Q3 2020 Mattel Inc Earnings Call
[music].
This time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session Dan.
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. It is now my pleasure to introduce VP Investor Relations, David when you have it.
Thank you operator, and good afternoon, everyone.
Joining me today are non cries, Mattel's, chairman and Chief Executive Officer, Richard Dickson, Mattels, President and Chief operating Officer, and Anthony Disilvestro, Mattels Chief Financial Officer.
As you know this afternoon, we reported mattel's 2023rd quarter financial results.
We will begin today's call with the non and Anthony providing commentary on our results.
After which we will provide some time free non Richard and Anthony to take your questions.
To help supplement our discussion today, we have provided you with a slide presentation our disk.
Our discussion slide presentation and earnings release reference non-GAAP financial measures, including gross sales.
Adjusted gross profit and adjusted gross margin.
Adjusted other selling and administrative expenses.
Adjusted operating income and loss adjusted earnings and loss per share.
Earnings before interest taxes, depreciation and amortization or EBITDA adjusted EBITDA.
Adjusted EBITDA free cash.
Free cash flow and constant currency.
Please note that the gross sales figures referenced on this call will be stated in constant currency.
In addition, please note that our accompanying slide presentation can be viewed in sync with today's call. When you access it through the investors section of our corporate website corporate Dot Mattel Dot com.
The information required by regulation G regarding non-GAAP financial measures is included in our earnings release and slide presentation.
And both documents are also available in the investors section of our corporate website.
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 categories and product lines.
These statements are based on currently available information and assumptions and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward looking statements, including risks and uncertainties associated with the COVID-19 pandemic.
We describe some of these uncertainties in the risk factor section of our 2019 annual report on form 10-K, our Q2 2020 quarterly report on form 10-Q.
Our earnings release and the presentation accompanying this call.
And other filings, we make with the FCC from time to time as well.
As well as in other public statements.
Mattel does not update forward looking statements and expressly disclaims any obligation to do so except as required by law.
Now I'd like to turn the call over to a non.
Thank you for joining materials third quarter 2020 earnings call.
I hope that you and your families are staying healthy and safe.
This was a very strong quarter for Mattel.
We saw a major upswing in topline and a significant increase in profitability.
We continue to make meaningful progress towards becoming an IP driven high performing public company.
Here are some of the key highlights for the third quarter.
Gross and net sales grew strongly versus prior year.
Gross sales were $1.8 billion up 10% as reported and up 11% in constant currency.
Net sales were $1.6 billion also up 10% as reported and up 11% in constant currency.
Adjusted gross margin was 51% a substantial improvement of 410 basis points.
This was the ninth consecutive quarter in which we improved adjusted gross margin on a year over year basis.
Adjusted operating income grew strongly to $401 million up 131%.
And adjusted EBITDA improved significantly to $470 million, an increase of 90%.
The toy industry as a whole grew meaningfully and continues to demonstrate its resilience in challenging economic times.
The industry is yet again proving to be a strategic category for retailers asparagus continue to prioritize spend on their children and look for high quality products at affordable price points.
Mattel's growth outpace the industry as we gained share in key markets around the world and achieved growth in each of our four regions.
Our Pos momentum remained strong throughout the quarter with total company Pos up double digits and outpacing sales.
POS momentum has continued into October.
A key highlight for the quarter was our growth in E Commerce, where we continue to see sales outpace other channels, even as more stores reopened.
E commerce growth by approximately 50% versus prior year and it now represents approximately 30% of our global Pos as we expanded our listings and continued to drive performance in this important channel.
Our supply chain is fully operational as we chase the extraordinary growth in consumer demand for our products.
Looking at our third quarter gross sales in constant currency by category.
Our strong performance was driven by growth in our dogs category action figures building sets games and other category and vehicles.
This was partially offset by infant toddler and preschool.
Outdoor category gross sales grew by 24% year over year, driven primarily by Barbie and the newly launched Kev Club dollar line.
Bobby continued to perform exceptionally well and grew by a remarkable 30%.
Gross sales increased across almost every segment driven by a combination of great product, new innovation cultural relevance and highly effective demand creation.
Pos growth rate in our adult category outpaced shipments by.
Barbie Pos was up more than 50% which is.
Which speaks to the strength and ongoing momentum of the franchise.
Per NPD.
In the third quarter, Matt There was the number one door manufacturer in the US Europe, and Latin America and gain share in all three regions.
In the us.
Probably it was the number one toy property for 12 of 13 weeks in the quarter and finished the period as the number one toy property overall not just in those.
American Girl also improved substantially.
Gross sales were down a mere 2% or $1 million compared to a decline of 16% in the first half.
This encouraging performance was in spite of COVID-19 related retail disruptions, including a large drop in overall tourist traffic to our flagship stores as well as the permanent closure of four of our retail stores. This year.
American girl direct to consumer sales, however, babbled and almost fully compensated for the reduction in the retail business with growth in new customer Activations average order value and conversion rates.
For the quarter direct to consumer represented more than 50% of sales.
Our vehicles category gross sales were up 8% year over year, driven by the strong performance of hot wheels and Matchbox.
Hardwoods grew 9% with broad based growth across segments, including monster trucks and Super Mario Kart.
Hotwheels also benefited from improved impulse purchases as retail stores reopened and foot traffic increased.
POS growth in our vehicles category was twice the rate of sales growth.
Hot wheels, Pos was up double digits, reflecting the significant demand for this brand.
Heart was gained share in the third quarter in the US and remains the number one vehicles brands per NPD.
Our infant toddler and preschool category growth sales were down 5% year over year due to a decline in Fisher price friends as we continue to exit underperforming licenses and a decline in Fisher price and Thomas and friends.
Fisher price core was down only 1%, which was a meaningful improvement compared to a 19% decline in the first half.
These encouraging results were driven by growth in the infant and toddler segments offset.
Offset by the toy story four comparison in our Imaginext line.
Category Pos was up low single digits and continues to outpace shipping.
Fisher price remains the number one infant toddler preschool manufacturer in the us per NPD.
Gross sales for action figures building sets games and other our challenger categories together grew 14% year over year, driven by games and plush.
Games achieved its seventh consecutive quarter of year over year growth.
Oh, no continued to perform exceptionally well remaining the number one item in the games and puzzles category in the U.S. per NPD.
Games, Pos remains strong and was up double digits in the quarter.
Our plush category continued to show strength with this year's launch of Star Wars the child.
In the US the child was the number one selling item in the past category in the third quarter and year to date fair NPD.
Building sets, we're down slightly a significant improvement compared to the first half.
We are encouraged by the double digit Pos growth in the quarter.
As expected.
Action figures declined due to a toy story four year over year comparison.
The decline was partially offset by Jurassic World, which was up in the third quarter and year to date in spite of being two years. After the release of the movie as it continues to establish itself as an evergreen property.
We also successfully introduced the masters of the universe collect a toy line.
With more to come in anticipation of the franchises relaunched next year.
In the U.S., we gained share in the action figures category in the third quarter per NPD.
Given the strength of our brands, we have accelerated our direct to consumer offering of collectors product to targeted segments of our consumers.
We continue to leverage our capabilities in E commerce and are looking to grow share and outpace the overall industry growth.
Looking at gross sales by region and.
In constant currency, we achieved growth in each of our four regions. Despite COVID-19, disruptions and local restrictions that impacted some locations.
By the end of the third quarter about 2% of all retail outlets the set our products representing about 1% of our revenue base remained closed.
While retailers were restocking the shelves, we still exited the third quarter with lower retail inventories year over year.
Looking at regional gross sales performance in constant currency for the quarter.
North America was up 13% driven by broad based strength across almost all categories.
POS was up more than 20%.
Mattel was the number one manufacturer in the third quarter in the U.S. and gain share throughout the quarter per NPD.
EMEA was up 16% driven by strong performance across all of our major markets and their continued shift to ecommerce piece.
POS also accelerated and slightly outpaced sales growth.
In Europe Mattel grew at twice the rate of the industry and gainshare throughout the quarter per NPD.
Asia Pacific was up 3% driven by solid growth in Australia.
POS was flat in the quarter compared to a double digit decline in the first half.
Several markets continue to experience restrictions and store recoveries.
Latin America was up 3% driven by an improving return market would store reopenings and increased foot traffic.
POS was up low single digits and in line with sales.
Our work over the past two years to develop a flexible and results oriented organization continues to serve us well.
While we faced significant disruptions in the first half of the year and some COVID-19 challenges still remained during the third quarter, we demonstrated our strong execution capabilities and the power of our brands.
We have clearly made significant progress in our short to mid term strategy to restore profitability and regain topline growth and at the same time, we continued to advance our mid to long term strategy to capture the full value of our IP.
We recently announced a new field project based on Thomas and friends, but.
The film will be co produced and directed by Mark Forrester the acclaimed filmmaker and director of James Bond quantum of solace.
Christopher Robin and finding Neverland among others.
We also recently Greenlit 104 episodes and two specials for the Thomas and friends television series.
These shows will premiere in fall of 2021.
Additionally, we announced season 13, a fireman, Sam and Greenland season, three of Polly pocket.
Both shows would be distributed globally through broadcast television and streaming services.
Production on our two masters of the Universe animated series is ongoing and we look forward to releasing them on Netflix next year.
The successful introduction of the product line. This year combined with these animated series.
Let the ground work for the holistic relaunch of this iconic franchise.
We continue to advance our digital gaming strategy with the launch of our hot wheels integration into world of tanks on council and the.
And the upcoming launch of Hotwheels Openworld on roadblocks.
We also continue to see growing engagement in our existing digital games, including owner face Stan Scrabble, Barbie Dreamhouse Hotwheels and more.
Looking beyond the third quarter based on the POS momentum, we are seeing the low retail inventories and the early start of the holiday shopping season, we expect gross sales to grow in the fourth quarter.
We are working closely with our retail partners on the challenge of meeting the extraordinary growth in consumer demand heading into the holiday season.
Looking to the full year we.
With continued operational savings and margin expansion, we expect to see strong EBITDA growth.
With that said in spite of the positive outlook. We are mindful of the Cove, It 19 volatility and other macroeconomic uncertainties, which could negatively impact performance.
In closing the third.
The third quarter represents a strong upswing compared to the first half as we were able to regain topline growth and exceed industry performance.
We saw growth in every region in constant currency and broadly across our portfolio.
Our supply chain continue to perform very well and worked in close partnership with our brand teams and commercial organization.
We achieved significant improvement in all key profitability metrics, including gross margin operating income EBITDA and free cash flow.
There is strong demand for our product with Pos outpacing shipments and we expect continued growth through the rest of the year.
We're also making significant progress on our strategy to capture the full value of our IP with Penn field projects already announced and numerous television projects in development or production with more to come.
We continue to demonstrate meaningful progress towards becoming an IP driven high performing public company.
I could not be more proud of the work of the entire Mattel team.
Every single employee deserves full credit for their commitment and contribution towards putting us back on a profitable growth trajectory.
We remain focused on executing our strategy and the creation of long term shareholder value.
And now.
Anthony Disilvestro will cover the financials in more detail.
As you know this is Anthony his first earnings call as CFO. He has already made a real impact since joining the company in June I'm sure.
Im sure you will all enjoy working with them.
Anthony.
Over to you.
Thanks, Tina we had an outstanding quarter with results exceeding our expectations. Following a first half that was impacted by store closures and restrictions due to COVID-19.
We are very pleased with the continuing improvements in gross margin a key driver of our overall financial performance as we continue to benefit from our cost savings programs.
Our cost savings programs in aggregate deliver $37 million the savings in the quarter, bringing the year to date total to $149 million.
Cumulatively, we remain on track to exceed $1 billion the savings exiting 2022.
Today, we will be providing 2020 guidance, reflecting our year to date performance and positive outlook for the fourth quarter, including the all important holiday season.
I'll now review our detailed result.
In the third quarter, we generated gross sales of $1 billion $818 million and net sales of 1.632 billion, both increasing by 10% as reported and 11% in constant currency versus prior year.
On an adjusted basis, we generated $401 million of operating income increasing by 131% year over year.
This substantial increase reflects gains across the PML, including higher sales gross margin expansion reductions in advertising in part due to timing and lower SDMA.
Adjusted EPS in the quarter with 95 cents.
265% higher than the prior year.
Adjusted EBITDA was up substantially improving by $222 million or 90% to 470 million.
This was driven by gains in operating income, partly offset by lower depreciation as we've reduced our capital spending over the past few years.
Bridging our third quarter gross sales performance by reporting segment.
America increased by 13% in constant currency versus the prior year.
The increase was fueled by double digit Pos growth, which outpaced the industry as our teams together with our retail and online partners executed extremely well.
International increased by 10% in constant currency versus prior year.
This was driven by 16% growth in India benefiting from accelerated ecommerce growth, while Latin America, and Asia Pacific each delivered 3% growth a significant improvement from the first half as retail doors continued to reopen.
American girl grow sales declined 2% in the quarter as we continue to make progress on our strategy to rationalize our retail footprint and transition more of the business to DTC.
As I mentioned the continued high growth of ecommerce was a key contributor globally.
Total company gross sales in constant currency increased 11%.
Gross sales as reported increased 10%, including a one point negative impact from foreign currency translation, primarily due to the weakening of the Brazilian real and Mexican peso.
We achieved continued improvement in gross margin compared.
Compared to 2019, our third quarter adjusted gross margin increased by 410 basis points to 51%. This.
This is the ninth consecutive quarter in which we improved adjusted gross margin on a year over year basis.
Our cost savings programs contributed 150 basis points of adjusted gross margin expansion.
We continue to achieve savings from our ongoing capital light program by rationalizing our manufacturing footprint and having successfully reduced our SK you count by over 30%.
This 150 basis point gross margin expansion consisted of $14 million the savings from the structural simplification program, which we completed at the end of last year and $11 million of savings under the multiyear capital light program.
Gross margin also benefited by 130 basis points from reduced royalties, reflecting lower sales of licensed products.
Next another contributed 110 basis points, driven primarily by the benefit of category mix, reflecting the above average growth of dolls and games.
And we experienced product cost deflation, adding 20 basis points to gross margin driven.
Driven by lower material prices, partly offset by increased conversion costs.
On a year to date basis, adjusted gross margin was 47.8% compared to 42.9% for the same period last year as we make further progress on our goal to restore profitability.
Moving down the piano advertise.
Advertising expenses for the quarter totaled $103 million, a decline of 40% compared to 2019.
As anticipated the year over year decrease in advertising was primarily due to lower spending in the quarter, reflecting a shift in timing to the fourth quarter as we plan to increase support for our products during the all important holiday shopping season.
We continue to proactively manage our SGN expenses and have taken additional actions in 2020.
Adjusted SGN eight for the quarter was $329 million compared to 351 million in the prior year quarter, a decline of 6%.
The decrease in SG Nay was primarily driven by the benefit of the structural simplification program and additional cost savings actions taken in 2020.
We also had very strong bottom line performance in the quarter adjusted operating income grew from $174 million to $401 million, an increase of $227 million or 131% compared to the prior year quarter.
The increase in adjusted operating income was primarily driven by sales growth gross margin expansion lower advertising in part due to timing and lower SGN.
Adjusted EBITDA was also up significantly reflecting the gains in operating income.
Adjusted EBITDA increased by $222 million or 90% to $470 million.
Generating free cash flow is a key focus area for us.
In the nine month year to date period cash from operations improved by $80 million from a use of $514 million in 2019 to a use of $434 million in 2020 as a lower net loss was partially offset by higher seasonal working capital requirements.
For the year to date period, depreciation and amortization decreased by $36 million from $186 million in 2000 $19 million to $150 million in the current year as weve reduced capital spending levels over the years.
Capital expenditures for the nine months increased from $76 million to $90 million.
We expect our full year capital expenditures to be in the range of $125 billion to $150 million, which remains well below historical levels.
Free cash flow improved by $65 million from a use of 589 million last year to $524 million in the current year.
We believe it is important to begin communicating free cash flow on a trailing four quarter basis, given the highly seasonal nature of our business.
On that basis, we generated positive free cash flow of $130 million over the last four quarters compared to $74 million a year ago, an increase of $56 million in.
The improvement in free cash flow was driven by increased cash from operations, partly offset by an increase in capital expenditures.
Turning to the balance sheet accounts receivable increased by $35 million to $1 billion $326 million due to the increase in gross sales.
While the dollar value increased days sales outstanding declined by five days ending the quarter at 73 days as we tightly managed receivables.
Owned inventory decreased by $38 million to $664 million.
The reduction is primarily due to the increased demand for our products.
We ended the quarter with a cash balance of $452 million, including $400 million of short term borrowings.
This compares to a cash balance of $218 million, a year ago with $230 million of short term borrowings.
The increase of $64 million and our cash balance excluding short term borrowings is primarily driven by our trailing four quarter positive free cash flow.
With no debt maturities until March 2023, and the availability of a $1.6 billion credit facility.
Liquidity is expected to be sufficient to effectively execute our strategy.
Given our EBITDA growth trajectory, we expect our leverage ratio to continue to decline and we intend to use excess free cash flow to reduce debt.
With one quarter to go into year and more visibility than we had in the early part of the COVID-19 disruption, we are providing sales and earnings guidance for 2020.
We expect full year gross sales in constant currency to be between flat to plus 1% as our projected strong second half performance offsets that 13% decline in the first half.
We anticipate our gross sales as reported to be negatively impacted by one to two percentage points due to currency translation.
Our guidance for the full year gross sales in constant currency reflects mid single digit expected growth in the fourth quarter as you know.
Xenon said, we are working closely with our retail partners on the challenge of meeting consumer demand heading into the holiday season.
In addition, we are mindful of the COVID-19 volatility and other macro economic uncertainties, which could negatively impact performance.
Moving to profitability, we are increasing our guidance for adjusted gross margin, which we provided on our second quarter call. We now.
We now expect our adjusted gross margin to increase by 350 to 400 basis points to about 48.5% to 49% for the full year compared to last year's 44.9%.
The improved gross margin outlook reflects better than expected manufacturing performance lower.
Lower than anticipated cost inflation, and the benefit of favorable volume and mix.
Advertising expense is expected to be near the midpoint of our previously communicated range of 11% to 13% of net sales.
On adjusted SGN eight for the full year we.
We expect to generate the $90 million of net SGN a cost savings previously discussed but expected to be partly offset by above target incentive compensation and currency translation, reflecting a U.S. dollar weaker than our initial expectations.
Adjusted EBITDA savings from structural simplification are still expected to be $92 million and we remain on track to deliver savings of 50 million under our capital light program.
Based on our year to date performance and outlook for the balance of the year, we expect full year adjusted EBITDA in the range of $625 million to $650 million compared to 453 million in 2019.
The strong forecasted growth in adjusted EBITDA reflects our ongoing progress to restore profitability and is driven by the benefit of our cost savings programs improved supply chain performance leveraging the benefit of our 30% SK you reduction.
Additional actions taken in 2020 to reduce SGN a fair.
Favorable product mix.
And overall better execution across our organization.
Mattel has delivered an outstanding quarter in spite of the pandemic, we have continued to make meaningful progress towards our strategy to restore profitability and regain topline growth. We believe we are well positioned to maintain this momentum.
I am very much looking forward to partnering with a non and the entire team as we continue to transform Mattel into an IP driven high performing to a company our.
Ill now hand, it over to the operator for the Q and a.
Thank you.
I Wonder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key.
And our first question comes from the line of Michael.
With Goldman Sachs.
Great. Thank you very much for the question and congratulations on a great quarter I just had two questions.
First there are a few theatrical shipped in the quarter minions got pushed out for instance, and didn't really show up in your results at all but I was wondering if you could talk about the impact of theatrical shares and discuss some of the key partner brand punished.
Initiatives that you have for this year and next and then I just have a quick follow up.
Yeah, Hi, Michael Thank you.
The as you noted.
Technical releases have been shifted away from this year to next.
This one had some impact on us overall didn't change the very strong performance, we expect to have in the in the second half of the year and see growth in the fourth quarter.
With that said, we do expect.
Performance to be positively impact next year impacted next year with the additional.
Releases theatrically.
And there is actually a pretty strong slate of movies that we expect such as minions Spirit Jurassic World, We fast and furious top gun on at this point expected to do show next year. So this in addition to our own strong portfolio of brands and products bodes well for us.
In 2021.
Great. Thank you and I just had a follow up question on the guidance.
Can you talk about some of the assumptions in the Fourq huge growth outlook of mid single digits.
Particularly given the 10% growth in in Threeq you.
During Q benefit from.
An outsized amount of retail inventory restocking is there anything in particular, you would call out. Thank you very much.
Just to say that we are seeing a significant upswing in revenues with our topline now forecasted to be to be up high single digits in the second half versus a double digit decline in the first half we do expect an improved second half, but we did not anticipate such a strong upswing upswing.
In such a short time, when we enter a peak production and plan our inventory.
POS remains strong and there is continuing demand for our product and what our supply chain is fully operational we are chasing extraordinary growth in demand.
We gave you guidance and we do expect to meet our gross sales.
Guidance, but we cannot be certain we will fully meet the surge in consumer demand.
We continue to work closely with our recent partners on the challenge of meeting the strong demand heading into the holiday season.
Just to add to that we do.
We did see the restocking of retailer inventories is the typical seasonal build that we see in the third quarter, but we did end the quarter below last year's level and when you consider the strong Pos or weeks of supply are also down at the end of the third quarter.
Yeah. Good good that thank you.
Thank you.
Next question comes from the line of Garrett Johnson with BMO capital markets.
Okay. Thank you.
No the supply chain is good because we do detail there we believe that difficult.
That's great.
So how's that supply chain, how will your factory.
Okay. So how do you tell us there.
There may be some retailer bottleneck, who began about as well so you'll draw that thank you.
Yes, our supply chain is fully operational and as I said, we at this point chase the extraordinary growth in consumer demand for our product and we work closely with our retail partners on the challenge of meeting the demand heading into.
Heading into the season this is not impacted by Cove it.
This is literally all about surge surge in demand as far.
As far as.
Retail and closure.
As we noted in the prepared remarks at this 0.2% of stores that sell our product.
Close representing about 1% of our revenue base.
South America and Europe. Their retail is 100% open Latam is about 2% close in Asia Pacific about 7% closed.
Okay, but none of the retail part or having any problem flowing goods. They are all pretty great.
Yes, the the recent partners are.
Are doing a great job.
Really chasing as world demand.
We've done.
Together, we work.
Hard to to fulfill the demand they doing an excellent job in the offering offering.
Multi channel offering omnichannel solution for shoppers and we expect that this.
This will remain an important category for them or strategic category for them heading into the holiday season.
And the last one Muslim Barb.
Partly please.
We're really good sellers over the summer.
No.
Jordan Busters offering kids activities, while they're at home can you believe this is Paul can sell through fourth quarter wonders products would have traditionally been sold so.
Yes, especially on those barbecue we know there are a lot of those sort of fits in July. Thank you.
Yeah, we do not believe there was pull forwards as it relates to shipment or consumer demand. The in the third quarter. Some restocking did occur but retail inventories are still down in absolute dollars and down significantly in weeks of supply.
So you know as it relates to consumer demand our own internal shopper research she.
Was that the vast majority of parents plan to spend the same or more on holiday purchases throughout the fourth quarter.
Thank you.
Next question comes from the line of our Pine could Gary would you be yes.
Hi, Thanks, very much. Thank you for taking the question.
Could you actually quantify where retail inventories are I know you said in your prepared remarks that that number was down year over year, then the quarter and you have if you have that number for North America as well as internationally that would be most helpful. Then.
And then I have a quick follow up thanks, Yeah, we don't have a specific number but let me give you some additional color context on retailer inventories and and going back to the beginning of 2020, we came into the year.
Retailer inventories are higher than the prior year and then as we talked about at the end of Q2, we talked about retailer inventories being down versus the prior year.
And then as I said earlier, there was the seasonal build in the third quarter of retailer inventories, but at the.
But at the end of the quarter, we're still down a little bit versus the prior year not as much as we were at the end of the second quarter, but when you consider weeks of supply given the high growth of Pos the weeks of supply or down rather significantly.
Okay. That's very helpful. Thank you.
You mentioned October retail momentum has held up should we assume you continue to see double digit increase in Pos into October.
We gave you guidance for the.
For the quarter and what I can say in addition to that the POS momentum is strong it remained strong throughout the quarter with total company Pos up double digits as we said outpacing sales. The you know the good news is that there is strong demand for the product.
And at this point it remains ahead of a head of sales and all of this we believe will be will point to a strong a strong season for us.
Thank you very much.
Thank you. Your next question comes from the line of Dan Arya with JP Morgan.
Hi, Thank you so much like taking my question.
No very impressive quarter can that the team I just had two quick question.
One is historically if you look at the fourth quarter sales versus the third quarter.
Usually the fourth quarter is bigger and dollar amount less than the third quarter, but it.
But it seems like you're guiding in the fourth quarter to be similar to the third quarter. This time around.
Is that conservatism or there is something that they make that guiding that outlook for the fourth quarter.
Okay.
Yes, Hi, Hi, Tammy. Thank you for the question I as I said this is not about.
Change in demand demand is still strong at this point, it's about being able to.
Being able to fulfill the demand. This is why we say we are chasing the.
This extraordinary surge in that Weve seen demand when you consider that we went from a double digit decline in the first half to a double digit growth.
In the third quarter and a high single digit growth overall in the second half at this point.
At this point, it's all about being able to fulfill this very strong.
Very strong extraordinary growth in demand.
Got it got it Matt.
Perhaps more and then another quick one as a further Thomas and friends movie that you just announced.
Are you are you planning to corporate is that movie, meaning if there's upside to that.
The movie revenues globally this sharing in that economics there.
It does and then more like a product driven revenue.
Well we haven't.
Disclose the terms of the distribution of the movie and in other words, the commercial arrangements about the movie.
This is a development deal with Marc Forster, the we have different types of of relationships and agreements with different studios and Directionally. We always expect to have economic upside in our movies. This is not none of our movies Apulia about.
You know.
A licensing deal we do get paid but we also retain upside in the economic success of our projects.
Got it that's super helpful. Thank you so much and best of luck for the quarter.
Thank you. Thank you.
Thank you.
Our next question comes from the line of Steph Wissink with Jefferies.
Thank you good day everyone.
The two areas that we could the first is on NP. Thank you mentioned that your expectations for the year right around the midpoint of that 11% to 13% range, which would imply a pretty significant step up in Q4. So our question is have you already committed to that amount or is that the banking the value in case, you need it, particularly just want to reconcile.
Now that with your comments on demand outstripping supply.
And then really quickly just on E com conducting that really stand out both for American girl and for the total company being almost a third of the business now.
You talked a little bit about what a higher percentage of E com penetration might mean to the timing of revenues the scope of your advertising and promotions anything that we should be thinking about in terms of that channel shift.
Yes.
Yeah, I'll start with the advertising question and give you a little bit of context. If you go back to the beginning of the year. We did say, we expect the shift of advertising to the back half and Thats turning out to be more of a shift between Q3 to Q4 as well I don't want to get into too much specifics for competitive reasons.
But let me say that some of that shift is due to year on year timing and some of it is the result of aligning our spend with consumer shopping behavior.
As you point out we also said for 2020, we expect to be near the midpoint of the 11% to 13% of net sales range and as you do the math you will see that's a pretty significant increase in our fourth quarter spending as we support our products during the holiday shopping season, when consumers are making those purchase decisions and.
No I would also say that most of that spend is largely committed at this point.
Yes, and then Steph I'll take the.
Econ question.
So as we said in the prepared remarks, we are seeing very strong growth for us.
In E Commerce and online retail.
More than 50% growth now representing 30% of our global Pos in the case of American girl did to see more than doubled and now represents more than 50% of sales, who clearly a very important part of of the business.
As it relates to our economics, what we are seeing is a high propensity of online shopping among consumers.
And at the same time traditional retailers are doing really good work in evolving in that direction offering more solutions for shoppers.
So this is really about being at the front of the curve of responding to changing consumer behavior and being able to meet demand in wherever consumers are we haven't broken out the economics change in margin and things of that nature, but I would say that.
As the future becomes more about online shopping and online retail.
Our ability to be at the front of it is going to be very important for growth. It is part of our strategy. As you know it's always been on that one page that we have.
What did change is the timing of it we are accelerating and the execution of this part of the strategy given the importance of this of this channel.
Thank you.
Thank you.
Next question comes from the line of Linda Bolton Weiser with da Davidson.
Thanks, Hi.
I'm trying to do the math and the EBITDA and what would be implied for the fourth quarter. It looks like your implied guidance is just slightly lower than where the street is so I was wondering if there's any way you can quantify the increase in incentive comp or what the year over year increase in incentive comp would be or if there is then.
The other factors that are affecting the FC in a in fourth quarter. Thanks.
Yes, I'll take that you've done your math right.
On a full year basis were going from 453 to 625 to 650 on adjusted EBITDA and that implies.
Implies a smaller growth in the fourth quarter I would tell you. The biggest change is actually in the advertising line. When you go through the math I just talked about.
The midpoint of 11 to 13.
Against where we are year to date implies a very significant increase in advertising and that shift right between the first three quarters in the last explains most of that Delta in terms of growth in EBITDA compared to the prior year. This.
So specifically around as DNA as we said in our remarks, we do expect to generate the $90 million net SDMA savings that we talked about before but sitting here today, our expectations and guidance for the full year is above our original expectations. So were accruing to above target incentive comp and.
Station don't want to quantify that yet it's all based on forecasts and estimates so it's a little bit premature for us to do that but again the biggest factor is that shift in advertising.
And Linda let me just add that.
The EBITDA guidance that we gave is as you know $50 million or more or higher than the guidance, we gave before the disruption, which we pooled.
So coming back and upgrading that number by $50 million after such a strong such.
Such negatives first half.
Tells you a story story of a strong very strong performance in the second half overall.
Thank you very much.
Thank you.
Your next question comes from the line of William Reuter with Bank of America.
Hi, Thanks for taking the question.
In year, one of the first slide of the presentation, you talked about the industry as a whole growing meaningfully and the telco and add to that.
It's based on your internal numbers, what do you think that the toy industry did grow out and I'm wondering as a whole the industry growth. What do you attribute this to and I guess, how much of it it may be related to Coca in some way.
Yes look the the industry as a whole did grow meaningfully and continued to demonstrate its resilience even in challenging economic times, we see the parents continue to prioritize spend on their children and look for high quality products at affordable price points.
The industry is a strategic category for retailers it drives foot traffic even.
Even though there's not a lot of foot traffic in stores, but it definitely increases engagement.
An important category for them the retinal partners themselves have done a really good job adapting to the new current environment and we expect them to continue continue to drive shopping.
Among consumers, especially as we head into into the season.
While we were.
We believe some of the growth that we see in the industry is because of coated it's important to note that the door industry has been growing historically and was projected to grow before coated.
We always point to Euro monitor research forecast growth of 4.9%.
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4.1% on a global bet on a global basis to 2024.
This is actually expected to be driven by the dawns category, which is meant to grow about 10% per year, which is a good thing from a tail.
And I would note that within.
These dynamics, we expect to continue to outpace the.
The industry growth and continued to perform above above.
Above above.
Above industry averages.
That was a very wholesome and turned and helpful.
Just one more question given your credit metrics have improved so much.
Do you have a leverage target at this point or are you thinking about you know, hoping or trying to achieve an investment grade credit rating.
Yes, so a couple of things on that front first we are very pleased with our free cash flow performance, we talked about the last four quarters being a positive 133 million and our intent is to pay down debt going forward to improve our leverage ratio.
If you combine that with the adjusted EBITDA performance and the trajectory. We expect our leverage will continue to decline and improve overtime and we are targeting and an investment grade rating I don't can't give you a date for that but directionally, that's where we're headed.
If you look at some of the metrics on it.
On a trailing four quarter basis, we ended the third quarter debt to adjusted EBITDA at 5.3 times and that compares to 6.9 times same period 12 months ago, So significant improvement and we expect that to continue to improve as we head towards investment grade.
Thank you and good luck for continued success.
Thanks, Bill Thank you.
And our next question comes from the line of David Battle with Ehrenberg capital markets.
Yeah. Thanks, so much for the question I have two if I could the first one where it would run.
Regards to gross margin for next year.
Curious to what extent should we expect certain areas of outperformance this year from things like royalties mix to reverse next year and then.
A quick follow up.
Yes so.
Not prepared to give guidance for 2021 at this point, but we needless to say, we're very pleased with the performance on gross margin in the fact that we're going to be up 350 to 400 basis points. This year to a range of about 48.5% to 49%.
If you go back in time 2017 that gross margin was just around 38% of significant improvement and that's really the result of all the great work. The company has done around cost savings, both structural simplification and the capital Light program now the capital Light program is a multi year program.
Addressing our plant plant.
Plant footprint, reducing eschar used by over 30% other approach productivity measures. We do expect that to continue to contribute contribute into 2021 I don't have a number for you yet.
We will also look for other opportunities and efficiencies to further improve our gross margin.
Great that's helpful. Thanks and second.
The second question is around E commerce, and specifically direct to consumer omni called out Masters of the universe and collector sets.
As a a partial driver sales. This year I was wondering if you could expand on that and just shed some light on to the extent to which that forms or is it broader E commerce and direct to consumer strategy that you expect to roll out in the future.
Yes, David it's too early to talk about that to provide specific detail, but as I mentioned before.
Online.
Retail and ecommerce and D to C, especially is an important part of our strategy and we'll be able to share with you more down the road as we make further progress.
Fair enough. Thanks.
Thank you.
Your next question comes from the line of Alicia Hendrix with Barclays.
Hi, Thank you good afternoon, and so you know you guys have had now a nice string of reporting upside in the quarters.
Thank you think everyone appreciate your conservatism.
But well it would be helpful to know what the biggest surprise wise in terms of.
The biggest delta I would say between your outlook and then what you reported and I think you touched on it very early in its calling in Michael's question, but maybe if you could help peel back the layers a little bit more and then as you look to the end of the year.
Finally on the same lines, where you think the biggest drivers of potential upside could be.
Yes, Thank you Felicia.
You've been following the company and you know that we've done a lot over the last.
A couple of years and many of the actions that we took before the pandemic to reshape and simplify our operations as part of our turnaround strategy definitely working our brands and our products resonates very well with consumers and our partnership with retailers and driving demand is working very.
Very well.
And you know when you ask about so.
Surprise.
We did expect growth.
As we've said in the second quarter, we said that we expect growth, but clearly the surge and incredible momentum we have both topline and bottom line.
Is very is very strong you know that the quality of the numbers. The fact that we grew in every region and broadly across the entire portfolio.
Seeing such strong growth in profitability. All of this is very is very strong and as it happens.
You know this was actually the highest quarterly growth from a tail in the past 10 years.
Of any quarter modest they're not the third quarter of any quarter. This was the highest growth from a tail in any quarter in the last 10 years.
And when you add that to the continuous improvement in gross margin nine quarters in a row, where we continue to improve gross margin on a year over year basis with such strong momentum all of that you know is is you know speaks to the progress we are making I can't sit here and tell you that it's exactly as we planned it's fair to say.
Ahead of our expectations.
And you know, we're not we're not slowing down we Kip Kip.
Keep up the momentum we focus on execution and it's great to see the results coming in.
Yes, I get all that I guess, what I'm just wondering is like.
What is that you you on any of the four so what I'm trying to say is like was it you know the restocking that was faster than expected were there certain products that just had stronger kind of take in retail I mean was there anything kind of.
That.
Hey, what was specifically kind of different because I think what we're all trying to do is it's kind of gauge.
Fourth quarter and certainly there is some conservatism built in there as well.
No I wouldn't say we're not.
We're not that I'm not trying to avoid the question.
It's.
It's in a way a tale of two hubs for for the year.
We did have a challenging first half and obviously we've done.
We've seen a very strong momentum in the third quarter and expect that to continue in the fourth quarter. The performance was broad based I literally can sit and just point to one part of the company dolls as a whole category grew 24%.
Vehicles.
Hardwoods was up 9% given our challenger categories were up 14%.
Our growth in the US was 1.4 times the industry's growth rates.
We were number one in the region in the third quarter in the in your.
In Europe, we grew at twice the rate of the industry and gainshare throughout the quarter per entity. So you look at our categories you look at our regions.
The company as a whole is performing very strongly and you know.
Together with the momentum we're seeing in the market that partly driven by by the by what retailers are doing themselves very strong demand from consumers all of this.
Comes together to these numbers, yes, I would just add to that.
You look to the fourth quarter. There are couple of factors at play want one is the continued Pos growth. The other is our supply chain ability to supply and that's what you know.
I was talking about in terms of we can't be certain that we could fully meet that surge. So that's the other factor as we look ahead in the near term.
Okay. Thank you and just very quickly on Fisher price and just can you.
Just can you expect to see kind of more of a positive momentum in the fourth quarter right now you're lagging in North America, but just wondering how long it would take three to work with some of the underperforming brands that you mentioned in the Medac.
Yeah, Hi, it's Richard Felicia, Yeah, we've had very good.
We've been very encouraged with the progress that we're making and Fisher price.
We've been seeing.
This in Pos growth for the last two consecutive quarters, it's been driven by new innovation, great new compelling products.
And Mattel led by Fisher price is still the number one leader in the infant toddler preschool category continuing to be this incredibly valued brand by parents and trust, which is such an important attribute today more than ever so you'll see a lot more progress and Fisher price, but we're really encouraged with the last two quarters of positive Pos.
Great. Thank you.
Thank you.
It is all the time, we have for Q1 day, so with that I will turn the call back over to chairman and CEO and non cries for closing remarks.
Thank you operator, and thank you everyone for your questions.
This was a very strong quarter for us.
We continue to make meaningful progress towards becoming an IP driven high performing public company.
You know I would not say that the cobi disruption.
Until it is over and that macroeconomic uncertainties do not remain but seeing such strong growth in topline and even more so on the bottom line in the midst of a pandemic is another clear sign that our turnaround is working.
We believe there is more to come and as always we remain focused on creating long term shareholder value.
We hope that you and your families are healthy and safe and now I will return the call back to Dave to provide the replay details. Thank you.
Moving on and thank you everyone for joining the call today.
The replay of this call will be available via webcast, an audio beginning at 830 P.M. eastern time today.
The webcast link can be found on our investors page or for an audio replay. Please dial 4045373 406.
The passcode is 3348954.
Thank you for participating in today's call.
Ladies and gentlemen, this concludes today's conference call as you've heard dissipating and you may now disconnect.
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