Mattel, Inc. (NASDAQ:MAT) Q1 2024 Earnings Call Transcript April 23, 2024
Mattel, Inc. beats earnings expectations. Reported EPS is $-0.08158, expectations were $-0.12. Mattel, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel’s First Quarter 2024 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. [Operator Instructions] Thank you. I will now turn the conference over to David Zbojniewicz, Head of Investor Relations. David, you may begin your conference.
David Zbojniewicz: 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 first quarter 2024 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 discussion today, we have provided you with a slide presentation. Our discussion, slide presentation, and earnings release may reference non-GAAP financial measures, including adjusted gross profit and adjusted gross margin, adjusted other selling and administrative expenses, adjusted operating income 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. 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.com. The information required by Regulation G regarding non-GAAP financial measures, as well as information regarding our key performance indicator is included in our earnings release and slide presentation.
And both documents are also available in the Investors section of our corporate website. The preliminary financial results included in the press release and slide presentation represent the most current information available to management. The company’s actual results when disclosed in its Form 10-Q may differ from these preliminary results as a result of the completion of the company’s financial closing procedures, final adjustments, 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. We describe some of these uncertainties in the Risk Factors section of our 2023 Annual Report on Form 10-K, our earnings release and presentation, and other filings we make with the SEC from time to time, as well as in other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so except as required by law. Now, I’d like to turn the call over to Ynon.
Ynon Kreiz: Thank you for joining our first quarter 2024 earnings call. We’re off to a good start for the year with significant gross margin expansion, positive adjusted EBITDA, very strong improvement in free cash flow, and are on track to achieve our full-year guidance. Looking at key financial metrics for the first quarter as compared to last year, net sales declined 1% as reported and in constant currency. Adjusted gross margin increased 830 basis points to 48.3%. Adjusted EBITDA improved $67 million from a negative $14 million to a positive $54 million and free cash flow improved by $254 million. Gross billings increased in North America, Latin America, and Asia Pacific with a decline in EMEA. Total company POS increased low-single digits with improving trends through the quarter and growth in dolls, vehicles, games, and building sets.
Mattel maintained share globally and gained share in its three leader categories, dolls, vehicles, and infant, toddler, and preschool as well as in games per Circana. With our strong cash flow generation, we improved our financial position, ending the quarter with a cash balance of $1.1 billion after repurchasing $100 million of shares in the quarter. Consistent with our stated capital allocation priorities, we plan to continue share repurchases in 2024. We believe the industry benefited in the first quarter from an early Easter. That said, this does not change our expectation that the toy industry will decline in 2024, although at a lesser rate than 2023. We expect to outpace the industry and gain market share in 2024. We are executing our strategy to grow Mattel’s IP-driven toy business and expand our entertainment offering.
We expect to continue benefiting from innovation across the toy portfolio and market share gains, meaningful progress on entertainment projects following the success of the Barbie movie, and greater efficiencies and productivity improvements with our optimizing for profitable growth program, which is targeted to achieve $200 million of annualized cost savings between 2024 and 2026. On the toy side of the company, Barbie was the number one dolls property globally and continued to gain significant share per Circana. We kicked off Barbie’s 65th anniversary celebration and are bringing new innovation to the brand, such as the recently launched Mini BarbieLand segment. Hot Wheels led the vehicles category per Circana with further expansion of its diecast line and new offerings for Racerverse, RC, and Skate.
Fisher-Price is launching its new wood segment next month, and this week we welcomed a new Head of Fisher-Price based at our East Aurora, New York campus. Games performance was strong and Uno was once again the number one card game property per Circana. Mattel Creations, our rapidly growing DTC channel serving adult collectors is expanding fan engagement. We recently hosted Mattel Creations Revealed a two-day virtual fan event featuring six hours of exclusive behind the scenes content and nearly 100 new collectible toys and exclusive consumer products with multiple same-day sellouts. We also made progress in capturing value of our IP outside the toy aisle. Following the successful awards season for the Barbie movie, highlighted by Grammy, Golden Globe, and Oscar wins, its cultural impact continues to reverberate around the world.
The film is a showcase for our strategy, bringing together the global resonance of our brands, our ability to attract and collaborate with leading partners, and demand creation expertise. We continue to make meaningful progress advancing our theatrical slate of 15 announced films in development with more news to share soon. In television, Barbie & Stacie to the Rescue, an animated movie launched globally on Netflix. Season 2 of Barbie: A Touch of Magic premiered last week. Hot Wheels Let’s Race, our new animated series debuted on Netflix and became a top 10 program in 69 countries. In digital gaming, we announced a new licensing partnership with Take-Two Interactive to publish a new Barbie mobile game planned for release later this year. In location-based entertainment, we announced a second Mattel Adventure Park through our licensing partnership with Epic Resort Destinations, which is scheduled to open in Kansas City in 2026.
In closing, our first quarter performance was highlighted by significant margin expansion and very strong improvement in cash flow with positive consumer demand and improving trends. Mattel is in the strongest financial position it has been in years, and we are on track to achieve our full-year guidance. Beyond this year, we expect to grow sales and earnings in 2025. We are executing our strategy to grow our IP-driven toy business and expand our entertainment offering and are well-positioned to create long-term shareholder value. And now, I will turn the call over to Anthony.
Anthony DiSilvestro: Thanks, Ynon. We achieved strong bottom-line results in the quarter and are on track to meet our full-year sales and earnings guidance. Net sales of $810 million declined 1% as reported and in constant currency. Adjusted gross margin increased by 830 basis points to 48.3%, benefiting from lower inventory management costs, cost deflation, and cost savings. Adjusted operating loss improved by $63 million to a negative $23 million, driven by gross margin expansion. Adjusted EPS was a negative $0.05 compared to a negative $0.24, an improvement of $0.19 and adjusted EBITDA increased from a negative $14 million to a positive $54 million, gaining $67 million. Gross billings in constant currency declined 2%, reflecting retail inventory reductions.
POS increased low-single digits with improving trends through the quarter. Dolls declined 5% with POS increasing high-single-digits. The gross billing decline was primarily due to Disney Princess and Disney Frozen, which had positive POS, but wrapped last year’s inventory build supporting the launch. Barbie gross billings were comparable to the prior year with POS declining low-single digits. Trolls, Monster High, and American Girl grew. Mattel was number one in dolls globally, gaining over 550 basis points of share in the category in Q1, and Barbie was the number one property in dolls and also gained share per Circana. Vehicles and Hot Wheels increased 4%. POS increased mid-single digits with growth in consumer demand for each Hot Wheels, Matchbox, and Disney Pixar Cars.
Mattel was number one in vehicles globally, gained share in the category in Q1 and Hot Wheels was the number one property in vehicles per Circana. Moving to Infant, Toddler, and Preschool, as discussed in our recent investor presentation, we are segmenting the category into three parts. The first and by far the largest is Fisher-Price, the power brand, which includes the core Infant, Little People, and newborn products, as well as the recently launched Fisher-Price Wood. The second is Preschool Entertainment, which includes owned IP, such as Thomas and Barney, Imaginext, which is our own form factor for action figures specifically designed for young children and partner brands. The third and by far the smallest is Baby Gear and Power Wheels, which we decided to strategically out-license or exit.
Total Infant, Toddler, and Preschool category declined 11% with POS down high-single-digits. The gross billings decline was due primarily to Baby Gear and Power Wheels, which we have been out-licensing or exiting, and Preschool Entertainment. Fisher-Price gross billings declined 1% due primarily to a decline in Infant, partly offset by the launch of Fisher-Price Wood. Importantly, Fisher-Price POS increased low-single digits. Mattel was number one in the Infant, Toddler, and Preschool globally, gained share in the category in Q1, and Fisher-Price was the number one property in Infant, Toddler, and Preschool per Circana. Challenger categories in aggregate were comparable to the prior year as growth in games and action figures was offset by declines in building sets and other.
POS declined high-single-digits due to action figures, partly offset by double-digit growth in games and building sets. Looking at our first quarter performance by region, gross billings in North America increased 1% with significantly lower closeout sales in the quarter. POS increased low-single digits. EMEA declined 13% due primarily to the impact of retail inventory reductions and weakening of the Turkish lira. POS increased mid-single digits. Latin America increased 1%, POS declined low-single digits. Asia-Pacific increased 15%, driven primarily by gains in Australia, New Zealand, and South Asia. POS declined low-single digits. As noted on our fourth-quarter call, we entered 2024 with retail inventory levels slightly elevated. This has been largely corrected as we ended the first quarter with retail inventory levels down high-single-digits in both dollars and weeks of supply.
The reduction which occurred earlier than the prior year had a negative impact on our first-quarter sales performance, particularly in EMEA. We believe retail inventory levels are now at appropriate levels to support the business going forward. Adjusted gross margin was 48.3% compared to 40%, an increase of 830 basis points. The significant increase in gross margin was driven by several factors. Lower inventory management costs, primarily obsolescence, and close-outs, which contributed 230 basis points. Cost deflation added 220 basis points, savings from the optimizing for profitable growth program added 120 basis points, favorable mix contributed 80 basis points, and foreign currency favorability and other supply-chain costs added 180 basis points.
Moving down the P&L, advertising expenses declined by $5 million to $71 million and adjusted SG&A increased by $6 million or 2% to $343 million. The increase in SG&A was primarily driven by market-related pay increases and investments, partly offset by cost savings. Adjusted operating loss improved $63 million to a loss of $23 million in the first quarter compared to a loss of $87 million in the prior year, primarily driven by gross margin expansion. Adjusted EBITDA increased $67 million of $54 million, benefiting from the same factor. Adjusted EPS improved $0.19 to a loss of $0.05 compared to a loss of $0.24 in the prior year. Cash from operations was a source of $35 million in the first quarter compared to a use of $206 million in the prior year, an improvement of $242 million.
The increase was primarily driven by improvements in both working capital performance and net income. Capital expenditures were $30 million compared to $43 million a year ago, and free cash flow was a source of $5 million compared to a use of $249 million in the prior year quarter. On a trailing 12-month basis, we generated significant free cash flow of $964 million compared to $187 million in the prior year, an increase of $777 million. The improvement was primarily driven by working capital performance in part due to timing associated with seasonal working capital and incentive compensation payments. Reflecting our improved financial position and consistent with our stated capital allocation priorities, we repurchased an additional $100 million of shares in the quarter, bringing total share repurchases since 2023 to $303 million.
We expect to make further share repurchases in 2024 under our $1 billion multi-year share repurchase program. Taking a look at the balance sheet. We finished the quarter with a cash balance of $1,130 million compared to $462 million a year ago, an increase of $669 million. The increase reflects free cash flow generated over the past 12 months, partly offset by the use of funds to repurchase shares. Total debt of $2.33 billion is consistent with last year. Our debt portfolio is well positioned with no maturities until 2026. Accounts receivable were $673 million comparable to the prior year and inventory was $669 million, a reduction of $292 million from the prior year and a significant contributor to our free cash flow performance. Our leverage ratio improved further.
Debt-to-adjusted EBITDA finished the quarter at 2.3 times compared to 2.9 times in the same period a year ago. The improvement was driven by the increase in our trailing 12-months adjusted EBITDA performance. We are realizing benefits from our recently announced optimizing for a profitable growth program, targeting $200 million in cost savings by 2026. In the first quarter, we generated $17 million of savings in aggregate with $9 million benefiting cost of goods sold and $8 million in SG&A. We are on track to achieve our targeted 2024 savings of $60 million. We are reiterating our guidance for 2024, including net sales in constant currency to be comparable to the prior year. Adjusted gross margin to be in the range of 48.5% to 49% compared to 47.5% in 2023.
Adjusted EBITDA to be in the range of $975 million to $1,025 million compared to $948 million in the prior year. Adjusted EPS to grow double-digits to a range of $1.35 to $1.45 compared to $1.23 in 2023 and free cash flow generation of approximately $500 million. We are operating in a macroeconomic environment that may impact consumer demand. The guidance considers what the company is aware of today, but remains subject to market volatility, unexpected disruptions, and other risks and uncertainties. In closing, we are off to a good start with strong margin and cash flow performance and are on track to achieve our full-year guidance. And now I will turn it over to the operator for Q&A.
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