Q3 2023 Mattel Inc Earnings Call
Good afternoon, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the Mattel third quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again press the star one thank you.
David <unk>, Vice President Investor Relations you May begin your conference. Thank.
Thank you operator, and good afternoon, everyone.
Joining me today are non cries, Mattel's, chairman and Chief Executive Officer, and Anthony Disilvestro, Mattel's Chief Financial Officer.
As you know.
This afternoon, we reported Mattel's 2023 third quarter financial results.
We will begin today's call with <unk> and Anthony providing commentary on our results.
After which we will provide some time for questions.
To help supplement our discussions today, we have provided you with a slide presentation.
Our discussion slide presentation and earnings release May reference non-GAAP financial measures, including adjusted gross profit and adjusted gross margin.
Adjusted other selling and administrative expenses.
Adjusted operating income or loss and adjusted operating income or loss margin.
Adjusted earnings per share adjusted.
Our adjusted tax rate.
Earnings before interest taxes, depreciation and amortization or EBITDA.
Adjusted EBITDA free cash flow free cash flow conversion leverage ratio 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.
For today's presentation references to Pos and consumer demand exclude the impact related to our Russia business, given our decision to pause all shipments into Russia in 2022.
Our slide presentation can be viewed in sync with today's call. When you access it through the investors section of our corporate website corporate Mattel Dot com.
The information required by regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicator is included in our earnings release and slide presentation.
And both documents are also available in the investors section of our corporate website.
Operator: Good afternoon, my name is Emma, and I will be your conference operator today.
The preliminary financial results included in the press release and slide presentation represent the most current information available to management.
Operator: At this time, I would like to welcome everyone to the Mattel Third Quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
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.
Operator: After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you.
Final adjustments.
Completion of the review by the company's independent registered public accounting firm.
David Zbojniewicz: David Zbojniewicz, Vice President of Investor Relations, you may begin your conference. Thank you operator and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer, and Anthony DiSilvestro, Mattel's Chief Financial Officer. As you know, this afternoon, we reported Mattel's 2023 Third Quarter Financial Results. We will begin today's call with Ynon and Anthony providing commentary on our results, after which we will provide some time for questions. To help supplement our discussions today, we have provided you with a slide presentation.
In other developments that may arise between now and the disclosure of the final results.
Before we begin I'd 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.
We describe some of these uncertainties in the risk factors section of our 2020 to annual operating report or Form 10-K R.
David Zbojniewicz: 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 expenses, adjusted 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, net debt, and constant currency. In addition, we present changes in gross billings, a key performance indicator.
Our Q2 2023 quarterly report on Form 10-Q.
Our earnings release and presentation and other filings, we make with the SEC from time to time as.
As well as in other public statements.
Mattel does not update forward looking statements and expressly disclaims any obligation to do so except as required by law.
Now I'd like to turn the call over to Ina.
Thank you for joining our third quarter of 2023 earnings call.
<unk> strong third quarter performance reflects the successful execution of our strategy to grow Mattel's, IP, driven toy business and expand our entertainment offerings.
David Zbojniewicz: Please note that we may refer to gross billings as billings in our presentation, and that gross billings figures, reference on this call, will be stated in constant currency unless stated otherwise. For today's presentation, references to POS and consumer demand excluded the impact related to our Russia business, given our decision to pause all shipments into Russia in 2022. Our slide presentation can be viewed in sync with today's call when you access it through the investor section of our corporate website, corporate.metel.com.
Our financial results exceeded expectations and showed meaningful sales growth and margin expansion.
With very strong free cash flow.
Consumer demand for our products increased in the quarter and we continued to outpace the industry.
The company benefited from the success of the Barbie movie with.
With significant contributions from box office participation the movie toy line and consumer product partnerships.
Looking at key financial metrics for the third quarter as compared to the year ago period.
David Zbojniewicz: 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 investor 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 10Q, may differ from these preliminary results as a result of the completion of the company's financial closing procedures.
Net sales increased 9% as reported or 7% in constant currency.
Adjusted gross margin improved to 170 basis points to 51%.
Adjusted EBITDA increased 22% to $580 million.
And trailing 12 month free cash flow increased by $158 million to $461 million.
POS was up mid single digits in the quarter.
David Zbojniewicz: 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. Before we begin, I'd 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.
And up low single digits year to date.
We expect to continue to grow as we enter the holiday season.
There are some color <unk>.
In the third quarter and year to date.
<unk> gained share globally.
And it's three categories.
Vehicles, and infant toddler and preschool.
As well as in building sets.
Following 22% growth from 2019 to 2022.
The global toy industry was down year to date and in the third quarter versus your kind of.
We expect the industry to decline mid single digits for the full year.
As it relates to Mattel.
David Zbojniewicz: We describe some of these uncertainties in the risk factor section of our 2022 Annual Operating Report, or Form 10K, our Q2 2023 quarterly report on Form 10Q, our earnings release and presentation, and other filings we make with the SEC from time to time, as well as another public statements.
We are very well positioned competitively and expect a strong holiday season.
Going into the fourth quarter.
We have a broad based lineup of innovative toys across multiple categories play patterns and price points.
This applies to our own franchises.
David Zbojniewicz: Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law.
As well as partner IP, including the upcoming Universal Trolls and Disney wish movies.
We have greater retailer support versus the prior year with more shelf space larger representation across major holiday catalogs and plans for increased advertising.
Ynon Kreiz: Now, I'd like to turn the call over to Enoch. Thank you for joining our 3rd quarter 2023 Earning School. Mattel's strong 3rd quarter performance reflects the successful execution of our strategy to grow Mattel's IP-driven toy business and expand our entertainment offering. Our financial results exceeded expectations and showed meaningful sales growth and margin expansion with very strong free cashflow. Consumer demand for our product increased in the quarter and we continued to outpace the industry.
We expect to continue to outpace the industry and gain market share in the fourth quarter and full year.
Given the sales year to date performance and expectations for the fourth quarter we.
We are updating our 2023 guidance to reflect an improved margin and profit outlook.
Anthony will provide more details shortly.
Ynon Kreiz: The company benefited from the success of the Barbie movie with significant contributions from box office participation, the movie toy line, and consumer product partnerships. Looking at key financial metrics for the 3rd quarter as compared to the year-go period. Net sales increased 9% as reported or 7% in constant currency. Adjusted growth margin improved 270 basis points to 51%. Adjusted EBITDA increased 22% to 580 million dollars and 12.3 cashflow increased by 158 million dollars to 461 million dollars.
Reflecting the strength of our financial position and confidence in creating long term shareholder value.
We made additional share repurchases in the quarter and expect to continue repurchases as part of our capital allocation priorities.
Our strategy to grow our IP, driven toy business and expand our entertainment offering is serving us well.
We are focused on accelerating top line by scaling our portfolio.
Growing franchise brands and advancing e-commerce in D C.
Increasing profitability by continuing to optimize our operations and.
And capturing the full value of our IP outside the toy aisle.
As it relates to the performance of our toy business in the third quarter.
Ynon Kreiz: POS was up mid single digits in the quarter and up low single digits year to date. We expect POS to continue to grow as we enter the holiday season. Perseucana in the 3rd quarter and year to date, Mattel gained share globally and in its 3 litre categories, dolls, vehicles, and infant order and preschool as well as in building sets. Following 22% growth from 2019 to 2022, the global industry was down year to date and in the third quarter, Percy O'Connor.
Does continue to grow with the benefit from the Barbie movie related toy line and adult collector base there.
The expanded Disney Princess and Disney Frozen line, and the global rollout of Monster High.
Vehicles performed exceptionally well driven by hot wheels.
The franchise is on track for a sixth consecutive record year of growth as we continue to innovate in those segments, including the new <unk> line.
And infant toddler and preschool.
Fisher price declined, but shipping and Pos trends improved in the quarter.
Little people collector continued to expand and now features all 32 NFL teams.
Ynon Kreiz: We expect the industry to decline mid-single digits for the full year. As it relates to Mattel, we have very well-positions competitively and expect a strong holiday season. Going into the fourth quarter, we have a broad based lineup of innovative toys across multiple categories, play patterns and price points. This applies to our own franchises, as well as partner IP, including the upcoming Universal Trolls and Disney Wish movies. We have greater retailer support versus the prior year, with more shelf space, larger representation across major holiday catalogs and plans for increased advertising. We expect to continue to outpaste the industry and gain market share in the fourth quarter and full year.
Challenger categories in aggregate declined as it comped and exceptionally strong film slate last year.
Building sets grew and in games, we announced pictionary versus AI. The first physical board game to integrate AI into gameplay.
We also renewed mattel's multi category agreement with Nintendo.
In terms of our entertainment business.
This was a breakout quarter for Mattel.
The Barbie movie Mattel's first major theatrical release became a global cultural phenomenon.
Breaking numerous box office records and becoming the highest grossing film of 2023.
The movie was a showcase for the cultural relevance of our IP.
Our ability to attract and collaborate with top creative talent and our demand creation capabilities at a global scale.
Ynon Kreiz: Given Mattel's year-to-date performance and expectations for the fourth quarter, we are updating our 2023 guidance to reflect an improved margin and profit outlook.
The movie has broadened barb as fan base, which will be an important contributor for the brand as part of our long term franchise management strategy.
Ynon Kreiz: Anthony will provide more details shortly. Reflecting the strength of our financial position and confidence in creating long-term shareholder value, we made additional share repurchases in the quarter and expect to continue repurchases as part of our capital allocation priorities. Our strategy to grow our IP driven toy business and expand our entertainment offering is serving us well. We are focused on accelerating top line by scaling our portfolio, growing franchise brands and advancing e-commerce and D2C, increasing profitability by continuing to optimize our operations and capturing the full value of our IP outside the toy aisle.
It also speaks to the potential of Mattel films and the significant progress of our strategy to capture the full value of our IP.
Mattel television permitted new episodes of the Monster High animated series and a live action movie sequel.
A special for Polypore kit and most serious for Barbie.
And those citizens of Thomas and friends Fireman, Sam and the Pictionary game show.
We also announced hot with less race.
Animated series that will premier on Netflix in spring 2024.
In digital gaming Matteo and game Fam unveiled a Barbie Dream house experience on roadblocks.
Rob its first ever a standalone game on the platform.
Ynon Kreiz: As it relates to the performance of our toy business in the third quarter, Dahl's continued to grow with the benefit from the Barbie movie-related toy line and a Dahl collector base, the expanded Disney princess and Disney Frozen line, and the global rollout of Monster High. Vehicles performed exceptionally well driven by hot wheels. The franchise is on track for a sixth consecutive record year of growth as we continue to innovate in new segments including the new race-versed line.
Our commitment to workplace culture and corporate citizenship continues.
Matteo was named as one of the world's best employers by Forbes for the third year in a row and one of the 100 best companies by fair amount for the second year in a row.
It is a reflection of how we are empowering our culture of growth optimism and wellbeing for our global team.
In September Mitel published its latest citizenship report, which highlights the progress we have made across our three ESG pillars.
Ynon Kreiz: In infant toddler and preschool, Fischer price declined, but shipping in POS trends improved in the quarter. Little people collector continue to expand in our features all 32 NFL teams. Challenger categories in aggregate declined as it calmed an exceptionally strong film slate last year. Blair, Billingsets Group, and in games we announced Pictionary vs. AI the first physical board game to integrate AI into gameplay. We also renewed Mattel's multi-category agreement with Nintendo. In terms of our entertainment business, this was a breakout quarter for Mattel.
Sustainable design and development.
Responsible sourcing and production and.
And thriving and inclusive communities.
We are committed to being a responsible corporate citizen and to our aim to contribute to a more diverse equitable inclusive and sustainable future.
In closing.
<unk> third quarter results reflect our success in executing our strategy with the Barbie movie, marking a milestone for the company.
We look forward to a strong holiday season for Mattel and expect to achieve our updated full year guidance and continue to grow market share.
Ynon Kreiz: The Barbie movie, Mattel's first major theatrical release became a global cultural phenomenon, breaking numerous box office records, and becoming the highest grossing film of 2023. The movie was a showcase for the cultural relevance of our IP, our ability to attract and collaborate with top creative talent and our demand creation capabilities at a global scale. The movie has brought in Barbie's fan base, which will be an important contributor for the brand as part of our long-term franchise management strategy.
Looking beyond 2023.
We believe we are well positioned to grow our IP, driven toy business and expand our entertainment offering.
We will benefit from the cultural relevance of our brands continued innovation and demand creation capabilities across our portfolio.
Increased content and consumer product executions, as well as ongoing financial discipline.
Cash flow management.
We plan to provide full year guidance for 2024 on our 2023 fourth quarter call.
Ynon Kreiz: It also speaks to the potential of Mattel films and the significant progress of our strategy to capture the full value of our IP. Mattel television premiered new episodes of the Monster High animated series, and a live action movie sequel, a special for polypocket, a new series for Barbie, a new seasons of Thomas and friends, Fireman Sam, and the Pictionary game show. We also announced Hot Wheels Let's Race, a new animated series that will premiere on Netflix in spring 2024.
I would like to thank the entire Mattel organization for their achievements hard work and commitment to creating shareholder value.
Before I turn the call over to Anthony.
On behalf of Mattel.
I would like to express our sadness following the horrific attacks in Israel.
We condemn terrorism and the unthinkable violence, taking place in.
Clothing, the ongoing hostage situation.
Our thoughts are with all those who are suffering.
Ynon Kreiz: In digital gaming, Mattel and GameFam unveiled a Barbie Dreamhouse experience on Roblox, Barbie's first ever standalone game on the platform. A commitment to work with culture and corporate citizenship continues. Mattel was named as one of the world's best employers by Forbes for the third year in a row and one of the 100 best companies by Ceremon for the second year in a row. It is a reflection of how we are empowering a culture of growth, optimism, and well-being for our global team.
I have lost loved ones.
In our steel in Harm's way.
And now I will turn the call over to Anthony.
Thanks and on.
We had a strong third quarter with top and bottom line growth and significant free cash flow.
Net sales of $1 billion, and $919 million increased 9% or 7% in constant currency compared to the prior year.
Adjusted gross margin of 51% increased 270 basis points compared to the prior year benefiting from the accretive Barbie movie related economics.
Ynon Kreiz: In September, Mattel published its latest citizenship report, which highlights the progress we have made across our three ESG pillars. Sustainable design and development, responsible sourcing and production, and thriving and inclusive communities. We are committed to being a responsible corporate citizen and to our aim to contribute to a more diverse, equitable, inclusive, and sustainable future.
Adjusted operating income was $506 million.
An increase of $108 million or 27% compared to the prior year, primarily driven by sales growth and gross margin expansion.
Adjusted EPS was $1 eight compared to 82, a year ago, an increase of 32%.
Adjusted EBITDA was $580 million, an increase of $106 million compared to the prior year.
Turning to gross billings in constant currency overall gross billings increased by 6%.
Ynon Kreiz: In closing, Mattel's third quarter results reflect our success in executing our strategy with a Barbie movie marking a milestone for the company. We look forward to a strong holiday season for Mattel and expect to achieve our updated, four-year guidance and continue to grow market Looking beyond 2023, we believe we are well positioned to grow our IP driven toy business and expand our entertainment offering. We will benefit from the cultural relevance of our brands, continued innovation and demand creation capabilities across our portfolio, increased content and consumer product executions, as well as ongoing financial discipline, and cash flow management. We plan to provide fuller guidance for 2024 on our 2023 fourth quarter call. I would like to thank the entire Mattel organization for their achievements, hard work and commitment to creating shareholder value.
POS increased by mid single digits.
Mattel continued to outpace the industry and gained 60 basis points of market share year to date purse or comment.
Looking at performance by category.
<unk> grew 24% driven by Disney Princess and Disney frozen.
Including the movie related benefits and the global rollout of Monster high.
Pos per dollars improved significantly and was in line with shipping.
RV increased 14% with comparable Pos growth.
Barbie Pos reflects strong gains in toys benefiting from the theatrical release of the movie and our robust marketing efforts.
<unk> outperformed the industry in the doll category and gained over 670 basis points of market share year to date in.
And Barbie was the number one doll property globally first for Karma.
Vehicles continued its strong performance growing 15% in line with Pos.
Growth was primarily driven by hot wheels, die cast vehicles, and new innovation, including the RC and <unk> segments.
Ynon Kreiz: Before I turn the call over to Anthony, on behalf of Mattel, I would like to express our sadness following the horrific attacks in Israel. We condemned terrorism in the unthinkable violence taking place, including the ongoing hostage situation. Our thoughts are with all those who are suffering, have lost loved ones and are still in harm's way.
Mattel gained 410 basis points of market share year to date, and the vehicles category purse or economy.
Infant toddler and preschool declined 5% in line with Pos.
In spite of the decline.
Both gross billings and Pos showed significant improvements in trend relative to the second quarter.
Anthony DiSilvestro: And now I will turn the call over to Anthony. Thanks a lot.
The decline was primarily due to Fisher price imagine next as it wraps theatrical tie ins in the prior year and our infant business, partly offset by strong growth and little people.
Anthony DiSilvestro: We had a strong third quarter with top and bottom line growth and significant free cash flow. Net sales of $1,919,000,000 increased 9% or 7% in constant currency compared to the prior year. Adjusted growth margin of 51%, increased 270 basis points compared to prior year, benefiting from the accretive Barbie movie related economics. Adjusted operating income was $506 million, an increase of $108 million or 27% compared to the prior year, primarily driven by sales growth and gross margin expansion.
Mitel outperformed the category.
And 50 basis points of market share year to date.
And was the number one toy company globally in.
In the infant toddler preschool category purse or economy.
Challenger categories in aggregate declined 21% in line with Pos.
As it Comped and exceptionally strong film slate last year.
Partly offset by growth in both building sets and games.
On a regional basis, our strong performance was broad based.
We grew Pos and gross billings in each of our regions, excluding the impact of Russia.
Anthony DiSilvestro: Adjusted EPS was $1.8 compared to $0.82 a year ago, an increase of 32%. Adjusted EBITDA was $580 million, an increase of $106 million compared to the prior year. Turning to gross billings in constant currency, overall, gross billings increased by 6%. POS increased by mid-single digits. Mattel continued to outpace the industry and gained 60 basis points of market share year-to-date purse or karma. Looking at performance by category, dolls grew 24% driven by Disney Princess and Disney Frozen, Barbie, including the movie related benefits, and the global rollout of Monster High.
North America gross billings increased 10% driven by double digit gains in dolls and vehicles.
Pos increased low single digits.
Year to date, Mattel gained market share in North America purse or economy.
EMEA declined 2%, including a negative three percentage point impact from Russia.
Pos excluding Russia significantly outpaced shipping increasing low double digits in the quarter.
Latin America grew 5% with Pos increasing high single digits.
First arcana Mattel gained market share in Latin America year to date.
Extending our number one market position.
Anthony DiSilvestro: POS for dolls improved significantly and was in line with shipping. Barbie increased 14% with comparable POS growth. Barbie POS reflects strong gains in toys, benefiting from the theatrical release of the movie, and our robust marketing F. Edwards, Mattel outperformed the industry in the doll's category and gained over 670 bases going to market share year to day. And Barbie was the number one doll property globally, purse or karma. The R.C, and Skate segments, Mattel gained 410 bases points of market share year to date in the vehicle's category, purse or karma.
Asia Pacific increased 18%, driven primarily by growth in Australia and India.
Pos increased low single digits.
Consistent with the end of the second quarter retail inventories remain below prior year levels.
At the end of the third quarter retail inventory levels in dollars.
Line by a double digit percentage versus the prior year with weeks of supply down high single digits.
The inventory is predominantly current and of good quality.
Looking ahead, we believe we are well positioned heading into the holiday season.
As previously discussed we expect gross billings to return to historical trends with approximately two thirds of annual shipments in the second half.
This is expected to contribute to a high fourth quarter growth rate as we wrap in atypical retailer inventory decline in the prior year.
Anthony DiSilvestro: Infant toddler in preschool declined 5% in line with POS. In spite of the decline, both gross villains and POS showed significant improvements in trend relative to the second quarter. The decline was primarily due to Fisher Price Imagine X as it wraps theatrical tie-ins in the prior year and our infant business parly offset by strong growth in little people. Mattel outperformed the category, gained 50 bases points of market share year to date and was the number one toy company globally in the infant toddler preschool category, purse or karma.
Adjusted gross margin was 51% in the quarter.
Compared to 48, 3% in the prior year, an increase of 270 basis points.
The increase in adjusted gross margin was driven by favorable mix, primarily the margin accretive benefits related to the Barbie movie Adder.
Added 170 basis points.
Pricing, which contributed 140 basis points.
Savings from the optimizing for growth program, which added 130 basis points.
Anthony DiSilvestro: Challenger categories in aggregate declined 21% in line with POS as it comped an exceptionally strong film slate last year, parly offset by growth in both building sets and games. On a regional basis, our strong performance was broad base. We grew POS and gross buildings in each of our regions, excluding the impact of Russia. North America gross buildings increased 10% driven by double digit gains and dolls and vehicles. POS increased low single digits.
And cost deflation, which added 70 basis points.
These positive factors were partly offset by the fixed cost absorption impact from significantly lower production volumes and other supply chain costs.
Totally 240 basis points.
Moving down the P&L advertising expenses of $124 million declined 3% compared to the prior year.
Looking ahead, we are planning to increase advertising spend in the fourth quarter and to end the full year with advertising as a percentage of net sales comparable to the prior year.
Anthony DiSilvestro: Year to date, Mattel gained market share in North America, purse or karma. Emia declined 2% including a negative three percentage point impact from Russia. POS, excluding Russia, significantly outpaced shipping, increasing low double digits in the quarter. Latin America grew 5% with POS increasing high single digits, purse or karma Mattel gained market share in Latin America, year to date, extending our number one market position. Asia Pacific increased 18% driven primarily by growth in Australia and India.
Adjusted SG&A increased 8% to $347 million, primarily driven by higher accrued incentive compensation and salary and market related pay increases partly offset by savings from the optimizing for growth program.
Adjusted operating income was $506 million, an increase of $108 million or 27% compared to the prior year.
The increase was primarily driven by net sales growth and adjusted gross margin expansion.
Adjusted EBITDA increased by $106 million to $580 million.
Anthony DiSilvestro: POS increased low single digits. Consistent with the end of the second quarter, retail inventories remain below prior year levels. At the end of the third quarter, retail inventory levels in dollars declined by a double digit percentage versus the prior year, with weeks of supply down high single digits. The inventory is predominantly current and of good quality.
Benefiting from the same factors.
Adjusted EPS increased by 32% ahead of operating income growth driven.
Driven by favorable interest costs.
A slightly lower adjusted tax rate.
And a lower share count, resulting from our share repurchase activity.
On a year to date basis cash from operations was a use of $80 million compared to a use of $275 million in the prior year, an improvement of $195 million.
Anthony DiSilvestro: Looking ahead, we believe we are well positioned heading into the holiday season. As previously discussed, we expect gross billings to return to historical trends with approximately two-thirds of annual shibbons in the second half. This is expected to contribute to a high fourth quarter growth rate as we wrap an atypical retailer imitory decline in the prior year. Adjusted gross margin was 51% in the quarter, compared to 48.3% in the prior year, an increase of 270 basis points.
The increase was primarily driven by improved working capital performance.
Capital expenditures were $118 million compared.
Compared to $127 million a year ago.
And free cash flow was a use of $197 million compared to $402 million in the prior year.
On a trailing 12 month basis, we generated $461 million in free cash flow compared to $303 million in the prior year.
Anthony DiSilvestro: The increase in adjusted gross margin was driven by favorable mix, primarily the margin increase of benefits related to the Barbie movie added 170 basis points. Pricing, which contributed 140 basis points, savings from the optimizing for growth program, which added 130 basis points, and cost deflation, which added 70 basis points. These positive factors were partly offset by the six cost absorption impact from significantly lower production volumes and other supply chain costs, totaling 240 basis points.
An increase of $158 million or more than 50%.
The increase was primarily driven by cash from operations benefiting from improved working capital performance.
Partly offset by higher capital expenditures.
With respect to uses of trailing 12 months free cash flow.
We repaid $250 million of debt in the fourth quarter of last year and.
And then the first nine months of 2023 repurchased $110 million of our shares.
Taking a look at the balance sheet.
We continued to improve our financial position.
We finished the quarter with a cash balance of $456 million.
Anthony DiSilvestro: Moving down the P&L, advertising expenses of $124 million declined 3% compared to the prior year. Looking ahead, we are planning to increase advertising spend in the fourth quarter and to end the full year with advertising as a percentage of net sales comparable to the prior year. Adjusted FGNA increased 8% to $347 million, primarily driven by higher accrued incentive compensation and salary and market related paying increases, partly offset by savings from the optimizing for growth program.
Compared to $349 million in the prior year.
The increase reflects the free cash flow generated over the trailing 12 months.
Mostly offset by the use of cash to reduce debt and repurchase shares.
Total debt declined to $2 $329 million from $2 billion $574 million last year, reflecting the repayment of $250 million of debt in the fourth quarter last year.
Accounts receivable increased by $190 million to $1 billion $571 million due primarily to the increase in net sales.
Anthony DiSilvestro: Adjusted operating income was $506 million, an increase of $108 million or 27% compared to the prior year. The increase was primarily driven by net sales growth and adjusted gross margin expansion. Adjusted EBITDA increased by $106 million to $580 million benefiting from the same factors. Adjusted EPS increased by 32% ahead of operating income growth driven by favorable interest costs, a slightly lower adjusted tax rate and a lower share count resulting from our share repurchase activity.
We have made significant progress in reducing owned inventory levels.
Inventory was $791 million compared to $1 billion and 84 million in the prior year.
A reduction of $293 million and a key driver of free cash flow generation.
Our leverage ratio was two seven times at the end of the third quarter.
This compares to three one times at the end of the second quarter and two three times a year ago.
We generated $40 million of savings in the quarter under our optimizing for growth program.
Since launching the program in 2021, we have achieved cost savings of $297 million.
Anthony DiSilvestro: On a year-to-day basis, cash from operations was a use of $80 million compared to a use of $275 million in the prior year and improvement of $195 million. The increase was primarily driven by improved working capital performance. Capital expenditures were $118 million compared to $127 million a year ago and free cash flow was a use of $197 million compared to $402 million in the prior year. On a trailing 12-month basis, we generated $461 million in free cash flow compared to $303 million in the prior year, an increase of $158 million, or more than 50%.
We are now on track to exceed our $300 million goal by the end of 2023.
Total estimated cash expenditures to implement the program.
<unk> to be $155 million to $185 million.
We are updating our full year 2023 guidance to reflect anticipated upside to our margin and bottom line results.
We continue to expect net sales to be comparable to last year in constant currency.
Our sales guidance reflects higher than anticipated benefits associated with the Barbie movie.
Offset by the impact of overall toy industry declines.
We expect growth in dolls, and vehicles offset by declines in infant toddler and preschool and in our challenger categories in aggregate.
Anthony DiSilvestro: The increase was primarily driven by cash from operations, benefiting from improved working capital performance, partly offset by higher capital expenditures. With respect to uses of trailing 12-month free cash flow, we repaid $250 million of debt in the fourth quarter of last year, and in the first nine months of 2023, repurchased $110 million of our shares.
And for our power brands, we expect Barbie and hot wheels to grow in.
Fisher price to decline.
At current spot rates, we expect foreign exchange translation.
We'll have a positive impact of approximately one percentage point on 2023 net sales.
Adjusted gross margin is now expected to be in the range of 47% to 48%.
Anthony DiSilvestro: Taking a look at the balance sheet, we continued to improve our financial position. We finished the quarter with a cash balance of $456 million compared to $349 million in the prior year. The increase reflects the free cash flow generated over the trailing 12 months, mostly offset by the use of cash to reduce debt and repurchase shares. Total debt declined to $2,329 million from $2,574 million last year, reflecting the repayment of $250 million of debt in the fourth quarter last year.
Compared to our previous expectation of approximately 47%.
And 45, 9% in the prior year.
The improved outlook is primarily driven by the incremental margin benefit associated with the Barbie movie and related consumer products upside.
We are raising our guidance for adjusted EBITDA to $925 million to $975 million and adjusted EPS to $1 15 to $1 25.
Compared to the prior ranges of $900 million to $950 million.
Anthony DiSilvestro: Our accounts receivable increase by $190 million to $1,571 million due primarily to the increase in net sales. We have made significant progress in reducing owned inventory levels. Inventory was $791 million compared to $1,084 million in the prior year, a reduction of $293 million and a key driver of free cash flow generation. Our leverage ratio was 2.7 times at the end of the third quarter. This compares to 3.1 times at the end of the second quarter and 2.3 times a year ago.
And $1 10 to $1 20, respectively.
Free cash flow is still expected to exceed $400 million.
Our guidance implies strong fourth quarter performance in terms of topline growth and gross margin expansion compared to the prior year.
As we previously stated our annual guidance includes an increase in SG&A of approximately $100 million.
As incentive compensation returns to targeted levels, most of which will impact the fourth quarter.
Our guidance also includes the forecast benefits related to the Barbie movie.
Anthony DiSilvestro: We generated $40 million of savings in the quarter under our Optimizing Pro Growth Program. Since launching the program in 2021, we have achieved cost savings of $297 million. We are now on track to exceed our $300 million goal by the end of 2023. Total estimated cash expenditures to implement the program are expected to be $155 to $185 million.
The total impact from our direct movie participation movie related toy sales and consumer products is expected to generate more than $125 million in sales.
With a blended operating income margin exceeding 60%.
The majority of this benefit is reflected in our third quarter results.
We are operating in a challenging macroeconomic environment with higher volatility that may impact consumer demand.
Anthony DiSilvestro: We are updating our full year 2023 guidance to reflect anticipated upside to our margin and bottom line results. We continue to expect net sales to be comparable to last year in constant currency. Our sales guidance reflects higher than anticipated benefits associated with the Barbie movie offset by the impact of overall toy industry declines. We expect growth in dolls and vehicles offset by declines in infant taller and preschool and in our Challenger categories in agriculture.
The guidance considers what the company is aware of today, but remains subject to further market volatility unexpected disruptions and other macroeconomic risks and uncertainties.
In closing our performance in the third quarter was comprehensive with top line growth market share gains adjusted gross margin expansion and significant free cash flow improvement.
We expect a strong holiday season, and are well positioned to achieve our full year guidance.
Anthony DiSilvestro: Garrett, and for our power brands, we expect Barbie and Hot Wheels to grow and fisher price to decline. At current spot rates, we expect foreign exchange translation will have a positive impact of approximately 1 percentage point on 2023 net sales. Adjustment grows margin is now expected to be in the range of 47 to 48 percent compared to our previous expectation of approximately 47 percent and 45.9 percent in the prior year. The improved outlook is primarily driven by the incremental margin benefit associated with the Barbie movie and related consumer products upside.
And now I will turn it over to the operator.
Thank you as a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
We asked today that you limit yourself to one question and one follow up thank you.
Your first question comes from the line of our Pine Kocharyan with UBS. Your line is open.
Oh, Thank you very much for taking my question.
Honestly very strong numbers for the quarter against a pretty weak industry.
Q4 guidance implies.
Cautious outlook.
In terms of flow through and you mentioned kind of increased advertising spend.
And I know that SG&A I'll also year over year, given accrued incentive comp.
Anthony DiSilvestro: We are raising our guidance for adjusted EBITDA to 925 to 975 million dollars and adjusted EPS to $1.15 to $1.25 compared to the prior ranges of 900 to 950 million and $1.10 to $1.20 respectively. Precash flow is still expected to exceed $400 million. Our guidance implies strong fourth quarter performance in terms of top line growth and growth margin expansion compared to the prior year. As we previously stated, our annual guidance includes an increase in SGNA of approximately $100 million as incentive compensation returns to targeted levels, most of which will impact the fourth quarter.
Et cetera, but revenues are scaling quite to be up about 18% on constant currency basis, when I do the math of flat sales.
Maybe if you could lay out why such strong revenue isn't flowing through a little bit better given sort of party strengthened consumer product strength that is probably also higher margin and then generally if you could just give that.
Kind of an overview of what you're seeing with the consumer as we head into Q4 that would be very very helpful. Thank you.
Sure I'll start.
With that.
I'll first say that the majority of the movie related benefit.
Being recognized in Q3, and so when we talk about our full year guidance. It does imply accelerated topline growth in Q4, and that's because we expect shipment trends to revert to historical patterns and we're wrapping a an atypical retail inventory decline in the prior year as.
Anthony DiSilvestro: Our guidance also includes the forecast benefits related to the Barbie movie. The total impact from our direct movie participation, movie related toy sales and consumer products is expected to generate more than $125 million in sales with a blended operating income margin exceeding 60 percent. The majority of this method is reflected in our third quarter results.
As we've said in our remarks, we're also expecting growth in consumer demand, we've got more shelf space, we're going to spend more on advertising, we've got new innovation greater representation.
And catalogs.
So that in terms of the top line.
The guidance also implies significant gross margin expansion compared to last year and last year being negatively impacted by inventory management costs and as you noted SG&A is expected to increase as we wrap below target incentive compensation levels.
Anthony DiSilvestro: We are operating in a challenging macroeconomic environment with higher volatility than a impact consumer demand. The guidance considers what the company is aware of today will remain subject to further market volatility, unexpected disruptions and other macroeconomic risk and uncertainties.
In the prior year, but net net our guidance implies very strong.
Q4 bottom line growth.
Okay.
Thank you Jonathan.
Anthony DiSilvestro: In closing, our performance in the third quarter was comprehensive with top line growth, market share gains, adjusted gross margin expansion and significant pre cash flow improvement.
Okay.
Yes, hi.
Yes, I'll comment on the.
On the toy industry.
So we saw the industry declining year to date and in the third quarter and we now expect the industry to decline mid single digit for the full year.
Operator: We expect a strong holiday season and are well positioned to achieve our full year guidance and now I will turn it over to the operator. Thank you. As a reminder, if you would like to ask a question, press star followed by the number one on your telephone keypad.
But remember this follows the industry being up 22% from.
From 2019 to 2022, reaching.
Operator: We ask today that you limit yourself to one question and one follow-up. Thank you.
Reaching an all time high so we're very confident about the long term growth trajectory of the industry, but this year coming off that high.
In a challenging economy is not.
Arpine Kocharyan: Your first question comes from the line of our Pine Caterian with UBS. Yes, your line is open. Hi, thank you very much for taking my question. Obviously, very strong numbers for the quarter against a pretty weak industry. Your cue for guidance implies kind of cautious out to outlook in terms of flow through an invention kind of increase advertising spend. And I know that as she and I have also year over year given include incentive comp, etc. But revenues are still implied to be up about 18% on constant currency basis when I do the math of flat sales.
It is not to be surprised by it.
In that context, just important to reiterate while the industry is expected to be down.
Our Pos.
It is expected to be up for the year It was up.
In the third quarter. It was up year to date, we expect it to be up in the holiday season up in the fourth quarter and up for the full year.
We are very <unk>.
Very well positioned competitively.
And to see us continue to perform well.
We did mention that heading into the fourth quarter, we have a very strong broad based lineup of innovative toys across multiple categories play patterns and price points for.
Ynon Kreiz: Maybe she could play out why such strong revenue isn't flowing through a little bit better given sort of Barbie strength and consumer product strength that is probably also higher margin. And then generally, if you could just give a kind of overview of what you're seeing with the consumer as we had into into cue for that would be very, very helpful. Thank you.
For both our own brands as well as third party brands and Universal Tourism business, which.
So all in all expect to continue to outpace the industry and.
And gain market share in the fourth quarter and the full year.
Thank you very much.
Your next question comes from the line of Megan Alexander with Morgan Stanley. Your line is open.
Ynon Kreiz: Sure, Arpine, I'll start with that. I'll first say that, you know, the majority of the movie related benefits is being recognized in Q3. And so when we talk about our full year guidance, it does imply accelerated top line growth in Q4. And that's because we expect shipment trends to revert to historical pattern. And we're wrapping an atypical retail inventory decline in the prior year. As we said in our remark, we're also expecting growth in consumer demand.
Hi, Thanks for taking our question I guess, maybe can we touch on that point in on for that in terms of what you're seeing quarter to date from Mpls perspective and.
The expectation that it's up in the fourth quarter I guess, how should that is driven by ongoing strength in Barbie and are you kind of expecting the rest of your categories to be more in line with the industry.
It's been out in the quarter, but.
Quarter to date Pos is positive for Mattel.
Ynon Kreiz: We've got more shelf space. We're going to spend more on advertising. We've got new innovation, greater representation in catalog. So that in terms of the top line, you know, the guidance also implied significant growth margin expansion compared to last year. And last year being negatively impacted by inventory management clock. And as you noted, you know, SGNA is expected to increase as we wrap below target incentive compensation levels in the prior year. But your net net or guidance implies very strong, you know, Q, Q4 bottom line growth. Thank you. Maybe. Thanks. Yeah. Hi, Arpine. Yes.
And our full year guidance assume growth in consumer demand for our products in the fourth quarter and the full year.
When we talk POF. This is not the movie participation box office participation. This is in toys. So we are performing well and this is not just Bobby.
Those category as a whole is performing well Disney Princess and frozen is doing well monster high is doing very well.
Hot wheels grew 19% in the quarter on track to achieve it.
Record.
Sure.
With more innovation and.
And very exciting product lines. So.
This is not just about Bobby it's broad based strength.
Ynon Kreiz: I'll comment on the on the toy industry. So we saw the industry declining here today. And in the third quarter, and we now expect the industry to decline mid single digit for the full year. But remember, this follows the industry being up 22% from 2019 to 2022, reaching an all time high. So we're very confident about the long term growth trajectory of the industry. But this year coming off that high in a challenging economy is not is not to be surprised by.
Not in every part I mean, we decline in Fisher for ISO.
<unk>.
Got some areas, where we still have challenges, but all in all the portfolio as a whole.
Is there is very strong and.
We believe that competitively, we're very well positioned in the fundamentals of the company are very strong.
Okay. Thanks, and then I guess, maybe on the back of that how would you characterize the retail environment today, maybe more specifically can.
Can you expand on what inventory levels look like and in stock levels for your brands or are you seeing retailers replenish in line with pls or taking a more cautious stance given the macro.
Ynon Kreiz: In that context, just important to reiterate what the industry is expected to be down. Our POS is expected to be up for the year. It was up in the third quarter. It was up here today. We expect it to be up in the holiday season up in the fourth quarter and up for the full year. So we are very, very well positioned competitively. And to see us continue to perform well. We did mention that heading into the fourth quarter, we have a very strong broad baseline of innovative toys or multiple categories, pay patterns price points for both our own brands as well as third party brands in universal tools and business wish. So all in all, expect to continue to outpace the industry and gain market share in the fourth quarter and the full year.
Arpine Kocharyan: Thank you very much.
Sure in terms of retail inventories I'll start by saying.
Third quarter gross billings, and Pos were fairly well aligned and retail inventories remain below prior year levels. So at the end of Q3.
Retail inventory levels in dollars were down by.
By double digit percentage and as we said in our predominantly current end up good quality and we're working very closely with our retailers and believe we are very well positioned heading into the holiday season with respect to those inventory levels.
And then just to go ahead and.
Following <unk> question earlier.
Very long on the toy industry industry is resilient.
Notwithstanding the decline this year, we've had over 10 years of growth.
Megan Alexander: Your next question comes from the line of Megan Alexander with Morgan Stanley. Your line is open. Hi, thanks for taking our question. I guess maybe can we touch on that point Ynon for a bit in terms of what you're seeing quarter to date from a POS perspective and with the expectation that it's up in the fourth quarter. I guess how much of that is driven by ongoing strain and Barbie and are you kind of expecting the rest of your categories to be more in line with the industry.
And we believe as a category.
Sector.
It has very strong fundamentals.
And playing into basic human behavior play being a strategic category for retailers attractive and affordable price points.
Megan Alexander: It's still early in the quarter, but according to date, POS is positive from Mattel and our full year guidance assume growth in consumer demand for our product in the fourth quarter and the full year. When we talk POS, this is not the movie participation box office participation. This is in toys. So we are performing well. And this is not just Barbie. The dog category as a whole is performing well, Disney princess and frozen is doing well.
And in an industry that continues to perform.
And show resilience, especially in challenging economic times.
Okay. Thank you very much.
Your next question comes from the line of Stephen <unk> with Goldman Sachs. Your line is open.
Hey, great. Thank you maybe on hot wheels, the category or the brand posted impressive year over year growth in the quarter North of 20% could you maybe unpack the drivers of that underlying performance how much of it was category strengths versus market share gains versus perhaps just timing of orders coming through.
Good quarter.
It's Steven.
Vehicles continue to perform very strongly growing 15% in line with Pos.
Megan Alexander: The monster high is doing very well. Hot Wheels grew 19% in the quarter on track to achieve its sixth record year with more innovation and very exciting product line. So this is not just about Barbie. It's broad based strength. Not in every part. I mean, you know, we decline in fish price. So there are some areas where we still have challenges, but all in all, the portfolio as a whole is very strong. And we believe that competitively we're very well positioned and the fundamentals of the company are very strong. Okay.
<unk> continued to gain share versus your kind of 410 basis points.
So meaningful growth.
In already.
Tom.
Our strong based on from a sale.
<unk>.
The growth was primarily driven by bypass vehicles and new innovation.
We've talked a lot about the our C line and escape segment.
So thats great to see new parts of the kind of category are growing we're also continuing to leverage the core that cost vehicles, we thought that both kids and adult collectors.
At the segment that is growing well.
Ynon Kreiz: Thanks, you know, and I guess maybe on the back of that, how would you characterize the retail environment today? Maybe more specifically, you know, can you expand on what inventory levels look like and in stock levels for your brands? Are you seeing retailers replenish in line with POS or taking a more cautious stance given the macro? Sure, you know, in terms of retail inventory, I'll start by saying, you know, in the third quarter, you know, gross billions in POS were fairly well aligned and retail inventories remain below prior year levels.
We continue to innovate and expand into additional segments. This fall.
Including the racer versus the new character baseline, which is also very innovative and exciting to see so.
This is all driving.
Credible performance and this is before.
The movie that they still think development is coming out.
Now developing.
What we hope will be an exciting project.
<unk> live action movie producer J J Abrams.
Ynon Kreiz: So at the end of Q3 retail inventory levels and dollars were down by double digit percentage. And as we said, you know, predominantly current end up good quality and you know, we're working very closely with our retailers and believe we are very well positioned, you know, having into the holiday season with respect to those inventory levels. And maybe just to add, you know, and following up in this question earlier, we we very long on the toy industry industry is resilient, notwithstanding the decline this year, we've had over 10 years of growth.
He is one of the most prolific filmmakers.
Generation is a great partner very excited.
Sure.
Or is this more a lot more to expect from hot wheels.
Very strong driver also want to mention Matchbox.
An important part of the vehicles category, which are.
Did well in the quarter gross billings were stable.
But Pos was up double digit.
Driven by strength in the bypass segment and there is another movie that we're developing for Matchbox.
With Sky.
Ynon Kreiz: And we believe as a category as a sector, it has very strong fundamentals in playing into basic human behavior of play, being a strategic category for retailers attractive and affordable price points and an industry that continues to perform and show resilience, especially in challenging economic tasks. Okay, thank you very much.
Which.
As the producer of the mission impossible series on top of that.
Great another great partner and we are very excited also about this project and the Internet.
Okay.
Great and then just one for Anthony Anthony on free cash flow is there any reason why the extra $25 million and EBITDA guide for this year, we didn't flow down to free cash flow with the outlook for Capex remaining the same perhaps something on working cap.
Worth calling out or or should we expect that to flow through.
Yes, it's pretty much dependent on the timing of the collections related to the upside around the Barbie movie and.
Stephen Laszczyk: Your next question comes from the line of Stephen Laszczyk with Goldman Sachs. Your line is open. Great, thank you. Maybe on Hot Wheels, the category, or the brand posted impressive year of year growth in the quarter, north of 20%. Could you maybe impact the drivers of that underlying performance? How much of it was category strengths versus market share gains versus perhaps just timing of orders coming through in the third quarter? Yeah, as Stephen let it, you know, vehicles continue to perform very strongly growing 15% in line with the OS.
It's hard to say exactly when thats going to come through so thats. The reason that we didn't change that.
Got it thank you.
Thank you your next.
Your next question comes from the line of James Hardiman with Citi. Your line is open.
Okay.
Hey, good afternoon, Thanks for taking my call guys.
So if I think about sort of the implied fourth quarter guidance on the revenue side in that mid to high teens and is there any way to think about what.
Stephen Laszczyk: We continue to gain share versus kind of 410 basis points. So many full growth in already from a strong baseline for Mattel. The growth was primarily driven by die cast vehicles and new innovation. We talked a lot about the RC line and skate segment. So that's great to see new parts of the kind of kind of growing. We also continue to leverage the core die cast vehicles with target both kids and adult collectors, but another segment that is growing well.
What the growth in Pos needs to be to allow for that.
That reported number in the fourth quarter.
Yes, we haven't broken down to that level, but we had said that we expect growth in consumer demand.
The fourth quarter from Mattel, we expect to outpace the industry, but we do expect gross billings to be ahead of that because we're wrapping that retail inventory declined.
The prior year, but we're expecting a strong fourth quarter with respect to consumer demand or Pos.
Stephen Laszczyk: We continue to innovate and expand into additional segments this fall, including the race of verse, the new character baseline, which is also very innovative and exciting to see. So this is all driving incredible performance. And this is before the movie that is still being developed and is coming out. And, you know, we are now developing what we hope will be an exciting project. Hot Wheels live action movie produced by JJ Abrams, who as you know, is one of the most prolific filmmakers of our generation.
Got it that makes sense.
It sort of leads to my next question, obviously, we haven't even got into the holiday season. So a lot of the 2024 color is way too early but if I just think about.
2023, right. It was a tale of two half first half there was a lot of inventory drawdown and so you were your sales levels were way worse than Pos second half is really about Barbie and the benefit that youre getting there is there any way to compare those two effects.
As we think about lapping them I think the big concern is that.
Stephen Laszczyk: He's a great part and very excited. And, you know, there's more a lot more to expect from Hot Wheels, the very strong driver. I also want to mention match box in an important part of the vehicle category, which did well in the quarter growth buildings were stable, but the US was up that was digit driven by strength in the die cast segment. And there's another movie that we're developing for match box with sky that which is the producer of the mission impossible series and talk about great another great partner. And we are very excited also about this project in in making.
As you get to $125 million of headwind that it's going to be real hard to lap that for the year, but just trying to make sure I understand the moving pieces. Thanks.
Stephen Laszczyk: Great.
Sure sure a couple of points there I would say that the year is kind of unfolding that we expected and we did.
Expect 2023 to revert to normal shipping pattern one third in the first half two thirds in the second half of that is what we're seeing and that led to declines in the first half growth in the second half with accelerated growth in Q4, given what we are.
Rapid in terms of the Barbie movie and economics look we expect this to be a catalyst.
For the brand and to benefit the franchise for quarters and years to come so we don't necessarily view it as hey, something we're just going to wrap so to speak.
Anthony DiSilvestro: And then just one for Anthony Anthony on free cash flow.
Anthony DiSilvestro: Is there any reason why the extra 25 million in EBITDA guide for this year wouldn't flow down to free cash flow with the outlook for cat that's remaining same perhaps something on working cap worth calling out or should we expect that to flow through. Yeah, it's pretty much, you know, dependent on the timing of the collections related to the upside around the Barbie movie and it's hard to say exactly when that's going to come through. So that's the reason that, you know, we didn't change that. Got it. Thank you. Thanks.
Yes.
Your next question comes from the line of Linda Bolton Weiser with D. A Davidson your line is open.
Yes, Hi, I was wondering if you could update us on your earlier comment about your theory that consumers were not as strong in their buying behaviors, maybe in the summer because they were saving up in order to spend more for Christmas.
James Hardiman: Your next question comes on the line of James Hardiman with City. Your line is open. Hey, good afternoon. Thanks for taking my call guys. So if I think about sort of the implied fourth quarter guidance in that, on the revenue side in that mid to high teams, there's a way to think about what, what the growth in POS needs to be to allow for that. That reported number in the fourth quarter.
You updated us on do you have any survey work or anything that update us on how consumers might where recently be thinking about things.
Yes, I would say, we don't have any new favorably.
But I would say things are unfolding as we had expected.
Q4 to date.
Is positive.
Positive for us and we continue to expect that consumers will revert back to more historical shopping patterns and make their purchases closer to the holiday season, and with that we would expect.
James Hardiman: Yeah, we haven't broken down to the level, but we had said that we expect, you know, growth and consumer demand in the fourth quarter from Mattel. We expect to outpace the industry, but we do expect, you know, growth billing to be ahead of POS, and that's because we're wrapping that retail inventory decline in the prior year. But, you know, we're expecting a strong fourth quarter with respect to consumer demand or POS.
Pos to accelerate as we progress through the fourth quarter.
Uh huh.
Okay and I was also wondering if you could.
Say, whether or not you looked at the Lewis and Doug.
A company that was so did you consider looking at that or why or why not.
James Hardiman: Got it. That makes sense. And it sort of leads to my next question. Obviously, you know, we haven't even gotten to the holiday season. So a lot of the 2024 colors is way too early. But if I just think about 2023, right, it was a tale of two half. First half, there was a lot of inventory drawdown, and so you were, your sales levels were way worse than POS. Second half is really about Barbie and the benefit that you're getting there.
Yeah.
Yes, I would say, we don't really comment on our competitor.
M&A.
We are very focused on executing our capital deployment priorities, which we talked about in terms of.
Investing to drive organic growth.
<unk> net leverage ratio of two to two five times and our investment grade rating and that gives us flexibility to consider M&A as well as share buyback.
James Hardiman: Is there any way to compare those two effects as we think about lapping them? I think the big concern is that, you know, as you, as you get to $125 million of headwind that it's going to be real hard to lap that for the year. But just trying to make sure I understand the moving pieces.
We're very happy with our position in the EPS.
Category, we are a leader in the number one toy company globally in Fisher price is the number one property in the category. So we love our position and.
Prospects for our business.
Okay. Thanks very much.
Ynon Kreiz: Thanks. Sure. A couple of points there. I would say that the year is kind of unfolding as we expected. And we did, you know, expect 2023 to revert to normal shipping pattern. One third in the first half, two thirds in the second half. That is what we're seeing. And that led to the clients in the first half growth in the second half with accelerated growth in Q4, giving what we're wrapping. In terms of, you know, the Barbie movie and economics.
Thank you Linda.
Your next question comes from the line of drew Crum with Stifel. Your line is open.
Okay. Thanks, Hey, guys. Good afternoon, Anthony on adjusted gross margin any notable swing factors to consider for <unk> and just wanted to confirm that for Q <unk> gross margin should decline quarter on quarter versus <unk>.
Yes in terms of commenting relative to the prior year as we think about fourth quarter and when you do the math.
Ynon Kreiz: Look, we expect this to be a catalyst, you know, for the brand and to benefit, you know, the franchise, you know, for quarters and years to come. So we don't necessarily view it as a something we're just going to, you know, wrap, so to speak.
Implies pretty significant growth gross margin expansion in Q4 versus <unk>.
2022, and had a couple of reasons for that one is the.
The prior year was about 43% and it was negatively impacted from fairly significant inventory management costs. So we're wrapping that and as I think about the current year, we will benefit from scale from our optimizing for growth program as well as cost deflation, we did see some.
Linda Bolton-Wiser: Your next question, it comes from the line of Linda Bolton-Wiser with DA Davidson. Your line is open. Yes, I was wondering if you could update us on your earlier comment about your theory that consumers were not as strong in their buying behaviors, maybe in the summer, because they were saving up in order to spend more for Christmas. Can you update us on do you have any serving work or anything that updates on how consumers might more recently be thinking about things?
Deflation in Q3 and would expect to see additional deflation in Q4, so that gives us confidence.
In terms of getting to that implied fourth quarter gross margin, which is more in line with historical levels as well.
Got it Okay, and then just circle back to the toy industry and your outlook now down mid single digits for the year. I think previously you were assuming down slightly as this adjustment based on a weaker <unk> relative to your expectations is it something you're anticipating for <unk> or a combination of the two.
Linda Bolton-Wiser: Yeah, I said we don't have any new server week to point to, but I would say things are unfolding, you know, as we, you know, had, you know, expected. You know, you know, Q for to date, you know, POS is, you know, positive, you know, for us. And, you know, we continue to expect that consumer will revert back to more historical shopping patterns and make their purchases closer, you know, to the holiday season.
And did I hear you correctly, Anthony that you expect Pos to accelerate in <unk> over <unk>, just want to clarify that thanks.
Linda Bolton-Wiser: And with that, we would expect, you know, POS to accelerate as we progress through the fourth quarter. Okay, and I was also wondering if you could say whether or not you looked at the Melissa and Doug at a company that was sold. Did you consider looking at that or why or why not? Yeah, I would say you look with, we don't really comment on a competitor, you know, MNA. We are very focused on executing our capital deployment priorities, which we've talked about in terms of investing to drive organic roads, maintaining that leverage ratio to two and a half times in our investment great rating.
Let me clarify that quickly so what I said is fourth quarter to date.
POS is positive from that level, we expect to accelerate it wasn't relative to <unk>.
Got it okay.
Yes, Andrew.
What we're seeing is a.
Year to date decline that.
It was more than we expected at the start of the year.
<unk>.
Primarily driven by macro economic factors in.
Inflation higher interest rates and other.
Elements that we all know and read about and experience.
We believe consumers are returning to normalized shopping patterns closer to the holiday season, So we expect to see.
Linda Bolton-Wiser: And that gives us flexibility to consider MNA as well as share buybacks. We're very happy with our position in the ITPS category. We are a leader and the number one toy company globally. And for sure price is the number one property in the category. So we love our position and the prospects for our business. Okay, thanks very much.
Some of that playing out in the fourth quarter, we believe that the industry and our retail partners.
Linda Bolton-Wiser: Thank you, Linda.
Well prepared for the holiday season, but that said, we now expect given the performance to date the industry to be down mid single digits.
Got it okay. Thanks, guys.
Thank you your next year.
Your next question comes from the line, Eric Handler with Ross and Kim Your line is open.
Drew Krum: Your next question comes from the line of Drew Krum with Steve phone. Your line is open. Okay, thanks. Hey guys, good afternoon. Anthony, on adjusted gross margin, any notable swing factors to consider for 4Q. And just want to confirm that 4Q gross margin should decline quarter on quarter versus 3Q. Yeah, in terms of, you know, commenting relative to the prior year as we think about 4Q. And when you do the math, you know, it implies pretty significant growth gross margin expansion to 4 versus 2022.
Thank you and good afternoon.
And I Wonder if you could talk a little bit about your movie expectations.
Drew Krum: And a couple of reasons for that. You know, one is the prior year was about 43%. And it was negatively impacted from certainly significant inventory management costs. So, you know, we're wrapping that. And as I think about the current year, you know, we'll benefit from scale, from our optimizing for growth program as well as, you know, cost deflation. We did see some deflation in Q3 and would expect to see additional deflation in Q4.
Obviously, a huge success with Barbie and I imagine that makes it easier to greenlight. Some additional films, obviously Hollywood is closed right now because of the strikes but.
Do you get.
Should we be thinking about maybe it could be sooner than later before we see the next Mattel branded movies coming out or how should we think about that.
Yes, Eric.
The vision from the outset was to collaborate with leading filmmakers.
To make standout quarter the movies based on our iconic brands that will resonate and culture and appeal to global audiences and I think it's safe to say that we managed to achieve that with its movie and there is no question that the success of Barbie.
Position Mattel as an important player in Hollywood.
The strength of our brands and cultural resonance.
Drew Krum: So, that gives us confidence in terms of getting to that implied fourth quarter, you know, gross margin, which is more in line with historical levels as well. Got it. Okay. And then just the circle back to the toy industry and your outlook, you know, now down mid single digits for the year, I think previously you were assuming down slightly. Is this adjustment based on a week or 3Q relative to your expectations?
Of our franchises.
This is an important factor.
Playing outside of the toy aisle and appealing to very broad audiences.
We demonstrated our ability to attract.
Collaborate partner and amplify top creative talent.
And they.
Other dimension that.
People didn't really fully appreciate and frankly, we also to some degree we're not.
Drew Krum: Is it something you're anticipating for 4Q or a combination of the two? And did I hear you correctly, Anthony, that you expect POS to accelerate in 4Q over 3Q? Just want to clarify that. Thanks. Let me clarify that, you know, quickly. So, what I said is fourth quarter to date, POS is positive. And from that level, we expect to accelerate. It wasn't relative to 3Q. Okay. And Drew, what we're seeing is a year-to-day decline that was more than we expected at the start of the year.
The full year.
Recognizing that it actually happened as our marketing capability outside of Detroit.
We're a company where creative company, we're an innovative company, but we are also experts in demand creation.
And we generate the year in and year out billions worth of demand through our product from.
From the start.
Here what with it.
Leverage our capabilities and our retail.
Reach and expertise to promote and market the movie.
Together with Warner Brothers, who did an excellent job, but we are too.
To amplify that and turn it into a cultural phenomenon.
Drew Krum: We believe it's primarily driven by macroeconomic factors, inflation, higher interest rates, and other elements that we all know and read about and experience. We believe consumers are returning to normalised shopping panels closer to the holiday season, so we expect to see some of that playing out in the fourth quarter. We believe that the industry and our retail partners are well-prepared for the holiday season. But that said, we now expect, given the performance to date, the industry to be down in this single day. Okay, thanks, guys.
So those assets.
<unk> shipped some capabilities make us an attractive player and we believe that the success of the <unk> model for all of those reasons will accelerate our strategy and.
And not just in movies, but in other verticals.
Given the strength of our brands and the fact that they resonate so strongly and culture.
So we're very excited to be where we are.
Clearly it was a breakthrough quarter for our entertainment strategy and we expect that it will.
<unk> help us accelerate things.
And in the coming quarters.
Great. Thank you very much.
Eric Handler: Thank you. Your next question comes from the line of Eric Handler with Roth MKM. Your line is open.
Yeah.
Your next question is from the line of Chris <unk> with J P. Morgan Your line is open.
Eric Handler: Thank you, good afternoon. You know, I wanted to talk a little bit about your movie expectations and obviously a huge success with party and I imagine that makes it easier to green light some additional films. Obviously, Hollywood is closed right now because of the strikes, but, you know, do you get, should we be thinking about maybe it could be sooner than later before we see the next Mattel branded movies coming out?
Thanks. Good evening. So my question is is it in the gross margin. There was 170 bps related to the Barbie movie can you talk about.
How what what that broke down into in terms of box office participation versus toil.
Toy toy sales and merchandise.
Third party merchandise and how are you thinking about that benefit in the fourth quarter.
Sure.
Eric Handler: Or how should we think about that? Yes, Eric, the vision from the outset was to collaborate with leading filmmakers to make standout quality movies based on our iconic brands that will resonate in culture and appeal to global audiences. And I think it's safe to say that we managed to achieve that with this movie. And there is no question that the success of Barbie reposition Mattel as an important player in Hollywood. The strength of our brands and cultural resonance of our franchises is an important factor, you know, playing outside of the oil and appealing to very broad audiences.
Not going to break it down to that level, but let me comment on the impact so within our gross margin bridge you.
You saw a 170 basis point mix benefit.
That's not all Barbie related, but it's primarily related to.
To our direct movie participation movie related toys, and consumer products, all kind of bundled together.
Also what we did say is for the full year, we expect those three items to deliver more than $125 million of sales with a blended operating income margin of over 60% and then the <unk>.
Geordie of all of that with.
Was recognized.
In Q3, and probably with a skew more toward the movie relative to the other items.
Eric Handler: We demonstrated our ability to attract collaborate partner and amplify top creative talent and the other dimension that people didn't really fully appreciate and frankly, we also to some degree, we're not, you know, fully recognized until it actually happened is our marketing capability outside of the soil. We are a company, we are creative company, we are an innovative company, but we are also experts in demand creation. And we generate year in and year out billions worth of demand to our product from the start yet here what we did we leverage our capabilities in our retail region expertise to promote and market the movie together with one of our brothers who did an excellent job.
So as we think about that.
The fourth quarter, how are you thinking about the sort of.
Specific Barbie movie lift in terms of topline and margin perspective participant.
The participation point goes down but are you largely sold through directly toys directly related to the movie and would you expect the merchandize portion to accelerate.
Yeah, I would say less margin accretion related to these items in Q4 than Q3.
Okay. Thanks very much.
Youre welcome Thanks, Chris.
Your last question today comes from the line of Jason Haas with Bank of America. Your line is open.
Eric Handler: But we truly amplify that and turn it into a cultural phenomenon. So those assets, relationships and capabilities, make us an attractive player and we believe that the success of the Barbie movie for all of those reasons will accelerate our strategy and not just in movies, but in other verticals given the strength of our brands and the fact that they resonate so strongly in culture. So we were very excited to be what we are clearly it was a breakthrough quarter for our entertainment strategy and we expect that it will help us accelerate things, you know, in the in in the coming quarters.
Hey, good afternoon, Thanks for taking my question.
Ynon Kreiz: Great, thank you very much.
I'm curious if you could help size up how much of a headwind destocking was to revenue in the first half of the year. The reason I ask is just because as we're thinking through our models for next year is there any embedded uplift to revenue or just because you'll be lapping over that destocking or is it the case that the.
Chris Horvers: Thank you.
Reason, there was that Destocking was because.
There was a restocking in the first half of 2022. So it was really more of a return to normal I'm trying to figure out if there's like a embedded revenue upside and what that could potentially be for next year.
It's very difficult to say in terms of the impact in 2024.
But youre right in the first half of 2023.
Anthony DiSilvestro: Your next question is from the line of Chris Horvers with JP Morgan. Your line is open. Thanks good evening. So my question is is in in the gross margin, there was 170 bits related to the Barbie movie. Can you talk about, you know, how what what that broke down in terms of box office participation versus the toilet. They'll set toys, toys, sounds in the merchandise. James, third party merchandise, and how are you thinking about that benefit in the fourth quarter?
We saw.
For most of the inventory correction that happened at retail and in the context of our full year guidance.
Three to four points of headwind again, most of that occurred in the first half of 2023 and depending on what retailers do going into 2024 again sitting here today right.
Hard to say, if there will be a bounce back relative to that destocking.
Got it that's helpful and then when I look at Barbie in the first half of the year for worldwide gross billings, excluding this excluding FX.
Anthony DiSilvestro: Sure, we're not gonna break it down to that level, but let me comment on the impact. So, within our gross margin bridge, you saw a 170 basis point mixed benefit. That's not all Barbie related, but it's primarily related to our direct movie participation, movie related toy sales and consumer products. We expect all kind of bundles together. Also, what we did say is, for the full year, we expect those three items to deliver more than 125 million sales with a blended operating income margin of over 60%.
It's down a little over 20% or so in the first half of the year and then we saw in <unk> and went to up 14% in the quarter.
Is it fair to assume that a lot of that acceleration was driven by the Barbie movie I'm trying to understand if the Barbie movie did drive that Halo effect to all Barbie towards not just the movie related Skus.
The concern being there that you may have to lap that next year. Since you won't have another major motion measure for Barbie.
But I am curious I don't know if there was promotions that shifted or other things to consider and maybe it just wasn't all the movie.
Anthony DiSilvestro: And then the majority of all that was recognized in Q3 and probably with a skew more towards the movie relative to the other items. So, as we think about the fourth quarter, how are you thinking about the sort of specific Barbie movie lift in terms of a top line and margin perspective participation point goes down, but are you largely sold through directly, you know, toys directly related to the movie, and would you expect the merchandise portion to accelerate? Yeah, I would say less margin accretion related to these items in Q4 than Q3. Okay, thanks very much. You're welcome. Thanks, Chris.
Yes, I think the way to think about Q3 and Barbie.
First in terms of the 14% increase in gross billings I would say, that's primarily attributable to the movie related items, but.
When you think about Pos which was up low double digits.
Well right, that's primarily driven by the improvement in consumer demand around toys.
And as we think about the impact.
We believe it's going to have a long lasting effect.
In terms of broadening Barbie fan base, right and that'll be an important contributor to the brand. It's really part of our long term franchise management strategy and with respect to 2023 in aggregate right. We expect Barbie to grow in Q4 and for it to be positive.
Jason Haas: Your last question today comes from the line of Jason with Bank of America. Your line is open. Thank you. Thanks for taking my question. I'm curious if you could help size up how much of a headwind destocking was to revenue in the first half of the year. The reason I ask is just because as we're thinking through our models for next year, is there an embedded uplift to revenue just because you'll be laughing over that destocking, or is it the case that the reason there was that destocking was because.
On a full year basis, which is part of the guidance that we updated today as well.
Got it that's very helpful. Thank you.
Sure.
This concludes our question and answer questions for today I'll turn the call back to you and increase chairman and CEO.
Thank you operator, and thank you everyone for your questions.
I'd like to conclude the call by expressing our hope for the safety of Israeli and Palestinian children.
Jason Haas: There was a restocking in the first half of 2022, so it was really more of a return to normal, trying to figure out if there's like a embedded revenue upside and what that could potentially be for next year. It's very difficult to say in terms of the impact in 2024, but you're right in the first half of 2023. We saw most of the inventory correction happen at retail and in the contacts of our full year guidance, you know, it's three to four points ahead with again, most of that occurred in in the first half of 2023.
Children and families are caught in the Israel Hamas War.
Since the attacks of October seven the Mattel children Foundation has been focused on humanitarian work, including cash and so probably donations to shelters and hospitals to support children who are suffering.
Jason Haas: And depending on what retailers do going into 2024 again sitting here today, right, it's hard to say if there will be a bounce back relative to that destocking. God, that's helpful. And then when I look at Barbie in the first half of the year for worldwide gross billings, excluding this excluding effects down a little over 20% or so in the first half of the year, and then we saw on three, it went up 14% in the quarter.
On a personal note I would like also to thank all of those who have reached out to me directly to express their concern.
And condolences.
We wish for for a Swift resolution to the war and more peaceful times in the future.
And now I'll turn the call back to Dave.
Thank you.
The replay of this call will be available via webcast beginning at 830 PM Eastern time today.
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.
This concludes today's conference call you may now disconnect.
Jason Haas: Is it fair to assume that a lot of that acceleration was driven by the Barbie movie, I'm trying to understand if the Barbie movie did drive that halo fact to all, you know, Barbie toys, not just the movie related skews. The concern being there that, you know, you may have to lap that next year since, you know, you won't have another major motion pressure for Barbie, but I'm curious, I don't know if there was promotions that shifts it or other things to consider and maybe it just wasn't all the movie.
Yeah.
Today's call.
This concludes.
Jason Haas: Yeah, I think the way to think about, you know, Q3 and Barbie, you know, first in terms of the, you know, the 14% increase in gross buildings, I would say that's primarily attributable to the movie related items. But when you think about POS, which is up, love double digits as well, right, that's primarily driven by the improvement in consumer demand around toys. And as we think about the impact, you know, the movie, you know, we believe it's going to have a, you know, a long lasting effect in terms of broadening Barbie's fan base, right, and that'll be an important contributor, you know, to the brand.
Jason Haas: It's really part of our long term franchise management, you know, strategy. And with respect to 2023 in aggregate, right, we expect, you know, Barbie to grow in Q4 and it for it to be positive, you know, on a full year basis, which is, you know, part of the guidance that we updated today as well. Sorry, that's very helpful. Thank you. Sure.
Ynon Kreiz: This concludes our question and answer portion for today. I turn the call back to an increase chairman and CEO. Thank you operator and thank you everyone for your question.
Ynon Kreiz: I would like to conclude the call by expressing our hope for the safety of Israeli and Palestinian children. Children and families caught in the Israel Hamas war. Since the attacks of October 7, the Mattel Children's Foundation has been focused on humanitarian work, including cash and toy, toy donations to shelters and hospitals to support children who are suffering. On a personal note, I would like also to thank all of those who have reached out to me directly to express their concern and condolences. We wish for for a swift resolution for the war and more peaceful times in the future.
Ynon Kreiz: And now I'll turn the call back today. Thank you, Inan.
Operator: The replay of this call will be available via webcast beginning at 8.30 p.m. Eastern time today. Webcast link can be found in the events and presentation section of our investors section of our corporate website, corporate.metel.com. Thank you for participating in today's call.
Operator: This concludes the conference call. You may now disconnect. It's called.
Operator: This concludes.