Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Mattel incorporated first quarter 2020 earnings Conference call.
At this time, all participants are in listen only mode.
For 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.
As a reminder, today's conference call is being recorded it will be approximately one hour in 15 minutes in order to accommodate Q1 day.
I would now like to introduce your host for todays call, David Spontania Bitch, Vice President of Investor Relations Mr. spending habits, you may begin.
Thank you operator, and good afternoon, everyone.
Joining me today are you don't cries, Mattel's, Chairman and Chief Executive Officer.
Richard Dickson, Mattel's, President and Chief operating Officer, and Joe You now were tells Chief Financial Officer.
As you know this afternoon, we reported mattel's 2021st quarter financial results.
Given the extenuating circumstances around coordinate team we will begin today's call with the non providing commentary around the impact where business.
And Joe will then provide some commentary on our results after which we will provide some time free non Richard and Joe to take your questions.
Help guide our discussion today, we have 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.
Just to the other selling and administrative expenses adjusted operating income in loss.
Adjusted earnings or loss per share.
Earnings before interest taxes, depreciation and amortization or EBITDA adjusted EBITDA.
Free cash flow and 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 website 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 related to the future performance of our business brands and product lines.
These statements are based on currently available information and assumptions.
There 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, including risks and uncertainties associated with the cobot 19 pandemic.
We describe some of these uncertainties in the risk factor section of our 2019 annual report on form 10-K, our earnings release and a presentation accompanying this call and.
In other filings, we make with this FCC from time to time as well as in other public statement.
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 29.
Thank you everyone for joining with deals first quarter 2020 earnings call.
We hope that you and your loved ones are safe and healthy.
Since our last earnings call. The World has been facing the unprecedented health and economic impact of coal that 19.
Well there is no playbook for a pandemic of this nature would have been quickly adjusting the way we operate in how we manage the company.
Our top priority has been to protect the health and safety of our people and at the same time mitigate the disruption to our business.
We successfully transitioned to a remote work structure for our employees working in 35 countries.
Implemented stringent measures to safeguard personnel about plant and distribution centers and temporarily close our American girl retail stores.
We were able to ensure almost seamless business continuity and remain for the most bought in for work mode throughout the period.
Our back office support functions most of the occasion and supported the enterprise what the organization's stayed focused on the execution of our strategy.
Our global supply chain organization has rapidly responded to the frequent and unpredictable changes or carrying in various locations where we operate.
We have taken mitigating actions to return on manufacturing and distribution operations to near normal operating capacity, including in China and were taking similar actions in other parts of the world where necessary.
The digital design systems that we recently implemented have enabled our design and development organization to innovate and collaborate remotely.
We have maintain our business calendar successfully executing our spring 2021 toy fair virtually.
Allowing customers from around the world to engage with our category and commercial teams.
Our global commercial organization has also been working with our retail partners daily to navigate the dynamic landscape and evolving consumer path to purchase.
We quickly developed and launched no promotions in the marketing activation initiatives that with tailored to the new consumer behaviors, including our global find ways to play together campaign on Amazon a one stop shop for families to search discover and purchase outdoors.
Ah work over the past two years to develop a flexible and results oriented organization is serving us well.
We are confident about our path forward and remain focused on the execution of our strategy to transform a tail into an IP driven high performing public company.
At no time, you know 75 year history has our mission to create innovative products and experiences that inspire and the pain and develop children through play being more vital there now.
Turning to our first quarter performance.
Our results were impacted by the global events that unfolded in February and March.
Gross sales were $670 million down, 14% as reported and 12% in constant currency.
Net sales were $594 million down, 14% as reported and 4% in constant currency.
Reported gross margin was 43% an improvement over 820 basis points.
Adjusted gross margin was 43.5% an improvement over 550 basis points.
And adjusted EBITDA was negative $65 million a decline of $44 million.
If the mix of the disruption we are encouraged by the continued improvement of our gross margin.
This speaks to the progress were making in optimizing our cost structure and restoring profitability.
Looking up our gross sales in constant currency for the quarter.
Why we expected higher retail inventories entering the year to have a negative impact when our revenues. The majority of the decline was cobiz 19 related.
This was driven primarily by the temporary closures of retail stores and distribution centers as well as retailers prioritizing essentially.
By the end of the first quarter more than 30% of the retail outlets, which sell our products representing about a third of our revenue base were closed.
Looking at it by region as of March 31st in North America, with mass grocery and online channels operating on the limitations roughly a one quarter of retail outlets were closed.
Gross sales in the region declined 17%.
In EMEA, where we sell more through hypermarkets and specialty stores roughly half of retail outlets were closed.
Gross sales in the region, however, increased 3% driven by strong momentum in the January and February timeframe.
In Asia Pacific approximately 10% of retail outlets were closed.
Gross sales in the region declined 20% driven primarily by significant revenue decline in China, yet with the country reopening we're seeing an improving trend.
In Latin America, roughly half of retail outlets across the region were closed primarily in Brazil and Mexico.
Gross sales in the region declined 14%.
Overall, we had very strong growth in online retail and E commerce Pos across all regions.
But it was not enough to offset the negative impact from the decline in brick and mortar retail globally.
Looking at Pos in more detail in the quarter.
Our global Pos through February was up low single digits, and we maintain global market share per NPD.
However in March our Pos declined 7% or NPD as Kobe 19 impacted the retail market and consumer demand shifted to other toy categories, where we have a smaller presence.
With families quarantined at home parents sought out products that were geared towards multiplayer participation time consuming activities or tours suitable for backyard play.
This led to growth in categories, such as games, construction arts, and crafts and outdoor or NPD.
We did benefit to a certain degree from this category driven growth and our games business actually outpaced the industry and gained market share in the first quarter for NPD.
However from a tell.
It was not enough to offset the declines that the industry experience in the other categories, especially in dolls and infant toddler preschool, where we are a market leader and what we have a large revenue base.
This is inspite of the fact that we grew market share in two of our leader categories dogs and vehicles per NPD.
We believe the factors that have been driving the category shift our temporary.
And based on our most recent data we expect that the industry, we tend to its pretty cold with 19 category trends.
Our internal research shows that parents and kids are already looking to expand their options and return to their favorite pre cobot 19 play patterns.
Looking to the second quarter.
The retail environment remains fluid would some markets starting to open and others expanding closures.
The combined impact remains to be seen.
Or non retail continues to grow and perform strongly helping to partially offset the decline in brick and mortar.
Quarter to date, our online Pos in the U.S. has increased over 90%.
Total Pos normalize for is to seasonality you showing improvement in April compared to March, especially in the U.S. We're in the last two weeks, we saw double digit year over year increases.
As it relates to our supply chain during the month April we experience temporary closure is certain manufacturing plants and distribution centers.
However, we're still several months away from the beginning about peak production.
And our proactively working to meet inventory demand for our product through the rest of the or.
With the majority of our manufacturing and distribution centers operational and increasing demand for our toys. We believe the main challenge in the current environment has become getting our products into the hands of consumers.
The retro disruptions we face in March were also present in April and are expected to continue over a longer period, most likely through June.
In addition.
We will be impacted by the postponed launch of Universal's minions, which was expected to be a key driver for us This year and has moved to summer 2021.
As well as a number of Olympic tie ins across all brands.
Given the combination of these factors, we expect a more significant revenue decline in the second quarter than we experienced in the first quarter.
Looking beyond the second quarter, we expect to see continuing improvement in our supply chain in retail distribution.
I was quarantine restrictions are relaxed.
We are planning for increased demand for our products as the economy reopens.
Expectation of a much improved second half and the all important holiday season.
Well, our first quarter results and second quarter outlook down versus prior year, we're very satisfied with our execution given the circumstances.
We believe there are several macro industry factors that will benefit us going forwards.
Historically, we're not recession proof that the industry has been resilient in downturns.
Although there is no direct comparison to the current circumstances. We believe parents will continue to prioritize spend on their children, even in tough economic times.
Retailers are aggressively looking to attract consumers to their online or brick and mortar stores and tours have always been considered a strategic category.
Our retail partners have done a remarkable job adapting to the current operating environment and we expect to see a gradual reopening of markets over time.
Also the highly seasonal nature of the industry lives time for recovery before we enter the all important holiday periods.
For these reasons, we believe the toy industry is in a much better position compared to most consumer discretionary industries.
In addition.
From a tells perspective.
The progress we made in reshaping our operations over the past two years together with our assets resources and capabilities.
In addition, a swelled to manage successfully through this period.
Our design and category management organizations have been quick to respond to consumer needs and find new ways to engage with our brands.
Within a matter weeks, we adjusted our demand creation across our portfolio.
In addition.
We launched the Mattel playroom, a free online platform that brings the best of Mattel forward and offer as parents and caregivers a centralized resource for activities expert advice games and content from our iconic brands.
Our supply chain organization has largely restore global manufacturing and distribution capacity and we believe that operations are on the right path to meet our production needs for the second half of the year, leading up to and including the holiday season.
Our global commercial organization would its focus on regional execution.
Continues to close the partner with retailers to accelerate our joint business plans to compensate for the disruption and adapt to the new retail environment, including transition to own and retail and Omnichannel experience.
Our strong collection of iconic evergreen brands is another competitive advantage.
As major entertainment releases, a shifting to next year, we're working with our retail partners to rebuild the fall and holiday Planograms.
Without trusted brands to mid consumer demand.
With approximately 65% to 70% of our sales usually coming in the second half of the year.
There is time to regain sales momentum.
At the sometime we continue to optimize our cost structure, both fixed and variable.
This includes bailey decisions on production and inventory commitment based on market dynamics with particular focus on managing profitability capital allocation and working capital.
We are targeting $90 million of adjusted SGN, a savings in 2020 compared to 2019.
Most of the S. You any savings are structural and will come from the expansion or acceleration of actions we were contemplating before Colgate 19.
As part of that yesterday, we announced the reduction of our global nonmanufacturing workforce by 4%.
The remainder of the S. You in a savings I plan to be realized from temporary actions taking in response to cope with 19.
As a reminder.
Separately from these efforts, we expect to realize $92 million of adjusted EBITDA savings. This year from our recently concluded structural simplification program.
As well as the previously announced $50 million of savings from our capital Light program.
With that together with the cumulative savings of $875 million from structural simplification that we have already achieved we expect to exceed $1 billion of savings exiting 2020.
As it relates to the balance of our cost structure at this time of the or approximately 75% about costs are variable.
This means that we can assess changes in demand and make the appropriate inventory commitments ahead of peak production, starting this summer as well as potential adjustments in advertising and trade spend to maximize returns.
Happy to light remains a key priority.
We continue to make progress and as of the end of April has already exceeded our full year target to reduce SK use by 30%.
This is an important achievement that would allow us to improve the match between demand and supply optimize manufacturing decisions improve customer fill rates and capture additional revenue opportunities.
Growing our cash flow and enhancing our liquidity also remain key priorities.
With that in mind, we have been proactively improving our capital structure and financial flexibility to ensure we can continue to grow our business.
As you know in 2019, we refinanced our near term debt and now have no maturities until March of 2023.
We also extended our existing $1.6 billion senior secured revolving credit facilities to November 2022.
We exited 2019 with over $600 million in cash and no short term borrowings and a comfortable with our liquidity.
Having achieved tangible progress across every part of the enterprise, we expect to regained the momentum we had entering 2020. After the disruption is over and continue to execute on offshore to meet them strategy to restore profitability and regain topline growth.
Both.
We have also made progress on our mid to long term strategy to capture the full value of our IP.
We're actively advancing the projects underway and expect to have more announcements soon.
The film industry has also been impacted by the Cobiz 19 disruption with production delays and changes in release schedules by all major studios and we're currently working with our partners to assess the timing implications.
We recently announced that we have entered into an exclusive multi year global music licensing agreement with Warner music.
Warner Music will serve as the exclusive distributor of Mattel's current catalog of more than a thousand songs from brands, including Barbie Hotwheels American Girl Fisher price and Thomas in France, among others.
We will also be partnering with Warner music or new music releases from our brands.
Just as importantly during this time, we recognize the role we play as a global corporate citizen and leveraging our expertise products and resources to support communities. Those indeed in frontline heroes.
Our design teams across campuses, a partnering with our manufacturing facilities to make personal protective equipment, including 500000 face shields for the nation to medical professionals.
We launched our thank you Bruce collection, which includes special edition products to salute current day heroes utilizing our preschool action and little people figures.
With all net proceeds being donated to first responders first.
Globally, we gave grants to feed the children and served the children.
Lastly, the Mattel children Foundation has donated art supplies games and other toys to the Los Angeles Unified School districts LNA students most need charitable efforts.
In closing, we exited 2019 with real operating momentum and in growth mode, and we started the new year with clear plans that we articulated at New York Toy Fair just two months ago.
2020, however is now being reshaped by exogenous and macroeconomic factors.
In spite of the challenging start.
We're very satisfied with our execution considering the circumstances.
With supply chain and retail distribution continuing to improve and markets reopening we're planning for increased demand for our products in expectation of a much improved second half and the holiday season.
We are confident in our ability to navigate through the balance of the year and believe we have the assets resources and capabilities that position us well to succeed in the recovery.
We expect to recapture the momentum that we had entering 2020 after the disruption is over.
We are committed to our strategic roadmap to restore profitability and regain topline growth in the short to midterm and to capture the full value of our IP in the mid to long term.
We remain focused on transforming mattel into an IP driven high performing toy company.
And creating long term shareholder value.
This is an exceptional time to be leading this company and I'm proud of how our team has embraced uncertainty and change and demonstrated resilience in the face of this challenge.
I'm grateful for all the hard work that everyone is done.
With that.
Joe will now cover the financials in more detail.
Thank you a nine and good afternoon, everyone as you've heard the work we have been doing over the past two years to build a more efficient business has put us on more solid financial ground.
We have created a significantly more flexible business model, which is serving us well during these challenging times and we expect to have sufficient liquidity to effectively manage through the covert 19 disruption and continue to execute our strategy.
I will now provide more details on the company's first quarter results.
Starting with the topline performance as a non said grew sales decreased 12% in constant currency compared to the prior year.
Early on we were encouraged by the Pos momentum in the business, even as we absorbed the expected mid single digit impact of higher retail inventories coming into the year.
However, the effects of covert 19, which emerged in late February drove the majority of the quarters decline.
Our global internal Pos was relatively flat through February and finished the quarter down low single digits due to the category shifted in non described.
Our Pos normalize for Easter seasonality is showing improvement in April compared to March, especially in the U.S.
Looking at the topline performance by category.
Dow's revenue decreased 9%, primarily driven by declines in Barbie and American girl.
Yes for the category was down low single digits through February and ended the quarter down mid single digits.
However, we grew market share in the category for the quarter per NPD.
Barbie sales ended down 8%, primarily as a result of the category shift due to covert 19.
Barbie Pos through February was up low single digits, despite facing a tough sixtyth anniversary comparison and increase competition from entertainment properties, but ultimately ended the quarter down low single digits.
Despite these headwinds barbecuing share in the quarter According to NPD.
We saw continued strength in fashionistas and in the new introduction of color reveal we also launched the next 13 episodes of gene Mouse Adventures on Netflix to provide more at home entertainment.
We are pleased with the positive direction of April Pos trends for Barbie.
American Girl sales ended down 16% driven primarily by the retail store closures, we initiated in March.
Prior to March sales were tracking ahead of expectations in direct to consumer and flagship stores and new customer activations were up versus the prior year.
We also saw strong growth in the online channel, where we generated a double digit sales increase in March and overall growth for the quarter with further acceleration in April.
However, the strong online retail growth only partially offset the loss of sales due to the closure of all our brick and mortar stores.
This was the first time, we have seen first quarter ecommerce growth in six years.
We're very encouraged with the momentum in American girl this past quarter, despite the challenging retail landscape.
Our other doll brands were also down slightly with declines in our licensed our properties and the sunsetting of some own smaller brands. This was partially offset by the growth in in channels and new product introductions.
Vehicles category revenue driven by hot wheels grew 4% in the quarter and we gain market share according to NPD.
POS for the category was up mid single digits through February but ended the quarter down low single digits.
Hi wheel sales were up 8% with growth across multiple product lines in place systems, including basic cars, Mario Kart and our monster trucks line.
How will gain share with Pos up double digits through February and up high single digits for the quarter.
Overall vehicles category growth was partially offset by the expected decline of Disney cars vehicles, given the non movie year.
Infant toddler in preschool category revenue was down 26%, primarily due to the decline of Fisher price, including Thomas and friends and Fisher price friends.
Yes for the category was down double digits through February and ended the quarter down double digits.
Our Pos trends follow the industry with the clients accelerating in March as consumers focused on other categories of play.
Shipping significantly trail Pos as consumer demand shifted to other toy categories. As a result of covert 19.
Fisher price core revenues were down partially due to declines in our Imaginext toy story line.
As expected Fisher price friends was down as we continue to exit underperforming licenses.
We are encouraged by the April the day, Pos trend, which showed significant improvement compared to the first quarter.
Revenue for action figures building setting games are challenger categories together declined 20%. However, Pos for the combined category was up mid single digits through February and ended the quarter up double digits.
Our games category performed exceptionally well with Pos up significantly marking the fourth consecutive quarter of positive Pos growth.
You know in particular benefited from extraordinary demand during the quarter Huiner was the number one purchased item in the games category, both in the U.S. and globally per NPD.
Even when you exclude who know Pos for the rest of our games portfolio performed very well.
Including pictionary as well as other top performing brands has CRE plunk apples to apples and pockets.
In spite of heavy competition in the category during the period, we gain market share. According to NPD. We believe this bodes well for the trajectory of our games business as it continues to be a growth category for Mattel.
The decline in our overall challenger category was primarily driven by toy story four post its movie launch here and Mega, which began the year with higher inventory levels and limited retail distribution.
Games Pos remains strong through April.
Turning to the rest of the PNM, starting with gross margin, we delivered significant improvement with our highest first quarter gross margin since 2016, despite disruption related to covert 19th.
First quarter reported gross margin was 43% of net sales an increase of 820 basis points versus the prior year.
This improvement was driven by realized savings from structural simplification and capital light programs and the absence of the 2019 inclined sleeper recall expense.
Adjusted gross margin was 43.5% of net sales an increase of 550 basis points versus the prior year. This improvement was driven by realized savings from our structural simplification and capital light programs.
Our gross margin in the first quarter exceeded our expectations, even after taking into account headwinds driven by covert 19.
We continue to make progress towards restoring profitability and we remain on track to return our gross margin to the high fortys in the mid to long term.
Moving on to advertising first quarter advertising expenses totaled $76 million or 12.8% of net sales.
This compares to $70 million or 10.1% of net sales in the prior year.
The year over year increase was primarily driven by the timing of nine media expense, which was pulled forward into the first quarter.
Reported machine a for the quarter was $329 million, an increase of $31 million versus the prior year.
Adjusted as she any for the quarter was $315 million, an increase of $26 million versus the prior year.
The year over year increase was primarily driven by higher incentive compensation and employee related costs, partially offset by realize savings from our structural simplification program.
As we said on our fourth quarter call, we expect full year incentive compensation to be down versus the prior year.
The higher expense in the first quarter is timing related as we booked a higher incentive compensation accrual compared to the prior year.
For the quarter reported operating loss was $150 million compared to a loss of $127 million in the prior year.
Adjusted operating loss for the quarter was $133 million compared to a loss of $97 million in the prior year.
The declines in reported an adjusted operating loss were due to lower sales and the timing of advertising Ines Genie expenses, partially offset by gross margin improvements.
Adjusted EBITDA was negative $65 million compared to negative $21 million in the prior year, driven primarily by lower sales and the timing of advertising Ines Genie expenses.
Partially offset by improvements in gross margin.
Moving to Texas in the first quarter, our income tax expense was $11.9 million. We continue to expect 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.
The full valuation allowance on our U.S. deferred tax assets. We have also analyzed the potential benefit of the cares act and similar stimulus legislation globally and determined it will be immaterial to our financial results, but will modestly benefit our liquidity given that some tax payments may be deferred.
Turning to the balance sheet.
We ended the quarter with a cash balance of $499 million, including $150 million of short term borrowings drawn down from our senior secured revolving credit facilities.
We chew on our credit facilities in the first quarter to address any potential near term capital market disruptions. This was followed by a similar $250 million drawdown in April.
Please note that we expect the second quarter borrowing needs to be relatively consistent with the prior years quarter.
Our working capital decreased year over year as a result of a decrease in accounts receivable and lower inventory.
More specifically net accounts receivable decreased 15% year over year and our days sales outstanding improved by two days to 80 days.
Owned inventory decreased $55 million versus the prior year.
The decrease in owned inventories primarily due to the plant closures that took place in February and March relating to covert 19.
Capital expenditures totaled $35 million for the quarter compared to $24 million last year as we continue to invest in the modernization of our I T systems and improve the efficiency of our operations.
Moving onto the second quarter, our supply chain continues to do a tremendous job rapidly responding to the dynamic environment and we have begun to see increasing demand for our toys.
As an and said the retail disruptions we faced in March are expected to continue in the second quarter and we believe the mean challenge in the current environment has become getting our products in the hands of consumers. In addition, we will be impacted by the shift in the entertainment slate.
Given the combination of these factors, we expect a more significant revenue decline in the second quarter than we experienced in the first quarter.
Our accomplishments over the past two years have allowed us to establish a more flexible financial structure that positions us well to respond to changing market conditions. These accomplishments include.
Our cost savings efforts, which we expect to deliver $1 billion of cumulative savings exiting the year.
Our more streamlined cost structure that is now approximately 75% variable.
And the much improved productivity and performance of our supply chain driven by our capital light program.
We continue to expect the 2020 TNL will benefit from realized savings of $92 million related to structural simplification and $50 million related to our capital light program.
We do not anticipate covert 19 to have any impact on the savings related to these programs.
Looking at the PNM for the full year.
We do expect to see continuing improvement in our supply chain in retail distribution has quarantine restrictions I relaxed.
We're also planning for increased demand for our products as the economy reopens in expectation of a much improved second half and the all important holiday season.
We hope to have a much clearer picture in the coming months, however, considering the level of uncertainty at this time, we are withdrawing our full year guidance.
I would now like to spend a few minutes on our liquidity and cost structure.
While we regularly perform liquidity stress test, we have analyzed more extreme scenarios given covert 19.
Following this indepth analysis, where we considered a number of assumptions around the potential size and duration of the impact. We continue to believe that we have sufficient liquidity to effectively manage through this disruption and continue to execute our strategy.
As a matter of practice, we also routinely evaluate our capital structure and access to the capital markets to Opportunistically improve our financial flexibility.
As a non mentioned we have no debt maturities until 2023, and we continue to have access to our $1.6 billion senior secured revolving credit facilities.
Additionally, we have numerous levers available to manage our variable cost across the p. now.
We have also significantly reduce capital expenditures over the past three years and continue to review all noncritical capital spending and cut back were prudent.
In closing the work we've done to reshape our operations over the past two years has improved our financial flexibility.
Cost structure and liquidity positioning us well to navigate through the covert 19 disruption and continue to execute our strategy. We are thoughtfully balancing the appropriate actions in the short term with our long term strategic priorities.
We remain focused on consistent execution and are taking the necessary actions to emerge stronger with that I'll turn it back over to the operator for acuity.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound Keith please standby, while we compiled the culinary roster.
Your first question comes from the line of Tammy the cardio with JP Morgan.
Hi.
I wanted thing, while and thanks for taking my question.
First question is could you talk about the April Pos trends by geography, and also which category they're driving the change if staying in the past two weeks of April.
Sure.
Do you think about you're talking about quarter to date April memory have Easter in there. So if you think about the U.S. when you adjusted for the Easter holiday. So you can get a comparable year over year, we have a high single digit growth overall for all brands dolls were up double digits dolls, Excluding American girl was up double.
Digits.
If in Tyler and preschool was up double digits.
An action building figures in games were up double digits.
And Tammy, let me expand a little bit.
For total Mattel.
Based on our internal Pos normalize for used to seasonality we are showing.
Improvement in April two quick compared to March.
And just to emphasize what Joe was saying is particularly strong in the U.S. We're in the last two weeks, we saw double digit growth.
In Pos and triple digit growth.
Online.
So strong momentum, especially in the U.S.
We still don't have full data for international but what we seem to yours is strong so far.
Got it. Thank you and so my follow up question is as you think about the second order.
Should we expect operating losses to be worse than what you did in the fourth quarter given the ongoing towards closer or do you have sent levers to pull.
Have a better operating.
Losses than the first quarter.
Yeah, we're not giving guidance yet for the second quarter.
And given the uncertainty over the disruption we can be more specific at this time.
As we said on the in the prepared remarks, the retail disruptions, we faced more in macho still present.
Yes, it president in April.
And I expect it to continue over a longer period of time, so it's not that it's getting worse, but rather it's the same type of disruption over a longer period of time.
But.
We are seeing.
Early trends of.
Oh the improvement.
And you know given the the.
The fact that we've seen improvement in supply chain and early signs of demand. The challenge now is getting product in the hands of consumers.
This is what we see the challenges and as retail continues to improve in markets. We open.
We expect things to get better as we move towards the second half.
Got it that's super helpful. Thank you so much.
Thank you.
Next question comes from the line of Tim Condor Wells Fargo.
Thank you.
Gentlemen, just a couple of things.
Maybe following on the prior question if we look at at this point and I know you don't have formal guidance. There would you anticipate the back half of the year at this point given the trends we've seen the time, we have to get there for yourselves and maybe more of an industry come and also.
Would that be comparable.
At.
Worst to what we saw in 2019.
Yes.
I'll take it Joe can add.
Looking beyond the second quarter.
We expect to see continuing improvement in our supply chain and retail distribution.
As quarantine restrictions.
Our relaxed.
We are planning for increased demand for our products as the economy reopens, an expectation of a much improved second half and the all important holiday season.
Situation that still Floyd. So you know, it's still too early to tell and we continue to monitor the retail landscape.
But if retail if the retail environment returns to normal we expect it would be a good holiday season.
But it is too early to tell at this point.
We do know that the toy industry.
Has proved to be resilient in downturns.
It is a strategic category for for retailers as we said before.
Retailers doing what they can to capture volume and sales and you know we believed that the toy industry is in much better position compared to most other a consumer discretionary industries.
So to 22 tail, but.
We do see early signs of demand growing and we expect things to improve into the second half of the year.
Okay, and then gentleman I guess along that line.
How would you term you said it came in a little heavy particularly in Mega.
Ended the year within the channel.
Would you termed the channel inventories now and then and then Joe just maybe a little color on the that non media related advertising expense that was pulled into Q1.
Sure so far on an inventory basis, you know retail inventories did improve in the first quarter. However, they were still up but at a reduced level compared to yearend.
All of our inventories how the we were very pleased with the inventory we have out there and we continue to work closely with our retail partners to ensure we are able to get the right product to them.
In the right place at the right time, so we're feeling pretty good about her inventory and.
I remember you know timing is in one of the biggest difficulties that we've been facing in regards to your non media expense, it's things like trade shows and stuff like that that.
Because it.
And time so.
So pulled forward into Q1 from from.
Yes exactly exactly.
Okay. Okay. Thank you gentlemen.
Thank you and our next question comes with a line of William Ruder with Bank of America.
Good afternoon.
You gave us the data points around what percentage of your retail outlets as of the under the first quarter were closed has that changed at all between the end of March and where we are today on may five.
You know, we're seeing puts and takes.
It varies by market.
Submarkets reopening others are moving towards closure, especially in Latin America, which is a step behind.
So we still expect disruption in the.
In the second quarter are similar to what we saw in the first quarter, but as I said earlier over a longer period of time.
What is changing and I think it's important to emphasize that is is demand.
You know quarter to date.
Our own line Pos in the U.S. has increased over 90%.
And we've seen.
Similarly, 50% to 100% increases in ecommerce depending on the market. So.
You know that puts and takes in you know if you see reduction in retail growth in online, but overall, we do expect the disruption to continue for the majority of the of the quarter.
That's helpful and then just one follow up.
You are helpful with regard to some of those entertainment properties that have been shifted into next year is there anyway that you can quantify what.
Percentage of your annual sales that you expected to be can.
Tied to those properties or kind of broadly tied to interpret tamer properties that are we pushed out.
No we haven't provided that information.
I understand all right thats the others. Thank you.
Thank you Bill.
Thank you and our next question comes from the line of our Vinay coach Aryan Yes.
Hi, Thank you very much I hope everyone is doing well I had a question on the retail doors closure sort of assuming that at least 30% or close.
You mean, that's around a third of your revenues give or take for Q2 that mean TV down at least by that.
The top line or are there some offsetting factor.
Think about.
Yes.
No I wouldn't guide you to extrapolate.
You know the numbers linearly like that there's strong impact positive impact of ecommerce.
That is growing.
Another factor to consider which is the shift in consumer demand by category.
Which we're now starting to see towards the categories, where we have a larger presence.
So there are.
Offsetting factor so the.
The closure of retail.
But with that said, we're not we haven't provided guidance.
For the quarter.
Right right now that separately Apple. Thank you and then just quickly I believe you mentioned 90 to native prostate lung truthfully here.
But I had in mind.
He said before today for the year in terms of what flows through to EBITDA, but today indicated that program is actually still running ahead of expectations. So I'm. Just wondering why that number is unchanged or did I catch staying correctly are you still expecting 92.
EBITDA from structural simplification.
Was you have to break it out into two pieces. So there's no confusion. So one is yes. The yearend number exiting 19 was 92 million. In addition, we told you that we were going to receive an additional amount on SGN agent. We raised on this call up to 90 million see of 92 million associated with.
Sexual simplification and an overall $90 million improvement Ines Genie.
On top of that.
On top of that in the period, we incurred we had the benefit of 39 million added the 92 of structural simplification.
Right right.
Thank you.
You're welcome thank you.
Thank you.
Next question comes from the line of Fred Whiteman with Wolfe Research.
Hey, guys just a follow up on that last question. If we look at $90 million in SGN, a savings that you're guiding to for this year. I think you had previously talked about $42 million in SGN a savings for this year. So is the 90 incremental to the 42 or the upsize is just developing between it's right right. It was.
42, we upsized an additional 50, so that's 80 to 90 correct perfect. Okay, great. Thank you.
Just if we could hoping you guys could maybe help us think about.
Yes sequential softening in the power brands versus last quarter, I mean, how much of that is really just due to changes in consumer demand versus some of production and distribution. That's used that you guys highlighted.
Even as far as in regards to what happened in the quarter or going into second quarter.
Yes, I mean have ever you guys want to address.
Yes, I remember in the quarter. It was really just the fact that covert 19 hit everyone here to stay at home and so there was this category shift.
To games and construction. So we think that was the.
The biggest reason for the shift in the core, yes, and I can expand a little bit.
The.
The.
Sure.
That we saw we believe is temporary and based on our most recent internal POS data, we expect the industrial returned to its pretty cobot 19 category trends.
In looking at our own total Pos.
As we said in the prepared remarks, if you normalize the numbers for is the seasonality were seeing improvement in April relative to March already and we said specifically in the U.S., what we're seeing strong double digit growth.
Triple digit increases on line.
You seeing positive.
The momentum for Bobby.
April Pos, especially well in the U.S., where we have data.
The brand strength continues as Bobby remains the number one fashion doll brand globally.
On a broadly we haven't seen a strong performance of Barbie dreamhouse.
Which is now our number one selling item in the U.S.
Typically it's an item that sells into holiday sourcing. It now is telling that there's clear this cleared them onto Barbie and even for Fisher price April today, Pos trend in the U.S. show significant improvement compared to the first quarter.
So.
As we said before there is momentum.
And.
With the Rupert disruptions that we saw in March continuing into the second quarter. The challenge is less about demand.
Definitely not about supply chain, but rather it's about getting products in the hands of consumers.
It's still a fruit situation and we continue to follow how the market evolves, but.
But in terms of demand.
We filling that trend the category shift is reversing back to normal play patterns.
Great. Thanks, just getting a quick one let me call receivable I think in slides you guys mentioned lower cost you balances.
Not surprising just given that 30% of retail doors are closed can you talk about any changes.
Okay to reserves or any breasts for repayment.
Right. So when you see the Q there is.
A new accounting pronouncement that causes us to bring up the reserve just slightly a couple of million dollars, but other than that we've been pretty fortunate.
Working with all of our retailers are making sure that we get the cash collected and sticking to the terms that we have so and remember about 80, 586% of of our receivables are insured and if you look across the globe, especially in Europe.
After the governments have provided reinsurance capabilities to these insurers so we feel pretty good about.
Collectability of our receivables.
Great. Thank you.
Thank you.
Next question comes from the line of Carla Casella JP Morgan.
Hi, This is Sarah Clark on for Carla Casella, and just a few quick question.
You mentioned that you're seeing improving trends in China can you just give a little bit more color around how that recovery has and for toy sales has locked downtick.
Well I mean, if you tell me.
The fact is it was pretty low.
So now that people are back in and they're getting out and starting to hit the retail stores were starting to see slow recovery. Obviously online has been tremendously helpful. For us. So we remember China was one that we had to restart over a year ago decided back a little bit and so now we're going to come back in a very slow and disciplined manner.
Yes.
Bill that business backup appropriately.
Helpful. Thank you and then on on American Girl can you talk about any plan to reopen retail stores at how you approach that add and how.
And if that Brad.
Priority for turning around and how you're approaching that given cobot disruption. Thank you.
Sure you know we remain incredibly focused on the American girl strategies, we laid out.
New York Toy Fair.
He referred the analyst day presentations the turnaround initiatives, specifically that we talked about included redesigning our website into digital flagship experiences in our flagship stores and a focus on digital now clearly cobot 19 has definitely led fusin challenges for us in our retail fleet.
We have temporary closure of all of our stores. So we've stopped obviously the progress on our flagship stores, but we've seen an incredible acceleration.
Our ecommerce platform.
And obviously the focus and investment that we put on that early on is really starting to pay off we've seen our ecommerce business up mid double digits in March we've seen further acceleration in April to high double digits.
And you know while the retail environment remains uncertain.
The evolution of our momentum is really going to be channel with our ecommerce platform.
The products and programs that we have coming out in the back half very strong and we'll continue to evaluate each state and each tour. According with government regulations, and the health and safety of our consumers and our employees.
Okay. Thank you.
Thank you.
Next question comes from the line of Steph Wissink with Jefferies.
Thank you good afternoon, everyone. I spent a follow on that E. Commerce comment if we can unpack that a little bit more and Joe can you remind us what percentage of your business in 2019 was the E com.
And if that were to grow pretty substantially can post cool that does that change any of your investment criteria or allocations. If you think about the back half an end to 21.
Are you referring to American girl.
Question related to E commerce or total E commerce.
For Mattel.
Total economy, if you're willing to.
Yes, we've never really given out the total he can number all we've all we have discussed historically is that typical based on the region are our econ numbers are pretty close to what the regional averages are and all that we've seen here in the first quarter is a step up.
Of an acceleration of term across the globe.
Yeah, and step let me I'll add that.
What we said in the prepared remarks that we're seeing very strong performance in.
In E Commerce online retail.
Obviously, the retailers themselves that the offer omni channel experience or doing an excellent job in partnership with us.
Quarter to date, as we said Pos in the US was up 90%.
So this is very strong.
Performance already.
The size of our ecommerce business business varies throughout the year it tends to be a bigger part of the mix towards the holiday period, so seeing it.
Saying, it's now is obviously encouraging.
We do extract the say margin between.
Brick and mortar retail.
As online which is good.
And as E Commerce continues to evolve we expect to be.
No.
Big player in that category and as you hopefully remember we were the number one.
We were number one in the U.S. in the fourth quarter last year in online retail. So we have the muscle we know what to do and this remains our focus area for the company going forward.
Okay. That's helpful and one follow up if I could just going to ask you guys to weigh in on a current debate.
Which is is this demand that you're seeing today, a pull forward or do you think that the holiday versus the current crisis are distinct buying occasions at retail entirely Inc.
No we.
We would distinct between the two periods you have a very specific situation right now.
On the economy.
Global retail, which is affected by the pandemic with all of the implications.
And you know by enlarge the challenge as we said before is literally getting product to the hands of consumers.
There is demand. So if you extend that approach you know as retail opens in the market.
Two.
And get back into normal.
You know behavior, we do expect demand to be fulfilled and the industry will recover.
So it is not about a pull forward demand.
There's no pantry loading.
It's a very specific situation related to the current you know disruption and over time, the mark to market the will return to.
To the normal situation.
I can add that based on our own internal research, which we conduct.
Still in full force these days.
Answer telling us that.
This you know the constitution will not impact their demand and purchase behavior over the holidays I want to caveat that this is our own research.
But with that said, we invest heavily into getting as much information as we can and this is the best we can tell at this point.
Very helpful. Thank you very much.
Thank you enter next question comes from the line of Felicia Hendrix with Barclays.
Hi, Thanks, a lot.
No and I know that you then trying to articulate this in a number of ways.
So bear with me, but based on contracts that are still coming to me.
I think that there's some confusion about your.
The comment to that demand in April improving PCB that disruption challenges that you're expecting in the second quarter. So I think where the confusion is coming from it isn't that demand that you're seeing for April that's improving isn't that assumption.
Retail distribution or are you just kind of saying that there could be a risk to this momentum in demand if we count.
What you do have think of it in three.
You know you have three areas that we have to come together.
When supply chain demand and retail.
And so we did as we said already addressed the issues, we had in supply chain and by and large this is completely now up and running.
Within a matter of weeks it will be in full capacity.
We also seeing indication right now of increasing demand. This is what we shared with you in terms of Pos.
Momentum and we also the we said that by reference specifically to the category shift that is not returning to its normal shopping and purchase patterns.
So at this point, what we see is is a gap in retail.
We're simply stores are not fully open and by that.
That's that's a gap in the market that is outside of our control and as well as we do online and as well as some of the retailers, especially the omni channel retailer is doing.
The steel.
The steel.
GAAP in retail, which is going to impact.
In fact the quarter.
And as I said also.
Some geographies have not yet seen the full impact of of Corbett 19, and we expect them to come.
To see to show negative trends later in the quarter. So all in all its going to be a challenging quarter, especially from a retail distribution perspective.
Okay. That's super clear then just to paraphrase perspective, the improvements that you're seeing in Pos everything that you talked about is more kind of underscoring that then.
The.
Yes, the games and construction and all that kind of stuff is now shifting back to more normalized patterns, which you're benefiting from but it's still a headwind from people.
That's right and if you if you extrapolate from that assuming successful supply chain.
Continuous demand and retail coming online.
As markets reopen this is the reason why we expect a much improved second half.
As things get back to.
Normalcy.
Right that makes a lot of sense and NGL like had a question for you on that on the gross margins.
Are you explained it well and it's also the improvement it's also articulated in the in the flight deck that you always get.
But I think there's you know this kind of conventional wisdom out there that when you know party doesn't do well, it's a drag on on margins. So.
We think it's getting the question in terms of how quick gross margins. So strongly Barbie was down 8% in the quarter starts just why wondering if you take bifurcate it drags that Barbie might have on the quarter with the other good guys that benefited the quarter in terms of gross margin.
Well before we get the Bobby detail, let me said that you know we've done a lot of work over the last two years to improve the where we operate increased performance and extract.
You know better numbers from our operations.
This you know by the end of this year, we will be $1 billion lighter in structural cost as you know, it's not a net saving because those offsetting factors, but we reduced structural cost by over a billion dollars by the end of this year.
This is clearly a you know.
Big reason why gross margin is improving inspite of the revenue declined in the quarter and it's actually when you kind of.
Focus on it it's a huge achievement to grow gross margin.
That level 820 basis points of 550 basis points relative to adjusted gross margin is a huge achievement.
You know, it's the best number we had in four years and this really goes back to all the work we've been doing.
Where are we starting to see the benefit in.
In the numbers in the bottom line.
Yes, I mean.
He says when you think about our SKU rationalization.
When you think about all the.
Tooling all the things that we've been doing tejas create a better margin across the board I mean, there's not a brand that hasn't been focused on improving its profitability. So there may be been a historical time were Barbie was the best but times have changed and.
They're actually some better so.
And when we mentioned the skew.
Reduction.
It was one line in our prepared remarks, but there's a kind of work that went in to fixing that part of the company.
So you know being.
Having achieved our target eighth month ahead of schedule into the year.
Is another testament to the way we are owning the things that we have to improve how supply chain is stepping up and doing incredible incredible work across the company in watch becoming now a.
A competitive advantage.
So you will see you will see.
More progress on our copy the lights.
Effort. This as you know skew rationalization is part of capital light.
We said there would be progress some of it is in and eliminating some of our distribution capacity manufacturing capacity and others isn't just pure operations, such as reducing our skew account.
Thank you for all of that it's very helpful.
Yes.
Thank you.
Next question comes from the line of race that show.
Research.
Hi, This is corium for Greg. Thank you for taking my question have you guys are all well.
Can you talk about what changes nature holiday plans, so far relative to what you discussed at toy fair.
I mean product line changes such as I won't get such as the Opex, but often in some retail as well thanks.
Yes, yes, there's been no significant changes to our product lineup, obviously were assessing the situation and adapting with new forms of creativity in our demand.
Creation programs, but ultimately as I mentioned in as we presented.
Your toy fair.
The great year for us with great product in great programs.
Which will continue the changes that we've made have been about you know adapting to a new create creative world in the context of some of the demand.
Creation program so.
Quickly.
Dialoging with our consumers online and various ways that we've driven new forms of product and brand communication had been really successful and as time moves on will continue to assess it and adjusted accordingly.
You know what you do you also and I mentioned, the fact that we've been able to keep to our calendar, even though we can't have in person meetings, we've been doing it virtually and it's been very very successful.
We have thank you Joe we've done a great job frankly, as as a global organization adapting to the new norm.
Driving many of our product and marketing conversations on line through various.
New technologies that have United the global organization that has truly stepped up and we continue to be on track and on calendar to deliver a strong back half.
Great. Thank you very much.
Thank you.
Next question comes from the line of Jamie Katz with Morningstar.
Hi, Good afternoon, I Hope you could just help us think about how maybe that movie calendar being pushed back in some of the content being pushed back might help benefit margins is that greater percentage of sales have to on first that partner brands.
There are any sort of an except you might be thinking about that might be helpful. First understand thanks.
You know this is obviously.
Option to the entertainment calendar at large.
Our.
Main partner in the context of what we had planned this spring was minions, which moves to 2021 frankly, what this actually does is pivot the consumers interest in core evergreen properties and play patterns that ultimately really give us a lot of strain there's been no made.
Your shift in our margin profile or ultimately our programs and products on the whole.
There will be obviously a shift in spring with minions.
Ultimately it really starts to strengthen if you will you know our own proprietary brands. This year as evergreen brands become more important and we're looking forward frankly to a truly robust 2021.
As many of the entertainment properties are shifting their programs into 21.
And Jimmy I'll add that sorry.
I haven't to emphasize emphasize the point that.
Owning one of the strongest catalog so children and family Entertainment franchises in the world.
We see as an absolute strategic advantage.
The fact that were less dependent on third party IP.
Is is it is an advantage the fact that.
Our brands are so strong and still resonate with consumers in a part of.
Pop culture, and we are able to quote to continuously reinvent.
And comet the consumer from different angles is is a huge benefit. So we feel very comfortable sitting where we are with the ownership of our catalog.
And at the same time, we did said, we'll look to expand into third party partnership, but but having a strong foundation.
With our own catalog that we own is a huge advantage.
Thank you.
And you did you have another question.
I was actually just curious you talked about effectively managing through the cover 19 Thats ROP Shannon can you tell me how long you are anticipating the called the 19 disruption to be.
Yeah.
No one has a crystal ball.
And and it is no one knows no one knows I.
I would say that atmel.
We're starting to think.
So.
Think about the day after.
Getting back to the office.
We've done a lot of work to protect our employees.
Globally as of today.
Across.
Tens of thousands of people, including our factories we had.
11 confirmed cases.
Which you can say you know is 11 people impacted that we know but in the big scheme of things it didn't really.
Stop us from performing the way we do.
That said, we continue to look at the situation and make sure that we are ahead of the game and are prepared for all types of eventualities.
And you know time is on our side.
And the fact that the majority of our business is at the end of the year is is helpful. You know it's never a good time to be facing with this type of disruption, but if it ever happens you might as well going with it and the early part of the year. So we have time to.
Assess things in respond and adjust what we do and make sure that we optimize the situation.
Thank you.
Thank you.
This concludes todays Q and a session.
I'll now turn the call back over to Mr. crites for any closing remarks.
Thank you operator, thank you everyone for joining us today.
This especial times and we appreciate your continued interest in the company.
As you can see weve.
Quickly adjusted the way, we operate and how we manage the company during this unprecedented time.
And we're very satisfied with our execution considering the circumstances.
We covered a lot this afternoon.
Just wanted to end by saying that we are confident in our ability to navigate through the balance of the year and believe we have the assets resources and capabilities that position us well to succeed in the recovery.
We do expect to recapture the momentum that we had entering 2020 after the disruption is over and as always we'll remain focused on transforming mattel into an IP driven high performing for a company and creating long term shareholder value.
We hope that you and your family as a safe and healthy.
We'll now turn the call back to Dave.
To provide the replay details thank you.
Thank you in on and thank you everyone for joining the call today.
A 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 our investor page or for an audio replay. Please dial for all 45373 406.
I was curious for 767 309.
Thank you for participating in today's call.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.
[music].