Q2 2022 Mattel Inc Earnings Call

July 21, 2022

Yeah.

Thank you for standing by and welcome to <unk> second quarter fiscal year 2022 conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone.

I would now like to hand, the call over to David Sporn, Yobbish, Vice President Investor Relations. Please go ahead.

Thank you operator, and good afternoon, everyone.

Joining me today are in 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 2022 second quarter financial results.

We will begin today's call with the non Andy Anthony providing commentary on our results.

After which we will provide some time for <unk>, Richard and Anthony to take questions.

To help supplement our discussion today, we have provided you with the 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 or loss and adjusted operating income or loss margin.

Adjusted earnings 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 our 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.

<unk> 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.

The preliminary financial results included in the press release and slide presentation represent the most current information available to management.

The companys actual results when disclosed in its Form 10-Q may differ from these preliminary results as a result of the completion of the company's financial closing procedures.

Final adjustments completion of the review by the company's independent registered public accounting firm.

In other developments that may arise between now and the disclosure of the final results.

Before we begin I'd like to remind you that certain statements made during the call may include forward looking statements related to the future performance of our business brands categories and product lines.

These statements are based on currently available information and assumptions and they're subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward looking statements.

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

We describe some of these uncertainties in the risk factors section of our 2021 annual report on Form 10-K, and on our Q1 2022 quarterly report on Form 10-Q.

Our earnings release and the presentation accompanying this call.

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 <unk>.

Thank you for joining our second quarter 2022 earnings call.

<unk> achieved another quarter of exceptional results with double digit growth in revenue and adjusted EBITDA Despite significant inflation.

This was the eighth consecutive quarter of increased top line performance, reflecting the strength and breadth of our portfolio and the success in executing our strategy.

Looking at the second quarter's financial highlights versus the same period in the prior year.

Net sales were up 20%.

Adjusted operating income was up 82%.

Adjusted earnings per share improved from <unk> to.

<unk> 18.

And adjusted EBITDA increased by 42%.

Paired with the NPD group.

<unk> was the number one toy company in the U S and number one globally in a litter categories dolls vehicles, and infant toddler and preschool.

Our power brands Barbie Hot wheels, and Fisher price, where each the number one property in their respective categories.

We achieved growth in all reported categories with extraordinary performance in action figures and double digit gains in North America, EMEA and Latin America.

Total company Pos was up low double digits.

Benefiting from the Easter shift to the second quarter.

As well as theatrical movie tie ins.

POS was up low single digits in the first half of the year with an improving trend post Easter.

Adjusted EBITDA increased substantially through a combination of sales growth pricing actions and cost savings in spite of significant cost inflation.

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

With all owned and operated factory is fully operational.

Overall, the first half of the year was an outstanding period of growth for the company.

With gross billings up 23% to over $2 5 billion.

A new record level for Mattel.

And adjusted operating income more than doubling to $212 million.

While first half sales benefited from increased retail inventories, we believe owned and retail inventories are appropriate to meet the projected increase in consumer demand for our products.

As we entered the second half we are reiterating our 2020 guidance for net sales growth in constant currency adjusted.

Adjusted EPS and adjusted EBITDA.

Top line performance will be driven by the power of our brand portfolio.

The re launch of Monster high and multi category partnerships with Universal's Jurassic World and minions and Disney and Pixar is light year among others.

We are also reiterating our 2023 goals.

Next year is shaping up very well.

With strong innovation pipeline and the broadening of our portfolio, including the global rollout of Monster High the return of Disney Princess and frozen franchises and the addition of Universal's trolls.

We also announced a multiyear global licensing partnership with Spacex for toys and collectibles starting in 2023.

This marks space access first ever collaboration with a global toy company.

We are mindful of the concerns related to global supply chain and macroeconomic outlook, including inflation that may impact consumer spending.

Like all companies, we are not insulated from market volatility and negative conditions.

That said the toy industry has historically demonstrated its resilience during challenging economic times, and we believe Mattel is well positioned to outperform the industry.

Looking at gross billings in the second quarter in constant currency versus the prior year.

The company achieved strong growth of 24% with increases in each of our litter categories.

Vehicles, and infant toddler and preschool.

As well as in our challenging categories overall, driven by action figures.

<unk> grew 5% led by Bobby and pilot pockets.

<unk> increased 7% on top of a significant double digit gain in the same quarter last year.

Bob We grew in most segments, partially offset by a decline in higher price point items.

American girl declined by $8 million compared to last years very strong second quarter.

Vehicles increased 28%.

Driven by Hot wheels.

<unk> grew 31% on top of a strong double digit increase in the same quarter last year.

Infant toddler and preschool also had a strong quarter, increasing 23% driven primarily by Fisher price core as.

As well as Thomas and friends.

Challenger categories in aggregate increased 48%.

Given by action figures led by Jurassic World and light here.

And by strong double digit growth in building sits.

The second quarter results are in line with our strategy to grow Mattel's, IP, driven toy business and expand our entertainment offerings.

The toy industry overall has been performing well year to date and we believe it will grow for the full year and continue to grow going forward.

We outperformed the industry for two years in a row and.

And see significant opportunities ahead to gain additional share.

We're making progress on capturing the full value of our IP in highly accretive business verticals.

Fluid and content consumer products and digital experiences.

The most notable example is the Barbie movie, which has just completed principal photography and is already generating incredible excitement and social media interest.

Today were exactly one year away from its planned worldwide theatrical release by Warner Brothers.

<unk> is expanding its slate and we just announced that Matchbox will be developed into a motion picture with Sky Dance media.

On the TV side, the Monster High live action television movie musical will launch on October six on a collagen and Permian plus <unk>.

Following by a 26 episode animated series this fall.

<unk> three of <unk> and the Masters of the Universe animated series will premiere on Netflix on August 18.

Time to hemans 40th anniversary.

Netflix will also debut the animated series define our nook in the same week.

First TV project based on original IP.

Consumer products and digital experiences.

<unk> presents a significant opportunity for mitel.

We have announced the hiring of two senior executives from the Walt Disney Company and scope Lee who lead our next chapter of growth in these important areas.

Following eight consecutive quarters of growth from a tale.

We believe we are well positioned to continue growing our IP, driven toy business and expand our entertainment offerings.

We are benefiting from strong retail partnerships and look forward to meeting the projected increase in consumer demand for our product.

As we enter the second half of the year and the all important holiday season.

We expect to achieve our full year 2022 guidance and 2023 goals and gain market share going forward.

As the owner of one of the strongest portfolios of children and family Entertainment franchises in the world.

We are excited by the opportunities to capture the full value of our IP.

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

Thanks.

We achieved another quarter of strong results here are some of the highlights for the second quarter.

Net sales were $1 $236 million, an increase of 20%.

Excluding the negative impact of currency translation net sales grew 24%.

Adjusted gross margin declined by 260 basis points due primarily to cost inflation.

Adjusted operating income was $121 million up 82% with the benefit of topline growth, partly offset by the gross margin decline.

Adjusted EPS was <unk> 18, compared to <unk>, an increase of 15, then driven by growth in adjusted operating income lower interest expense and a lower adjusted tax rate.

The adjusted tax rate in the quarter was 31% compared to 76% a year ago.

Adjusted EBITDA increased by $55 million or 42% benefiting from top line growth.

Overall, we are very pleased with our second quarter and first half results, having achieved strong growth in revenue and profitability.

We recognize that we are operating in a very volatile environment with significant increases in input costs supply chain disruption.

And consumers are experiencing the highest level of inflation in over 40 years.

We believe we are well positioned to manage through these challenges as we have done so for the last two years by leveraging our asset capability and flexible operating model.

We are reiterating our 2022 guidance for net sales growth.

Just that EPS and adjusted EBITDA.

Adding the expected impact of currency translation on net sale and.

And updating for a slight improvement in projected adjusted gross margin.

Turning to gross billings in constant currency.

Total company increased 24% with double digit growth in three of four regions and gains in all reported category.

Quarter end retail inventory was up in both dollar and weeks of supply as retailers ordered product to meet the projected increase in consumer demand, including for products tied to major theatrical releases and to increase inventory levels in advance of the holiday season to.

<unk> supply chain risks.

Looking at gross billings in constant currency by region.

North America was up 30% with growth across all power brands and key categories.

Led by accident figures.

POS increased high single digits.

EMEA grew 21%.

Growth with comprehensive with gains in all key market, all reported category and all power brands.

Pos increased low double digits.

Latin America had an exceptionally strong quarter, increasing 34% with growth in all markets and power brands.

Pos increased low double digits.

Asia Pacific was flat as strong growth in Australia, and Japan was offset by a decline in China.

Which was impacted by Covid related retail closures.

POS increased mid single digits.

Adjusted gross margin declined 260 basis points to 44, 9%.

Gross margin was negatively impacted by cost inflation, principally materials and ocean freight and other supply chain costs, which had a negative impact of 570 basis points.

And increased royalties, which had an impact of 110 basis points, reflecting the growth of licensed properties.

These negative factors were partly offset by pricing, which contributed 160 basis points.

<unk> top line growth, which generated a fixed cost absorption benefit of 130 basis points.

Savings from optimizing for growth, adding 110 basis points.

As previously discussed we have implemented additional pricing accident that will take effect in the second half of 2022.

These have been factored in to the full year guidance.

Moving down to P&L advertising expenses increased 2% to $90 million.

Adjusted SG&A expenses were $343 million, an increase of 3%.

Due to capability building investment and market related pay increases.

Offset by lower incentive compensation and optimizing for growth savings.

As a percent of net sales adjusted SG&A expenses declined by 460 basis points to 27, 8%.

We generated strong double digit growth in adjusted EBITDA in spite of the inflation driven gross margin decline.

Adjusted operating income increased by 82% or $55 million to $121 million.

Benefiting from the flow through of topline growth, partly offset by the decline in gross margin.

Adjusted operating income as a percent of net sales increased by 330 basis points to nine 8%.

Adjusted EBITDA increased by $55 million or 42% to $185 million.

Cash from operations was a use of $425 million, reflecting the seasonality of the business compared to a use of $241 million in the prior year.

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

Partly offset by higher net income.

Capital expenditures were $79 million compared.

Compared to $75 million in the prior year.

Free cash flow was a seasonal use of $503 million compared to $316 million in the prior year.

Free cash flow on a trailing 12 month basis was $147 million compared.

Compared to $374 million in the prior year.

Free cash flow was impacted by an increase in working capital, partly offset by higher earnings.

The increase in working capital is due to higher inventory as we are manufacturing earlier in the season and higher accounts receivable associated with our strong top line growth.

Free cash flow conversion for the trailing 12 month period was 13% compared to 39% in the prior year period.

Looking ahead to the full year, we expect to improve free cash flow and conversion rate compared to 2021.

Taking a look at the balance sheet.

Cash balance was $275 million compared to 385 million in the prior year.

Total debt was $2 billion $576 million down from $2 billion $839 million as free cash flow was used to repay debt.

Accounts receivable increased by $205 million to $989 million in line with sales growth.

Inventory was $1 billion $178 million compared to $818 million last year the.

The increase is due to an earlier seasonal inventory build and the impact of cost inflation.

Leverage ratio continued to improve we finished the second quarter with a debt to adjusted EBITDA ratio of two three times.

Compared to three times in the prior year and two four times at the end of the first quarter.

We continue to benefit from a combination of growth in adjusted EBITDA and debt reduction.

Savings from the optimizing for growth program were $22 million in the quarter $13 million of which benefited cost of goods sold.

Looking ahead, we continue to expect the program to achieve incremental savings of $80 million to $90 million in 2022, and total savings of $250 million by 2023.

I will now cover our 2022 guidance.

Net sales are expected to grow by 8% to 10% in constant currency.

This will be driven by growth in each of our leader category as well as our challenger categories combined.

<unk> gross billings are expected to grow driven by the relaunch of Monster High and continued success Apollo pocket.

Barbie is expected to be comparable to 2021, the highest year on record and following two years of strong double digit growth.

While fashion doors continued to perform well we are seeing some softness in higher priced items, such as the Barbie greenhouse.

We are very confident and Barbie multiyear growth trajectory amplified by the Barbie theatrical movie release next summer.

American Girl is now expected to modestly decline for the year.

Vehicles is expected to grow led by Hartford.

Infant toddler and preschool is expected to grow led by Fisher price and Thomas and friends.

Gross billings for challenger categories, together are expected to grow driven primarily by strong performance in accident figures.

Net sales guidance in constant currency reflects our expectation for continued growth in the second half.

Currency translation for the full year is forecast to have a negative impact on as reported net sales of approximately two to three percentage points.

Adjusted gross margin for the full year is now expected in the range of 47% to 48%.

Slight improvement compared to our previous guidance of approximately 47% and compared to 48, 2% in 2021.

At EBITDA guidance remains unchanged we continue.

To expect adjusted EBITDA to be in the range of one one to one <unk> 5 billion.

Relative to our prior guidance the negative impact of currency translation is offset by the improved gross margin.

SG&A is expected to decline as a percent of net sales while advertising remains relatively flat as a percent of net sales.

Adjusted EPS is expected to be in the range of $1 42 to $1 48 per share compared to the 2021 base of $1 30.

Adjusted tax rate is forecast to be 26% to 28% compared to 25% in 2021.

EPS in the second half will be negatively impacted by a higher adjusted tax rate compared to the prior year period.

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

Reflecting the previously mentioned strategic investments to increase manufacturing capacity and our own dolls and vehicles facilities in which we have a significant competitive cost advantage.

<unk> guidance and goals take into account anticipated supply chain disruption that the company is aware up today, but remains subject to any unexpected supply chain disruption fluctuations in foreign exchange rates inflation changes in global economic conditions and consumer spending.

Labor market fluctuations and other macroeconomic risks and uncertainties.

Looking ahead, we are also reiterating our 2023 goals to achieve high single digit net sales growth in constant currency and adjusted operating income margin of approximately 16% to 17% of net sales.

The adjusted operating margin goal reflects our expectation that over time, the combination of pricing and cost savings will exceed cost inflation, which we expect to moderate in 2023.

Our 2023 EPS goal is to exceed adjusted EPS of $1 90, with the expected benefit from top line growth margin expansion and.

And utilization of improved free cash flow.

In closing Mattel executed another strong quarter and we are very pleased with our first half results.

We achieved continued growth in top line and profitability.

We further reduced leverage ratio and consistent with our capital allocation priorities are making progress towards achieving an investment grade credit rating.

We believe we are well positioned to achieve our guidance for the year and goals for 2023.

Thank you for your time today, and I'll now turn it over to the operator for Q&A.

Thank you at this time to ask a question press Star one on your telephone again Thats Star one on your telephone to ask a question.

Yes.

Our first question comes from the line, Mike <unk> of Goldman Sachs, Mike King Your line is open.

Hey, good afternoon. Thank you for the question I just have two on dolls.

First I was just wondering if you could just describe the monster high opportunity a little bit more.

Do you see the potential of the prospects of that getting back to levels seen in the last cycle.

And then second I was wondering if you could talk a little bit about the rollout strategy for Disney Princess next year.

What does that ramp up kind of look like thank you very much.

Sure Michael It's Richard.

So on Monster High first off we're incredibly excited about the relaunch of the brand.

We've dropped some collective product already much success, we're anticipating a great new launch with our animated series live action TV movie musical which will launch on Nickelodeon This fall.

We've also got <unk>.

Incredible lineup of new product, that's going to be rolling out a whole new generation.

Of fans for Monster high so very very excited about the relaunch and we're not going to quantify or specify the comparison to what it was but what we do believe it will be a top.

Fashion doll, and we will continue to exceed expectations, certainly from a consumer perspective and be a very important part of our portfolio going forward.

We're going to have a global rollout next year.

So this year is of course.

S launch and then globally Youll see some really robust.

<unk> Rollouts for 2023.

We are also incredibly excited for the Disney Princess returned to Mattel.

A new if you will take on the entire portfolio, leveraging our extraordinary capability and talent within the doll portfolio.

It's obviously, a big incremental opportunity for 2023 and really the brand as we've talked about is back because nobody designs dolls develops manufacturers.

Or does it better than Mattel, we are so excited to unveil our product program can't wait to share with you. The details we're leveraging our Mattel playbook, which of course is very well known right now and getting better and better.

And we expect a meaningful program and a meaningful business as part of our portfolio.

Great. Thank you Richard.

Thank you. Our next question comes from the line of Fred Wightman of Wolfe Research. Your line is open.

Okay Wyman your line is open.

Sorry about that guys just cut out for a second.

I was just hoping you could sort of rationalize our bridge. The net sales performance that we've seen sort of year to date and then the fact that you didn't increase the sales outlook, which seems to imply a pretty meaningful deceleration into the back half of the year. So is there something that youre seeing out there that's giving you pause could you just sort of help us understand the thinking for the back half.

Sure I can.

Take that I think when you look at our <unk>.

<unk> for the quarter alright, So Pos is up double digits, but when you look at the first half were up low single digits and we've seen an improving trend post Easter and what we expect to happen is that as we go into the second half we expect second half.

Pos performance to be above our first half levels and for <unk> to gain share.

For the full year. So you see kind of an unwinding of what happened in <unk>.

In the first half all of this is embedded in our 'twenty two guidance.

And which we reiterated top line growth of 8% to 10% in constant currency, we are significantly above that rate in the first half, but that does imply continued growth in the second half of the year.

It makes sense and then.

I don't know if its ethylene or if it's Richard but it sounded like there was a little bit of change on the Barbie side thats expected to be comparable with the prior year. I think previously you were expecting all power brands to grow so.

Is that just concentrated at the higher price point could you sort of expand on what youre seeing there and how youre thinking about that brand going forward, especially with some of these other adult launches scheduled over the next few years.

Yes, it's Richard.

First off Bob its first half performance has been really strong growth of 9% as we mentioned following two full years of strong double digit growth. We do anticipate the full year to be comparable to <unk> 21, which again was the highest year on record.

<unk> fashion doll business is continuing to perform well there was some softness in higher priced items, specifically the dream House that said, we also expect the greenhouse will have its second biggest year on record this year.

Barbie continues.

Continues to be the number one global doll property in fashion doll, it's got.

Widespread brand health, we continue to execute in line with our Mattel playbook and with the expansion of our brand experiences across a multitude of platforms amplified of course by the buyback theatrical movie release, which is going to be an.

An incredible event next summer, we are very confident in <unk> multiyear growth trajectory.

Great. Thank you.

Okay.

Our next question comes from the line of Arpanet Cochran of <unk>.

<unk> investment bank.

Your line is open.

Thank you Dan and good afternoon.

I know Youre Pos is up for the quarter and Easter shift obviously helps.

But you also have prime day shifting kind of the quarter.

Could you give us a sense of what you're seeing in retail sell through when you compare prime day to Prime day, and generally if you could comment what youre seeing in general from the consumers so far in <unk>.

July would be Super helpful. As investors are all watching how that sort of Christian way, it's going to behave kind of for the back half I'm trying to read the tea leaves of what they're seeing right now and then I have a quick follow up thank you.

Yes, so in terms of Prime day, we had our biggest prime day performance ever and are certainly thrilled with our partnership I would say with respect to POF private day does not have a material impact on our quarter or year to date year to date performance as I said a moment ago.

We are certainly very pleased with our first half performance.

POS year to date is up low single digits, and we've seen an improving trend post Easter so that certainly bodes well and as we look to the second half again, we expect Pos performance to be above the first half levels and for for us to gain share.

On a full year full year basis, so we feel really good about.

What they had in terms of the second second half.

Hi, Arpin.

I'll address your question on consumer behavior, just in general kind of broader.

So the industry is growing overall.

We are seeing a positive trend in both Easter as Anthony said.

Based on our own internal analysis, the importance of toys for families continue to be high and most shoppers plan to spend the same or more on tours in 2022 as it did in 'twenty one.

Purposeful brand and toys.

Are resonating with consumers.

More than ever.

We as we said before we also expect shoppers to continue to buy and prioritize well known trusted brands.

With a focus on quality.

We have seen slight decrease in some higher price point items as we've said in the prepared remarks.

But demand remained higher than pre pandemic levels, and we expect traditional holiday season shopping pattern too.

And in general the consumption pattern to come back.

Consumers continue to.

Return to the brick and mortar stores as these open.

And going back to what we always said that the industry has very strong fundamentals.

And we do expect it to continue to grow.

One more point that is worth highlighting is the fact that the your monitor just.

Dated their outlook and now expect the industry to grow.

This year at 6% more than 6% and exceed $100 billion.

This year and to continue to grow at the five 5% CAGR through 2026.

There is some.

Macro.

The feedback and information we have.

The industry did.

It very well.

During the Covid years, we outperformed the industry for two consecutive years.

And we believe we are well positioned to continue to do that and gain share going forward.

Thank you.

That's very helpful. And then just really quickly could you talk a little bit about weeks of inventory at retail and how much that's up I know it should be up year over year, given kind of entertaining calendar and then in terms of kind of inventory on hand in our mind you have caused the increase year over year, Yes, you had really unsustainably low inventories last year that your car.

<unk>.

And perhaps more importantly, shifting production schedules and longer term at this time all of that has to translate to higher.

Sorry on hand, but can you just go over the inventory increase youre looking at and how to think about that because there seems to be a lot of.

Yes, I missed the end of that question, but let me cover the situation on inventory and I'll start with our owned inventory as we've talked about before we have taken proactive steps.

On our part to build ahead to make sure we have product available for retailers and consumers throughout the year.

This includes higher inventories of products tied to theatrical releases this year and in preparation for the monster high relaunch that Richard.

<unk> talked about.

And then in terms of retailer inventories as we said our first half sales did benefit from retailers increasing their inventories as you look at it a quarter and now retailer inventories are up both in dollars and in weeks of supply.

Retailers ordered product to meet the expected growth in demand that includes product for the theatrical releases as well as to increase inventory levels ahead of the holiday season to reduce supply chain risk as we look at this inventory is healthy inventory we believe both the.

Owned and retailer inventories are at appropriate levels to meet the projected increase in consumer demand for our product and as I said before we expect to see improved Pos performance in the back half and for <unk> to gain share.

Thank you very much.

Thank you.

In the back half and for <unk> to gain share.

Thank you very much.

Thank you.

Our next question comes from the line of Eric Handler of <unk> Partners, Eric Handler. Your line is open.

Thank you very much I appreciate the question.

Couple of things one get the question.

Couple of things one.

Relative to street expectations Hot wheels.

<unk> was by far the biggest positive surprise I'm curious if there was anything.

And hot wheels that was.

For the quarter.

And secondly, I'm curious.

If there was any pull forward of direct imports.

Shipments that you had in the quarter as well.

Thanks, Eric I'll take the first part of that gladly by the way Hotwheels is continuing to just perform incredibly strong with growth of 31%.

Second quarter, and 33% year to date, we are on track no pun intended for the fifth consecutive year of growth.

And the growth is widespread.

We're incredibly excited for the second half, we've got great new products, good new segment introductions.

Specifically, our core die cast line and track play sets.

Are performing really well, we continue our momentum with hot wheels Monster trucks.

In addition to that we've also had accelerated focus on adult fans, we've been expanding our premium DSC offerings and we're continuing success in this dynamic new space with <unk>. So.

So theres lot more to share and to come with hot wheels, and thank you for that question. We're very excited about the performance of the brand and its future on the di part, yes, we did see a shift in the quarter, but are not expecting a material change for the full year.

Thank you and just one quick follow up.

You said Anthony that advertising as a percent of.

Net sales should be.

Flat with last year, which was 10%.

<unk> were down relative to the same quarters last year that would imply a pretty significant increase in advertising promotion as a percent of sales.

In the back half of the year is that just a reflection of as youre going to have more product on shelves are.

You have or maybe you have a little bit of a cushion there.

Yes, so we are planning for increased advertising in.

In the back half coupled with more.

Space at retail as well as new innovation and extensive promotional activation all designed to drive demand across the portfolio.

Great. Thank you very much.

Thank you.

Our next question comes from the line of Derek Johnston.

BMO. Your line is open Greg Johnson. Please go ahead. Good afternoon. Good afternoon. Thank you.

Anthony maybe you could put a little bit more on the answer to Eric's question about direct import pull forward.

Can you quantify how much might have pulled into second quarter that normally would have been in third quarter.

Yes, so we're not going to get into that level of detail, but as we disclosed.

We do see a difference between our gross billings performance and our Pos and Thats kind of all captured in the context of the increase in retailer inventory that we.

That we talked about we feel as I said before that we're in a good position on inventories as we enter the back half.

Okay, Great and then what was what changed towards the incremental change or changes that encouraged you to ever so slightly increase your gross margin guidance.

Yes. So as you noted there is a slight improvement in our gross margin relative to our previous expectations were now expecting 47% to 48% compared to the prior guidance of approximately 47%.

<unk> was driven by a combination of factors.

With no single item being material, we continue to expect that significant.

Significant impact from Cogs inflation more than 400 basis points, we saw last year and we feel good about the fact that we're able to offset most of that through a combination of pricing scale benefit from our topline growth as well as cost savings from our <unk> program and lastly, what I.

I would say is that over time, we continue to expect the combination of pricing and cost savings will more than exceed the impact of inflation and contribute.

The margin expansion and help us get to our 2023 goal of 16% to 17% adjusted operating income margin.

Okay, Anthony related to all of that on the gross margin bridge, you didn't kind of FX.

I'm sure it's lumped in somewhere so what was the impact of FX on the quarter.

In terms of gross margin.

Yes. So certainly if you think about FX from a translation standpoint, there was some impact on the dollar value of growth margin, but not on the percentage and from a transactional standpoint, our hedging program insulated us from volatility in that respect so from a gross margin.

Percentage standpoint.

No significant impact from FX.

Okay, great. Thank you.

Okay.

Thank you.

Our next question comes from the line of drew Crum of Stifel Drew Crum. Your line is open.

Okay. Thanks, Hey, guys good afternoon.

Address the divergence in growth rate for our power brands.

In North America versus international and any more detail behind the strength you saw in the quarter for Fisher price in Panama, and then I have.

A follow up.

Okay.

I'll take the Fisher price and Thomas part that we can address the second part of the question Fisher price and Thomas was up 24% in the quarter.

And 19% year to date. So we are on track for a second consecutive year of growth.

And in this franchise also growth has been widespread we're heading into the second half with expanded distribution at retailers. We've got some incredible innovative products tied to major theatrical summer releases, we've got momentum on Thomas and friends with the global rollout of our new content and as always the back half.

Introduces Fisher price core innovation items.

Got lots of new products coming out with little people partnerships with our own brand Barbie and hot wheels, and little people collector of course will have extensive marketing to amplify all of our retail commitments and in particular, we're very proud of Thomas and friends. The new content has led to increase brand engagement opening.

Lots of opportunities across multiple platforms, and we expect to drive momentum heading into 'twenty three.

Look with respect to the other part of your question is as we look at our regional performance three of our four categories were up double digits.

In the quarter in North America, EMEA and Latin America. We also had Pos growth in all four of our regions and the growth in our power brands played an important part and contribution to the growth.

In those in those regions and the other driver is in our calendar categories collectively action figures had an exceptional quarter benefiting from the theatrical tie ins.

Jurassic World as well as last year.

Got it Okay and then my follow up guys as you've announced several film and TV products projects excuse me.

Various stages of development can you remind us what is contemplated in your net sales goal for 2023 and I'm trying to understand what your vision is in terms of the business model should we anticipate meaningful contributions from things like consumer product licensing or gross participation fees and does that mean.

<unk> your margin goal.

Yes.

Yes drew.

Have been sized.

Contribution from <unk>.

From our intellectual properties or that part of the strategy, but we did say it is not.

Part of our goals the there is no.

We didn't factor any any meaningful contribution from the.

Our film slate or or <unk>.

Licensing and merchandising strategy or gaming for that matter. This is.

We've said before this is <unk>.

Growing it's shaping up strongly.

We haven't spoken today about the Barbie movie, but with.

We did address it in the prepared remarks that it is shaping up.

Very very strongly.

It will have an impact but it is not factored into.

Into our guidance nor the other activities that we announced recently.

Okay. Thanks, guys I should say I said guidance and goals for 2003.

Okay.

Yes.

Thank you.

Our next question comes from the line of Jim Chartier of <unk> Crespi Hardt.

Jim Chartier your line is open.

I apologize Jim Chacha. Your line is now open late license business.

How important are these properties to kind of jumpstarting.

Growing the overall consumer licensing business and how big is barbie's consumer license business today versus kind of prior peak. Thanks.

Jimmy the other question was caught up at the beginning could you repeat the full question.

Just how important is the Barbie movie and relaunch of Monster high to Jumpstarting, the overall consumer licensing business.

Just how big is Barbie licensing business today versus kind of prior peak.

Yes, first off I'd say that we've got extraordinary momentum the Barbie brand preceding any theatrical so that theatrical is going to be designed to continue the momentum of Barbie.

And with that our consumer product partnership business is also growing and accelerating with the momentum that we have on this with this property. So we anticipate with the film.

We'll have even additional acceleration in the consumer product and overall franchise opportunity as we continue to expand the brand whether it be in digital gaming content.

<unk> products, the multiyear growth trajectory for Barbie is solid.

And I would add Jim that while within factor it into our goals, we all understand that.

<unk> success.

IP strategy.

Can be transformative.

And this is across.

All this additional verticals that are very large all adjacent to the toy industry, but there are large in and of themselves. The goal that we have in entering this verticals is not.

Just to sell more toys, but also to have organic growth incremental growth within these verticals and this is a strategy strategy, we're employing but of course in success. There is a halo effect strong movie.

Be well.

Have an impact not just on the <unk>.

<unk> sales, but on brands overall.

Alright, thank you.

Thank you at this time I would like to turn the call back over to <unk> for closing remarks, Sir.

Thank you operator, and thanks for everyone for your questions today.

Just in closing this was another quarter of outstanding results for the company.

We are continuing an extraordinary period of growth from a tail.

Having reiterated and updated our 2022 guidance and 2023 goals.

We are entering the second half of the year.

<unk> and look forward to.

Through the holiday season, and are very happy with the position we're in.

We expect to meet the projected increase in consumer demand for our product and gain share going forward.

We always appreciate your interest in <unk>.

And thank.

Thank you for following our progress and.

In executing our strategy. Thank you and I will now turn it.

Back to Dave.

Thank you and on the replay of this call will be available via webcast beginning at 830 PM Eastern time today the.

The webcast link can be found in the events and presentations section of our investors section of our corporate website corporate Mattel Dot com.

Thank you for participating in today's call.

This concludes you may now disconnect.

<unk> you may now disconnect.

Goodbye.

The conference will begin shortly to raise Johan during Q&A, you can dial stolen.

[music].

Okay.

Yes.

[music].

Yeah.

[music].

Thank you for standing by and welcome to <unk> second quarter fiscal year 2022 conference call.

At this time all participants are in a 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.

I would now like to hand, the call over to David <unk>, Vice President Investor Relations. Please go ahead.

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 second 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 the non Richard Anthony to take 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.

Operating income or loss and adjusted operating income or loss margin.

Adjusted earnings 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 our 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 preliminary financial results included in the press release and slide presentation represent the most current information available to management.

The company's actual results when disclosed in its Form 10-Q may differ from these preliminary results as a result of the completion of the company's financial closing procedures.

Final adjustments completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results.

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

We describe some of these uncertainties in the risk factors section of our 2021 annual report on Form 10-K, and on our Q1 2022 quarterly report on Form 10-Q.

Our earnings release and the presentation accompanying this call.

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 <unk>.

Thank you for joining our second quarter 2022 earnings call.

<unk> achieved another quarter of exceptional results with double digit growth in revenue and adjusted EBITDA Despite significant inflation.

This was the eighth consecutive quarter of increased top line performance, reflecting the strength and breadth of our portfolio and our success in executing our strategy.

Looking at the second quarter's financial highlights versus the same period in the prior year.

Net sales were up 20%.

Adjusted operating income was up 82%.

Adjusted earnings per share improved from three cents to.

<unk> 18.

And adjusted EBITDA increased by 42%.

Paired with the NPD group.

Tangible is the number one toy company in the U S and number one globally in a litter categories dow's vehicles, and infant toddler and preschool.

Our power brands Barbie Hot wheels, and Fisher price or each the number one property in their respective categories.

We achieved growth in all reported categories with extraordinary performance in action figures and double digit gains in North America, EMEA and Latin America.

Total company Pos was up low double digits.

Benefiting from the Easter shift to the second quarter.

As well as theatrical movie tie ins.

POS was up low single digits in the first half of the year with an improving trend post Easter.

Adjusted EBITDA increased substantially through a combination of sales growth pricing actions and cost savings in spite of significant cost inflation.

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

With our owned and operated factories fully operational.

Overall, the first half of the year was an outstanding period of growth for the company.

With gross billings up 23% to over $2 5 billion, a new record level for mitel.

And adjusted operating income more than doubling to $212 million.

While first half sales benefited from increased retail inventories, we believe owned and retail inventories are appropriate to meet the projected increase in consumer demand for our products.

As we entered the second half we are reiterating our 2020 guidance for net sales growth in constant currency adjust.

Adjusted EPS and adjusted EBITDA.

Top line performance will be driven by the power of our brand portfolio.

The re launch of Monster high and multi category of partnerships with Universal's Jurassic World and minions, and Disney and Pixar light year among others.

We are also reiterating our 2023 goals.

Next year is shaping up very well with strong innovation pipeline and the broadening of our portfolio.

Including the global rollout of Monster high the return of Disney Princess and frozen franchises and the addition of Universal's trolls.

We also announced a multiyear global licensing partnership with Spacex for toys and collectibles starting in 2023.

This marks space access first ever collaboration with a global toy company.

We are mindful of the concerns related to global supply chain and macroeconomic outlook, including inflation that may impact consumer spending.

Like all companies, we are not insulated from market volatility and negative conditions.

That said the toy industry has historically demonstrated its resilience during challenging economic times, and we believe Mattel is well positioned to outperform the industry.

Looking at gross billings in the second quarter in constant currency versus the prior year.

The company achieved strong growth of 24% with increases in each of our leader categories.

Vehicles, and infant toddler and preschool.

As well as in our challenging categories overall, driven by action figures.

<unk> grew 5% led by Bobby and pilot pocket.

<unk> increased 7% on top of a significant double digit gain in the same quarter last year.

Bob we grew in most segments.

Actually offset by a decline in higher price point items.

American girl declined by $8 million compared to last years very strong second quarter.

Vehicles increased 28% driven.

Driven by Hot wheels.

<unk> grew 31% on top of a strong double digit increase in the same quarter last year.

Infant toddler and preschool also had a strong quarter, increasing 23% driven primarily by Fisher price core as.

As well as Thomas and friends.

Challenger categories in aggregate increased 48%.

Even by action figures led by Jurassic World and light year.

And by strong double digit growth in building sites.

The second quarter results are in line with our strategy to grow Mattel's, IP, driven toy business and expand our entertainment offering.

The toy industry overall has been performing well year to date and we believe it will grow for the full year and continue to grow going forward.

We outperformed the industry for two years in a row and see significant.

Significant opportunities ahead to gain additional share.

We're making progress on capturing the full value of our IP in highly accretive business verticals.

Clothing content consumer products and digital experiences.

The most notable example is the Barbie movie, which has just completed principal photography and is already generating incredible excitement and social media interest.

Today were exactly one year away from its planned worldwide theatrical release by Warner Brothers.

<unk> is expanding its slate and we just announced that Matchbox will be developed into a motion picture with Sky Dance media.

On the TV side, the Monster High live action TV multi musical will launch on October six on a collagen and Paramount plus.

Followed by a 26 episode animated series this fall.

Three of he man and the Masters of the Universe animated series will premiere on Netflix on August 18th time, two hemans 40th anniversary.

Netflix will also debut the animated series define a note in the same week.

First TV project based on original IP.

Consumer products and digital experiences.

Also presents a significant opportunity for mitel.

We have announced the hiring of two senior executives from the Walt Disney Company and Sculpturally.

Our next chapter of growth in these important areas.

Following eight consecutive quarters of growth from a tail.

We believe we are well positioned to continue growing our IP, driven toy business and expand our entertainment offerings.

We are benefiting from strong weighted partnerships and look forward to meeting the projected increase in consumer demand for our products.

As we entered the second half of the year and the all important holiday season.

We expect to achieve our full year 2022 guidance and 2023 goals and gain market share going forward.

As the owner of one of the strongest portfolios of children and family Entertainment franchises in the world.

We are excited by the opportunities to capture the full value of our IP.

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

Thanks.

We achieved another quarter of strong results here are some of the highlights for the second quarter net sales were $1 $236 million, an increase of 20% excluding.

Excluding the negative impact of currency translation net sales grew 24%.

Adjusted gross margin declined by 260 basis points due primarily to cost inflation.

Adjusted operating income was $121 million.

Up 82% with the benefit of topline growth, partly offset by the gross margin decline.

Adjusted EPS was <unk> 18, compared to <unk>, an increase of 15% driven by growth in adjusted operating income lower interest expense and a lower adjusted tax rate.

The adjusted tax rate in the quarter was 31% compared to 76% a year ago.

Adjusted EBITDA increased by $55 million or 42% benefiting from top line growth.

Overall, we are very pleased with our second quarter and first half results, having achieved strong growth in revenue and profitability.

We recognize that we are operating in a very volatile environment with significant increases in input costs supply chain disruption and.

And consumers are experiencing the highest level of inflation in over 40 years.

We believe we are well positioned to manage through these challenges as we have done so for the last two year.

Leveraging our asset capability and flexible operating model.

We are reiterating our 2022 guidance for net sales growth adjusted EPS and adjusted EBITDA.

While adding the expected impact of currency translation on net sale.

And updating for a slight improvement in projected adjusted gross margin.

Turning to gross billings in constant currency.

Total company increased 24% with double digit growth in three of four regions and gains in all reported category.

<unk> supply chain risks.

Looking at gross billings in constant currency by region.

North America was up 30% with growth across all power brands and key categories.

Led by accident figures.

POS increased high single digits.

EMEA grew 21%.

Growth with comprehensive with gains in all key markets, all reported category and all power brands.

Pos increased low double digits.

Latin America had an exceptionally strong quarter, increasing 34% with growth in all markets and power brands.

Pos increased low double digits.

Asia Pacific was flat as strong growth in Australia, and Japan was offset by a decline in China.

Which was impacted by Covid related retail closures.

POS increased mid single digits.

Adjusted gross margin declined 260 basis points to 44, 9%.

Gross margin was negatively impacted by cost inflation, principally materials and ocean freight and other supply chain costs, which had a negative impact of 570 basis points.

And increased royalties, which had an impact of 110 basis points, reflecting the growth of licensed properties.

These negative factors were partially offset by pricing, which contributed 160 basis points.

<unk> top line growth, which generated a fixed cost absorption benefit of 130 basis points.

And savings from optimizing for growth, adding 110 basis points.

As previously discussed we have implemented additional pricing action that will take effect in the second half of 2022.

These have been factored in to the full year guidance.

Moving down to P&L advertising expenses increased 2% to $90 million.

Adjusted SG&A expenses were $343 million, an increase of 3%.

Due to capability building investment and market related pay increases.

Partly offset by lower incentive compensation and optimizing for growth savings.

As a percent of net sales adjusted SG&A expenses declined by 460 basis points to 27, 8%.

We generated strong double digit growth in adjusted EBITDA in spite of the inflation driven gross margin decline.

Adjusted operating income increased by 82% or $55 million to $121 million benefiting from the flow through of topline growth, partly offset by the decline in gross margin.

Adjusted operating income as a percent of net sales increased by 330 basis points to nine 8% adjusted.

Adjusted EBITDA increased by $55 million or 42% to $185 million.

Cash from operations was a use of $425 million, reflecting the seasonality of the business compared to a use of $241 million in the prior year.

The increased use of cash was due to higher working capital requirement, partly offset by higher net income.

Capital expenditures were $79 million compared.

Compared to $75 million in the prior year.

Free cash flow was a seasonal use of $503 million compared to $316 million in the prior year.

Free cash flow on a trailing 12 month basis was $147 million compared.

Compared to $374 million in the prior year.

Free cash flow was impacted by an increase in working capital, partly offset by higher earnings.

The increase in working capital is due to higher inventory as we are manufacturing earlier in the season and higher accounts receivable associated with our strong top line growth.

Free cash flow conversion for the trailing 12 month period was 13% compared to 39% in the prior year period.

Looking ahead to the full year, we expect to improve free cash flow and conversion rate compared to 2021.

Taking a look at the balance sheet.

Cash balance was $275 million compared to $385 million in the prior year.