiting some of those nonperforming licenses. So it's things like that that's creates the negative drag, but when you look at the owned brands, they're delivering solid mid single digit growth and this is a really important point that our own brands that are expected to performed well in a mid single digit growth.
Our own brand is very good foundation, and we're very happy with that to get started.
And I would refer you open it to slide 28.
The deck, we broke out in pretty good detail the various components of the gross sales drivers.
And.
You know we believe we are set well to do to achieve this in 2020.
Thank you Pam I can see all the trade there. Thanks.
Thank you.
Thank you. Our next question comes from Tim Condor Wells Fargo Securities. Your question. Please.
Thank you and the gentleman. Thank you for the more detailed guidance I think everyone appreciates that and and looking forward to the 21st and maybe a little bit more color on a three year or so type of outlook. If you would.
From that perspective, I want to focus on the capital light.
I know again, they're sensitivities and negotiating things with within governments and a lot a lot of things from that perspective.
Political political things and considerations, but.
How should we look toward think about where your end game is here in the press release with the with Mega you talked about that some areas and new if you alluded to this before maybe in die cast that it makes sense to keep it can you kind of maybe bucket a little bit more what you're maybe thinking about keeping and maybe the.
Potential where you see additional EBIT das savings, what that a range or something on that number could be from capital light.
And then I have one of the follow up.
Yeah, Hi, Tim.
You know as we said we are making a transformative changes.
In our supply chain. The the concept is to be able to simplify modernize and design I'm more progressive more flexible more adaptive more mobile.
Infrastructure that will allow us to optimize.
Market conditions and our own requirements.
We do have a plan we're executing towards the plan as you noted we haven't disclosed the plan for different reasons, but you can see that the we're tracking tracking well at this point, we have closed or consolidated for four plants.
And more is coming and with that we also said that some in some cases.
Without.
Being dramatic about things, we take a view and in certain situations, we will retain certain capabilities that our unique such as the.
Hotwheels factory as one example.
We're not going to be able to share more more detail, but you can rest assured that we are making progress you will see more savings more benefits.
Coming through.
$50 million already expected based on the actions, we already announced in 2020 and there would be more benefits that will come come our way.
And you have to bear with us and.
See the progress in you know.
In the making.
Okay. Okay.
And then maybe back to some of the previous questions on on the on the build for 20, specifically and dolls owned.
Whoever wants to take this maybe Richard I don't know Barbie Barbie. How are you what are you planning with Barbie to go against obviously, a great run the Barbies had here and then course frozen I think we'll have a pretty good year in 20, given that you know, it's only kind of came out in Q4, but just any color around that gentlemen.
It would be helpful. I think for most people.
Tim. Thank you for asking that question, we are incredibly proud of the work that we've done on Barbie.
As you know this is now going to be our ninth consecutive quarter of year over year growth and in fact, it's the highest sales number that we've had in six years. So we are confident in the foundational programs that we've built for Barbie and are continuing to grow upon strength. This year was terrific year for Barbie and as you.
Well no. It was one of the most competitive Dol years out there.
Certainly entertainment driven and as usual highly competitive with new Dol entries and certainly the customers voted on Barbie most of our segments performed exceptionally well.
Actually the diversity in inclusivity from Fashionistas continues to be an incredibly important pop culture conversation, it's not only generating a lot of purpose, but profit we're incredibly proud of the career segment aspiring girls to be anything they want to be.
And the innovation that we've proven that we can do with Barbie not only from a marketing perspective, but from a product perspective is really being highlighted now we introduced a new blockbuster item called color reveal and its continuing to generate the incredible excitement. So we've got great Buzz and great momentum going into 2020, the right way.
I'm really excited to show everybody, what we're doing toy fair I hope, you'll all be there because will expose all of our exciting product and strategic narratives.
Okay, and then and then just a little derivative I apologize bts.
Any any comment on how that did in 2019 for where the company.
Yes, you know Bts was an exciting launch for us it actually performed well in the context of our expectations. If anything. It also proved the speed and nimble reaction that we can have as an organization going after the right pop culture narratives speed to market with incredibly.
Exciting looking dolls, we are continuing with Bts, there's lots of other news that will come down the pike.
But we were pleased with Bts and our overall portfolio performance.
As we move away from some of the year over year comp issues 2020 is poised for meaningful growth and a great new innovative product pipeline that you'll see in toy fair.
Okay again, congrats gentlemen, Sienna see you next week.
Thank you then.
Thank you. Our next question comes from Gary Johnson of BMO capital markets. Your line is open.
Thank you good afternoon, everyone.
Product questions I guess for Richard here.
First a couple Collamore riskier launches were hot wheels, IDN Creatable world comment on how those performed.
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Sure.
You are very quick to have cash available for pre sell into the shot the dot com and I wasn't aware you had a star wars push license you can talk about you talked about how you are executed on that product line.
Yes.
Sure Gary first let me just take a victory lap here on Hot wheels. You know this brand is continuing to perform 2019 was the biggest hotwheels year. However, it's the sixth consecutive year Pos growth.
Both in the us.
And globally. Yeah. This is a story of complete innovation, both from a marketing and demand creation perspective, as well as product and the digital demand creation evolution that we've had moving more to linear and from linear to digital has proven incredibly successful we've done experience your marketing with us.
Wheels Legends tour, introducing monster trucks as a new segment with a live experience will show and a variety of other really exciting narratives.
For hot wheels that has proven incredibly successful some of the great new product that we introduced a 19 like hot wheels, Mario Kart Toy line was the biggest new license launched since Star Wars in 2015, we're going to continue to surprise consumers and all of you with the product that we have lined up that you'll see as we move into choice.
Fair for 2020, so lots of really great momentum.
To build upon for hot wheels.
Moving to Creatable World, which as you know was a really another very big milestone moment for the company again kind of proving our leadership in the doll category. We got over 2.3 billion impressions with the narrative of Creatable world and over 90% of that was positive.
We felt really good about the leadership say leadership statement that we made with Creatable world and it had pockets of exceeding expectations in some cases in meeting expectations in others, we're continuing to refine and define this new and exciting play pattern and segment and you'll hear a lot more about that as well as we get to choice.
Sure.
Last but certainly not least is the child, which of course, we call baby Yoda.
Really thrilling moment for Mattel could be first in the marketplace with this incredibly innovative design amazing obviously toy you know the speed of which our design development and entire team reacted to the product working very closely with our partners.
Proved itself again as Mattel only can do we're really excited about not only baby yoda and the child, but the entire plush category overall, not only with star wars, but with other partners that will reveal at toy fair, where we're really on a role with it and I can't wait to see it when we get there.
Okay. Thank you Richard.
Thank you. Your next question comes from London be wiser of D.A. Davidson. Please go ahead.
Hi.
Sorry, if I missed it but did you guys give a specific capital spending guidance number for 2020 and also.
Even if you were to significantly increase your free cash flow in 2020, it's still wouldn't put a very big dent in your sizable that load.
Is there any group of maybe some smaller brands that are not growing that you would consider divesting.
To be able to use proceeds to accelerate debt pay down thanks.
So the answer the first part of your question. If you go to page 31 of the deck. We sent you you see that we have capital expenditures in around the $125 million to $150 million range.
In regards to properties, we're very confident in our portfolio of IP.
And so we don't think that Theres anything right now that would do that and remember when you're thinking about our EBITDA debt load. There's two things one the cash that will be generating so you will start being able to do a net that calculation and second the growth of EBITDA that brings down our leverage ratio.
Linda we talked about it before with everyday that goes by we are improving our profitability and improving our cash position.
Well ready drove.
Very significant improvement in leverage ratio, that's will continue to get better.
This year and as we said before as it stands we don't have any debt maturities until March of 2023 and that maturity is $250 million.
So we have a lot of.
Flexibility.
In the short to midterm, let's call it.
And.
Getting on stronger financial footing with everyday that goes by.
So there is no reason to sell any of our assets. These growth drivers, including the declining properties that are all growth drivers and we're turning them around don't forget that just a little over two years ago, Bobby wasn't decline and it's just reached its highest here.
Yes.
In run off the city in the last six years so.
We believe we're sitting on on a treasure trove of our assets of assets of great IP and this will be part of our success.
In the in the mid to long term. So we're executing diligently and you will see the results.
In the numbers.
Great and can I, just follow up on the Corona virus.
Issue.
Understanding is that when the workers travel to the factory locations that they actually do need to be quarantined for two weeks. After their rival date. So is it really two weeks past February 17th that production is going to start thanks.
Now to the divest of our knowledge in talking with our guys over there that no production would start on the 17th.
And we are actually have people in the factory getting things ready et cetera. So you know you staggered in so right now we're planning on starting on the 17th unless the government puts out another guidelines.
Great. Thanks, a lot.
Thank you.
Thank you. Our next question comes from Eric Handler of.
Km partners. Your line is open.
Thank you very much I've got two questions first.
Magazine, just have found are really good stride.
Last year and I wanted to you know when you look at the action figure building setting games segment.
If you just parsed out Mega last year, what with that growth be for that business.
You know what sort of drove that growth how much of that was licensed saying how much of that was just sort of the core block business and I'll follow up at the second question. After you answer this one.
Thanks, Eric It's Richard.
Thank you for recognizing that momentum that we've got in Mega It's been a great turnaround story as we refocused and established ourselves as a true challenger.
And taking that challenge your mindset in position driving really right product at the right place in order to regain share in the construction category.
Yeah, just as a reminder, that turnaround plan really focused on setting up the right inventory to get those increases in Pos and we delivered.
2019 was a good year in the construction category for us with Mega and we will continue that momentum as we build upon strength in 2020. There is a great new campaign that we're going to be revealing for you and everybody else into a fair that is going to really identify mega with appointed a different.
That we're pretty excited about the licensing pieces Mega what we don't break out the specifics of it continues to be an important part of the brand Halo game launch ramp up is really one of the key brands for US. We've got some great momentum of course with Pokemon and then send new innovation that you're going to see in the Mega blocks category.
Something called pickup blocks, which is a great new product, it's going to have specific content and media around it. So look we think we can talk a lot about mega I would rather save a lot of it when I walk you through the gallery and share our strategic point of view, when we get to toy fair, but all going into right direction and just to go out on that.
In regard to your question on growth, we did say I did say in my prepared remarks that each of the challenger categories grew double digits.
Last year in 2019.
And in parent this I can say that a lot of it goes back to the core strategy of running the company.
Bye Bye category.
As a holistic portfolio will talk about that's more a toy fair, but this.
It is driven by this new structure, we're able to.
Grow each category, which with its own dedicated strategy leadership team and an anchor brand that solidify the momentum.
That's helpful. Thank you.
Now in contrast to Mega we still have a lot of issues.
With Thomas and I'm wondering is there anything structurally that has changed in the play pattern with trains. It just seems like just.
Consistent historically, a very consistent pattern.
For kids, particularly boys and I'm, just trying to figure what has changed there that has kept.
That you know that what was seemingly a very strong brand.
Just on a downward path for the last several years.
Yes, Thanks, Eric the truth is and we've shared thus the Thomas trend is a self inflicted wound.
We have acknowledged a frankly aid.
Challenge with this brand, particularly in association with how we drove product. The good news is in 2019, we saw early signs of progress as we rolled out a singular core system. A play you know just playback case study one of the reasons why Thomas business.
Some extent fell off the track no pun intended was because we had variations of track play and also moved away from the depth of characters.
In merchandising, we're getting back to a singular core play system, we're doing great strong engagement with content that continues to resonate with kids around the world and we're strengthening our retail presence and merchandising assortment at retail all of this has been work in progress in 2019, we did see in the new.
New single track system in the fourth quarter, some great Pos lift in single digits on that segment with that as early signs of momentum we're going to accelerate that progress into 2020. In addition to that we had the catalyst of Thomas is 75th birthday, which we have some great proven track record of celebrating.
Days with momentum around our brands some terrific new product interactive engines that will bring the toys to life and last but not least we're excited to move the Thomas content in the U.S. for Netflix So a great series.
Good strong lineups, both product and strategies for 2020, and we'll get a little bit more into detail in New York When we see you.
Thanks, So just as one last follow up that doesn't mean, you're moving away from Nickelodeon towards that flicks.
Yes.
Great. Thank you.
Thank you. Our next question comes from Felicia Hendrix Barclays. Your line is open.
Hi, Thanks, a lot.
No I know you've said throughout this call that your inventory levels are fine, but in your prepared remarks. You also just mentioned that there will be higher inventories in the first quarter. So I should tell you. If you could specifically talk about whats driving that and can we extrapolate that.
You know your south potentially being down in the first quarter to kind of comedy for that higher inventory.
Yes, I think what yes, Mike My comment was that the fact that the inventory in the first quarter could have a 1% to 2% impact.
On on revenue in the quarter.
So yes.
Yes, so what's driving that higher higher level is that just kind of building for the rest of the air is that something else.
Well, what do you mean as far as the mid single digit growth of all of our our our owned brands, we're talking about mid single digit growth.
So yes.
Getting your question right.
Well, you're saying, there's just slightly higher levels of inventory in the first quarter I'm just trying to understand what exactly is adding that yeah, because we expect to be up mid single digit.
To our first quarter sales. So I think that's that's the biggest reason.
Okay. So don't match.
That's that's the whole where he is that's what we're hoping right now that's we're telling you. We're gonna have to update you on in regards to the virus, but that's still an unknown we have to come back to you on that yes. Okay. I just want to talk about it and then just with RV with your expected growth in Barbian 2020 is just wondering how we should think about that in terms of domestic and international.
Than domestic.
Domestic was down this quarter, which was not surprising given what's going on environment, but just if you could just help us think about how to model that for 2000.
Yes, Felicia I think we've we've proven now that it's not a question of if Barbie is going to grow its more about our philosophy is how high and how fast we're very confident in the programs that we haven't plays for Barbie, we're going to share a lot more of that detail for you to give you the same type of confidence when we get to toy fair, but certainly the past nine.
Nine consecutive quarters and of course this year in particular with such a competitive landscape.
Good good people more confidence, but we'll share a lot more that detail with you when we get to toy fair.
Okay sounds like you'll see rich October 20 domestically for Barbie.
We will actually continue growth in Barbie.
We did grow in Barbie.
Shipments were down.
For the year for Barbie, we performed very well and we had.
Expected essentially the same.
Same performance that you saw in the first half in second half in the context of the plans for Barbie and as usual you know this is there's a long term proposition, we're going to be going towards 61st year. So we tend to look at Barbie with a long term view, yes, okay, great and then just Joe you've done an extraordinary job. This year in terms of on your cost savings programming.
Kind of.
Showing upside to that almost each quarter.
In terms of just a little bit that's left in 2020, it's getting harder to show up that or what do you think that you just.
We could see some more at the same.
You mean in regards to cost savings or yes outstanding.
Yes, so right now we concluded the structural simplification program. So we ended up at $875 million on a original $650 million program and you know through.
2019 will have 797 million or that affected EBITDA can you have another 92 million that will affect 2020, so that carry over into 2020 is about 92 million and then in capital light we did get the acceleration in the period of 15 million.
Then we'll have another 50 million have savings associated with capital light.
Right I just heard the carryover is what it is we shouldn't expect that somehow.
Yes, if we if we've concluded the program et cetera, now just because we've concluded the program doesn't mean, we're not going after more savings, but the formal program that we've been pitching you on it we're now done and listen just to clarify the previous remark I guess I think I thought about what you said it we are going to have a mid single digit impact to Q.
One results as a result of where the inventory is.
At year end going into the first quarter. So I just wanted to make their clear.
Right and that's how I was asking it and I think it impacts.
And our setting.
I, just where we should talk about this offline because I'm not sure.
Okay, let's do that okay. Thanks, Okay. Thank you Felicia on on that note, we have time for one more.
One more question or sort of questions but.
Those are.
I don't have time to get the questions put on the table now we'll be happy to address it after this call.
Final question comes from a line of William Reuter of Bank of America. Your line is open.
Hey, guys.
Just one question on your capital allocation.
Your guidance implies pretty strong free cash flow and you talked about debt reduction, but there isn't any pre payable debt.
Capital structure at this point, so I guess I'm curious, whether you would repurchase your 2023 notes in the open market and then related to that you talked about investment grade I guess will you focus on getting to investment grade before you would do shareholder friendly stuff like share repurchases are.
I don't know large onetime dividends something like that.
Sure I mean look we will always use the most efficient use of our cash and remember the one thing at yearend. He knows the large that becomes callable. So so that does happen in December.
So yeah look at those all the things you mentioned are things that are on the table.
But we have to continue to grow the company and then will you will evaluate the best use of our cash on a go forward basis.
Great. Thanks for sneaking me and appreciate it.
Okay. Thank you so I just want to.
Summarize make a few closing comments.
And thank you all for the questions. This this call run a little longer given that it's a fourth quarter Big year. We also gives your guidance.
There is more common a toy fair, but it's fair to say that.
2019 was an important point important inflection point for the company.
In our 10 around.
You saw methodical execution of our strategy.
It is working we have achieved significant improvements across key profitability metrics, including gross margin operating income EBITDA Lps.
And importantly, we achieve free cash flow positive, which is a big point.
In the turnaround.
We also increased revenue in constant currency and grew global market share in the fourth quarter, which was very competitive and at the same time repaying our global leadership position for the year.
We also continued to make progress in capturing value from our IP with five new film project announced.
Three television series with Netflix and a lot of activity in our franchise management team.
So all in all I would say.
We are very proud of the accomplishments of the company of the team around the world.
Our 2020 guidance reflects continued momentum and we hope to show with you more as we go forward.
Thank you and I'd like now to turn the call over to Dave.
For the last closing comments.
Thank you in on thank you everyone for joining the call today.
The replay of this call will be available via webcast, an audio beginning at 830 PM Eastern time today.
The webcast link can be found on your Investor page before an audio replay. Please dial 4045373 406. The passcode is 5764 607. Thank you for participating in today's call.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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