Q2 2021 Mattel Inc Earnings Call
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Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Good day and thank you for standby, we'll continue Mattel incorporated second quarter 2021earnings.
Conference call at this time, all participants are in listen only mode. After the speaker's presentation. There will be question and answer session to ask a question. During the session you will need to press star 1 on your telephone if you require any pretty assistance. Please press star Zero as a reminder, this conference call is being recorded.
Like to turn the call.
To David's point, you Bitch, Vice President of Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone joining.
Joining me today are you non cries Mattel's chairman.
<unk> Chief Executive Officer.
Richard Dickson, Mattel's, President and Chief operating Officer, and Anthony Disilvestro, Mattel's Chief Financial Officer.
As you know this afternoon, we reported Mattel's 2021 second quarter financial results.
We will begin today's call with the non and Anthony providing commentary.
Metairie on our results.
After which we will provide some time for a non Richard and Anthony to take your questions.
To help supplement our discussion today, we have provided you with a slide presentation.
Our discussion slide presentation and earnings release May reference non-GAAP financial measures.
<unk>, including adjusted gross profit and adjusted gross margin.
Adjusted other selling and administrative expenses adjust.
Adjusted operating income and loss and adjusted operating income loss margin.
Adjusted earnings and loss per share earned.
Earnings before interest taxes depreciation.
Asian, and amortization or EBITDA adjusted.
EBITDA.
Free cash flow free cash flow conversion leverage ratio and constant currency.
In addition, we present changes in gross billings, a key performance indicator.
Please note that.
We may refer to gross billings as billings in our presentation and that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise.
Our accompanying slide presentation can be viewed in sync with today's call. When you access it through the Investor section of our corporate website.
Corporate Dot Mattel Dot com.
The information required by regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicator is included in our earnings release and slide presentation and both documents are also available in the investors section of our corporate website.
We have elected to revise prior periods for certain immaterial out of period adjustments, which do not require us to amend previous filings.
These adjustments are reflected in our second quarter earnings release, and slide presentation and will be reflected in our 2021 second quarter form 10-Q.
These adjustments will.
We will also be subsequently updated on the financial history section of our Investor Relations website at a later date.
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're 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 factors section of our 2020 annual report on form 10-K, and our Q1.2021 quarterly report on form 10-Q.
Our earnings release, and the presentation accompanying this call and.
And other filings, we make with the SEC from time to time.
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 Iraq.
Welcome to Mattel second quarter 2021 earnings call.
I hope that you and your families remain safe and healthy.
Mattel had another exceptional quarter as the company significantly improved profitability and accelerated topline growth.
Consumer demand for our product was very strong Mattel had market share gains across all regions.
<unk> in the second quarter per NPD.
Key highlights for the second quarter as compared to the same period in the prior year. Our net sales were up 40% as reported and 36 in constant currency.
Adjusted gross margin improved by 370 basis.
<unk> and reached 47, 5% the 12th consecutive quarter of growing gross margin.
And adjusted EBITDA was $131 million more than 4 times the same period last year.
Our tremendous momentum continued with.
Double digit growth in gross billings in each of our 4 regions.
Double digit growth across the full reported categories and double digit growth in our 3 power brands Barbie Hot wheels, and Fisher price and Thomas and friends.
As well as double digit growth for American girl.
Strong this is an exciting time for Mattel.
Having successfully completed the heavy lifting of the transformation over the past 3 years, we're now in growth mode, and establishing Mattel as an IP driven high performing toy company.
Taking a broader look.
At this quarter as part of our recent performance and continuous significant improvement across key metrics.
Gross billings grew double digits for the fourth quarter in a row.
Total company Pos grew double digits for the fourth quarter in a row and we have achieved positive Pos.
Growth for the last 5 quarters.
And global market share also growth for the fourth consecutive quarter. According to NPD.
Also according to NPD Mattel was the largest and fastest growing of the top 5 manufacturers in the U S on a year to date basis.
Looking at performance by region in the second quarter per NPD.
Sales growth exceeded the industry by 9 percentage points in the U S Inc.
11 percentage points in EMEA, and 19 percentage points in Latin America.
With more break.
More stores open in most markets consumers return to in person shopping experiences.
Clearly in regions with lower e-commerce penetration.
This is the benefit from Mattel given the breath of our omni channel presence, which includes more than 407.
70000 retail doors.
Yeah.
As brick and mortar improved e-commerce, Pos declined slightly but still represented more than 25% of our total Pos.
Furthering the broad expansion in e-commerce in recent years and reaffirming our strategy to expand.
And in the online retail and e-commerce space.
According to NPD.
<unk> was again the number 1 prime day toy manufacturer in the U S with twice as many items in the top 20 industry wide versus last year.
While.
While we saw strong growth in the quarter. We were also managing to global supply chain challenges and cost inflation.
Our supply chain and commercial organizations, we're able to minimize the disruption and continue to work closely with our retail partners as.
We aim to meet the cyclical.
Significant consumer demand for our products.
We also had another quarter of strong cash generation and we continue to improve our free cash flow conversion.
Looking at second quarter gross billings in constant currency by category versus prior year.
It is clear that day, Mattel playbook is working across our portfolio.
<unk> grew by an impressive 47%.
With strong growth in Barbie American girl pilot pocket, and Universal Spirit, which launched in June.
Does.
Cash was strong up double digits.
Bob <unk> continued its incredible performance growing 41% with Pos up double digits.
Per NPD.
<unk> those category gained 4.5 share points in the quarter and.
And Barbie was the number 1 global doll property in the second quarter and year to date.
American Girl is becoming a playbook success story and now a growth driver for Mattel.
American girl increased 43%.
Third consecutive quarter.
<unk> growth in the second quarter of double digit growth.
Vehicles increased significantly up 62% benefiting from a return to in store impulse shopping.
And the category was strong up double digits.
Hot wheels grew 61%.
According to NPD Hot wheels continued to build upon strength as the number 1 vehicle globally in the second quarter and year to date.
We are achieving great success in the relaunch of Matchbox as well as strong growth.
<unk> business cars.
Infant toddler and preschool was up 12% driven by Fisher price and Thomas and friends power brands with growth across little people.
Infant newborn and imagine X.
Fisher price core grew 15.
10% with Pos down low single digits due to the comparison to the high demand in baby gear last year when families went into foreign team.
Per NPD.
Price continued to be the number 1 infant toddler and preschool property globally and gained.
With.
As expected <unk> was down also due to the comparison to the Hy Bon pain related demand last year.
Thomas and France was up 14%.
Action figures building sets games and other are challenging.
Sure categories together grew 28%.
Action figures was another success story with gross billings more than double it driven by Jurassic World. The relaunch of Masters of the universe and WWE.
Building sets.
<unk> was up double digits, driven by Mega blocks and the continued success of pokemon and Halo.
Per NPD Mattel growth global share in the action figures and building sets categories in the second quarter and year to date.
Games declined double digits.
As we lapped high comps a year ago in their search category.
Per NPD.
<unk> remains the number 1 card game globally.
Plush grew double digits, driven by Mattel's products tied to Star Wars, and an expanding range of other.
Licensed offerings.
Mattel's performance exceeded expectations as our strategy to improve profitability and accelerate top line growth in the short term continued to show outstanding results on our path to establish Mattel as an IP driven.
Other high performing toy company.
We are optimizing for growth program remains on track to deliver on the previously announced goal to achieve savings of $250 million by 2023.
Yeah.
Our strategy is driving growth across mattel's 3.
Driven our brands as well as key flagship franchises, including American girl Mega, partly pocket and owner.
We are leveraging our resources to relaunch iconic catalog IP, including Masters of the universe, Matchbox and Monster high.
<unk>, where we see significant upside potential.
We are also strengthening Mattel standing as a partner of choice for the major entertainment companies, including Disney Microsoft Nickelodeon, Nintendo Universal Warner Brothers and WWE.
And have licensing agreements for several highly anticipated properties in 2022 and beyond.
Looking at our mid to long term strategy, we continued to make progress towards capturing the full value of our IP.
Mattel.
Its first non tangible tokens featuring 3 unique NFC is from the hot wheels, NFPA garage theories that were auctions on the Mattel creations collector platform.
With the launch we are creating a new way for innovation and artistry 2 converge in the toy.
Launched and we will continue to express our brands in the NFC format as we launch new creations throughout the year.
The animated Masters of the Universe Revelation series with just released on Netflix last week and a second series key man and the Masters of the universe Premier.
Premiers in the fall.
Bob Its next animated special Big City Big Dreams, We launched Netflix in September.
Polly pocket is being developed into a live action motion picture in partnership with MGM weekly.
We plan, a denim writing and directing <unk> start.
Space Poly and also co producing.
This marks our 13th movie in development.
We are happy to share that the new Bob will feature movie is green lit and will go into production in 2022 for a targeted release in 2023.
Greta Gerwig is now also confirmed to direct as well as rights.
During the quarter, we evolved our citizenship strategy and goals and launched several key initiatives, including Mattel playback and no toy peg back program to recover.
<unk> and reuse materials from all Mattel toys for future Mattel products.
Bob we lapsed the Ocean are first fashion doll line made from recycled ocean bound plastic and the Fisher price say start awareness campaign, engaging and educating parents and caregivers.
An important topics such as safety health and development of babies and children.
As part of our diversity equity and inclusion goals, we achieved 100% base pay equity for all employees performing similar work globally.
Today, we announced.
Ounce Mattel has been recognized as a 2021, great place to work by the great place to work Institute.
We will shortly be publishing a new citizenship report that expands on our strategy and goals in this important area.
The strength of the quarter and comprehensive topline growth is adding momentum to our transformation strategy.
As was the case in the first quarter. There was some COVID-19 related year over year benefit this quarter, but we again outpaced the industry and believe our exceptional.
Results are attributable to the strength of our brands and the quality of our execution.
This is also evident when comparing this quarter to the second quarter in 2019 before COVID-19 with net sales being higher by 19%.
Given our first half results and expectations for continued growth in the second half of the year. We're now raising our full year guidance for net sales growth in constant currency to be in the range of 12% to 14%.
We're also raising our full year guidance for adjusted EBITDA.
To be between 875 and $900 million.
As it relates to our stated goals beyond 2021, we are well positioned to achieve mid single digit net sales growth in constant currency in 2022 and in 2020.
<unk> 3 <unk>.
And adjusted operating income margin in the mid teens by 2023.
With our strong momentum and positive outlook and taking into account what we know today, we expect to exceed $1 billion in adjusted EBITDA in.
In 2022.
Taking a macro view.
The industry as a whole is expected to grow in the coming years.
Euro monitor has increased there are industry forecast again, and now estimates a growth rate of 5.4% CAGR.
<unk> the next 5 years through 2025.
Within this environment, we believe we will outpace the industry and continue to grow our market share.
In closing.
This was another exceptional quarter for the company.
Our strength is foundational and broad based.
And we believe we are in the strongest position we have been in many years to improve profitability and accelerate top line growth.
Mattel is on a growth trajectory.
Our multiyear transformation strategy.
Working.
And we are establishing Mattel as an IP driven high performing toy company.
I would like to thank the entire Mattel organization for the outstanding results in our team's ability to drive world class innovation and creativity across the portfolio.
As we remain focused on growing long term shareholder value.
And now I'm happy to turn it over to Anthony to discuss materials financial results.
Thank you.
Anthony.
Over to you.
Thanks Ilan.
As you just.
Mattel continued its strong comprehensive performance.
Taking a closer look at our second quarter result relative to the same period in the prior year.
Reported net sales were $1 billion and $26 million compared to $732 million an increase of 40%.
Heard strength across the portfolio.
On a constant currency basis net sales increased by 36%.
Adjusted gross margin was 47, 5%, increasing 370 basis points.
As the scale benefit of the very strong top line growth more.
Driven by offset the negative impact of cost inflation.
Adjusted operating income was a positive $67 million compared to a loss of $28 million an improvement of $94 million.
Adjusted EPS was a positive 3 <unk> compared to a loss of 26 cents.
<unk> of 2009.
And adjusted EBITDA increased by $102 million or 353% to $131 million.
Overall, another outstanding quarter with results exceeding expectations.
We continued to improve.
Prove our cash flow performance.
And early in the third quarter, we redeemed through a call option the remaining $275 million of 675% notes due 2025.
The incremental debt reduction will lower annualized interest expense by 19 million.
And in price.
Which is in addition to the $40 million annualized benefit from the refinancing transaction completed in the first quarter.
As a result, we now expect as reported interest expense to be approximately $255 million for 2021.
Inc.
Including $102 million of 1 time costs associated with the redemption of the 675% notes.
Looking at growth billings by region.
For the fourth consecutive quarter, we achieved growth in each of our 4 regions in constant currency.
With strong double digit growth this quarter.
Gross billings outpaced Pos growth.
Reflecting store reopening and some inventory restocking by retailers after last year's retail shutdown.
Retailer inventory levels increased by double digits in dollars.
And by mid single digits and weeks of supply, reflecting the strong Pos growth.
Pos growth outpaced the industry with strong consumer demand across the portfolio.
North America was up 29% with Pos increasing high single digits.
EMEA was up 54% with Pos increasing double digits.
Latin America increased 48% driven by strong performance across markets as stores reopen.
Pos increased double digits.
Asia Pacific increased 29% drill.
Growth in Australia, Japan, and Southeast Asia.
Pos increased low single digits.
At the end of the second quarter, 1% of all retail outlets that sell our products, representing 1% of our revenues were closed.
Although almost all stores.
Stores were opened store traffic continues to be negatively impacted by travel and other local restrictions.
In North America and EMEA.
All retail outlets were open at the end of the quarter.
In Latin America, 1 percentage of stores, representing 5% of our revenues.
Driven by we're closed while in Asia Pacific.
2% of stores were closed representing 5% of revenues.
During the quarter, we did experience supply chain disruptions, including shipping container shortages that were exacerbated by a temporary port shutdown.
And temporary plant shutdowns in Asia related to COVID-19 restrictions.
These challenges however did not have a material impact on our results in the quarter.
Adjusted gross margin increased by 370 basis points to 47.
In China.
Here is a breakdown of the key drivers.
Scale benefit driven by high sales growth contributed 330 basis points.
Cost savings contributed 220 basis points in.
In the quarter optimizing for growth delivered 20.
$5 billion of savings within cost of goods sold.
Mix and other had a favorable impact of 170 basis points.
Merrily, driven by category and sales mix and lower inventory obsolescence expenses.
Cost inflation had a negative impact.
1.220 basis points, driven by increases in materials and logistics.
Foreign exchange, primarily in Latin America had a negative impact of 120 basis points.
Moving down the P&L.
Advertising expenses were 88.
$1, an increase of 47% in line with revenue growth.
Adjusted SG&A expenses increased by 16% to $333 million drew.
Driven by our above target incentive compensation expense expected this year.
Given our strong results while the prior year included onetime savings related to COVID-19.
We had another quarter of significant improvement in profitability.
Adjusted operating income improved by $94 million from a negative $28 million.
$8 million is that a $67 million.
The increase was driven by sales growth and higher adjusted gross margin despite higher inflation partly.
Partly offset by increases in advertising and adjusted SG&A.
Reflecting the improvement in operating income our adjusted EBITDA increased.
$102 million to $131 million in the quarter.
We continued to meaningfully improve our cash flow generation.
Cash from operations year to date improved by $225 million towards seasonal use of 200.
$41 million driven primarily by improvements in the net income line.
Free cash flow year to date improved by $207 million as gains in cash from operations were slightly offset by increased capital expenditures.
Looking at cash flow performance over the trailing 12 months, we are making great.
Great progress.
Cash from operations increased by $400 million to $510 million the.
The increase was driven by gains in net income, partly offset by higher working capital usage.
On a trailing 12 month basis free cash flow was 374 million.
Compared to a negative $10 million a year ago.
An improvement of $384 million.
On a trailing 12 month basis, we converted 39% of our adjusted EBITDA into free cash flow.
Compared to a negative 3%.
A year ago.
We again generated sequential improvement in this key metric.
After ending the first quarter of 2021 with a free cash flow conversion of 36%.
We believe we are well positioned to continue our positive cash flow momentum.
Through the balance of 2021 and beyond.
We ended the second quarter with a cash balance of $385 million and essentially no short term borrowings.
This compares very favorably to the year ago quarter, and which we had a cash balance of 462 million.
<unk> and short term borrowings of 400 million.
The improvement in cash less short term borrowings of $323 million was primarily driven by our significant free cash flow generation over the trailing 12 months.
Accounts receivable increased by 134 million.
The $784 million, reflecting the strong sales growth.
We continue to effectively manage our receivables and finished the quarter with days sales outstanding of 69 days 11 days below the prior year.
We ended the second quarter with an inventory.
<unk> of $818 million.
Up $90 million versus the prior year, primarily due to cost inflation, which will negatively impact gross margin in the second half.
And as we build inventory to support growth.
We continue to make significant.
Mentor's progress on reducing leverage.
Our debt to adjusted EBITDA ratio improved meaningfully.
Declining to just 3 times at the end of the second quarter compared to 8.4 times a year ago.
Early in the third quarter, we redeemed the remaining 200 incentives.
Significant $1 million of 675% notes due in 2025.
We remain focused on continuing to pay down debt and returning to investment grade metrics.
Which will provide flexibility to consider other shareholder value creating opportunities in the.
<unk>.
We are making very good progress on our optimizing for growth program.
<unk> $49 million of savings year to date.
We continue to expect savings of approximately $80 million to $90 million in 2021.
And are confident we will achieve our total targeted savings of $250 million by 2023.
As he non stated we are increasing our 2021 net sales and adjusted EBITDA guidance relative to the guidance, we provided last quarter.
We now forecast net sales for the full year to increase by 12% to 14% in constant currency.
Almost doubling the growth rate of our prior guidance.
Full year net sales growth is expected to be driven by dolls vehicles action figures infantile.
<unk> toddler preschool and building sets categories.
We also expect growth in our 3 power brands.
Harvey Hot wheels, and Fisher price and Thomas.
As well as American girl.
Our net sales guidance means that we expect growth in the second half.
Guidance for gross margin has not changed since last quarter.
We continue to expect adjusted gross margin to decline to a range of 47.6 to 48, 1%.
Within gross margin, we now expect a slightly higher negative impact from cost inflation than we.
Especially guidance due.
Due to further increases in ocean freight.
This will be partly offset by cost savings and upcoming pricing actions in many of our key markets.
The pricing actions will be implemented in the second half of the year.
With that we.
We previewed increasing guidance for adjusted EBITDA by $75 million to a range of $875 million to $900 million.
Given the forecasted increase in profitability.
We are providing guidance for tax expense, which we expect to be in the range of 90.
We are $105 million for the year, excluding any unusual items.
Forecasted capital expenditures are now expected to be approximately $150 million to $175 million above.
Above our previous guidance of $125 million to $150 million.
As we invest in expanding capacity to support future growth.
The new guidance takes into account all of the anticipated supply chain disruptions that we are aware of today.
But it is still subject to COVID-19 related impacts Inc.
Including new unexpected supply chain.
Seen disruptions market volatility and other macroeconomic risks and uncertainties.
As the non said beyond 2021, we are well positioned to achieve our goals of mid single digit net sales growth in constant currency in 2022.
And in 2000.
23.
And an adjusted operating income margin in the mid teens by 2023.
With our strong momentum and positive outlook and taking into account what we know today, we expect to exceed $1 billion in adjusted EBITDA in 2022.
We look forward to providing more detail at the beginning of next year.
In closing this was another outstanding quarter from Mattel.
We have strong momentum and are pleased to raise guidance as we improve profitability and accelerate topline growth.
Beyond the P&L, we are strengthening the balance sheet and making our way back to investment grade credit metrics.
On a personal note.
Having just completed my first year at Mattel I cannot be more excited to be where we are and part of a winning team.
I will now hand, it over to the.
Operator for the Q&A.
As a reminder, if you asked the question at this time. Please press. The Star then the number 1 key ordinary Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue press the pound key please limit your question to 1.
And 1 follow up your first question comes from the line of drew Crum with Stifel. Your line channel.
Okay.
Okay, Hey, guys. Good afternoon. Thanks.
Thanks for the question.
Strong up double digits.
Lagged however, the shipment growth that you reported.
1.
We expect the 2 to align or asked differently. What are your expectations for Pos growth in the second half and I think separately for Anthony the free cash flow conversion over the last 12 months, a 39% is that a good number to use for 2021 against your adjusted EBITDA guidance.
When would you should we assume something higher or different.
Okay. Let me address the conversion question first first.
Let me say, we're very pleased with our free cash flow conversion performance, 39% trailing 12 months ending the second quarter and Thats up from 35% in the first.
<unk> up from 23% for 2020, we continued to make a profit.
And as we look ahead.
1 is to continue to improve our free cash flow conversion for.
Several reasons 1 is we will continue to utilize our <unk>.
Free cash flow to reduce.
Our cash tax situation is such that we have certain tax attributes that will minimize cash taxes in the near term and we will continue to manage the capital expenditures appropriately. So for those reasons. We expect this metric to continue to improve over time.
Debt.
On the on the Pos hydro.
The second quarter of growth.
Pos growth, reflecting store reopening and some inventory restocking by retailers after last year's retail shutdowns.
Retailer inventory levels.
Chris by double digits in dollars and by mid single digit in weeks of supply, reflecting the strong Pos growth.
Quarter to date.
It remains strong this is the third quarter.
<unk> growth in the second half of the year as we said and are off to a good start in.
In the third quarter.
And just thinking a.
A bit of a further look just heading towards the holiday season, we feel great about our.
Brand momentum and retail promotional plans for the holiday season.
But too early to provide the <unk> projections for that.
Okay.
<unk>, Inc.
Your next question comes from the line of Michael <unk> with Goldman Sachs. Your line channel.
Great. Thank you very much for the question.
I was just wondering if you could expand a little bit about your comments about the holiday.
How do you expect that to.
Play out are there any things that youre doing.
<unk> get ahead of any supply chain.
Jane concerns thank you.
Yes.
Too early to talk about the holiday in detail, but as I said, we do feel very good about <unk>.
Brand momentum.
Thanks, and all the plans we have in place right now, we do expect to grow market share and continue to outperform the industry.
Supply chain.
Is a competitive advantage and we feel that we have the capabilities.
The scale.
To continue.
MIT.
Together to work collaboratively with the retail partners to meet.
The strong consumer demand for our product.
Taking that in combination with our expectation for growth in the in the second half.
We do expect.
<unk> strong growth for the year, we effectively doubling our guidance.
Alright.
Quarter after we provided 6% to 8% GAAP.
Guidance.
In Q1, we are now raising it effectively doubling the growth expectation. So that should tell you that we do expect.
Yeah.
To end the year strongly.
Even with the disruptions that may come our way from.
In relation to Covid.
Great. Thank you and as a follow up I was just wondering if you could talk a little bit more about <unk>.
Yields in vehicles, obviously, an incredibly strong category.
And in the quarter.
You did talk a little bit about the strength in impulse shopping as well as the relaunch of Matchbox.
These sustained tailwind as we might be able to see in the back half. Thank you.
Yes, Thanks, Michael we delivered as you can see extraordinary growth and vehicles this quarter.
And gross billings up 61% and growth across all regions.
The growth primarily was in our core Dicast business.
We grew strong double digits in that segment and also incredible growth in Mario Kart, which is a great strong license for us as well as monster trucks.
I mean hot wheel city.
As we continue to drive the vehicle category as its leader, we've talked you about matchbox as well and certainly Disney Pixar cars.
Rounding out what is the leading vehicle category in the industry with very very.
Excited about the upcoming innovation.
A basin that we have as well as content.
Legends tour with hot wheels on special events, and we will continue to accelerate growth in this category.
Your next question comes from the language Steph Wissink with Jefferies. Your line's now from.
Thank you good afternoon, everyone.
Anthony This question is probably best suited for you its just related to the middle of the P&L. If I take your gross margin guidance and then drop down to your EBITDA guidance. I was wondering if you can help us think about advertising and promotion as a percentage of sales selling and administrative it would just imply that you're going to be down quite sharply in dollars just wanted.
To understand a little bit about brand support and then where you expect some of the savings to be realized and the seller.
Selling and administrative area. Thank you.
Yeah sure let me address that question in the context.
Of our Q2, and then talk about the second half so SG&A was up a little bit.
In the second quarter, driven by 2 drivers 1 is above target incentive compensation, given our revised outlook for the year and we're wrapping some 1 time benefits last year related to COVID-19.
Advertising was up pretty significantly again.
That's primarily in line with sales and I would expect as we look at the second half.
The year right for advertising as a percentage of sales to be fairly consistent.
Relative to the prior year and track with sales.
I mean, the other drivers.
Think about our adjusted EBITDA for the second half, we do expect to be down slightly and that's a combination of our growth margin being down driven by an accelerating impact of cost inflation. We ended the second quarter.
With some inflation.
<unk> impact on the balance sheet and that will come through the P&L.
In the second half, but we're looking to offset a good piece of that right with savings from our optimizing for growth program and some incremental pricing actions that we are now taking in the marketplace that will be implemented in the second.
Half.
Just lastly, I think the way to think about our performance is really on a full year basis. If you take our EBITDA guidance of 875% to 900 debt represents growth of 24% to 27%, which is about <unk>, our topline expectation of 12% to 14%.
Very helpful. Thank you.
Your next question comes from the line of our Pine Contrarian with UBS investment Research. Your line is now open.
Hi, Thank you.
So you mentioned exceeding <unk> billion and adjusted EBITDA in 'twenty, 2 and it seems like that is based on kind of mid singles.
Visit growth on top of double digit growth in top line. This year could you go through the puts and takes maybe non of what's driving that and then asking for really sort of big picture because topline.
Top line growing at a double digit rate. This year is a pretty tough comp to offset.
It's the entertainment calendar new launches.
Launch is picking up like Monster high.
Jurassic World you're coming from.
Incredibly well with that license just if you could break down what you think could drive that would be helpful. And then I have a very quick follow up thank you.
Yes sure.
So.
We're seeing exceed $1 billion EBITDA this is more directional.
We're not saying exactly a billion dollar EBITDA was saying we will exceed it just to give you a sense of where we are heading.
And we didn't provide the breakdown will obviously give a much more detailed guidance.
At the start of the year, but if you if you look at the growth drivers for the comp.
<unk>.
For next year and beyond we actually have several.
Several exciting opportunities and growth.
Engines.
With the power brands that are doing so well right now Barbie and hot wheels.
Is that just growing at a tremendous space.
Strong performance from flagship franchises like Kunal, Polly pocket Monster Monster trucks, and even though even the new white space that plush youre seeing very positive momentum with the turnaround brands.
Growing and becoming a growth drivers for the company.
You some girl Fisher price, Thomas and friends and Mega.
There's also the 3 new catalog IP.
The debt we are re launching a masters of the universe Monster high and Matchbox that have such incredible potential with a built in fan base.
America, and obviously the expanding partnerships that we have with entertainment companies. So this is just in the core business before you talk about new innovation.
e-commerce or the IP strategy. So there are a lot of a lot of growth drivers a lot of opportunities ahead of us in trucking.
The momentum we're seeing we're very.
Our confidence in saying that we will exceed $1 billion of EBITDA in 2022.
That's very helpful. Thank you and then a quick follow up on.
Are you able to share the extensive pricing action that you.
Have taken to mitigate some of the cost pressures.
When they take full effect.
Appreciate any detail there in some of our conversations with the trade we picked up anywhere from 8 to 10 percentage. Some core brands that were very very surprising to us. So any details you could provide there would be very helpful. Thank you.
Yes.
Yeah, we're not providing a specific breakdown, but the pricing actions will be implemented in the second half of the year that we're not you didn't see any impact in the second quarter obviously.
And it is our expectation that the combination of pricing and are optimizing for growth savings will more.
Then exceed.
Exceed the impact of cost inflation over time.
Okay.
Your next question comes from the line, Linda Bolton Weiser with D.
D. A Davidson your line is net.
Yes, hi.
I was wondering.
You could talk.
Talk about the timing of when you might make decision given your improved cash flow.
Regarding you know potential dividend or share repurchase I'm, just kind of the rough timing of when you might be talking more about that.
Yeah sure I can address.
Address that I think.
First.
We feel really good.
About our recent performance with respect to cash flow, we are growing our EBITDA, we are converting a higher percentage of that into free cash flow. We are using that free cash flow in the near term.
As evidenced by the redemption of the remaining 275 million of the 6 and 3 quarters.
Third quarter, both debt EBITDA improvement in the free cash flow to reduce debt is resulting in improving credit metrics. So we're down to 3.0 times debt to adjusted EBITDA.
To reduce as of the end of the second quarter, and we're making our way back towards those.
Those investment grade metrics.
And when we get there this will provide us good flexibility to consider other shareholder value, creating opportunities in the future don't have specifics to share.
But we are well on our way.
Great. Thanks, and then.
Thank you mentioned in your commentary that you view supply chain is a competitive advantage.
Sarah can you elaborate on that and is that just referring to the idea that you actually own affair.
With your old plant and can you update us on your manufacturing footprint reduction and kind of where you are in that process.
Sure Linda so we.
As you know restructured our supply chain and made the.
There are no changes not just the how.
How we make.
But the entire process and setup, we simplified the operation we closed 4 plants, we reduced the number of items that we make those the items that were not productive and overall.
Our supply chain to be.
Several.
Real driver not just.
Again cost reduction, but actually driving our topline.
And helping us grow the business.
In spite of the disruption.
In the second quarter and there were disruptions we had no material impact on our results and this is.
Because of our capabilities, our scale and how we run our supply chain.
We expect that to continue to improve and get even better.
And then we believe that this is 1 of the advantages that we have over.
Any other player in the industry. It is a combination of.
Bob.
Factories that we own as well as how we work with.
With the third party suppliers and other vendors, but on the whole we view supply chain.
As a business partner.
It's not a cost center. It is not a service center, it's a business partner for the rest of the organization and.
Some and is really making a difference.
Positive impact on the overall enterprise.
Your next question comes from the line of Kevin Johnson with BMO. Your line is now open.
Great. Thank you. My question is are you assuming only lines reported Linda was asking but I was hoping.
You could talk a little bit more about the tactics of specific tactics, we've been using to mitigate some of the shipping challenges and what you plan to do.
To get to a heavy shipping season upcoming here.
And similarly, you diversified manufacturing base across geographies do you have built in redundancies to mitigate.
You could geographic risk.
And.
Yes, we will leave it at that so how are you doing it that's.
The question.
So.
I'll give you a couple of examples.
When it came to Ah Hi, Derek sorry, I should have said high for us.
Hey, Matt.
Mitigate in terms of container container shortage.
We've been managing through that.
For multiple quarters now and.
And given our scale and relationships relationships with suppliers, we've been able to minimize that impact.
There were temporary plant shutdowns that we've experienced.
With some intermittent.
Cases over the past year due to COVID-19 related disruptions and we were able to manage through that as well we have.
The ability to leverage resources, and mobilize resources where needed.
With the ability to restart plants quickly.
Ernst and given the geographic diversity of our manufacturing footprint, we've been able to.
Minimized the impact.
And then other dimension would be labor shortage same thing, we've been able to mitigate for that for multiple quarters now by mobilizing resources and leverage capabilities.
Cliff is.
While we have them given that we work in multiple.
Places and again.
1 some factories with.
That operate at a very high level of productivity.
So just as just to give you a bit of a feel.
I should say that.
We still foresee continuing supply chain challenges.
For the rest of the year, but we have factored them into our plants and the new guidance does take into account all of the anticipated supply chain disruptions that we are aware of today of course, it could be still unanticipated suppliers.
Supply chain challenges and.
And it's hard to tell what the future may hold but we.
We have proven that we have the ability to manage through major disruptions given our scale and capabilities as was the case during the pandemic last year and with all of the expected disruptions that we are anticipating.
We still expect to grow.
A healthy double digit 12% to 14% in net sales for the year.
Okay, Thanks, and can I ask Richard a question.
Of course sure Garik right here.
Hey, Richard Hi.
Your reaction to masters of the universe revelation.
6 on Netflix I think it was number 2 for kids.
Are there any metrics you could share in terms of yours and how was the performance.
<unk> expectations.
Well first off we were actually number 1.
<unk> ranking on the kids series in the U S. In its first weekend.
Yeah, sorry about that revenue.
The favorable routes and we were also a top 5 series on.
On Netflix in 20 markets.
We were top 10 in 55 markets. Those include ranking number 4 in the U S number 1 in Brazil.
Number 2 in Germany all of this in the first weekend, we are really very very.
Very pleased with the beginning of this.
And excited about the continuation of the momentum on Masters of the universe in a variety of different ways.
Action figures has been a great success story for US overall, we talked about gross billings more than doubling.
Innovation with Jurassic and WWE, but really.
Very very happy with the relaunch of Masters and as we move forward. We're also looking forward to the next series as well that will start in the fall he men and masters of the universe premiers in the fall and that's actually geared towards kids. So so far so good and momentum building.
Your next question comes from the line of Tami Zakaria with Jpmorgan Your line's now open.
Hi, Thank you so much for taking my question.
My first question is.
Are you seeing any benefit and in your appeal as.
From the child tax.
Credit payments that started hitting.
Accounts from mid July.
Hi, Tommy Yes, we do believe the credit are having a positive impact from consumer demand.
This is by the way in some cases also happening in other countries.
That said the toy industry.
Proved its resilience.
Yet again in.
In the second quarter, not because of those stimulus checks, but just given the fundamentals.
Of the category the importance of physical play.
And it continues to be a.
Strategic category for retailers, so it's great to see a positive impact, but we're not dependent on that the industry is not dependent on debt and the healthy fundamentals of the toy industry as a whole.
Is very much a strong and and in a good place.
Got.
Got it that's super helpful. So I think that's a perfect segue to my second question I think your updated.
Full year guidance.
Revenue guidance sort of Embeds 1.
1 percentage growth in the back half.
But my back of the envelope.
The math.
Math is correct so.
So.
Is that expectation not.
Conservative given the 2 year stacks, you've been holding in the first half and then you have stimulus money.
Coming in and you know theres a lot of momentum.
Mental and your brand so.
Why why why is the back half expectation.
Not better than what you just guided to.
Hi, Tim It's Anthony let me comment on that I think first and foremost.
Our guidance with our guidance, we do expect growth.
In the second half of 2021, and I think it's important to remember that's on top of the double digit growth in the second half of <unk>.
Last year, we're off to a good start to the second half and we've seen strong Pos.
Pos growth.
As the non said we feel really good.
About our brand momentum.
Promotional plan for the holiday season, and expect to grow market share and continue to outperform the industry.
And in a broader context of the full year, our net sales growth guidance in constant currency is now 12% to 14% so strong double digits right and we're wrapping.
Wrapping a year that had some.
Nominally is around the quarterly phasing with double digit declines in the first half of 2020, followed by double digit increases in the second.
Anthony I would just add debt, we don't manage the company quarter by quarter, but take a full year view as part of our long range outlook and.
First half growth is higher than the second half are.
The expected full year performance is very strong and clearly points to our growth trajectory and that's how we are thinking about.
The momentum.
Your next question comes from the line of Shawn Collins with Citi.
The group your line is now open.
Yeah, great. Thank you hi, guys.
Hey, Bob My question is a follow up on the relaunch of the Masters.
Of your of the universe on net.
Alex This weekend.
I certainly watched it.
<unk> greatly and I wanted to ask if you could talk about the role.
While the firm day associated toys, such a tool that <unk> Taylor in stores I think target as a key partner in this effort.
Any color would be interesting. Thank you.
Well, we have first of all thank you for watching and appreciate it we are excited about it as well and there are choice in the marketplace with all of our major.
Rollout how partners.
Including of course, as you mentioned target Walmart and in a variety of other places that you can find action figures play sets.
And other licensed product.
Associated with the property as we continued to gain momentum and as our fall product rolls out youll see more and more.
Major product.
Lots of excitement around innovative ways that we will be merchandising as well as retail promotions to support the content.
Great. That's helpful. Thank you Richard I appreciate it.
Your last question comes from the line of Greg <unk> with Wolfe.
Research your line standard Ob.
Hey, guys, it's Fred Wightman on for Greg just quickly could you dig into the gross margin guidance staying unchanged. Despite the higher top line.
Outlook, you mentioned some higher cost inflation I think you had talked about 300 basis points of headwinds from the transportation and resins previously where is that figure now and.
We expect to see at least some benefit from the incremental pricing that you touched on too.
Yes, I can take that 1 Greg.
Greg how are you.
Sorry, let.
Let me address that.
Our full year guidance as I said for growth margin has not changed since the last quarter, we continue to expect to be in.
147, 6% to 48, 1%.
It is important to remember that the first half gross margin benefited from a significant fixed cost absorption benefit, which we do not expect will continue into the second half.
<unk> gross margin Whats changed is we now expect a slightly higher negative impact.
Net rail cost inflation than we previously guided and Thats due to ocean freight.
And also we expect that inflation to impact our second half results much more than the first half driven by a couple of factors 1 is the.
Inflation rate has trended upward as we enter the peak production.
Back from season, and also as I mentioned earlier, our existing inventory at the end of the second quarter on the balance sheet did have a higher level of inflation inside of it and that will come through the P&L in the second half and against that.
No.
Inflating impact will be partly offset.
Cost savings were making great progress on our optimizing for growth program and will also benefit from the upcoming pricing actions across a number of our key markets that we're implementing in the second half of the year and again as I said earlier, despite the inflation impact on gross margin.
Debt to continue to improve profitability with adjusted EBITDA expected to grow at 2 exit rate of our topline.
Great. Thanks.
That concludes our question and answer session for today I will now turn the call back to chairman and CEO being in price post dosing.
Dosing remarks.
Thank you operator.
This is another exciting time for Mattel.
We exceeded expectations with another exceptional quarter and strong consumer demand for our product.
We significantly outperformed the industry and grew market share in each region per NPD.
As we've heard today.
Margin the Mattel playbook is working across the portfolio. We believe we are in the strongest position we have been in many years to improve profitability and accelerate top line growth as we establish Mattel is an IP driven high performing toy company.
We appreciate your interest.
And thank you for following our story and now I will turn.
Call back to David Thank you Dave.
Thank you a non and thank you everyone for joining the call today.
The replay of this call will be available via webcast and audio beginning at 830 PM Eastern time today.
The webcast link can be found in our investor page or for an audio replay. Please dial 1.4.
<unk> 045 hundred 37.3406.
Pass code is 3897 to 4.4.
Thank you for participating in today's call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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David.
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Bob.
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Thanks Martin.
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