MATTEL INC /DE/ Q3 FY2024 earnings call

• Continued to execute the multiyear strategy to grow IP-driven toy business and expand entertainment offering. - Achieved strong profitability with significant margin gains offsetting the impact of the prior year's Barbie movie-related benefits. - Balance sheet strengthened with free cash flow up significantly in the trailing 12 months. - Entertainment strategy highlights: Masters of the Universe live-action movie preproduction, Matchbox and View-Master live-action movies greenlit; Hot Wheels: Let's Race Season 2 ranked in top 10 TV series in 27 countries; Barney's World premiered on MAX; joint venture with NetEase expected to exceed $200 million in gross billings this year. - Toy industry performed better than anticipated, and Mattel well-positioned for fourth quarter with broad product lineup and exciting product tied to theatrical releases.

Net sales were $1.84 billion, a decline of 4% as reported or 3% in constant currency. Adjusted gross margin reached 53.1%, an increase of 210 basis points. By category: Dolls gross billings were down, impacted by the prior year's Barbie movie success; Vehicles grew 13% led by Hot Wheels; Infant, Toddler, and Preschool declined as certain product lines were exited, but Fisher-Price grew for the second consecutive quarter; Challenger categories collectively grew, with Uno achieving its largest quarter on record. By region: North America declined 3%, EMEA declined 6%, Latin America grew 2%, Asia-Pacific grew 8%. Retail inventory levels ended the quarter down high single-digits compared to the prior year.

• Expect net sales in constant currency to be comparable to slightly down for full year. - Fourth quarter expected to see top line growth driven by good holiday season, market share gains, and toyetic theatrical slate. - Full year 2024 adjusted gross margin expected to increase to approximately 50% from 47.5% in 2023. - Adjusted EBITDA expected in range of $975 million to $1.025 billion; adjusted EPS expected to grow double-digits to range of $1.35 to $1.45; capital expenditures forecasted in range of $200 million to $225 million; free cash flow expected to be approximately $500 million.

Include significant risks and uncertainties that could cause actual results to differ from forward-looking statements, such as market volatility, unexpected disruptions, and macroeconomic risks as described in the Risk Factors section of latest Form 10-K, 10-Q, earnings release, slide presentation, and other SEC filings.

Q: Could you give a quick sense on the retail environment and what gives confidence to reiterate growth guidance for Q4?

A: Ynon Kreiz said the toy industry continues to perform better than initially expected, National Retail Federation expects holiday sales growth, internal research shows more consumers plan to shop for toys in Q4 and majority look for evergreen well-known brands which bodes well for Mattel.

Q: When you look at the implied margin for Q4, why are margins a bit more pressured?

A: Anthony DiSilvestro said there's cost inflation in Q4, wrap of movie benefit, and shift of advertising into Q4 impacting margin.

Q: How does the change in payment terms from a major retail partner impact working capital and free cash flow guidance?

A: Anthony DiSilvestro said no impact on free cash flow guidance.

Q: Can you talk about the sizing of the investment in the new global design center and longer-term CapEx?

A: Anthony DiSilvestro said purchased a building in El Segundo as global design center, and $200 million to $225 million is a proxy for future CapEx.

Q: Talk about digital gaming initiatives longer term and timeframe for first self-published game.

A: Ynon Kreiz said digital gaming is an important growth driver, Mattel163 expected to exceed $200 million in gross billings this year, and working on first self-published game with strong studio.

Q: How should we think about SG&A for the year and drivers of compensation growth?

A: Anthony DiSilvestro said SG&A as a percent of sales expected to be up slightly, driven by investment in areas like digital gaming and IT.

Q: How to think about tariff exposure and sourcing from China?

A: Ynon Kreiz said product made in China is approximately 50% of manufacturing, which is lower than industry average, and continue to diversify manufacturing footprint.

Q: Thoughts on top retailers' sentiment towards the category and shift in shipments from 3Q to 4Q?

A: Anthony DiSilvestro said retailer sentiment is positive, prioritize toys as strategic category, and working with partners to have right product in right place and quantity for holiday season.

Q: On Power brands, any change in outlook?

A: Anthony DiSilvestro said no change in overall category guidance or for Power brands.

Q: Dig deeper into Optimizing for Profitable Growth program and timeline for savings?

A: Anthony DiSilvestro said program targeting $200 million of savings by 2026, on track to achieve $75 million in 2024 with more from cost of goods sold line.

Q: Shift to value products and price mix headwinds?

A: Anthony DiSilvestro said well-positioned with range of price points from different products to play into value-seeking consumers.

Q: Inflation/deflation outlook for 2025 and other margin puts and takes?

A: Anthony DiSilvestro said a bit early to comment on 2025, but deflation benefit lessening and expecting inflation in Q4 2024.

Q: EBITDA, EPS guidance and tax rate change?

A: Anthony DiSilvestro said tax rate favorability not significantly moving EPS as other factors offset.