Q1 2022 Mattel Inc Earnings Call

April 27, 2022

Ladies and gentlemen, thank you for standing by and welcome to the Mattel, Inc. First quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand the conference.

Over to your speaker, Mr. David <unk> head of Investor Relations.

Thank you operator, and good afternoon, everyone join.

Joining me today are non 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 2022 first quarter financial results.

We will begin today's call with the nanny, Anthony providing commentary on our results after which we will provide some time for a non Richard 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, including adjusted gross profit and adjusted gross margin.

Adjusted other selling and administrative expenses.

Adjusted operating income and adjusted operating income margin.

Adjusted earnings or loss per share adjusted tax rate.

Earnings before interest taxes, depreciation 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 investors section of our corporate website corporate 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.

In the second quarter of 2021, we elected to revise prior periods for certain immaterial out of period adjustments that do not require us to amend previous filings.

These adjustments are reflected in our first quarter earnings release, and slide presentation and will be reflected in our 2022 first quarter Form 10-Q .

These adjustments will also be subsequently updated on the financial history section of our Investor relation 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 <unk>.

Including risks and uncertainties associated with the COVID-19, pandemic and the Russia and Ukraine War.

We describe some of these uncertainties in the risk factors section of our 2021 annual report on Form 10-K , our.

Our earnings release and the presentation accompanying this call.

And the 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 Ina.

Thank you for joining Mattel's first quarter 2022 earnings call.

<unk> achieved its highest first quarter results, we have on record for net sales operating income and EBITDA.

Having completed our turnaround in 2021, we are firmly in growth mode and are operating as an IP driven high performing toy company.

The full year outlook is strong.

We expect to grow market share and we are reiterating our 2022 guidance and 2023 goals.

Looking at first quarter financial highlights versus prior year.

Net sales were up 19%.

And exceeded $1 billion.

A remarkable performance on top of a 47% increase in 2021.

Adjusted operating income nearly tripled.

Adjusted earnings per share improved from a negative 10 cents to a positive <unk> <unk> and adjusted EBITDA increased by 65%.

Our performance was comprehensive with growth in gross billings in constant currency in all regions.

Digits in North America, EMEA and Latin America.

We also grew in six of seven categories, where we operate.

With double digit growth in our three power brands Barbie Hot wheels, and Fisher price and Thomas and friends.

We expect the strong performance to continue with growth in the second quarter amplified by sales tied to the theatrical releases of Universal's Jurassic World and minions as well as Disney and Pixar is light here.

We believe we are well positioned with owned and retail inventories to meet consumer demand for our products.

First quarter benefited from increased points of distribution as.

As well as retailers restocking low inventories following the strong holiday season, and gearing up to support product launches tied to the upcoming theatrical releases.

POS declined high single digits, reflecting promotional in spring reset timing retailers restocking low inventories following the strong holiday season, and the Easter shift to the second quarter.

As we begin the second quarter.

April Pos has increased more than 25%.

Bringing year to date Pos in line with our expectations.

While first quarter gross margin was down due to significant inflation.

Favorable foreign exchange pricing scale and cost savings helped to mitigate the inflation impact.

With the added benefit of strong topline growth, we achieved significant gains in operating income and EBITDA.

With adjusted EPS turning positive.

We continue to anticipate higher inflation in 2022 versus last year.

But expect it to moderate in 2023.

Per the NPD group.

<unk> was the number one toy company in the U S and the number one globally.

Our leader categories dolls vehicles, and infant toddler and preschool.

Bobby hardwoods in Fisher price were each the number one property in their respective categories.

<unk> supply chain is playing a key role in our success.

All of our factories are fully operational.

And we are working with our retail partners to ensure product is available on shelves to meet consumer demand.

While we are monitoring macro level factors affecting supply chain and the broader economy, we are confident in our growth trajectory.

Looking at gross billings by category versus the prior year.

Strong performance continued.

And our products resonated with consumers and families.

<unk> grew 8%.

Led by Bobby and Polly pocket.

<unk> was up 12%.

And continued its multiyear momentum.

American girl declined $10 million compared to a very strong first quarter last year.

We expect American girl to grow for the full year.

Vehicles increased 36%.

With growth across all product lines.

Hot wheels, Matchbox and Disney's Pixar cars.

Hot wheels grew 36%.

With retailers restocking, our top selling backcast scars.

Infant toddler and preschool increased 15%.

Driven primarily by Fisher price core.

With growth and imagine next newborn infant and little people as well as Thomas and friends.

Challenger categories together grew 44%.

Led by exceptional growth in action figures and building sites.

Action figures were up a strong 75%.

Driven by Jurassic World Light here and Masters of the universe.

The first quarter results are in line with our strategy to grow Mattel's IP driven toy business.

As we scale our portfolio, we also expanded to 494000 brick and mortar stores, where our product is sold.

We strengthened our position as a partner of choice for the major entertainment companies with the recently announced multiyear global licensing agreement with Universal for Dreamworks animations trolls.

Mattel will have the licensing rights to develop a full line of these psoriatic franchise, which is expected to launch at retailers in line with the new theatrical release in fall of 2023.

We recently expanded our D to C offerings to customers across several major EMEA countries.

We are building a strong and engaged collector base with our Martel creations platform.

We further optimized our operations with the recent consolidation of our manufacturing in Mexico.

The state of the art facility will help to diversify martel supply chain footprint and optimize near shoring of production.

In line with our capital light approach, we're making targeted strategic investments to increase manufacturing capacity.

Improved productivity.

Leverage technological capabilities, while reducing cost and enhancing operational efficiencies.

We also made progress on our strategy to expand our entertainment offering as we look to capture the full value of our intellectual properties in highly accretive business verticals, which are directly adjacent to the toy industry.

This includes content consumer products and digital experiences.

We have just announced that J J Abrams is bad robot will produce the hot wheels movie.

Which we are developing with Warner brothers.

The Barbie movie is in principal photography in London, and we could not be more excited about the <unk> vision and creative execution.

What is shaping up to be an iconic cultural events.

Well Ferro and SRA have recently joined the all star cast.

Led by Academy Award nominated as Margot, Robbie and Ryan Gosling.

As well as similar.

America Ferrera Kate Mckinnon.

Michael Cera and hiring nurse.

Among many other top tier talent.

As announced yesterday by Warner Brothers.

The film will be released theatrically worldwide on July 21, 2023.

In addition to the growing portfolio of Mattel 163 mobile games.

This week, we launched the human and Masters of the universe digital game on roadblocks.

Martel also launched new NFC sets for hot wheels, and Barbie and Belmont.

Which sold out instantly.

We're looking to further leverage our iconic brands in the fast growing world of digital Art collection with several more launches planned in 2022.

We take our role as a responsible corporate citizen very seriously.

And the aim to contribute to a more diverse equitable inclusive and sustainable future.

This week, we are publishing Mattel's 2021 citizenship report.

It provides a progress update on environmental social and governance strategy and goals.

Clothing, and no goal to reduce plastic packaging by 25% for our product by 2030.

This is in addition to other previously announced sustainable product and packaging goals, including to achieve 100% recycled recyclable or biomass plastic materials in our products and packaging by 2030.

We are committed to mattel's purpose to empower the next generation to explore the wonder of childhood and reached our full potential.

To our mission to create innovative products and experiences.

That inspire entertain and develop children through play.

On behalf of the entire Mattel team I would like to express our sadness and dismay.

Are the devastating impact of the war in Ukraine on innocent children and families.

We stand with the Ukrainian people and have launched programs to support organizations on the Frontlines, adding refugee children and families.

We hope for a peaceful resolution and our thoughts are with all those who are suffering.

And now Anthony will cover the financial performance in more detail.

Thanks Adnan.

We started 2022 with a very strong first quarter, we generated net sales of $1 billion and $41 million an increase of 19%.

Excluding the negative impact of currency translation, we grew 22% with growth across all regions and all of our reported categories.

Adjusted gross margin declined by 70 basis points with significant cost inflation, mostly offset by the favorable impact of foreign exchange transaction pricing scale and cost savings.

Adjusted operating income was $90 million up 190%.

As we scaled the business.

While adjusted operating income margin increased by 520 basis points to eight 7%.

Adjusted EPS was a positive eight compared to a negative <unk> <unk> in the prior year period.

The adjusted EPS improvement was primarily driven by operating income growth and lower interest expense.

Adjusted EBITDA increased by $60 million or 65% driven primarily by top line growth.

Turning to gross billings in constant currency.

Total company gross billings increased 23% and benefited from increased points of distribution.

Retailers restocking low inventories following a strong holiday season.

And gearing up to support product launches tied to the upcoming theatrical releases.

Quarter end retail inventory was up in both dollars and weeks of supply.

As we work with retailers to meet strong second quarter consumer demand.

Looking at gross billings by region.

North America was up 25% driven by growth across key categories and all power brands.

POS declined due to the Easter shift and promotional timing.

EMEA was the fastest growing region with a 29% increase driven by growth across all markets with positive Pos.

Latin America also had a very strong quarter, increasing by 28%.

Driven by growth across all markets and categories with positive Pos.

Asia Pacific increased by 1% with strong growth in Australia, and Japan, mostly offset by declines in China, which was impacted by COVID-19 related retail closures.

POS declined in the region.

At the end of the quarter retail stores were fully opened in North America and Latin America.

Europe had less than 1% of stores closed due to the war in Ukraine.

In Asia Pacific approximately 6% of the stores were closed due to restrictions in China, which accounted for 11% of sales.

Adjusted gross margin declined 70 basis points to 46, 6%.

As anticipated cost inflation had a significant 550 basis point impact primarily due to increases in material and ocean freight costs.

The impact of cost inflation was mostly offset by several factors.

Foreign exchange transactions had a favorable impact of 160 basis points.

Pricing, primarily the carryover benefit of our second half 2021 actions contributed 120 basis points.

Strong top line growth generated a fixed cost absorption benefit of 100 basis points.

And savings from optimizing for growth added 90 basis points, completing the bridge to <unk> 46, 6%.

Given the anticipated level of cost inflation as previously discussed.

We are implementing pricing actions in 2022 that are factored in to our guidance.

Moving down the P&L advertising expenses were about flat at $74 million.

Adjusted SG&A expenses were $322 million, an increase of 4%.

Due to employee related expenses as well as higher bad debt expense related to the Russia, Ukraine War.

Partly offset by incremental optimizing for growth savings.

Bottom line performance was very strong across key metrics.

Adjusted operating income increased by 190% or $50 9 million to $90 million.

The increase was primarily driven by the flow through benefit of topline growth.

Favorable FX pricing and cost savings, partly offset by inflation and cost of goods sold.

Adjusted operating income margin increased from three 5% to eight 7% an improvement of 520 basis points.

Adjusted EBITDA increased by 65% or $60 million to $152 million.

Cash from operations was a use of $144 million.

Reflecting the seasonality of the business compared to $36 million in the prior year.

The increased use of cash was due to higher working capital requirement.

As a result free cash flow was negative $180 million compared to $72 million in the prior year with.

With capital expenditures comparable to the prior year at $36 million.

On a trailing 12 month basis.

We generated $226 million of free cash flow compared to $305 million in the prior year.

Free cash flow was negatively impacted by the growth in inventories as we are pre building earlier in the season to support growth.

Free cash flow conversion for the trailing 12 month period was 21% compared to 36% and.

In the prior year period.

Looking ahead to the full year, we expect to improve free cash flow and conversion rate.

Taking a look at the balance sheet.

Cash balance was $537 million compared to $615 million in the prior year.

Total debt was $2 billion $572 million down from $2 $838 million in line with our strategy of using free cash flow to repay debt.

Accounts receivable increased by $182 million to $862 million, driven primarily by the first quarter sales growth.

Inventory was $969 million compared to $626 million last year due.

Due to the earlier timing of our seasonal inventory build as well as the impact of inflation.

Leverage ratio continues to improve.

We finished the first quarter with a debt to adjusted EBITDA ratio of two four times compared to three three times in the prior year.

And expect it to continue to further improve.

This is driven by the growth in adjusted EBITDA and debt reductions save.

Savings from the optimizing for growth program were $17 million in the quarter.

Looking ahead, we continue to expect the program to achieve incremental savings of $80 million to $90 million in 2022.

In total savings of $250 million by 2023.

As <unk> mentioned, we are reiterating our full year guidance for 2022.

<unk>, our momentum and the expectation for another strong growth year for Mattel.

With respect to the impact of the Russia, and Ukraine War.

Our business in these countries represented less than 3% of total gross billings in 2021.

We now expect our business in these two countries to decline in 2022.

However, this negative impact is expected to be offset by improvements in other geographies.

We expect to grow net sales in 2022 by 8% to 10% in constant currency.

This will be driven by growth in our leader categories led by our power brands and American girl as well as our challenger categories together, driven primarily by action figures.

Full year adjusted gross margin is expected to decline from 48, 2% in 2021.

Two approximately 47% in 2022.

Cost inflation, primarily in raw materials and ocean freight is expected to be more significant in 2022 than in 2021.

For moderating in 2023.

We expect the negative gross margin impact of inflation will be mostly offset by the benefits from pricing, including the incremental 2022 actions.

Fixed costs scale benefit from top line growth.

And anticipated savings from the optimizing for growth program.

2022, adjusted EBITDA is expected to increase to a range of one one to one <unk> 5 billion.

Representing growth of 9% to 12%.

As a percent of net sales SG&A is expected to continue to decline while advertising remains relatively stable.

From our 2021 base of $1 30.

Adjusted EPS is expected to increase to a range of $1 42 to $1 48 per share.

Adjusted EPS is benefiting from lower interest expense as we reduce debt in the near term partly.

Partly offset by an expected increase in the adjusted tax rate.

We are now providing a forecast for adjusted tax rate, which excludes the impact of non-GAAP items.

For 2022, we are forecasting an adjusted tax rate of 26% to 28%.

Compared to 25% in 2021.

Our year to go EPS performance will be more significantly impacted by the timing of tax expense compared to the prior year period.

Capital expenditures are forecast to be in the range of $175 million to $200 million.

An increase from prior year, as we strategically invest to increase manufacturing capacity and our own the dolls and vehicles facilities.

This investment is in line with our capital light strategy to support anticipated growth and where we have a significant competitive cost advantage.

Looking ahead, we expect to achieve strong growth in the second quarter and are confident in meeting our full year guidance.

The guidance takes into account the anticipated market and supply chain disruption that we are aware of today, but it is subject to any unexpected supply chain disruption market volatility and other macroeconomic risks and uncertainties.

Looking ahead to 2023, we are reiterating our 2023 goals to achieve high single digit net sales growth in constant currency.

And then adjusted operating income margin of approximately 16% to 17% of net sales.

Our 2023 EPS goal is to exceed adjusted EPS of $1 90.

Driven by top line growth margin expansion and the benefit of improved free cash flow.

In closing Mattel executed another outstanding quarter, and we are very pleased with our start to the year.

Thanks for your time today, and I will now turn it over to the operator for Q&A.

Thank you before we begin our Q&A session I would like to turn the call back over to David <unk> for a few remarks.

<unk>.

Thank you before we begin the Q&A I would like to state that per our company policy, we will not be commenting on press reports and speculation that have come out over the past 24 hours.

We are focused on executing our strategy to grow Mattel's, IP, driven toy business and expand our entertainment offering.

And with that we're happy to answer your questions operator back to you.

Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then return to the queue to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question will come from Eric Handler with <unk> partners. Please go ahead.

Good afternoon, and thanks for the question.

Anthony I'll start with you in prior quarters, you've done a very good job of framing what the.

The retail environment looks like with.

I believe average weekly inventory on hand wondering if you could sort of update how things ended in the first quarter and what youre seeing into Tokyo.

Sure I can certainly address that question.

What you.

You will see is a differential between gross billings and Pos.

Gross billings that we said benefited from a number of factors increased points of distribution retailers restocking low inventory on shelves. Following a very strong holiday season, and gearing up to support product launches is tied to the upcoming theatrical releases so quarter end retail inventory was up in both dollar.

And weeks of supply, which positions us very well to support second quarter growth expectations also say that retail inventory is very healthy and we feel are in a great position and have reiterated our guidance for strong topline growth of 8% to 10%.

Great and then as a follow up I guess none.

It was interesting yesterday to see.

The launch of the.

<unk>.

And the universe came on roadblocks.

Curious with all of your IP that you have how are you thinking about mattel's position in the meta versus.

Yes.

We know we have one of the strongest catalog of children and family Entertainment franchises in the world.

And that applies to content consumer product and digital experiences and.

And as it relates to the meta versus specifically.

And then if the subset these areas have driven by Collectability and communities.

Both cases are.

Brands and franchises are positioned perfectly to win in the area. We launched five NFC campaigns in less than a year all of which have been sold out instantly.

There were not a commercial scale or more experimental and market testing, but we cannot be more encouraged and happy with the results. So we know we are well positioned and we see that does.

As a real tangible opportunity over time.

Thank you.

Thank you. Our next question will come from Linda Bolton Weiser with D. A Davidson. Please go ahead.

Yes. Thank you.

I was just curious.

Your results were still strong in the fourth quarter and your revenue.

Beat the street by by quite a bit.

What are your thoughts about potentially increasing the guidance for the year.

One held you back and doing so even if you could have gone to like 9% to 11% growth. For example can you just kind of go through your thoughts about how you are.

Outlook is changing for the rest of the year.

Yes, Hi, Linda.

This is still early in the year.

We have three more quarters to go very happy with our performance in the first quarter and focus on the.

Continued to executing our strategy.

We did say, we expect to grow in the second quarter.

We are reiterating guidance, both topline and bottom line and continue to execute well.

We set out to do.

Okay, and then as a follow up can I just ask you on the cost inflation front can you give us a little more color on how things are changing a couple of companies who have sat in some data. We look at indicate that for example container freight rates.

Keith and I are absolutely kind of trending down are you seeing that and what can you say about some of the other cost inputs. Thanks.

Sure I can address that we are seeing some decline in spot rates from the recent peak, although certainly against prior year and historical that continues to be quite elevated.

Given that we procure ocean freight through a combination of contract and spot purchases that impact its fairly modest and really doesn't change our outlook for the full year and as we've said before we are impacted by material material, particularly resins and zinc.

As well as those in freight we're seeing some inflation in wages and some of our supply chain market. So our full year outlook for inflation has not changed we continue to expect it to be more significant in 2022 and 2021.

And I would add in response to that we did take pricing in 'twenty, one which is having a carry over benefit into 2022.

And we are implementing additional pricing actions in 2022.

That will improve.

Improve the back half and we've factored those into our guidance as we look ahead on the inflation front to 2023, we do expect it to moderate.

Okay. Thank you very much.

Thank you. Our next question will come from our Pankow Chairman with UBS investment Bank. Please go ahead.

Thanks, and good afternoon. This is Anthony I was wondering how much of your distribution grow year over year.

If I can make a lot of people, perhaps think of your distribution is saturated we are already shipping to every way you could be shipping so what channels drove that growth and then you mentioned extended direct to consumer offering outside of North America could you detail exactly what those were and then I have a quick follow up thank you.

Yeah on the first part of the question in terms of distribution and I think this goes to our performance.

Over the last couple of years. The fact that we have gained market share two years in a row, we have good momentum.

We have actually gained shelf space.

And that's what we're seeing come through in terms of points of distribution.

Okay, and then directly.

During our credit Mark.

And I can add on that.

And then in addition to shelf space just to confirm we also increase the actual number of doors brick and mortar stores, where we sell our product from around 485, two now at around 494000.

Stores, where our product is sold we haven't provided breakdown. How this is split but we're looking to continue to grow.

The retail footprint, where our product is sold and offer our consumer choices.

The brick and mortar business represented less than 70, 70% of our business in 2021.

All in retail and e-commerce continues to grow.

And represents in 2021 represented 31% of all Pos.

D to C is a growing part of our strategy as you know this is part of our.

A key part of our strategy.

It's divided between Martel creations, which is more of the high touch high highly curated part of the business we have.

The metallurgy shop shopper and of course.

The American girl did to serve business all in all we have an omnichannel retail strategy. We aim to be wherever consumers are and continue to expand and grow the number of places where people can shop and buy a product.

Thank you that's super helpful.

Pricing helped your.

Margin by 150 basis points I think in Q4.

But about 120 basis points. This quarter could you give a sense of what that looks like for the rest of the year and I know you said, you've taken and intend to take more pricing there is a lot of concern.

From investors about sort of state of the consumer and inflationary pressures as you reiterate your guidance here is there some kind of price elasticity.

Thank you John .

To assess impact of pricing on demand for your brands that you could share.

Yeah, I can talk a little bit about the.

The pricing and as you noted pricing had a 120 basis point positive impact on Q1, most of that is the carryover impact of that.

Pricing actions from last year and as we noted on our last call. We were contemplating additional pricing actions this year.

Inflationary environment continues to be very significant and have an impact on us. So we are <unk>.

Implementing pricing actions in 2022, which will go into effect in the second half obviously, we've factored those into our guidance, particularly for gross margin as you know we're guiding gross margin down.

A little bit to 47% with a significant impact and inflation and what we feel good about is that we're able to offset most of that through a combination of the pricing actions that we've taken the cost savings from our optimizing for growth program as well as the scale benefit from our top line growth and as.

We've said before longer term, we would expect the impact of pricing and cost savings over time to more than offset the impact of cost inflation and contribute to margin expansion.

And with respect to the second part of the question we haven't seen.

And the negative impact on demand.

With pricing.

And.

Important to say that.

When we take pricing action, we are being very thoughtful and.

And are committed to maintaining the right balance between.

High quality and value for consumers and.

And I'm being very smart and strategic about it so we have not seen any impact.

In the first pricing action, we took last year and we are not we don't expect to see an impact this year.

Thank you.

Yeah.

Thank you. Our next question will come from drew Crum with Stifel. Please go ahead.

Okay.

Okay. Thanks, guys good afternoon.

Action figures up 75%, if I heard correctly and the lift appears to be shipping movie properties during <unk>.

Does that compare to your expectations to Q.

And your commentary was do you expect to achieve strong growth in the quarter.

Additionally, the movie properties are there any other key drivers you would highlight.

Follow up.

So our action figure business has been incredibly.

Incredibly strong as you know driven by Jurassic World Disney and Pixar as light year.

And of course Masters of the universe, we're expecting continued growth for the rest of the year with these incredible theatrical releases and specifically the momentum is continuing on masters of the universe.

Our portfolio also includes further growth with Minecraft and WWE E.

As evergreen properties.

We don't provide the financial projections by property, but specifically these two blockbuster theatrical.

The drivers of the category and then of course, our evergreen brands Mo to Minecraft WWE E. All with innovation and great marketing going forward. So a very very strong category performance and expect it to be strong for the year.

Got it thanks, Richard and then my follow up.

Turning to Europe .

Looks like the gross billings and MBA.

Pretty good <unk>.

Can you break out Europe , only what's been your need.

Taylor and consumer demand.

Notable changes observed in April as the wars dragged on.

Thanks.

Yes, with respect to our performance in EMEA.

In our remarks is very very strong is our fastest growing region and really comprehensive growth across all markets positive Pos.

9% increase in gross billings and it's just a continuation of the great performance, we've seen in the region over the last couple of years.

And with respect to the start to the second quarter not isolating EMEA in particular.

Our Pos for the April month to date has exceeded 25%, but we're off to a good start to the second quarter.

Okay got it thanks guys.

Thank you. Our next question will come from Stephanie Wissink with Jefferies. Please go ahead.

Hello, It's Matt <unk> from Jefferies filling in for Steph Wissink here today very strong results in the first quarter I was hoping that you could help us think.

Further think through current trade level inventories.

<unk> desired trade level inventory to support anticipated demand trends or is there still some channel fill in Q2.

Yes, we feel.

Terms of retailer inventory, we feel like we're in a very good position we saw some restocking during the during the quarter.

The inventories are healthy.

Well positioned to support future growth.

As Richard just noted the theatrical tie ins that are coming mid year. So we feel like we're in a really good position as we look ahead.

Awesome. Thank you and then in terms of owned inventory with quarterly inventory being up 69% year over year can you just provide a little more insight.

Level and composition please.

Sure.

On our balance sheet, our inventory ended at $969 million. It is up from $626 million last year and really reflects mostly our decision right to pre build earlier in the season to support growth.

And about a quarter of that increase is actually the impact of cost inflation, but again, a proactive step on our part to build ahead spread out manufacturing through the season more so that we make sure we have product availability for retailers and consumers throughout the year.

Thank you so much.

Sure.

Thank you. Our next question will come from Garrick Johnson with BMO capital markets. Please go ahead.

Okay.

Hey, good afternoon. Thanks.

Listen to building inventory earlier, our retailers, bringing product in earlier and maybe moving forward set dates for.

For movies and back to school.

Not aware of any shift in timing garik.

Alright, thank you.

Sure.

Thank you. Our next question will come from Megan Alexander with Jpmorgan. Please go ahead.

Hi, Thanks, very much and just talk to the gross margin follow up in <unk>.

First off you talked about significant pressure on <unk>. It was only down 70 basis points. So youre still expecting gross margin down 110 for the year. So can you just help us.

We should be thinking about gross margin for Q2, and then the second half whats changing in the remainder of the year such that the decline gets worse you have another price increase coming and then we will start to lap some of the more significant freight and input cost increases in the back half, though is it that raw material costs are higher than you expected or is there something else that you saw.

<unk> that maybe it doesn't continue.

Yeah. Good question. So I can comment on that as you noted were down 70 basis points in.

In the first quarter, our full year guidance implies about 120 basis point of decline and what you see is because of the seasonality of the business. The first quarter is small so when you get that outsized top line growth you get a greater fixed cost absorption benefit in the first quarter than you will in the balance of.

For the year and secondly, our savings from optimizing for growth.

Tend to be more fixed costs. So they have a bit of an outsized impact on Q1 relative to the balance of the year as well, but again as we look at the full year, some downward pressure, but we feel good about the fact that our pricing and cost savings are going to offset most of the expected inflation.

That's helpful. Thank you and then a quick follow up there have been some reports about Amazon Prime day moving into July from June if that were the case would that impact with shipments of timing or what most of the shipments still happen in Tokyo.

That wouldn't have a material impact on our.

Timing of our shipments.

Got it thank you very much.

Sure.

Thank you. Our next question will come from Fred Wightman with Wolfe Research. Please go ahead.

If we just look at the Cogs Bridge that you gave it looks like sequentially. It was the.

Cost inflation was a little bit better down $5 50. This quarter I think that was 600 last quarter do you think that that inflationary number has peaked and should continue to come down from here.

No I would expect as we said.

Our outlook for inflation Hasnt materially changed we still expect it to have a more significant impact in 2022, and then the 400 basis points in 2021.

And I would say that the first quarter.

In line with that.

That being said, probably a little more weighted to the first half and second half given the escalation that happened in the back half of 2021.

Makes sense and then are you guys still expecting all power brands to grow for the year.

Yes, we are.

Great. Thank you.

Sure.

Thank you. Our next question will come from Mike <unk> with Goldman Sachs. Please go ahead.

Hey, good afternoon, and thank you very much for the question I was just wondering if you could.

Talk a little bit about the point of sale trends I think you had said it was in line with expectations through April I was just wondering if you had a.

A number that you could share with us for the company and then any specific commentary around Barbie.

Barbie dolls would be great. Thank you very much.

Yes, so as we stated we feel really good about April April month to date is up more than 25% on a total company basis.

And as we also stated in our prepared remarks.

POS was down high single digits in the.

In the first quarter.

But EMEA EMEA was up Latin America was up North America was down Asia Pacific was down and one point I'd like to make with respect to the Pos data.

We do provide a significant level of disclosure and detail about our performance.

POS is a directional tool and impacted by different variables that may not provide an accurate view of underlying trends in the short term. So what we're saying is going forward, we're going to provide pass at a macro level for the portfolio or on a regional basis, and then specific situations, where it's relevant for the long.

Some trajectory of the business. So we're not going to be providing in the category level and Barbie in particular on a regular basis.

Michael.

Ill expand upon the Barbie question Barbie had an incredible quarter, we were up 12% and that's on top of an 86% growth last year. So clearly the brand is continuing its multi year momentum.

We're the number one overall Dallas property every week in the U S and the number one global Dallas property. The strength continues we've got some incredible innovative products that are in the marketplace like Barbie extra.

And we recently launched a new innovative entry called QD reveal this was just launched in March and QD reveal hit the doll category industry top 10.

It's a big feat in its first month and it actually outpaced the launch of our largely successful color of your line.

So we continue to drive momentum and cultural relevance, we had an incredible sellout overnight sensation with our Barbie Queen Elizabeth collector Dol, you'll continue to see more culturally relevant collect your product in the marketplace.

And we're looking forward to the momentum continuing not only for Barbie, but the entire Dallas category.

Okay. Thanks, Richard Thanks, Anthony.

Thank you. Our next question will come from Jim Chartier with <unk> Crespi Hardt. Please go ahead.

Hi, Thanks for taking my question.

You guys have a strong movie release calendar this year, but yes.

Car series launching Disney plus I'm curious.

The strength of other streaming series, how impactful that could be this year.

Yes.

Our vehicles category has been extraordinarily strong I mean, the whole category itself has been growing we.

<unk> grew 36% on top of 15% last year and Thats growth across all product lines Hot wheels, Matchbox and as you've asked Disney Princess and Disney Pixar cars.

The line is incredibly strong great innovation, we continue to work incredibly close with our partners at Disney.

Innovating and extending the incredible characters in the car series in new and different ways, but ultimately these results demonstrate our successful execution of our category structure that we've been planning across our entire portfolio, but in particular, the vehicles category has incredible momentum, including Disney Pixar.

Cars Matchbox Hot wheels.

And much more to come.

Great and then on the mirror.

It can grow what gives you the confidence the business will grow this year, despite the first quarter decline.

Or are you sticking within the stores are thorsten and traffic coming back to the stores.

Yes. Thank you for that question, we are expecting full year growth in American girl, We've got incredibly strong plans in place.

And as we progress through our turnaround we are very confident the product launches and marketing plans for American girl are primarily focused on the second half of the year. The decline that we saw in the first quarter was primarily due to the later Easter.

And as well closure of two stores.

You know we've shared we've continued to evaluate our retail footprint.

At the same time, we've been investing in our flagship stores. So as you mentioned New York City has been.

Really on a great turnaround traffic is up our business is actually up in that store I encourage anyone for that matter, who visit us in New York to visit our flagship store and really see the revitalization both in merchandising event.

And customer service at an entirely new level of excitement. So all in all again I think from a marketing merchandising D.

T C store experience perspective, we are very much on track with our American girl plans and I think youll start to see a lot of excitement and scoreboard growth in the back half great.

Great. Thank you.

Thank you. Our next question will come from Jamie Katz with Morningstar. Please go ahead.

Hi, good afternoon, Thanks for taking my question.

It's become a pretty important component of one of your competitors.

Plan and Roblox was mentioned so I'd be interested to hear how you guys are.

Sizing that opportunity for yourself and maybe how you think about that contributing to the profit profile going forward. Thanks.

Hi, Jamie.

Digital gaming is a strategic priority and part of our mid to long term strategy.

To capture the full value of our IP.

Clearly, it's a large market and we see a significant opportunity to grow our business, there and leverage the strength and the engagement and communities.

Franchises have.

We have.

Three part strategy.

Gaming.

One is <unk> III, it's our own mobile game publisher in partnership and that is part of a JV with <unk>.

So far we launched two games Hunan face then in full fledge and recently launched the third game Skibo.

We already shared that last year, this JV exceeded $100 million of revenue.

So based on two games only so this is.

Growing fast we don't consolidate the number given that we don't control the JV, but it's a fast growing part of our business. We also have licensed partnerships. This is what we work with third parties. This is also a nice business that is growing it's not as big but it's still early.

We're having a lot of momentum there and the third piece self publishing this is where we launched <unk>.

<unk> on the kids targeted.

Platform, such as roadblocks, we have already the hot wheels game on that platform. We recently or this week launched the masters of the universe game on roadblocks. So we are building scale building momentum still early but given the strength of our catalog.

We have a real opportunity.

You have a scaled business in this area.

Okay, and then just as a follow up with you.

Help us understand whether or not the retailers you guys are working with are having any different expectations. This year for things like sales allowances or any.

Any different demands that they are putting on you guys given.

<unk> chain issue. Thanks.

No we don't see any.

Any material change in sales adjustments for us.

Excellent. Thank you.

Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Michelle Mattel's, Chairman and CEO Mr. <unk>.

Thank you operator, and thank you all for your questions.

In summary, this was an outstanding start of the year from a tail.

Momentum continued across the business, we started the second quarter with strong consumer demand. The full year outlook is also strong and we expect to grow market share.

We are firmly in growth mode and are operating as an IP driven high performing toy company.

As always we appreciate you following our journey and your interest in the company. Thank you and I will now turn the call.

Over to Dave.

Thank you Yvonne and thank you everyone for joining the call. The replay of this call will be available via webcast and audio beginning at 830 PM Eastern time today.

Webcast link can be found on our investor page or for an audio replay. Please dial 1404 537 3406.

Passcode is 3845555.

Thank you for participating in today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Mattel, Inc. First quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand the conference.

Over to your speaker, Mr. David born yet.

Head of Investor Relations.

Thank you operator, and good afternoon, everyone join.

As you know this afternoon, we reported Mattel's 2022 first quarter financial results.

We will begin today's call with me now on any Anthony providing commentary on our results after which we will provide some time for a non Richard 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, including adjusted gross profit and adjusted gross margin adjusted other selling and administrative expenses.

Adjusted operating income and adjusted operating income margin.

Adjusted earnings or loss per share adjusted tax rate.

Earnings before interest taxes, depreciation 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 and 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 investors section of our corporate website corporate Mattel Dot com.

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 that do not require us to amend previous filings.

These adjustments are reflected in our first quarter earnings release, and slide presentation and will be reflected in our 2022 first quarter Form 10-Q .

These adjustments will also be subsequently updated on the financial history section of our Investor relation website at a later date.

Including risks and uncertainties associated with the COVID-19 pandemic.

And the Russia, and Ukraine War.

We describe some of these uncertainties in the risk factors section of our 2021 annual report on Form 10-K R.

Our earnings release and the presentation accompanying this call.

And the 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 Ina.

Thank you for joining Mattel's first quarter 2022 earnings call.

<unk> achieved its highest first quarter results, we have on record for net sales operating income and EBITDA.

Having completed our turnaround in 2021, we are firmly in growth mode and are operating as an IP driven high performing toy company.

The full year outlook is strong.

We expect to grow market share and we are reiterating our 2022 guidance and 2023 goals.

Looking at first quarter financial highlights versus prior year.

Net sales were up 19%.

And exceeded $1 billion, a remarkable performance on top of a 47% increase in 2021.

Adjusted operating income nearly tripled.

Adjusted earnings per share improved from a negative 10 cents to a positive <unk> <unk> and adjusted EBITDA increased by 65%.

Our performance was comprehensive with growth in gross billings in constant currency in all regions.

Digits in North America, EMEA and Latin America.

We also grow in six of seven categories, where we operate.

With double digit growth in our three power brands Barbie Hot wheels, and Fisher price and Thomas and friends.

We expect the strong performance to continue with growth in the second quarter amplified by sales tied to the theatrical releases of <unk>.

Unit versus Jurassic World and minions as well as Disney and Pixar is light here.

We believe we are well positioned with owned and retail inventories to meet consumer demand for our products.

First quarter benefited from increased points of distribution as.

As well as retailers restocking low inventories following the strong holiday season, and gearing up to support product launches tied to the upcoming theatrical releases.

POS declined high single digits, reflecting promotional in spring reset timing retailers restocking low inventories following the strong holiday season, and the Easter shift to the second quarter.

As we begin the second quarter.

April Pos has increased more than 25%.

Bringing year to date Pos in line with our expectations.

While first quarter gross margin was down due to significant inflation.

Favorable foreign exchange pricing scale and cost savings helped mitigate the inflation impact.

With the added benefit of strong topline growth, we achieved significant gains in operating income and EBITDA with adjusted EPS turning positive.

We continue to anticipate higher inflation in 2022 versus last year.

I would expect it to moderate in 2023.

Per the NPD group.

<unk> was the number one toy company in the U S and the number one globally.

Later categories dolls.

Vehicles in infant toddler and preschool.

Barbie Hot wheels, and Fisher price were each the number one property in their respective categories.

Material supply chain is playing a key role in our success.

All of our factories are fully operational.

And we are working with our retail partners to ensure product is available on shelves to meet consumer demand.

While we are monitoring macro level factors affecting supply chain and the broader economy.

We are confident in our growth trajectory.

Okay.

Looking at gross billings by category versus the prior year.

Strong performance continues.

Our products resonated with consumers and families.

<unk> grew 8%.

Led by Bobby and Polly pocket.

Bobby was up 12%.

<unk> continued its multiyear momentum.

American girl declined $10 million compared to a very strong first quarter last year.

We expect American girl to grow for the full year.

Vehicles increased 36%.

With growth across all product lines.

Wales, Matchbox and Disney's Pixar cars.

Hot wheels grew 36%.

With retailers restocking, our top selling <unk> cars.

Okay.

Infant toddler and preschool increased 15%.

Driven primarily by Fisher price core.

With growth and imagine next newborn infant and little people as well as Thomas in France.

Okay.

Challenger categories together grew 44%.

Led by exceptional growth in action figures and building sites.

Action figures were up a strong 75% driven.

Driven by Jurassic World Lights here and Masters of the universe.

The first quarter results are in line with our strategy to grow Mattel's IP driven toy business.

As we scale our portfolio.

Also expanded to 494000 brick and mortar stores, where our product is sold.

We strengthen our position as a partner of choice for the major entertainment companies with the recently announced multiyear global licensing agreement with Universal for Dreamworks animations trolls.

Mattel will have the licensing rights to develop a full line of these psoriatic franchise, which is expected to launch at retailer is in line with the north theatrical release in fall of 2023.

We recently.

We expanded our D to C offerings to customers across several major EMEA countries.

We are building a strong and engaged collector base with our Martel creations platform.

We further optimized our operations with the recent consolidation of our manufacturing in Mexico.

The state of the art facility will help to diversify martel supply chain footprint and optimize near shoring of production.

In line with our capital light approach, we're making targeted strategic investments to increase manufacturing capacity.

<unk> productivity and leverage technological capabilities, while reducing costs and enhancing operational efficiencies.

This includes content consumer products and digital experiences.

We have just announced that J J Abrams is bad robot will produce the hardwoods movie.

Which we are developing with Warner brothers.

The Barbie movie is in principal photography in London, and we could not be more excited about Greta gerwig vision and creative execution.

But what is shaping up to be an iconic cultural events.

Well Ferro and his array have recently joined the all Star cast led by Academy Award nominated as Margot Robbie and Ryan Gosling as.

As well as similar.

Erica for Kate Mckinnon.

Michael Cera and Harry Ness among.

Among many other top tier talent.

As announced yesterday by Warner Brothers.

The film will be released theatrically worldwide.

<unk> 21 2023.

In addition to the growing portfolio of Matteo <unk> III mobile games.

This week, we launched the human and Masters of the universe digital game on roadblocks.

Martel also launched Knorr and if these sets for hot wheels, and Barbie and Belmar.

Which sold out instantly.

We're looking to further leverage our iconic brands in the fast growing world of digital Art collection with several more launches planned in 2022.

We take our role as a responsible corporate citizen very seriously.

And the aim to contribute to a more diverse equitable inclusive and sustainable future.

This week, we are publishing Mattel's 2021 citizenship report.

It provides a progress update on environmental social and governance strategy and goals.

Clothing and logo to reduce plastic packaging by 25% for our product by 2030.

This is in addition to other previously announced sustainable products and packaging goals, including to achieve 100% recycled recyclable or biomass plastic materials in our products and packaging by 2030.

We are committed to mattel's purpose to empower the next generation to explore the wilder of childhood and reached our full potential.

To our mission to create innovative products and experiences.

That inspire entertain and develop children through play.

On behalf of the entire Mattel team I would like to express our sadness and dismay.

Are the devastating impact of the war in Ukraine.

<unk> children and families.

We stand with the Ukrainian people and have launched programs to support organizations on the front lines, adding refugee children and families.

We hope for a peaceful resolution.

Thoughts are with all those who are suffering.

And now Anthony will cover the financial performance in more detail.

Thanks Adnan.

We started 2022 with a very strong first quarter.

We generated net sales of $1 billion and $41 million an increase of 19%.

Excluding the negative impact of currency translation, we grew 22% with growth across all regions and all of our reported categories.

Adjusted gross margin declined by 70 basis points with significant cost inflation, mostly offset by the favorable impact of foreign exchange transaction pricing scale and cost savings.

Adjusted operating income was $90 million up 190% as we scaled the business.

While adjusted operating income margin increased by 520 basis points to eight 7%.

Adjusted EPS was a positive eight.

Compared to a negative 10 cents in the prior year period.

The adjusted EPS improvement was primarily driven by operating income growth and lower interest expense.

Adjusted EBITDA increased by $60 million or 65% driven primarily by top line growth.

Turning to gross billings in constant currency.

Total company gross billings increased 23% and benefited from increased points of distribution reach.

Retailers restocking low inventories following a strong holiday season.

And gearing up to support product launches tied to the upcoming theatrical releases.

Quarter end retail inventory was up in both dollars and weeks of supply.

As we work with retailers to meet strong second quarter consumer demand.

Looking at gross billings by region.

North America was up 25% driven by growth across key categories and all power brands.

POS declined due to the Easter shift and promotional timing.

EMEA was the fastest growing region with a 29% increase driven by growth across all markets with positive Pos.

Latin America also had a very strong quarter, increasing by 28%.

Driven by growth across all markets and categories with positive Pos.

Asia Pacific increased by 1% with strong growth in Australia, and Japan, mostly offset by declines in China, which was impacted by COVID-19 related retail closures.

POS declined in the region.

At the end of the quarter retail stores were fully open in North America, and Latin America.

Europe had less than 1% of stores closed due to the war in Ukraine.

In Asia Pacific approximately 6% of stores were closed due to restrictions in China, which accounted for 11% of sales.

Okay.

Adjusted gross margin declined 70 basis points to 46, 6%.

As anticipated cost inflation had a significant 550 basis point impact primarily due to increases in material and ocean freight costs.

The impact of cost inflation was mostly offset by several factors.

Foreign exchange transactions had a favorable impact of 160 basis points.

Pricing, primarily the carryover benefit of our second half 2021 actions contributed 120 basis points.

Strong top line growth generated a fixed cost absorption benefit of 100 basis points.

And savings from optimizing a pro growth added 90 basis points completing the bridge to <unk> 46, 6%.

Given the anticipated level of cost inflation as previously discussed.

We are implementing pricing actions in 2022 that are factored in to our guidance.

Moving down the P&L advertising expenses were about flat at $74 million.

Adjusted SG&A expenses were $322 million, an increase of 4%.

Due to employee related expenses as well as higher bad debt expense related to the Russia, Ukraine War.

Partly offset by incremental optimizing for growth savings.

Bottom line performance was very strong across key metrics.

Adjusted operating income increased by 190% or $50 9 million to $90 million.

The increase was primarily driven by the flow through benefit of topline growth.

Favorable FX pricing and cost savings, partially offset by inflation and cost of goods sold.

Adjusted operating income margin increased from three 5% to eight 7% an improvement of 520 basis points.

Adjusted EBITDA increased by 65% or $60 million to $152 million.

Cash from operations was a use of $144 million, reflecting the seasonality of the business compared to $36 million in the prior year.

The increased use of cash was due to higher working capital requirement.

As a result free cash flow was negative $180 million compared to $72 million in the prior year with.

With capital expenditures comparable to the prior year at $36 million.

On a trailing 12 month basis.

We generated $226 million of free cash flow compared to $305 million in the prior year.

Free cash flow was negatively impacted by the growth in inventories as we are pre building earlier in the season to support growth.

Free cash flow conversion for the trailing 12 month period was 21% compared to 36% and.

In the prior year period.

Looking ahead to the full year, we expect to improve free cash flow and conversion rate.

Taking a look at the balance sheet.

Cash balance was $537 million compared to $615 million in the prior year.

Total debt was $2 billion $572 million down from $2 $838 million in line with our strategy of using free cash flow to repay debt.

Accounts receivable increased by $182 million to $862 million, driven primarily by the first quarter sales growth.

Inventory was $969 million compared to $626 million last year.

Due to the earlier timing of our seasonal inventory build as well as the impact of inflation.

Leverage ratio continues to improve we.

We finished the first quarter with a debt to adjusted EBITDA ratio of two four times compared to three three times in the prior year and.

And expect it to continue to further improve.

This is driven by the growth in adjusted EBITDA and debt reductions save.

Savings from the optimizing for growth program were $17 million in the quarter.

Looking ahead, we continue to expect the program to achieve incremental savings of $80 million to $90 million in 2022.

In total savings of $250 million by 2023.

As <unk> mentioned, we are reiterating our full year guidance for 2022.

<unk>, our momentum and the expectation for another strong growth year for Mattel.

With respect to the impact of the Russia, and Ukraine War.

Our business in these countries represented less than 3% of total gross billings in 2021.

We now expect our business in these two countries to decline in 2022.

However, this negative impact is expected to be offset by improvements in other geographies.

We expect to grow net sales in 2022 by 8% to 10% in constant currency.

This will be driven by growth in our leader categories led by our power brands and American girl as well as our challenger categories together, driven primarily by action figures.

Full year adjusted gross margin is expected to decline from 48, 2% in 2021 two.

To approximately 47% in 2022.

Cost inflation, primarily in raw materials and ocean freight is expected to be more significant in 2022 than in 2021.

For moderating in 2023.

We expect the negative gross margin impact of inflation will be mostly offset by the benefits from pricing, including the incremental 2022 actions.

Fixed costs scale benefit from top line growth.

And anticipated savings from the optimizing for growth program.

2022, adjusted EBITDA is expected to increase to a range of one one to $1 <unk> 5 billion.

Representing growth of 9% to 12%.

As a percent of net sales SG&A is expected to continue to decline while advertising remains relatively stable.

From our 2021 base of $1 30.

Adjusted EPS is expected to increase to a range of $1 42 to $1 48 per share.

Adjusted EPS is benefiting from lower interest expense as we reduce debt in the near term.