Q3 2021 Mattel Inc Earnings Call
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Good day and thank the standby welcome to the Mattel incorporated.
Three quarters. When you did one earnings conference call at this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero.
Core plays a reminder, this conference call is being recorded.
Turning to call over to David Phung, Yeah, That's vice President Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone.
Joining.
With me today are on cries, Mattel's, Chairman and 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 third quarter financial results.
We will begin today's call with <unk> and Anthony providing commentary on our results after which we will provide some time for <unk>, 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.
In earnings release May reference non-GAAP financial measures, including adjusted gross profit and adjusted gross margin adjusted other selling and administrative expenses.
Adjusted operating income or loss and adjusted operating income or loss margin.
Adjusted earnings or loss per share.
From which we exclude the impact of a $510 million noncash tax benefit associated with releasing valuation allowances on deferred taxes.
Earnings before interest taxes, depreciation and amortization or EBITDA.
Adjusted EBITDA free.
Free cash flow.
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 we.
Created in constant currency.
Less 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 <unk> Dot com.
The information required by regulation G regarding non-GAAP financial measures.
We will be 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 in the second quarter of 2021, we elected to revise prior periods for certain immaterial out of period adjustments, which do not.
Hi, Ross to amend previous filings.
These adjustments are reflected in our third quarter earnings release, and slide presentation and will be reflected in our 2021 third quarter Form 10-Q.
These adjustments 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 are subject to a number of significant risks and uncertainties.
Rick wise 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 on our.
Certainty through 2021 quarterly report on Form 10-Q.
Our earnings release, and the presentation accompanying this call 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.
Q2, except as required by law.
Now I'd like to turn the call over to <unk>.
Welcome and thank you for joining Mattel's third quarter 2021 earnings call.
Before we begin on behalf of everyone at Mattel I would like to take a moment to.
So the loss last week, one of the industry's great leaders, Brian Goldner.
I had the pleasure of knowing Brian for over 25 years.
It was passionate he was an optimist.
Operator with integrity.
It was a highly respected competitor.
He will be greatly missed across.
Our industry and certainly by many on this call today.
Our thoughts are with his family and theme at Hasbro.
Okay.
Turning to the third quarter results.
<unk> continued its strong performance despite ongoing global supply chain disruption.
High inflation and Covid related Lockdowns.
The company exceeded expectations with strong consumer demand for our products.
Key highlights for the third quarter as compared to last year, our net sales grew 8% as reported and 7% in constant currency.
This was the fifth consecutive quarter of year over year growth in net sales.
Adjusted EBITDA was $463 million, essentially flat and cash generation continued to improve with free cash flow for the trailing 12 month growing almost two five times.
<unk> to $320 million.
Looking at our performance in more detail.
Gross billings as reported grew 8% versus the prior year and were up 18% versus the third quarter of 2019 pre COVID-19.
<unk> grew high single digits with strength in North America, EMEA, and Latin America more than offsetting the impact of temporary retail closures in several countries in Asia Pacific.
Third the NPD group Mattel continued to outpace the industry with global market share gains for.
Positive quarter in a row and all regions growing share in the third quarter.
Also per NPD looking at market share by region in the third quarter, Mattel gained 35 basis points in North America.
31 basis points in EMEA.
97 basis.
The first in Latin America, and 83 basis points in Australia.
Even as brick and mortar improved E. Commerce also growth and represented more than 25% of our total Pos in line with our strategy to expand in the online retail and E Commerce space.
Our supply chain and commercial organizations, we're successful in working through global supply chain disruption and closely collaborated with our retail partners in trying to meet consumer demands.
The strong performance of our supply chain. This year is attributable to our scale expertise.
This points similar model.
We anticipated short supply and longer lead times and factor that into our planning with mitigating actions.
For example, we expedited procurement of raw materials.
Forward finished goods production to increase capacity.
Invested in additional tooling to dual source manufacturing of critical product lines.
Leverage our diverse manufacturing footprint to optimize near shoring of production.
Contracted ocean freight capacity and rates in advance.
And secured access to additional ports and shipping.
In France.
Okay.
The Mattel playbook is driving consumer demand across multiple categories in our portfolio strategy is delivering growth overall.
The fourth quarter is off to a good start.
We expect to continue growing for the balance of the year.
Keeping that gain market share and have a strong holiday season.
Our strength is foundational and broad based for.
For the third time this year, we are raising guidance for both revenue and adjusted EBITDA for the full year in 2021 and believe we are.
<unk> position to achieve our goals in 2022 and 2023.
Turning to third quarter gross billings and Pos in constant currency by category versus the prior year.
Those gross billings was up three.
Well put led by Barbie, Universal Spirit, and Polly pocket and aligned with Pos.
Bobby grew globally.
3% with Pos up low single digits.
Gross billings was up 26% year to date.
Per center MPD.
Dogs continued to gain market share globally, and Barbie remains the number one global downs property in the third quarter and year to date.
For the full year Barbie is expected to grow double digits.
Americans.
<unk> was flat in the quarter and up 17% year to date.
American girl is showing strong results across key metrics and high consumer engagement.
As we enter the biggest quarter with approximately 50% of sales typically occurring in the fourth quarter.
<unk> for the full year, we expect American girl to grow high single digits.
Vehicles grew 5% led by hot wheels cars.
Category Pos continued to be strong up double.
Digits.
<unk> gross billings grew four.
<unk> and was up 20% year to date.
Global demand was robust across key segments with Pos up double digits.
According to MPD hardware.
<unk> remains the number one vehicle property globally in the third quarter and year.
4%.
Hot wheels is on the road to achieved its fourth consecutive record year of sales.
Infant toddler and preschool declined 1% in the quarter and was up 8% year to date.
Category.
To date, Pos was up low single digits, with particularly strong demand in North America.
Fisher price core declined 1% with Pos up mid single digits.
Gross billings was up 9% year to date.
For the full year.
Category Fisher price and Thomas is expected to grow for the first time in five years as the brand's turnaround continues.
Per NPD Mattel.
<unk> continued to grow market share in the infant toddler and preschool category.
Fisher price was the number one infant toddler and preschool.
<unk> property globally in the third quarter.
Action figures building sets games and other.
Our challenger categories together grew 25%.
With exceptional strength in action figures and strong growth in building sets and.
Preschool.
POS was up double digits.
Action figures continued to benefit from very strong demand with growth of more than 50% in the quarter and 76% year to date driven.
Driven primarily by Jurassic World Masters.
Other universe and WWE.
Building sets also continued to grow with new offerings, and greater distribution driving a double digit increase for the quarter and 29% year to date.
Games saw a mid single digit decline as.
Because of the high comps a year ago in the search category.
POS was up in the quarter led by Uno.
And per NPD.
<unk> continued to be the number one card game globally.
Other which includes flash was up 25%.
As we live.
With expanded products tied to Star Wars, and new license offerings driving continued growth.
For the full year, our challenger categories together are expected to grow double digits.
The Mattel team continued to execute on our <unk>.
Percent G to improve profitability and accelerate topline growth, while also capturing the full value of our IP.
While COVID-19 drove industrywide consumer demand for toys. It has also created significant headwinds and ongoing disruption in global supply chain and retail closures.
As yours.
The short capacity and global supply chain also caused significant inflation in ocean freight which is impacting profitability.
That said Mattel continued to grow well ahead of the industry for the fifth consecutive quarter, increasing market share in all our.
Strategy categories, two challenger categories, and all regions in the third quarter and year to date per NPD.
We believe that our growth can be mostly attributed to the strength of our brands.
<unk> and breadth of our product our world class supply chain.
Core commercial capabilities and very effective demand creation in close collaboration with our retail partners.
Our restructured organization and optimizing for growth program together with the pricing action announced last quarter help mitigate inflationary pressures.
Global is part of our growth strategy. We are also actively expanding our portfolio of licensed partnerships we.
We are excited to announce that we have renewed our decade long partnership with WWE, <unk>, which we expect will drive growth.
We just announced an expansion.
Our relationship with Disney consumer products games in publishing for Disney and Pixar is eagerly anticipated movie light here.
This is the origin story of toy story as far as like here and it is expected to be very toyetic.
Martel has the global.
Global licensing rights to develop the toy line for the franchise, which is expected to launch at retailers around the world beginning summer 2022.
We continue to make progress on our mid to long term strategy to capture the full value of our IP.
Mattel films.
<unk> of actively working on the development of the Hurricane live action projects announced to date and Mattel television has launched eight shows in 2021 with 30 more in production and over a 30 in development.
During the quarter.
<unk> released exciting.
As our content on Netflix, including Barbie Polly pocket to masses of Universe series.
As well as expanded global distribution for Thomas and friends across more than 150 countries.
Last week Martel launched Barbie radio in partnership with IHOP media.
Citing new and Warner Music group's Arts music.
In online gaming, we launched the hot wheels unleashed videogame on all major consoles to widespread acclaim and.
And announced the release of Mattel, one six threes Skibo mobile game launching next week.
The third mobile game from a tailwind <unk> III, joining our popular Uno and faced in mobile games.
During the quarter, we advanced our role as a responsible corporate citizen.
With the publication of our new citizenship report, including.
This is updated environmental social and governance strategy and goals.
Last week, we announced that in 2020, we achieved 97% of recycled or FSC certified content in the paper and wood fiber used in our products and packaging.
<unk> in our goal of 95%.
The Forest Stewardship Council has honored Mitel with a 2021 leadership awards for excellence.
<unk> was also ranked among forbes' world's best employers and best employers for women.
In 2021.
We are proud and excited to make so much progress in this important area and continue to focus on our culture and employee well being.
Given our results year to date strong consumer demand and expectation.
<unk> for continued growth in the fourth quarter with a strong holiday season, we are raising our full year guidance.
We now expect full year net sales in constant currency to increase by approximately 15%.
And adjusted EBITDA to also increase and being there.
<unk> of $900 million to $925 million.
Beyond 2021.
We reiterate our goals to grow net sales by mid single digits in constant currency in 2022 and in 2023 and achieve an adjusted operating income margin.
The rain in the mid teens by 2023.
We also reiterate our expectation to exceed $1 billion in adjusted EBITDA in 2022.
Okay.
In closing.
This was another strong quarter from a tail.
<unk> with continued consumer demand for our products.
We achieved growth and continued to gain market share in spite of significant and unprecedented exogenous challenges.
The increased guidance puts materials on track to achieve its highest full year growth rate in decades.
Well.
The company is on a clear trajectory to improve profitability and accelerating topline growth.
Our transformation strategy is working and we are operating as an IP driven high performing toy company.
We remain focused on.
Growing shareholder value and look forward to finishing the year on a high note with a strong holiday season.
Thank you Anthony over to you.
Thanks, Anna as.
As you just heard.
With another strong quarter.
Kate with results exceeding expectations, despite supply chain and COVID-19 related disruption.
Taking a closer look at our results for the third quarter and compared to the prior year.
Reported net sales were $1 billion $762 million compared to $1.636 billion.
<unk> increase of 8%.
Afflicting the strength of our portfolio.
With gains primarily in North America and across most categories globally.
Excluding the impact of currency translation net sales increased 7%.
Adjusted gross margin was 47.
In EMEA declining 280 basis points due.
Due to the impact of cost inflation, partly offset by the benefit of pricing and cost savings.
Adjusted operating income was $401 million compared to 397 million and an improvement of $4 million.
Eight on an as reported basis.
EPS was $2 29 per share, including a $510 million noncash tax benefit associated with releasing our valuation allowances on deferred tax assets.
Reflecting improvements in profitability and future.
Okay.
Adjusted EPS was <unk> 84.
Compared to <unk> 94.
The year over year comparison is impacted by a lower tax rate in the prior year.
And adjusted EBITDA was $463 million.
<unk> to $465 million.
Overall strong results for the quarter as topline growth and the benefits from our cost savings program and pricing actions offset the impact of cost inflation.
Gross billings increased by 7% in constant currency in the quarter.
With global Pos increasing hi.
High single digits.
Pos growth outpaced the industry.
And our NPD, we again achieved market share gains in each of our four regions.
Looking at gross billings in constant currency by region.
North America was up 11% with.
As increasing high single digits driven by growth across the portfolio.
EMEA was up 3% with Pos increasing high single digits.
Latin America increased 8% with Pos increasing by double digits as we further expanded our leadership.
In the region.
In Asia Pacific gross billings declined, 22% and Pos declined roughly half that rate.
<unk> and the impact of temporary retail closures in several key markets.
At the end of the third quarter.
Except for the Asia Pacific region.
<unk> all of the retail outlets that sell our products we're open.
In the Asia Pacific region, 4% of stores, representing 7% of our revenues were closed.
And together with lower retail traffic more negatively impacted results.
Overall, we delivered growth.
Above expectations, despite the impact of supply chain disruption.
Adjusted gross margin declined by 280 basis points to 47, 8%.
Here is a breakdown of the key drivers.
As anticipated cost inflation had a significant.
Impact of 350 basis points, due primarily to increases in material and logistics.
Other factors, including mix had a negative impact of 140 basis points.
And foreign exchange had a negative impact of 70 basis points.
On the positive.
<unk>.
Pricing had a positive impact of 110 basis points.
As we've discussed we began implementing incremental pricing actions during the third quarter.
The scale benefit driven by our topline growth contributed 90 basis points.
Cost savings contributed.
So 80 basis points in the quarter optimizing for growth delivered $14 million of savings within cost of goods sold.
Moving down the P&L.
Advertising expenses were $118 million, an increase of 15% as we continue to drive demand creation.
It is a support Pos.
Adjusted SG&A expenses were $324 million.
A decline of 2%, primarily driven by benefits from our cost savings programs and lower incentive compensation expense.
Adjusted operating income increased 1% to 400.
<unk>.
The increase was driven by top line growth and lower SG&A.
Partly offset by a decline in gross margin and higher advertising expenses.
Adjusted EBITDA declined by $2 million or less than 1% to $463 million in the <unk>.
$1 million up 58% year to date.
We continue to meaningfully improve our cash flow generation.
Cash from operations year to date improved by $186 million to a seasonal use of $256 million.
Driven primarily.
<unk> gains in net income adjusted for the noncash impact of the release of the valuation allowances.
Free cash flow year to date improved by $153 million.
Driven by gains in cash from operations, partly offset by an increase in capital expenditures up $33 million.
To support future growth.
On a trailing 12 month basis, we continue to make significant progress in improving cash generation.
Free cash flow was $320 million, an improvement of $191 million from the prior year.
Driven by higher cash from operation.
Italy by slightly offset by an increase in capital expenditures.
As youll see on the balance sheet free cash flow has been used to reduce long term debt.
On a trailing 12 month basis, we converted 33% of our adjusted EBITDA into free cash flow.
Compared to 21% in the prior year.
We believe we are well positioned to continue our positive cash flow trends through the fourth quarter and beyond.
Taking a look at our balance sheet.
We finished the quarter with a cash balance of $149 million.
Short term borrowings of $128 million and long term debt of $2 billion $570 million.
On a net basis. This compares very favorably to the year ago quarter, and which we had cash of 452 million short term borrowings of $400 million in long term debt of 2 billion.
$853 million.
The improvement in our net debt position was primarily driven by our free cash flow generation over the trailing 12 months.
The reduction in long term debt reflects our redemption early in the third quarter are the remaining 275 million.
Principal amount of 675% notes due 2025.
The incremental debt reduction will lower annualized interest expense by $19 million.
Which is in addition to the $40 million annualized benefit from the refinancing transaction completed.
Earlier in the year.
We continue to expect as reported interest expense to be approximately $255 million for 2021 <unk>.
Including $102 million of one time costs associated with the redemption of the 675% notes.
Accounts receivable increased by $112 million to $1 billion $438 million in line with sales growth.
We ended the quarter with an inventory balance of $854 million up $174 million versus the prior year, primarily due to cost inflation.
And increases to support future growth.
The inflation impact on inventories will negatively impact gross margin in the fourth quarter and into 2022.
Our leverage ratio continues to improve meaningfully.
We ended the quarter with a debt to adjusted EBITDA.
<unk> ratio of two eight times compared to five three times a year ago.
As we've stated we remain focused on strengthening the balance sheet and utilizing excess free cash flow to reduce debt and returning to investment grade metrics.
Which will provide flexibility.
To consider other capital allocation strategies in the future.
We continue to make good progress on our optimizing for growth program generating $20 million of savings in the quarter and $69 million year to date.
We expect to achieve savings of approximately 80 to.
<unk>.
In 2021 and are on track to achieve our total targeted savings of $250 million by 2023, a key driver towards our mid teens adjusted operating income margin goal by 2023.
Yeah.
As <unk> stated we.
We're increasing our 2021 net sales in constant currency.
And adjusted EBITDA guidance relative to the guidance, we provided last quarter.
We now expect net sales to increase by approximately 15% in constant currency.
Up from our prior guidance range of 12% to 14%.
Full year net sales growth, reflecting the strength of our portfolio is expected to be driven by dolls vehicles action figures infant toddler preschool and building sets categories.
We also forecast full year growth in our three power brands Barbie Hot wheels.
Surprising Thomas.
As well as American girl.
This net sales guidance reflects our expectation for continued growth in the fourth quarter.
Guidance for gross margin has not changed.
We continue to expect adjusted gross margin to decline to a range of 47.
The 6% to 48, 1%.
The gross margin guidance is impacted by cost inflation, partly offset by savings from our optimizing for growth program and.
And pricing actions, including those that were implementing in the second half.
We are increasing guidance for adjusted <unk>.
EBITDA by $25 million to a range of $900 million to $925 million.
As we did last quarter, we are providing guidance for tax expense.
On an as reported basis, we now forecast tax expense to be a net benefit in the range of 390 to four.
$400 million.
Including the benefit of releasing the valuation allowances and the impact of other tax related adjustments.
Forecasted capital expenditures are still expected to be approximately $150 million to $175 million include.
Including capacity additions.
To support growth.
The guidance takes into account the anticipated supply chain disruption that we are aware of today.
Still subject to any unexpected supply chain disruption market volatility and other macroeconomic risks and uncertainties.
Looking beyond.
<unk> 2021, we are well positioned to achieve our goals of mid single digit net sales growth in constant currency in 2022 and 2023.
And an adjusted operating income margin in the mid teens by 2023, as well as exceed $1 billion in adjusted <unk>.
EBITDA in 2022.
We look forward to providing guidance for 2022 on our fourth quarter earnings call.
In closing this was another strong quarter for Mitel.
We are very pleased with our overall financial performance and remain focused on growing shareholder value.
I'll hand, it over to the operator for Q&A.
Sure sorry, as a reminder, if you have a question at this time. Please press Star then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue press the pound key we kindly request.
Our limit your questions to one and one follow up your first question comes from the line of Eric Handler with <unk> partners. Please go ahead.
Good afternoon, and thank you for the question.
So congratulations on the.
The light year.
License.
The thing that was separate from the toy story deal do you still have on.
The overall toy story license and if we could go back to the last toy story movie I seem to remember expectations of revenue.
I'm thinking too.
$200 million of.
Retail sales.
Is that still do you think thats a good starting point for late year.
Hi, Eric this agreement to separate from.
What we've done to date.
We are not providing specific guidance for this particular.
The partnership, but as we said in the prepared remarks, it is expected to be.
A very toyetic movie so it's a meaningful addition to our portfolio.
And Erika it's Richard we still maintain the origin story of the original toy story movies of which we continue.
<unk> to market and sell products against.
Great. Thank you very much.
Your next question comes from the line of Tami Zakaria with Jpmorgan Chase. Please go ahead.
Hi, Thank you so much for taking my question.
And so.
So could you provide any color on the trend.
Trend you're seeing.
To date, given Youre lapping Amazon Prime day from last year.
Sure. This is Anthony look.
We are off to a strong.
In the fourth quarter.
Look ahead to a strong holiday season.
Got it that's helpful. If I could ask one more follow up.
I think our Fisher price.
<unk> was up about mid single digit in the quarter, but it seems like.
Shipments were down about a point can you help us understand the gap there.
Sure.
Richard Hi.
Despite a decline in gross billings for the first quarter. The Pos as mentioned remains strong we grew our market share per NPD.
Segments of growth, we're really little people infant newborn and imagine AXT, we saw growth in North America and the decline in gross billings was primarily attributed to Asia Pacific.
Because of Covid lockdowns.
NPD also mentioned as well that Fisher price as the number one infant toddler preschool properties.
Globally in the third quarter as well as year to date, and we expect growth in the category for 2021.
Your next question comes from the line of Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone.
Anthony I think that's one maybe best for you, but it is a question related to pricing I think if I jotted. It down correctly, you said about 110 basis points of benefit in the third quarter. How should we think about the benefit you expect to see in the fourth quarter and I think you also mentioned that you expect margins to be down again, so I'm just trying to reconcile.
Benefits.
From price both in sales guidance and margins and then anything you want to help us think through in terms of 'twenty. Two just the anniversarying of those price increases and how that should factor into our gross margin bridge for 'twenty two thank you.
Sure as we said in the remarks pricing it did have a benefit of 110 basis.
Points in Q3, but that does not yet reflect all the incremental pricing actions that we're implementing in the second half. So we should have a greater pricing benefit in Q4.
That being said our gross margin guidance implies a decline of about 300 basis points of gross margin.
In Q4, obviously the biggest driver of that is cost inflation, which we expect to partly offset with the pricing actions, we're implementing as well as continued savings from our optimizing for growth program.
It's a little early to talk about two.
2022, and we.
To providing guidance for 'twenty two on our fourth quarter earnings call.
And lastly, I would just add I mean as <unk>.
<unk> stated in the remarks, we do expect to exceed $1 billion of adjusted EBITDA in 2022.
Okay, and what are you assuming in your sales guidance for the benefits of price.
In the fourth quarter.
We're not going to get specific on the magnitude of the pricing action for competitive regions.
Reason, but we are implementing those pricing actions, it's going well, we haven't seen any negative response in.
In terms of consumer.
Purchases. So we will continue to implement those programs.
Your next question comes from the line of fire Pike could triangulate UBS. Please go ahead.
Hi, Thank you this is Nick.
Probably very well aware.
Considerable concern among investors regarding supply chain disruption and what it could mean for the holiday season.
And primarily what risks this poses for first half of the year could you spend a few minutes going over the type of contingency measures you have taken to sort of mitigate any unanticipated.
Disruption and also if you could detail what percentage of your volume do you expect to go through direct import programs. In Q4. If you have if you have a sense at this point, but I'm, hoping you too. Thank you.
Yes, Hi, arpin.
During the third quarter.
Supply chain and commercial.
Commercial organizations were very successful in working through.
Global supply chain disruptions and it's not that we were not impacted but we did anticipate short supply and longer lead times and factored that into our planning and took very specific mitigating actions.
There are few some of the examples we talk about is that is how we expedited procurement of raw materials.
We pulled forward finished goods production to increase capacity.
Invested in more tooling in order to dual source manufacturing of.
Very specific product lines.
Well, we expected shortage, we leverage them.
Our scale you know.
Diverse manufacturing footprint to optimize near shoring of production. We also contracted the ocean freight capacity and rates in advance and secure the access to additional ports and shipping lanes, which appears obvious in high.
But but we were.
Ahead of the game and this is really where our.
Our scale expertise and flexible supply chain.
The all the work we've done over the last three years is working to our advantage and with that we are ready for a strong holiday season.
Hindsight and do what we can to meet made the strong demand for our product.
And to the second part of that.
Not really we don't really see.
We don't really expect to see any material change in the mix of trade and direct import going ahead.
Would you say that could be attractive.
What do you.
Isn't there volume.
Breakdown I know during the current period.
Tariff disruption it could have been as low as 35 and above but could you kind of get a sense of what that where that percentage stands.
Yeah.
We're not going to get into that level of detail for competitive reasons.
Okay, Okay no problem.
Thank you everyone and great job. Thank you.
Thank you.
Your next question comes from the line drew Crum with Stifel. Your line is now.
Okay. Thanks, Hey, guys good afternoon.
About your experience with masters of the universe in terms of product sales.
Separate from any revenue recognized from Netflix.
And what would be the next marker for this brand and then I have a follow up for Anthony.
Sure.
We're incredibly pleased with the progress and momentum.
Not only in with Masters of the universe, but the entire action figure.
Category.
We've been consistently growing share in this category all of 2021.
We are particularly excited about notches universe.
The relaunch has been going incredibly well.
<unk> is performing content is working during.
During the quarter, we released two series, which.
We have part two actually a masters of the universe revelation, that's premiering on Netflix next month.
Our performance in action figures really is a great example of the successful execution of our category structure that we've been applying this methodology across our portfolio to existing properties.
A light WWE Jurassic and Minecraft, and it's really showing up on the scoreboard 2021.
It's been a phenomenal year for action figures of course with the excitement with masters of the universe as Mattel IP, but 2022 is going to be even bigger and better Jurassic World minions, We just renewed.
Essence, with WWE and of course, the expansion of Disney Pixar as light year.
We're incredibly excited about the category and certainly not just at the universe is a prized performed property.
Okay. Thanks, Richard and then my follow up for Anthony the updated guidance for 'twenty one.
That would imply an adjusted EBIT margin in the low teens range. If my math is correct kind of 13 14 percentage.
Does that suggest you are pacing ahead of your goal.
The mid teens threshold by fiscal 'twenty, three and it does it cause you to rethink that goal with perhaps been higher.
<unk> are like.
Yes.
We are making.
Great progress against our goal of <unk>.
Adjusted mid teen Oi margin by 2023, I'm not going to sit and tell you. We're ahead of that but with the success, we're seeing on our optimizing for growth program.
Gail.
Benefit we're getting from our higher top line.
Well on our way and I think when we get to our fourth quarter call, we'll be able to provide more specific 2022 guidance then.
Your next question comes from the line, Jeremy Johnson with BMO capital.
<unk> markets. Please go ahead.
Alright, good afternoon. Thank you.
You talked about gaming for a second and your hot wheels unleash game.
Great reviews with truly cool.
Just wondering about the economics of that and if that can be material to you guys.
Then.
Other digital initiatives behind.
Hi, Matt like Uno mobile and others. Thank you.
Hi, Garik.
We're not providing specific bye bye bye project, but the message here is that we are growing our digital gaming activity. There is a strategic priority for us as part of our mid to long term strategy to capture the full.
<unk> value.
Our IP.
Given the strength of our catalog. We believe there is significant opportunity for us to go to grow.
<unk>.
In digital gaming increase brand engagement and.
And capture more opportunities outside of the toy aisles.
Yes.
We got that was very.
Out with a very positive reviews.
We also launched another game.
Part of Mitel 163, our mobile gaming platform. This is the third game.
Come out on our own our own.
Mobile gaming platform.
And with that you will see additional activity.
In digital experiences not just gaming, but also NFC and other digital opportunities.
Thank you.
Your next question comes from the line of Mike <unk> with Goldman Sachs. Please go ahead.
Hey, good afternoon. Thank you very much for the question I just wanted to follow up on an earlier question about.
Supply chain issues.
Could you just give us a status update about where some of the.
They get supply chain challenges are today and how those challenges may have evolved.
Over the last couple of months.
And then separately.
And you talked to it a little bit about the flexible supply chain as well as mitigate.
How important is it to own your manufacturing facilities to actually be able to navigate through these supply chain challenges. Thank you very much.
Alright.
Hi, Michael so.
Look the I thought I'd start with the.
Second question.
We do believe that owning our own manufacturing, especially in relation to Donaldson Dicast, where we have so much scale.
That gives us a competitive advantage.
Vantage in terms of cost quality and service.
We do have the ability to designed for it to do.
You have a strategy design for manufacturing principles to drive down cost improve quality increase speed to market and all in all allowed us.
To perform so well in control on beach being controllable.
Key part of the chain.
In terms of challenges what type of challenges, we're seeing look it does it's not different from what you reading and what everyone sees in terms of logistics.
Two.
Short supply on <unk>.
Distribution capacity, but.
As we said earlier given the given our scale given our.
Our expertise in and how we how we evolved our supply chain platform to be more nimble more flexible to be able to mobilize.
The horses and shift manufacturing and distribution where needed.
We were able to.
To manage toward the disruption and again I want to say this is not that we were not impacted but even with that we were able to grow our business capture market.
Sure.
<unk> positioned the company for growth in the fourth quarter and the holiday season.
Great. Thank you.
I can ask a follow up question on Richard's comments regarding action figures.
Obviously, a tremendous amount of strength in the quarter up 50%.
Was that.
Primarily that's the universe I know you mentioned Jurassic world as well.
Just wondering if there was a specific.
Content catalyst or something that you would call out for Jurassic world that drove a lot of strength in.
How should we think about action figures growth from here on out thank you.
Yes, as I mentioned and very specific.
I think this is really about our portfolio strategy.
Clearly, we've got a great portfolio of brands and the growth is really a comprehensive Jurassic has certainly been.
Our successful partnership for Us and we continue to see great growth as we mentioned WWE has been a partner of ours for over a decade.
<unk> very excited about the renewal and we've got lots of great plans ahead as.
As we look forward.
We recognize our extension with the Disney partnership with light year, We're clearly looking at continued growth in the category.
As you can see it's already been a great year for.
So we're seeing figures I mentioned as well we have been consistently gaining market share in 2021, and 2022 is going to be an even bigger year Masters specifically is a great story in relation to our overall strategy, taking IP unlocking the value, creating a franchise plan.
For act with content partners driving toy product, both for adult as well as Kid with a consumer product component and we're really starting to get traction in that strategy. So overall action figures is definitely an exciting category for us.
And Michael I just.
Just wanted to build off on what Richard said.
<unk>.
Working with about the portfolio and how we run our action figures. This is really how we run the entire company.
When we shifted to the category structure the opportunity was too.
Grow our business across all all the full portfolio at scale and the way you do that is through the category.
Tonnage meant strategy.
If you look at our performance year to date.
We outgrew the industry.
<unk> growth rate by one seven times.
So this is not just growth.
Relative to our own.
<unk> last year.
But by industry standards.
We grew.
The industry grew in the third quarter by six 4%, we actually grew by 11, 5%. So well ahead of the industry and a lot of it.
Is.
This is driven by our strategy.
Portfolio strategy, but of course execution across the enterprise, including strong performance by our supply chain as well as our commercial organization and this is where the entire company is working hand in hand.
To follow our strategy and Youre seeing youre seeing youre seeing the results in.
In the numbers.
Your next question comes from the line of outlook Patel with <unk> capital markets. Please go ahead.
Hi, Thanks for taking my question.
So I noted in Q1 that you guys said resident freight was.
Approximately 15% of Cogs.
Does that stand today in Q3.
And I think you guys also said you were expecting 35% inflation in those two items what are your expectations for inflation going forward.
Yes, I'll take that things have gone a little little bit.
Worse on the inflation front, we made some adjustments in our Q2 guidance. So those two items resident in Ocean freight as you said, they're somewhere around 15% to 20% of our cost base and our latest estimate is that on a combined basis.
They're increasing by a rate of 50%, so a little bit higher than the 30.
We talked about earlier.
Yeah.
Okay.
Quick.
Good.
I was just can add that on a year to date basis, we've successfully offset all of that inflation and our gross margin through a combination of pricing savings from our cost savings.
<unk> five program.
Well as the scale benefits associated with our topline growth.
Okay, great that actually was going to be my follow up I guess.
One more question are you guys, taking on any hedging activities to mitigate some of the impact on the margins from these costs.
Yes, we have a pretty robust program across a number of commodities through a combination of advanced purchases and through financial hedges right too.
Basically lock in for a period of time, so we're delaying the impact and that gives us some time to make adjustments such as the pricing.
And is that we're taking in the second half.
Okay, Great. That's all I had thanks.
And your last question comes from the line, Ken Clarke chart here with <unk> Crespi Hardt. Please go ahead.
Alright, Thanks for taking my question.
It looks like on the balance sheet the inventories.
<unk> is well positioned.
Over 20% on a two year basis, which is stronger than your sales growth on a two year. So just curious you know how much of that is in transit.
And make it be delivered late and then what is your retail inventory look like at retail at the end of third quarter and where.
Produce expected to end the year. Thanks.
Yes, I think there's two parts to the question, yes, our inventories are up on the balance sheet year over year, I think it's about $174 million and there are two drivers of that one is the cost inflation I just talked about and the other part is increases to support future growth.
Or do you have in terms of retailer inventories, we ended the quarter with retailer inventory levels up mid single digits in dollars compared to last year.
But down low to mid single digits. When you look at weeks of supply and when you factor in the recent increases in Pos.
Net.
We believe we are.
Well positioned.
As we head into the fourth quarter and the holiday season and are working closely with our retail partners.
Great. Thank you.
That concludes our question and answer session for today I'd like to turn the call back to our chairman and CEO.
No.
For Pinal County.
Thank you operator, just to say in summary that our third quarter performance shows that we are operating as an IP driven high performing toy company you are seeing it in the numbers youre seeing it in the results and while the industry as a whole has been growing strongly we.
We have been gaining market share for five consecutive quarters.
There is strong demand for our product we are entering the fourth quarter with great momentum and are off to a good start towards a strong holiday season, we continue to successfully navigate the global supply chain disruption.
It is.
What the industry is facing as a whole, but we are on track to achieve our highest full year growth rate in decades, having just raised our guidance for the third time. This year, we are clearly executing on our strategy to improve profitability and accelerate top line growth.
And.
I appreciate.
I appreciate you following our journey.
Thank you for your time, we appreciate all the questions and the interest in Marseille and will.
We will be happy to answer more questions offline.
I'll turn it back to Dave Thank you Dave.
Thank you Anna 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.
The webcast link can be found on our investor page or for an audio replay. Please dial 404 537 3406.
The passcode is 690 418.
839.
Thank you for participating in today's call.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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