Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Significant gross margin expansion, with adjusted gross margin increasing by 430 basis points to 49.2%.
- Adjusted EBITDA improved by $23 million to $171 million, and adjusted EPS increased by $0.09 to $0.19.
- Free cash flow more than doubled in the trailing 12-month period, reaching $826 million compared to $361 million a year ago.
- Mattel Inc (MAT, Financial) repurchased $200 million of shares in the first half of 2024 and plans to continue share repurchases in the second half.
- The company gained market share globally in key categories such as dolls, vehicles, and infant, toddler, and preschool, with brands like Barbie, Hot Wheels, and Fisher-Price leading their respective categories.
Negative Points
- Net sales declined by 1% as reported, and gross billings declined by 2%, with low-single-digit declines in North America, EMEA, and LATAM.
- Dolls gross billings declined by 5%, primarily due to a wrap of early movie-related shipments from the prior year.
- Infant, toddler, and preschool categories saw a 3% decline due to strategic exits or out-licensing of certain segments.
- Adjusted SG&A expenses increased by $37 million to $361 million, driven by market-related pay increases, IT system upgrades, and hiring for the entertainment strategy.
- The toy industry is expected to decline modestly in 2024, although this is an improvement from earlier outlooks.
Q & A Highlights
Q: Could you give us an update on what you're hearing from your retail partners on the health of the consumer as we head into the back half of the year?
A: The toy industry performed better than anticipated in the first half and was comparable to the prior year. We expect the industry to decline modestly in 2024, but this is an improvement from our outlook at the start of the year. The fundamentals of the toy business are strong, and we expect our toy business to grow in the second half, looking forward to a good holiday season with new product innovation and increased retailer support.
Q: Could you talk about your freight position at the moment and how some of these pricing dynamics could impact financials into the second part of the year?
A: We continue to monitor the situation in the Red Sea and have accounted for the anticipated impacts in our guidance. We feel well-positioned with our supply chain capabilities and the relationships we have with carriers. We contract most of our ocean freight on fixed rates, and while we saw some volatility in the quarter, the situation has improved since the beginning of the quarter.
Q: How should we think about the other 40% of gross billings, given the restatements to last year's numbers?
A: This refers to our challenger categories, which include action figures, building sets, games, and other. We saw significant growth in games led by UNO and the success of Show Em No Mercy. Building sets continue to scale with Pokémon doing well, while action figures saw a slight decline, primarily due to Jurassic World as we comp the movie from two years ago.
Q: What drove the other 100 basis points of gross margin expansion?
A: The key driver was the fixed cost absorption as we ramped up production levels. Last year, we curtailed production to address our owned inventory situation. We're back to normal production levels, which brings significant efficiencies running through our supply chain.
Q: Could you give an updated view on the consumer product licensing business post-Barbie movie?
A: The Barbie movie was a catalyst, leading to more than 165 consumer product collaborations. The business continues to grow, and the movie has helped to further invest in this area. While we will be down year-over-year due to the Barbie movie wrap, the business remains a critical component of monetizing our IP in entertainment verticals.
Q: How are inventory levels trending across the industry and specifically with your retail partners?
A: Our retailer inventory levels are in a very good position, following historical patterns. We ended Q2 with retail inventories down high-single digits compared to the prior year. Our owned inventory levels are also down almost $200 million versus the prior year, and they are of high quality, well-positioned for the second half of the year.
Q: Can you talk about where you're seeing traction with Fisher-Price and how to think about that given tougher comparisons in the back half of the year?
A: Fisher-Price grew 11% in the second quarter, driven by newborn, Little People, and the launch of the new Wood line. In the second half, we expect Fisher-Price to expand the core line, launch the Wood segment globally, and add new franchises to Little People collector. We are confident in the long-term growth potential of Fisher-Price.
Q: Could you talk about the gross margin improvement and any particular headwinds impacting gross margin in the back half of this year?
A: We achieved significant gross margin improvements in the first half, up 430 basis points in Q2 and 600 basis points in the first half. The primary drivers were our optimizing for profitable growth program and cost inflation. For the full year, we expect gross margin to be up 100 to 150 basis points, with some headwinds in the second half from the Barbie movie wrap and cost inflation, partly offset by continued cost savings.
Q: Can you remind us how the toy industry avoided tariffs in the first Trump administration and how you would manage through if there were incremental tariffs imposed?
A: We are always monitoring potential government policy or regulatory changes that could impact the business. We have designed an organization that gives us flexibility and mobility to leverage manufacturing opportunities globally. Our diverse manufacturing footprint allows us to respond to changes effectively, whether they are threats or opportunities to reduce costs and improve output.
Q: Could you give us some color on how you expect POS to trend in 3Q and 4Q?
A: POS was comparable in the first half, and our full-year guidance implies POS will be comparable on a full-year basis. We expect the toy side of the business to grow in the second half, offset by the Barbie movie wrap, and continue to outpace the industry and gain market share.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
