Q3 2022 Mattel Inc Earnings Call
Net debt and constant currency.
In addition, we present changes in gross billings, a key performance indicator.
Please note that we may refer to gross billings as billings in our presentation and that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise.
Our accompanying slide presentation can be viewed in sync with today's call. When you access it through the Investor section of our corporate website corporate Dot <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 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 complete.
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.
Before we begin I would like to caution you that certain statements made during the call are forward looking including statements related to the future performance of our business brands categories and product lines.
Any statements, we make about the future are by their nature uncertain.
These statements are based on currently available information and assumptions and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward looking statements, including risks and uncertainties associated with the COVID-19, pandemic and the Russia, Ukraine War.
<unk>.
We describe some of these uncertainties in the risk factors section of our 2021 annual report on Form 10-K.
And on our second quarter 2022 quarterly report on Form 10-Q.
Our earnings release, and the presentation accompanying this call and other filings, we make with the SEC from time to time as well as in other public statements.
Mattel does not update forward looking statements and expressly disclaims any obligation to do so except as required by law.
Now I'd like to turn the call over to <unk>.
Thank you for joining our third quarter 2022 earnings call.
The third quarter results reflect the resilience of our diversified portfolio and the success in executing our strategy.
Despite significant inflation.
Foreign exchange headwinds and a challenging macroeconomic environment, we achieved growth in net sales in constant currency and adjusted EBITDA.
Looking at the third quarter financial highlights compared to the prior year third quarter.
Net sales were flat and up 3% in constant currency.
Making it the ninth consecutive quarter of growth.
Year to date net sales increased 10% and.
And 13% in constant currency.
Adjusted operating income was down 1% year.
Year to date adjusted operating income was up 22%.
Adjusted earnings per share was down <unk> <unk>.
Year to date adjusted EPS was up 34.
A 38%.
Adjusted EBITDA increased $10 million or 2%.
Year to date, adjusted EBITDA was up $125 million or 18%.
The NPD group for.
For the third quarter and year to date Mattel was the number one toy company in the U S. Overall and number one globally in our later categories.
Vehicles, and infant toddler and preschool.
And our power brands Barbie Hot wheels, and Fisher price, while H the number one property in their respective categories.
Looking at gross billings in the third quarter in constant currency compared to the prior year.
Martel grew 3%.
Vehicles action figures and building sites all grew double digits, while <unk> was flat.
In infant toddler and preschool declined single digits.
And geographically our international segment grew double digits.
Partially offset by a mid single digit decline in North America.
Year to date total company gross billings grew 13%.
Total company Pos was essentially flat in the third quarter with growth in all international regions offset by a decline in North America.
Our 2022 price increases have been successfully implemented.
While it is still early we have not seen a meaningful impact on consumer demand.
Adjusted EBITDA benefited from pricing actions and cost savings, which more than offset significant cost inflation.
We are maintaining guidance for the full year 2022, and net sales growth in constant currency of 8% to 10% yet.
Yet, we do see a more challenging macroeconomic environment and increased volatility heading into the latter part of the year.
As we expect higher pressure on gross margin, we are revising guidance for 2022, adjusted EBITDA down slightly to 1.05 to $1 $1 billion, representing growth of 4% to 9% versus 2021.
Anthony will cover our updated guidance in more detail shortly.
In the fourth quarter, we have higher advertising and planned promotional activity.
And have secured more shelf space and omnichannel retailer support compared to the prior year.
We also have greater holiday toy lists representation and much stronger in stock and inventory levels than this time last year.
We expect Pos to accelerate in the fourth quarter and to outpace shipping.
Beyond this year 2023 is shaping up well.
This will be driven by strong cross category innovation.
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 Straws.
As well as the global premiere of the Barbie movie.
First theatrical release.
We plan to provide full year guidance for 2023 during our 2022 fourth quarter call.
The year to date performance and full year outlook are in line with our strategy to grow Mattel's IP, driven toy business and expand our entertainment offerings.
<unk> strengthened its position as a partner of choice for the major entertainment companies.
We recently extended our relationship with the Pokemon company by signing a multiyear license renewal for building sets in all major markets.
Mattel creations continues to gain momentum as a highly curated DTC experience.
Targeting the collector market with exciting new products and in international expansion.
We continue to make progress on capturing the full value of our IP in highly accretive business verticals outside of the toy aisle.
The Monster High live action television musical movie premiere that earlier this month and was the number one kids and family movie on Taiwan, plus during its launch week.
The movie also reached over 4 million total viewers on linear on Nickelodeon networks.
Following the strong performance the sequel has just been Greenlit.
The Monster High animated series, we launched just in time for Halloween.
Pictionary premiered on Fox and CBS affiliates in September and is growing audience week over week.
Our second season of the new animated preschool series define a new will premiere on Netflix in November .
And we recently announced new seasons for Thomas and friends pilot pocket and fireman Sam.
The latest Barbie animated movie was just released on Netflix today.
Part of a new multi year agreement with Netflix for exclusive content that will also include three original series.
The barbell theatrical film continues to generate audience excitement.
Having completed principal photography this past summer the.
The movie is currently in post production and.
And we eagerly anticipate its global release in July next year.
We also expanded our presence on roadblocks to include Bobby and pilot pocket in the laptop virtual World. In addition to our hot wheels, and Masters of the universe Standalone games on the platform.
And the growing space of any fees, we announced a digital art collaboration for Bobby with Women's empowerment brand bus beauties for 15001 of a kind Nf fees to debut later this year on Mattel creations.
Mattel is being recognized for its achievements in workplace culture and employee wellbeing.
Mattel was recently included among the world's best employers by Forbes.
Best workplaces for innovators by fast company.
100, best companies by fair amount and the healthiest 100 workplaces in America.
All in all this was a good quarter for Mattel.
With the ninth consecutive quarter of year over year net sales growth in constant currency.
Year to date results show that we are successfully navigating a complex environment.
The strategy to grow our IP, driven toy business and expand our entertainment offering is working.
We look forward to the all important holiday season.
And believe we are on track to achieve another growth year for the company.
While we are seeing higher volatility related to macroeconomic challenges that may impact consumer spending the toy industry has historically demonstrated its resilience during difficult economic times and is forecast to grow for the full year and thereafter.
We believe our fundamentals are strong.
Mattel's portfolio is resilient and well balanced with thriving brands that continue to drive increased consumer engagement and cultural relevance.
There is new product innovation in all categories.
And we're entering new white space opportunities.
Our partnerships with the major entertainment companies.
And we are winning new key licenses.
We are making progress on capturing the full value of our IP in highly accretive business verticals outside the toy aisle.
With more opportunities in content digital experiences and consumer products.
The balance sheet is healthy and about to become another growth lever.
Our World Class leadership team and global organization are executing with excellence.
We believe we are well positioned to further grow the business increased market share and create long term shareholder value.
And now Anthony will cover the financial performance in more detail.
Thanks, and good afternoon.
As <unk> said, we achieved good results for the quarter in the midst of a challenging macroeconomic environment.
We generated net sales of $175 6 billion.
Flat to the prior year and up 3%, excluding the negative impact of currency translation.
Adjusted gross margin increased by 50 basis points as the benefit of pricing actions and cost savings more than offset cost inflation.
Adjusted operating income was $398 million.
Declining 1% due primarily to an increase in advertising expense, mostly offset by the increased adjusted gross margin percentage.
Adjusted EPS was <unk> 82.
Compared to 84 cents in the prior period a decline of 2%.
Excluding the onetime cost associated with the debt paydown in the prior year interest expense was comparable to the prior year.
While the adjusted tax rate increased two percentage points to 22%.
Adjusted EBITDA increased $10 million or 2% to $473 million.
Our year to date performance, which benefited from retailers increasing inventories in the first half has been very strong with key metrics increasing double digits.
Net sales grew 10% and were up 13%, excluding the negative impact of currency translation adjusted.
Adjusted operating income increased 22%.
And adjusted EBITDA grew by $125 million or 18%.
Turning to gross billings in constant currency.
The third quarter was up 3% and year to date was up 13%.
<unk> was flat with growth in Monster high and Polly pocket offset by a decline in Barbie and licensed properties.
Barbie was down 3% after two full years of double digit gain and the highest year on record.
Year to date category growth billings grew 3%.
Vehicles increased 17% driven by hot wheels, which also grew 17%.
Having a record third quarter year.
Year to date category gross billings grew 25%.
Infant toddler and preschool was down 6%.
Due to declines in baby gear newborn and infant.
Partly offset by growth and imagine next and little people.
Year to date category growth billings grew 7%.
Challenger categories in aggregate increased 3% driven by double digit growth in action figures and in building sets.
<unk> offset by declines in plush and games.
Year to date challenger categories gross billings grew 25%.
From a geographic perspective, we achieved growth in three of four regions.
North America declined 4% following a first half in which retailers accelerated purchases.
Gross billings year to date were up 12%.
Consistent with gross billings declined.
<unk> declined by mid single digits in the third quarter.
EMEA achieved another strong quarter of growth with gross billings, increasing by 8%.
POS was up low single digits and outpaced the industry.
Latin America had an exceptionally strong quarter with gross billings increasing by 23%.
Driven by growth in all reported categories and key markets.
POS was up mid single digits.
Asia Pacific gross billings grew 11%.
Driven primarily by strong growth in Australia and Japan.
Early offset by declines in China, which continues to be impacted by COVID-19 related retail closures.
Pos increased double digits.
Primarily driven by gains in Australia.
Quarter end retail inventory levels were up in both dollars and weeks of supply as we head into the holiday season.
Inventory is up good quality and we are working closely with our partners to meet the anticipated acceleration in Pos.
Adjusted gross margin increased 50 basis points to 48, 3% as pricing and cost savings exceeded significant cost inflation.
Here are the components of the increase in gross margin.
On the positive side pricing, primarily the benefit of our mid year actions contributed 240 basis points.
Savings from optimizing for growth added 140 basis points.
And other factors added 30 basis points.
These gains were partly offset by the impact of cost inflation.
A negative 330 basis points.
And royalties.
Negative 30 basis points associated with the high growth of licensed properties.
Moving down the P&L advertising expenses increased 8% to $128 million as we support our brands and drive demand.
Adjusted SG&A expenses of $323 million or.
Were comparable to last year as salary inflation.
It was offset by lower incentive compensation expense and incremental optimizing for growth savings.
Adjusted operating income declined by 1% to $398 million.
Due to higher advertising expense.
Mostly offset by an increase in adjusted gross margin.
Adjusted EBITDA increased by $10 million or 2% to $473 million.
Year to date, adjusted EBITDA was up strongly by $125 million or 18%.
Cash from operations for the year to date period was a use of $275 million.
Reflecting the seasonality of the business.
Compared to $256 million in the prior year.
The increased use of cash was primarily due to higher working capital usage.
Mostly offset by higher net income excluding the impact of noncash items.
Which in the prior year included the release of the deferred tax valuation allowances.
Free cash flow year to date was negative $402 million <unk>.
Compared to negative $371 million in the prior year.
Capital expenditures increased to $127 million.
Compared to $115 million in the prior year period.
On a trailing 12 month basis, we generated $303 million of free cash flow.
Compared to $320 million in the prior period.
The decline is due to increased working capital usage and higher capital expenditures.
Mostly offset by higher cash earnings.
Increased working capital requirements are primarily due to declines in current liabilities and growth in inventory.
Free cash flow conversion for the trailing 12 month period was 27% compared to 33% in the prior year period.
Okay.
Taking a look at the balance sheet.
Cash balance was $349 million compared.
Compared to $149 million in the prior year.
Total debt was $2 $5 74 billion.
Compared to $2 $6 98 billion.
Total debt net of the cash balance our net debt declined to 225 billion compared to $2 549 billion in the prior year, an improvement of $324 million.
Reflecting our free cash flow generation over the last 12 months.
Looking ahead, we intend to use available cash in the four quarter to repay the upcoming maturity of the $250 million, 315% notes.
Accounts receivable declined by $56 million to $1 382 billion due primarily to the negative impact of foreign currency translation.
Inventory was 1.084 billion.
Compared to $854 million last year, an increase of $230 million or 27%.
The increase reflects higher quantity as we accelerated seasonal production and the impact of cost inflation, partly offset by currency translation.
This position has improved meaningfully relative to last quarter, when inventory was up $360 million or 44%.
And we expect the trend to continue to improve.
Leverage ratio at the end of the third quarter was two three times debt to adjusted EBITDA compared to two eight times in the prior year.
The improvement is driven by the combination of growth in adjusted EBITDA and debt reductions.
We continue to make progress toward our goal of achieving an investment grade rating.
We continue to generate significant cost savings.
<unk> for growth program savings were $29 million in the quarter 20.
$24 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 since launching the program in 2021.
As the non mentioned we are maintaining our guidance for full year 2022, net sales growth in constant currency of 8% to 10%.
This is expected to be driven by vehicle and infant toddler and preschool categories.
Led by Hot wheels, and Fisher price and Thomas and friends, respectively as.
As well as our challenger categories in aggregate led by action figures.
We now expect the dolls category to decline slightly.
With Barbie and American girl to decline low single digits.
We are confident about the long term growth trajectory of Barbie and American girl.
We now anticipate that currency translation will have a negative impact of 3% to four percentage points on net sales, reflecting the recent adverse movement in foreign currency rates.
Adjusted gross margin is now expected to be approximately 47%.
Compared to 48, 2% in 2021.
This was modestly below our prior guidance from July and reflects the financial impact of managing higher inventory levels through the balance of the year.
Adjusted EBITDA is now expected to be in the range of 1.05 to $1 1 billion.
Slightly below our prior guidance and up from a 2021 base of 1.007 billion representing growth of 4% to 9%.
The change from the prior guidance reflects the lower gross margin expectation and the impact of currency translation.
We continue to expect as a percent of net sales.
SG&A to decline and for advertising to remain relatively flat.
From our 2021 base of $1 30.
Adjusted EPS is now expected to increase to a range of $1 30 to.
To $1 42 per share.
We continue to expect an adjusted 2022 tax rate of 26% to 28%.
Compared to 25% in 2021.
Consistent with prior guidance.
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 owned dolls and vehicles facilities.
In which we have a significant competitive cost advantage.
We are operating in a challenging macroeconomic environment with higher volatility, including inflation that may impact consumer demand.
The guidance considers what the company is aware of today.
But remains subject to further market volatility any unexpected disruption and other macroeconomic risks and uncertainties.
With respect to our previously stated 2023 goals.
Given the increased volatility in the market as well as the revised 2022 outlook, we are reevaluating our expectations and we will provide annual guidance for 2023.
On our 2022 fourth quarter earnings call.
That said, we are confident in our continuing growth trajectory and expect top and bottom line growth next year.
In closing Mattel executed a good quarter and we are very pleased with our year to date results with double digit top and bottom line growth.
We are improving our leverage ratio.
And consistent with our capital allocation priorities are making progress towards achieving investment grade credit ratings.
We believe we are well positioned to continue our growth trajectory.
Thanks for your time today, and I will now turn it over to the operator for Q&A.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of drew Crum with Stifel. Your line is open.
Okay. Thanks, Hey, guys. Good afternoon, so on the last call as it relates to the POS I think you indicated.
Pos in the second half without pace the first half.
<unk> flattish for Q I heard you correctly, you're suggesting it will outpace shipment growth.
With that in mind can you still achieve that second half past call and then I have a follow up.
Yes. This is Anthony I'll start.
Look ahead, we expect fourth quarter, Pos to accelerate and to outpace shipping and obviously, we're working closely with our retail partners to meet the anticipated acceleration.
There's a number of reasons and demand drivers are that are out there we have increased advertising support in the fourth quarter more promotional activity with our retailers, we have more shelf space and greater representation and toilet. So a lot of reasons to believe and our expectation is that possible access.
All right.
I'd also add that quarter to date is in line with expectations.
And we are pleased with our performance.
And also worth noting that shoppers are returning to a traditional purchasing pattern.
Closer to the holiday season.
So we expect to see us accelerating.
I appreciate it.
Got it okay. Okay. Thanks, guys and then just as a follow up you mentioned in your preamble the acceleration in ordering ordering by the domestic retailers. During <unk> was there anything else to explain the divergence between the North American performance.
International performance on gross billing.
<unk>. Thanks.
Yes.
In the U S. There were certain categories that performed.
Disproportionately well.
Traditionally under index, specifically plush and <unk>.
In credit and trading cards.
But.
I wouldn't take the quarter in isolation I wouldn't look at it in isolation a year to date, we're up 12%.
In the third quarter and year to date, we were the number one company in the U S. Overall.
We're we've been number one in the U S for 28 consecutive years. We're also number one in a litter category in our power brands are each number one in their respective categories. So we're very confident about.
Success in North America, and believe we are well positioned to continue the growth trajectory.
Okay got it thanks guys.
Your next question comes from the line of Eric Handler with <unk> Partners. Your line is open.
Good afternoon, and thank you for the question Im wondering if you could talk a little bit more about sort of the state of retail, particularly in North America right now.
Youre seeing increased market volatility does that mean, our retailers are cutting back on orders at all or they reducing the amount.
Days inventory being held.
As stores can you give us some perspective on what's going on particularly also.
As you look at the various platforms, maybe mass merchant versus dollar stores versus online platforms.
I have a follow up.
So there's no.
Think of it that there is.
A volatile environment.
And.
Macroeconomic challenges.
And.
Could affect consumer demand.
But.
With all of that the toy industry has.
Historically demonstrated its resilience during challenging economic times.
It has grown year to date it is expected to grow for the full year and according to Euromonitor or are they continuing to expect the industry to grow at five 5% CAGR.
Through 2026 so.
We're seeing the industry continuing to demonstrate strong fundamentals.
<unk> to our own internal.
Research, we expect consumers to spend the same or more this coming Christmas or the holiday season relative to.
Last year, we are seeing purposeful brands and quantity toys resonating with consumers now more than ever.
And.
And we believe.
Important big brand quality product.
End up winning.
Susan.
This is what we focused on this is where we excel.
And as Anthony mentioned, we do have.
Expect we have more advertising and promotion in the quarter.
More shelf space.
Better representation on holiday toy list.
In an in stock inventory.
We believe we are well positioned for.
For the coming season and continue to grow next year.
In 2023, both topline and Bottomline.
Okay, and then the pump.
For Anthony.
I imagine it's been a little frustrating waiting for.
The investment grade credit rating upgrade can you just sort of give us an update on where that stands what sort of the credit ratings may be.
Waiting on and once you do get that.
Upgrade what are some of the immediate things you could sort of do.
Because of that.
Yes, I think the first comment I'd make is we continue to make really good progress in improving our balance sheet and our leverage ratio. We finished Q3 at two three times debt to adjusted EBITDA and Thats down from two eight times in the prior year and if you recall our capital allocation priorities. The first one was to invest.
Organic growth in the second was to get our leverage down and maintain a target range of two to two five times and we.
And look as we look at an investment grade rating. It is an important milestone for Mattel and with that stronger balance sheet. We will have the flexibility consider other priorities such as M&A and share repurchases. So we continue to make.
I mean can you continue with our dialogue with the rating agencies and continued to deliver again, improving that balance sheet and reducing leverage.
And Eric you add Eric.
Just to add to Anthonys comments as we said in the note we do see.
Our balance sheet and capital structure, becoming another growth lever.
We've been very focused on bringing it.
Good place.
We very much within our target range.
And continue to improve it and we also talked about.
Repaying another $250 million.
Before the end of the year.
<unk> continued to strengthen our position.
Turning to our balance sheet too.
Yes.
Another lever of growth.
Much appreciate it thanks.
Thank you.
Yeah.
Your next question comes from the line of Linda Bolton Weiser with D. A Davidson your line is open.
Barbie I think you had said before that it was kind of like the higher price point like the Dream House type items, which were most impacted is that still the case or is there something else that is spread a little bit more in terms of the weakness.
Ms in Barbie.
Linda its Richard.
On the first part of the question, but I did catch the second part which.
Mike ill, let up.
So I'll answer it from a <unk> perspective in total.
Look we're very confident in <unk> long term growth trajectory.
Clearly she is the number one global doll property, we continued to execute in line with our playbook year to date <unk> tailings gross billings were up 3% in constant currency, which again is an excellent achievement when we compare it to 'twenty, one which as you recall at the high.
Last year on record.
So as expected we did see a modest decline in the third quarter and more specifically on higher price point items like the Dream House, which you mentioned and which we shared last quarter. The brand. However continues to be on the forefront of cultural conversation incredibly successful initiatives ranging from <unk>.
Barring women such as Jane Goodall, we drove the biggest style trend in fashion recently with the Barbie core trend.
We're obviously looking forward to 'twenty three we've got a great strong innovation pipeline. We've got continued expansion of brand experiences by the way this is across multiple platforms.
This includes a new slate of content with Netflix as well as the highly anticipated Bobby theatrical movie relief for next summer. It's also I think important to note <unk> has doubled in size over the past five years and was the number one global toy property overall for the.
Last two years, which speaks to the strength of the brand.
Okay, and then sticking with <unk> for a minute.
In terms of your Monster high sell in your shipments into the channel.
In terms of what was planned for the for the second half.
Percentage of that was like roughly done in the third quarter and then like what percentage would be done in the fourth quarter in terms of the sell in.
Yes, we can we can show the percentages, but what I can tell you is that we are incredibly happy and encouraged with the performance that we've had to date on the relaunch of Monster high.
As you know we've launched it with a live action television musical movie, which premiered this month. It was also the number one kids and family movie on Paramount plus during the week of its launch we reached over 4 million total viewers on linear Nickelodeon network.
And following actually this strong performance, we just greenlit sequel.
We've also got 26 episodes of Monster High animated series, which is going to launch on Friday October 28th and Nickelodeon of course, just in time for Halloween.
We've got the new Kid targeted product thats, hitting shelves, which will coincide with the content releases and as I mentioned, it's really off to a spectacular start.
<unk> also been nurturing and developing the brand with our collector community, which has been incredibly loyal we've done multiple drops on Mattel creations, which has been selling out in literally minutes.
So we're very happy we are looking forward to the continued rollout of monster high in.
In North America this year and also internationally in 2023.
And can I just sneak in one more on do you guys have a target for your own inventory balance roughly at the end of the year.
Yes, I think as we look at our inventory level and we finished the third quarter up $230 million or 27% and we're making improvement sequentially Q2 was up $360 million or 44% and we expect that trend to continue and improve through the balance of the year.
And believe that our year end inventories will be modestly above prior year level.
Thank you very much.
Well. Thank you. Thank you Linda.
Thanks Linda.
Your next question comes from the line of making Alexander with Jpmorgan. Your line is open.
Hi, good afternoon. Thanks for taking our question maybe just a quick follow up on Joe's question earlier can you maybe clarify what's implied in the <unk> guide from our Pls standpoint.
Third quarter to date in line with expectation. So does that mean, it's accelerated versus <unk> is positive now or are you expecting a further acceleration from here I think it makes a lot of signs that consumers are shifting their spending back tomorrow traditional patterns, but you've also highlighted increased volatility multiple times. So just trying to reconcile what maybe.
Sounds like more caution on the consumer spending outlook with an expectation that pls accelerates from here.
Yes look so I think a little early to talk about quarter to date Pos performance in any detail. What we did say is that we expect to accelerate in the fourth quarter and our shipping and remember that's in the context of a non mentioned about shoppers returning to traditional <unk>.
Buying patterns, where they buy closer to the holiday.
Season, and as we also mentioned there's many reasons to believe that that Pos is going to accelerate based on advertising promotional activity shelf space.
And the circular then toy lists that are out there. So again, we're very confident in.
In the statement about POF accelerating in the fourth quarter.
Okay. That's helpful. And then maybe a question on 23 you talked about.
<unk> topline and Bottomline growth can you spend a little bit of time, just talking about maybe some of the puts and takes on the margins like are you seeing costs sequentially improve and should we anticipate that.
Gross that's a tailwind to gross margin in 'twenty, three and gross margin can be up in 'twenty. Three if sales are up and then on the SG&A side, you do still have cost savings there and are there other levers to pull if the top line comes in a bit weaker than you had previously expected.
Yes, So let me make a couple of comments.
With respect to 2023 again, we're going to provide guidance on our fourth quarter call, but in terms of.
Inflation you saw in the P&L. It did have a fairly significant impact in Q3 330 basis points, but we are seeing some improvement in market prices for ocean freight for materials, but continuing pressure on wage rates and as we've said before overall, we expect inflation to.
Moderate as we go into 2023, I think it's premature to talk about our overall gross margin, but additionally, as we look at next year, it's shaping up well we've got the global rollout of Monster High We've got Disney Princess and frozen Universal Trolls, and the Barbie Barbie movie So.
And a lot to be a lot of positive drivers on the top line and again moderating inflation in the middle of the P&L.
Alright, Thank you very much.
And just to add to that is also as we said, we do expect to grow the top and bottom line next year.
Thanks Anthony.
Your next question comes from the line of Arpin Kocharyan with UBS. Your line is open.
Hi, Thank you thanks for taking my question.
Could we go back to Bobby for a second there is a lot of skepticism around whether Barbie can grow next year.
I guess what are your thoughts around that you obviously have never had such a big box office event for the brand at the same time, it's not a nation is live action, which can be tricky.
I know, it's very early at this point, but as you think about the brand and what's in store for 2000 22023.
Do you see that growing from the many sort of record level.
Yes, <unk>. Thank you for the question.
As I said, we're incredibly confident in Barbie for.
Whole list.
Listed reasons, but in particular, the last five years of proof.
Doubling in size over the last five years is quite an achievement. We've got strong innovation, we've got Netflix slate, we've got franchise initiatives and we've got probably the highest anticipated Barbie movie.
Theatrical release next summer.
So look all things considering are.
Our incredibly confident in the long term growth trajectory of Barbie, it's been the remaining number one.
All time.
And again the performance that we've had consistently gives us the confidence.
As we move forward that's got an extraordinary team as you know our category structure complements our overall <unk> performance.
Got category management, which allows our brands collectively to have unique reason for being.
And as a result, we're confident that all of our brands can thrive together.
We've got an incredible portfolio Monster high which of course is.
Rolling out now with great excitement, we've got the return of Disney Princess and frozen franchises. We've got the addition of universal toll.
As well again as the Premier of Barbie movie. So look all in all we couldnt be more excited about what the future holds and the doll space and in particular Barbie as the leading fashion doll and global doll property of all time.
Great. Thanks, most of my questions on margin has been answered.
Hoping you could talk a little bit on monster high and kind of sizing that opportunity back in the day because of the.
Given our significant brand certainly north of $500 million and very high margin. What are your targets. After that sort of initial launch is that kind of a more near term goal thinking about sort of next 12 month 2023 versus what it could be two years or three years.
Well look again Monster high is is an incredible property within Mattel's treasure trove of properties, we've taken a very strategic approach to the relaunch of the brand as you know we started with our <unk>.
Tell creations collector drop which had been going on throughout the year or two extraordinary fanfare and sellouts. We then have coordinated and partnered with Nickelodeon and Viacom to create a compelling live action TV musical movie, which of course premiered earlier this month and did incredibly.
Well, we've got the 26 episodes, which I mentioned as well dropping on Friday, the 28th and we've got a really robust.
Innovative pipeline of product thats going to be hitting the marketplace as well as mentioned North America has just started we've got incrementally for 2023 as it rolls out throughout the world and while we're not going to size.
The business itself. It is a significant opportunity certainly in our portfolio and will be a top 10 property overall in the fashion doll.
Ranking.
Thank you very much.
Your next question comes from the line of Andrew <unk> with Jefferies. Your line is open.
Hey, Thank you for letting the new Guy asked a couple of questions.
And I apologize if these are too simplistic, but.
You quantify a little bit of the different pieces are kind of in that inflation.
And that inflation headwind.
As far as what's the what's the biggest pieces smallest pieces.
Please thank you.
Sure I can do that so as you saw in our Q3.
The negative impact of inflation was 330 basis points is 410 basis points year to date and there is three primary drivers and the most significant impact.
Is the increase in ocean freight rates that we incurred in this year. So again, that's the primary factor and then to a lesser extent in about equal proportions and increase in materials, primarily resident in zinc and the balance being an increase in labor cost in our key.
Fly chain market.
Got it that's helpful. Thank you and then just one other one kind of on the <unk>.
The entertainment side are you guys able to kind of quantify whether internally or whether you could share with us the impact of.
Some of these some of these initiatives around entertainment.
If you if it hits a certain target.
Presents X improvement in sales.
Or is it or is a lot of these things just more around just kind of aware customer awareness brand brand brand awareness strategies, when I think about the multiple entertainment properties.
Yep.
Yes.
Thanks, Andrew.
What we've said before is that we see the opportunity to capture the full value of our IP.
Accretive to what we're doing the toy side.
So we view these opportunities areas, where we can create.
<unk> achieved growth and develop.
Our business units that are profitable and will contribute meaningfully to <unk>.
Sales.
In business overall of course, there will be a halo effect on <unk> sales, but the opportunity is to build accretive businesses.
That would be.
Successful in and of themselves we.
We haven't broken down the various components.
<unk> said that we believe that in success this could be meaningful.
When we talk about these areas it includes content.
Consumer products and digital experiences and the content.
It includes film and television.
We have a robust slate.
On film it's more.
One project in production as you know in fourth and in development that we've announced with more coming on.
On the TV side, we have this year 12.
Series and specials that will be on air.
Including eight new projects.
And the list goes on and off there's a lot of activity.
Still early days, but.
We are putting the building blocks.
Assembling a very strong leadership team on that side of the business and seeing real traction.
Got it and I appreciate it. Thank you guys so much.
Thank you.
Your next question comes from the line of Fred Wightman with Wolfe Research. Your line is open.
Hey, guys I just wanted to dig into the gross margin guidance I think that you guys called out now it sounds like some higher promo spend in the fourth quarter. But then also FX is there any way that you can sort of.
Split out those two.
So it looks like a call it 50 basis point update for gross margin.
Yes, I can address that so the updated guidance for gross margin that you saw approximately 47% compared to our prior guidance of 47% to 48%. So again ticking down just a bit and the primary factor is the.
As the financial impact of managing inventory through the balance of the year. The FX impact is more to EBITDA and EPS because its not really affecting the margin in the current period. So that translation impact doesn't affect gross margin percent, although it does affect gross margin and <unk>.
EBITDA dollars.
<unk> through but again the primary change here is that financial impact of managing inventory.
Makes sense and then if we just think about the 'twenty three targets and the decision to remove some sort of Holistically I think you guys introduced those back in early 2021, and I know that they've been updated a few times. Since then but can you just sort of frame. What you guys are looking for over the next eight weeks.
Against the backdrop of targets that have been out there for almost two years is it really just a matter of Pos and sell through was going to sort of be the big moving swing factor or is it promos like what is sort of the big thing that you're waiting for.
I think the biggest issue is we are seeing a challenging macroeconomic environment consumers under pressure.
<unk> itself and much higher volatility in the market. So it makes it very difficult.
To forecast. So we also as you know we revised our 2022 outlook the basis moved around a little bit by coupled with the increased volatility, it's just causing us to step back and reevaluate those 2023 expectation so we'll get through <unk>.
Come out and then we will provide guidance for 2023, when we get to our fourth quarter earnings call.
That being said we are confident in not only continuing to grow the top and bottom line. This year, but continuing that trajectory next year with again delivering top and bottom line growth.
Perfect. Thank you.
Thanks, and Frank just to add.
Some of the things that we said 2023 is shaping up well, but we have some very distinct drivers that we've talked about in aggregate, we mentioned monster high the global rollout.
The return of Disney Princess and frozen.
Franchises, that's a big.
Big event, a big driver of that.
Yes.
Important to highlight which is going to be.
Key addition to our portfolio and other properties such as <unk>.
That would be added to what we're doing then.
The Barbie movie, which.
While not animated.
We still expect to drive significant.
Hello for the Barbie brand.
So we have some on top of what we do organically.
<unk> unique.
Unique.
<unk> started.
Distinct divisions due to our business next year.
Thank you.
Your final question comes from the line of Garrick Johnson with BMO capital markets. Your line is open.
Okay.
Great. Thank you.
Can you just talk about the incremental pressure on gross margin comes from managing higher inventory levels, just talk about that what what are you doing to manage higher inventory levels, where are the higher inventory levels.
And.
I noticed that your sales allowances as a percent of gross sales were actually lower year over year. So it doesn't it looks like youre managing.
In the third quarter.
Those inventories that need to be managed somehow.
Yes, Thanks, Scott for the question, let me address this by talking comprehensively about the inventory situation because thats how it arises in our prior calls we did talk about the fact that we accelerated production the improved service levels and to reduce supply chain risk at the same time.
Retailers also increased inventory levels to meet expected growth in demand and ahead of the holiday season to reduce risk and reflecting our strategy one inventory levels at the end of Q3 are up $230 million at the 27% increase and that position has improved.
<unk> meaningfully relative to last quarter, when we are up $360 million or 44% and as I said earlier, we expect that trend to continue to improve the inventory at the current end up good quality, but as we assess the situation today and recognizing increased marketplace challenges.
Volatility inventory levels are elevated and as we manage through the balance of the year. We now expect increased discounts and promotions. These will have a negative impact on Q4 margin and this is what we've factored into our guidance.
Perfect. Thank you.
Good luck.
Okay.
There are no further questions at this time I will now turn the call back over to the chairman and CEO Mr cries.
Thank you operator, and thank you everyone for your questions today.
Summary, this was a good quarter in the midst of a challenging macroeconomic environment.
We believe our fundamentals are strong and we're very confident about our multiyear growth trajectory as.
As we said in the prepared remarks, our strategy is working and we are operating as an IP driven high performing company.
Look forward to the holiday season, and believe we're on track to achieve another growth year for Mattel.
Thank you again and appreciate your interest in the company and are now going to turn it over back to Dave.
Thank you Amy and thank you everyone for joining the call today.
A replay of this call will be available via webcast beginning at about 830 PM Eastern time today.
The webcast link can be found in the events and presentations section of our Investor section of our corporate website corporate Mattel Dot com. Thank you for participating in today's call.
Okay.
This concludes today's conference call you may now disconnect.
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