Earnings Call Transcript - MAT Q1 2024

Operator, 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. Thank you. I will now turn the conference over to David Zbojniewicz, Head of Investor Relations. David, you may begin your conference.

David Zbojniewicz, Head of Investor Relations

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, Chairman and CEO

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 doll 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 the 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 our 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, CFO

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, gaining 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 to $54 million, benefiting from the same factors. 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.

Operator, Operator

Thank you. We will now start the question-and-answer session. Your first question comes from Alex Perry from Bank of America. Please go ahead.

Alexander Perry, Analyst

Hi, thanks for taking my questions here. I guess, just first, can you talk about how the point-of-sale sort of trended in the quarter versus your expectations? What do you think drove the acceleration as you move through the quarter? Do you think that was primarily the Easter shift? And then what is sort of the expectation for point-of-sale as we move through the year? Is it still flat similar to your 4Q guide? Thank you.

Anthony DiSilvestro, CFO

Sure. I can take that. And let me comment on the impact of the Easter holiday more broadly. First of all, the timing of Easter did not materially impact our year-on-year shipments in the first quarter. POS, as we said for the total company was up low-single digits in Q1 with improving trends as we moved through the quarter, including some likely benefit from the holiday timing. When you isolate our holiday performance by looking at our POS for the last six weeks through mid-April, so that includes the Easter holiday in both periods, POS was positive. And year-to-date POS through that mid-April point is now comparable to last year. And looking ahead and similar to last year, we expect our shipping trends in 2024 to align with the historical trends, which are about a third of our gross billings in the first half and two-thirds in the second half.

Alexander Perry, Analyst

Perfect. And just my follow-up is, can you just talk a bit more about Hot Wheels and what's driving the growth there? Would you sort of expect that level of growth to continue as we move through the year? Thank you.

Ynon Kreiz, Chairman and CEO

Hot Wheels has been an outstanding brand with an impressive track record. It has experienced growth for six consecutive years and is set to grow again in 2024. This growth is fueled by excellent product innovation. Diecast sales are increasing, and we are expanding into the adult collector market. Distribution is being broadened, with new product lines like RC and Skate, along with more content on Netflix. The new animated series on Netflix has reached the top 10 in 69 countries. We continue to enhance engagement by integrating brand purpose, consumer-focused innovation, cultural relevance, and a strong franchise approach to extend our reach beyond the toy section. This impressive performance is happening even before the release of the movie we are developing with J.J. Abrams. Additionally, the vehicles category has been robust for several years, and we are also working on another movie with SkyDance for Matchbox. Overall, this is a strong category where we are gaining market share and are optimistic about ongoing success.

Alexander Perry, Analyst

Perfect. That's really helpful. Best of luck going forward.

Operator, Operator

Your next question comes from Arpine Kocharyan from UBS. Please go ahead.

Arpine Kocharyan, Analyst

Hi, thank you for taking my question. I wanted to go back to the Disney Princess dynamics a bit. I think you mentioned inventory correction impacting sales. Was there anything else that you would call out in terms of what drove that decline? And then I have a quick follow-up.

Anthony DiSilvestro, CFO

No, Arpine, it's primarily the wrap from the introduction last year, the pipeline is still. And importantly, the POS for the line is positive in the first quarter, and we're very, very optimistic about the future for that line.

Arpine Kocharyan, Analyst

Thank you. That's helpful. And then I wanted to ask you regarding buybacks. Cash flow showed nice improvement for the quarter. Could you maybe walk us through what needs to happen for you to pull the trigger on being a bit more aggressive on buybacks? Is it really absence of M&A? You've also talked about perhaps participating more in the economics of your theatrical slate. Do you have an update on that or anything specific you could share? What needs to happen for investors to see upside to buybacks here? Thanks.

Anthony DiSilvestro, CFO

Yes, we're not providing specific guidance on our share repurchases, but we continue to follow our capital allocation priorities. First, we focus on investing to drive organic growth. Second, we aim to maintain an investment grade rating with a leverage target of 2 to 2.5 times. Third, due to our improved financial position, we are considering mergers and acquisitions as well as other corporate development opportunities. Lastly, share repurchases are also part of our strategy. As you may remember, we resumed repurchases last year in 2023 for the first time since 2014, purchasing about $200 million of our own stock. Coming into this year, with our strengthened financial position and confidence in our strategy, we announced a new $1 billion share repurchase program, which is multi-year and expected to be funded with free cash flow. We completed $100 million in the first quarter and will continue to assess our capital allocation priorities. We are consistently evaluating the balance between mergers and acquisitions and share repurchases.

Ynon Kreiz, Chairman and CEO

And I would add that while mergers and acquisitions are a priority in our allocation strategy ahead of share repurchases, we actually invested over $300 million in buying back our own stock instead of pursuing external acquisitions. We believe that given the current share price of Mattel stock, this is a great opportunity for us to invest in ourselves. We will continue to assess this as circumstances change. We have the capacity, we have the cash, and we remain focused on creating long-term value for our stakeholders.

Anthony DiSilvestro, CFO

And just to add one more point, Arpine, we did mention at our Investor Day that we will consider targeted investments in our entertainment verticals that accelerate the strategy and potentially capture a larger share of the upside.

Operator, Operator

Your next question comes from Drew Crum from Stifel. Please go ahead.

Drew Crum, Analyst

Okay. Thanks. Hey guys. Good afternoon. So Anthony, just looking at the adjusted gross margin closer and the various drivers behind the year-on-year improvement in 1Q. Which would you expect to persist or which do you need to continue over the balance of the year in order to hit or outperform your guidance range for 2024?

Anthony DiSilvestro, CFO

Yes. So let me comment on gross margin. Certainly, in the first quarter, we achieved significant gross margin expansion. We're up over 800 basis points. The three primary drivers being lower inventory management costs, cost deflation as principally ocean freight, and savings from our optimizing for a profitable growth program. Given that first quarter performance and our guidance, it does imply that the balance of the year will be about flat to last year and there are a few puts and takes in that. First, we expect to continue benefiting from cost savings and we'll also benefit from increased production levels, an absorption benefit as we wrap last year's reduction of owned inventory levels. And then going the other way, we'll wrap the Barbie movie benefit and we would also expect to see some inflation as we wrap the decline in ocean freight, account for the situation in the Red Sea, and some continued upward pressure on our wage rates. So that's kind of how we balance it for the balance of the year. And at this point, we are reiterating our full-year guidance, which is to be around 48.5% to 49%, so up 100 basis points to 150 basis points.

Drew Crum, Analyst

Got it. Okay. Very helpful. And then Ynon, just any updated thoughts around your expectations for Barbie in 2024 with the quarter in the books? Thanks.

Ynon Kreiz, Chairman and CEO

Barbie is an extraordinary brand that has never been more relevant or connected to pop culture than it is right now. The movie has definitely expanded its audience, bringing in a wider demographic and creating more opportunities. Barbie continues to capture significant market share in the doll category and across the industry. As you know, we are celebrating Barbie's 65th anniversary with multiple activations. We plan to launch three new segments that we discussed at Investor Day, and we anticipate gaining more shelf space in the second half of the year. We are also expanding into an adult collector line aimed at pop culture fans, while continuing to engage with core kids through more content on Netflix, including both a series and a movie. Additionally, we are publishing a new mobile game in partnership with Take-Two. There is a lot happening with Barbie. We mentioned that Barbie will see a slight decline this year due to last year's impressive performance. However, thanks to the brand's strength, various activations, new product lines, and everything else surrounding it, we expect continued growth and progress beyond 2024. We have always stated that this is not about short-term management of the brand but rather about long-term growth and expansion, and we couldn't be more confident and proud of Barbie's current positioning and future trajectory.

Drew Crum, Analyst

Okay. Thanks guys.

Operator, Operator

Your next question comes from Fred Wightman from Wolfe Research. Please go ahead.

Fred Wightman, Analyst

Hey, guys. Thanks. Just maybe to a follow-up on that, Ynon, you just said that you're still expecting Barbie to be down marginally for the year. Was there any change to the other power brand outlooks for either Hot Wheels or Fisher-Price?

David Zbojniewicz, Head of Investor Relations

No change from what we conveyed at Investor Day. We anticipate Hot Wheels will see growth and Fisher-Price will remain stable. It’s important to note that Fisher-Price is our power brand as we now define it. This includes the Infant and Toddler segments, as well as Little People and the new wooden line that we are launching this year. We are currently implementing a new strategy in the Infant, Toddler, and Preschool category. We recently appointed a new leader for Fisher-Price and this category was a key focus during Investor Day as we discussed our evolving strategy. There are many new developments within Fisher-Price and how we are managing this category. Overall, we expect Hot Wheels to grow, Fisher-Price to grow, and Barbie to see a slight decline among our power brands.

Fred Wightman, Analyst

Okay, great. And then just thinking about the cadence of the year, Anthony made a comment that it's going to be back to historical norms. I think that's what you guys had said previously, but you also made a comment you expect the first half to benefit from restocking. Is that still the plan?

Anthony DiSilvestro, CFO

Yes, we haven't gotten that specific. Certainly, our first quarter was negatively impacted by the reduction in 2024. And looking ahead, we will wrap last year's retail inventory decline. So there should be some tailwinds ahead in that respect.

Operator, Operator

Your next question comes from Kylie Cohu from Jefferies. Please go ahead.

Kylie Cohu, Analyst

Good day. Thank you for taking my question and congrats on the strong quarter. I was hoping kind of double-click on the optimizing for profitable growth program. I was kind of wondering how you plan on leveraging AI over the next 24 months, specifically in regards to this program.

Anthony DiSilvestro, CFO

Sure. So you mentioned the optimizing for a profitable growth program. Again, this is a new program that we announced coming into 2024, a three-year program with a $200 million cost-saving target by 2026. And we have quite an extensive look at AI, right, and we are looking at, I would say, use cases within the company where it can apply for us, whether it's things like translation, that's just one example, but I think there may be good applicability and that is certainly within the scope of our program as we look to further efficiencies that would leverage our global scale. AI is certainly one of them. And other cost-saving opportunities, particularly within our supply chain as well. And this does include plans we disclosed recently to eliminate one of our plants in China. So it's a very comprehensive program. And I would say, given our track record, we're very confident in our ability to deliver.

Ynon Kreiz, Chairman and CEO

And Kylie, I would add that we are looking at AI broadly in terms of integrating more capabilities into different type of analytics, as well as product development and also product integration. So we have a team that is dedicated to that and we are looking to leverage the technology in the broad sense of the world, not just in terms of achieving or driving this cost-saving initiative.

Kylie Cohu, Analyst

Awesome. Great. That's super helpful color. And I guess my follow-up would be around Mattel163. Do you have anything to share about the success of the Uno app? Some data you looked at like users are up or anything else about upcoming launches? I know you mentioned the partnership with Take-Two, but anything about Mattel163 would be great.

Ynon Kreiz, Chairman and CEO

The goal of our digital gaming strategy is to expand physical play into the virtual world by creating digital games and experiences that encourage ongoing engagement among fans of all ages, utilizing our brands. Mattel163 serves as a showcase, similar to how the Barbie movie highlighted the potential of films. It demonstrates our brands' ability to branch into digital gaming. In 2023, we achieved nearly $200 million with just three games at a very high profit margin, illustrating the potential of our brands when executed effectively. Our partners have excelled in collaborating with us on marketing and developing games that foster high engagement. While we have not announced new games yet, this remains a priority, and the upcoming game with Take-Two is an important partnership. Additionally, we aim to increase self-publishing of mobile games based on our intellectual property, allowing us greater economic participation in the success of our games through strong brands. It is crucial to highlight how powerful brands can enhance consumer engagement, lower marketing expenses, and potentially create a lucrative business driven by these strong brands.

Kylie Cohu, Analyst

Great. Thank you so much.

Operator, Operator

Your next question comes from Megan Alexander from Morgan Stanley. Please go ahead.

Megan Alexander, Analyst

Hi, thanks very much. I don't want to beat a dead bush here, but can we just go back and wanted to ask a little bit more about just the cadence of the year? I think at the beginning of the year two, you had expected shipping to align with historical trends. Maybe you could quantify for us what the destocking headwind in the first quarter was and whether it was in line with your expectations. I think you commented 3 to 4 point destock headwind last year. So is that something that we should expect benefits the second quarter?

Anthony DiSilvestro, CFO

Yes, I think looking ahead, right, there should be tailwinds with respect to lapping some of the retail inventory declines. So as you referenced, last year, fairly significant retailer inventory decline. We came into 2023 with levels elevated and we guided a 3 to 4 point impact. We made great progress in 2023, but we still ended the year with retail inventory slightly elevated. So the impact in 2024 is significantly less of a negative and therefore a tailwind with respect to gross billings. And when we gave our guidance for 2024, right, we said that we expect POS to be flat, for net sales to be comparable in constant currency. So there is a plus and a minus there. One is the pluses, the wrapping of last year's retail inventory declines and the offset to that is the wrap of the Barbie movie related benefits. So yes, a tailwind in 2024 and it's reflected in the guidance and it's really kind of so far unfolding as we expected.

Megan Alexander, Analyst

Okay. That's helpful. Thank you. And then just on the gross margin performance, is there any way within that mix benefit to quantify the tail from the Barbie movie, whether it was streaming new partnerships, it seems like you're still rolling out new partnerships related to the movie. So I know there is a lot that goes into that mix line. Any way to quantify what was pure Barbie movie related within that?

Anthony DiSilvestro, CFO

Yes, it's challenging to break it down, but overall, the 80 basis point favorable mix comes from the higher margin licensing business, with Barbie growing faster than the toy segment. We are also experiencing some benefits related to the movie as we head into 2024, though it's certainly not as impactful as last year.

Ynon Kreiz, Chairman and CEO

You're welcome.

Operator, Operator

Your next question comes from Eric Handler from ROTH MKM. Please go ahead.

Eric Handler, Analyst

Good afternoon. Thank you for the question. Anthony, I wanted to discuss the cash flow statement. Your cash flow from operations was nicely positive, and I believe this is the first time that's happened since 2014, showing a substantial improvement year-over-year. While net income loss decreased significantly, there was also a considerable benefit from working capital. If you are keeping your free cash flow guidance steady around $500 million and not changing CapEx, does this imply that the working capital benefit gained in the first quarter will gradually unwind in the remaining quarters of this year? How should we think about that?

Anthony DiSilvestro, CFO

Yes. A couple of points. One is, there is some timing inside of our working capital performance and I'll point to two things. One is related to incentive compensation. We didn't accrue incentive comp for 2022, we did for 2023 and we're going to pay out the 2023 incentive in the second quarter of 2024. So we ended the first quarter with an accrued liability with respect to that program. That was a benefit. There's also some timing related to our inventory performance. Our owned inventories were down significantly in 2023. We're going to maintain those levels in 2024. So less of a benefit. So those kind of will unwind as we go through the year, which is why we're still guiding to that $500 million 2024 free cash flow generation.

Eric Handler, Analyst

Very helpful. I assume Barbie performed quite well in the home entertainment sector. Could you provide insight into the ongoing contributions from the Barbie movie? How should we consider this not only for the first quarter but for the remainder of the year?

Anthony DiSilvestro, CFO

Yes. I would say it's not material to our overall results. There is some carryover benefit. But again, I wouldn't say it's material.

Operator, Operator

Your next question comes from Christopher Horvers from J.P. Morgan. Please go ahead.

Christian Carlino, Analyst

Hi, good afternoon. It's Christian Carlino on for Chris. Could you speak to how retailers are planning early holiday orders? And are they looking for more value? And do you expect the ASP or deflationary pressure in the category to continue at retail?

Ynon Kreiz, Chairman and CEO

Yes. It's difficult to be very specific at this point in the year. We are definitely in discussions with all of our major retailers about planning for the upcoming holiday season, including product pricing, shelf space, promotions, and advertising. All of this is part of the planning process. We are confident that we have a strong plan in place with our retailers and feel optimistic about the holiday season, but it's a bit early to discuss specific orders.

Anthony DiSilvestro, CFO

Yes. One thing I would add about pricing is that we have a large portfolio and a broad range of products, allowing us to cater to all levels of pricing. This is one of the strengths of managing a large portfolio like ours, as we can partner with retailers at different price points and provide options for consumers at all price levels.

Christian Carlino, Analyst

Got it. That's helpful. And were you able to recapture any of the fixed-cost absorption impact in the first quarter? And how should we think about the phasing of that over the year now that we're back to normal seasonality and POS trending in line with shipments?

Ynon Kreiz, Chairman and CEO

Yes. I think it's more in the year to ago period and not so much in the first quarter. So as we ramp up production going into the second quarter and third quarter, that's when we should see that absorption benefit.

Operator, Operator

Your next question comes from Stephen Laszczyk from Goldman Sachs. Please go ahead.

Stephen Laszczyk, Analyst

Hey, great. Thank you for taking the questions. Maybe just a follow-up on the retail sentiment at the moment. I'm curious if you could just maybe talk a little bit more about what you're hearing from your retail partners on the consumer and the demand side of the equation at the moment and how that might compare to what you expected coming into the year. Any pockets of the industry that are maybe outperforming or underperforming your expectations so far?

Ynon Kreiz, Chairman and CEO

So far, things are meeting our expectations. Retailers are very engaged. We often emphasize the strategic importance that retailers place on this category because it is experiential, attracts foot traffic, features affordable items, and appeals to an inherent human tendency to play, especially with major brands and quality products. As we've noted in our prepared remarks, we believe the industry gained from an earlier Easter this year, and year-to-date through mid-April has been similar to last year. However, we do anticipate some decline in 2024, though at a slower pace than last year. This decline stems from the same issues that affected 2023, including a lighter theatrical film slate and a shift in consumer spending toward experiences and services. That trend seems to be easing, and we believe the industry will eventually return to growth and continue to expand in the long run. We expect to outperform the industry, as we have observed positive consumer demand reflected in the improving trends we've discussed, and we anticipate gaining market share throughout the year.

Stephen Laszczyk, Analyst

Got it. Thanks for that color. And then maybe just a follow-up. On to the extent you're willing to expand on the M&A point, is there any type of assets or features of assets that you're particularly considering at the moment or think would be best-suited for Mattel's strategy at this point? I think in the past, you said you were not looking to do something that would surprise the investment community. Any sense of what that means?

Ynon Kreiz, Chairman and CEO

Yes, we noted that when considering M&A opportunities, we anticipate they will be additive and closely aligned with our strategy, helping to accelerate our objectives. We are cautious about the risks associated with successfully implementing an acquisition. If we proceed with anything, we expect it to be beneficial, strategic, and straightforward, ensuring the market is not surprised by the type of asset or the price we pay, remaining disciplined both financially and commercially. We have worked diligently to place the company on a solid financial foundation. Currently, the company has its strongest balance sheet, cash generation, and an investment-grade leverage ratio. We have made significant progress, and we are not willing to jeopardize that. Therefore, we are being very thoughtful and prudent. As I mentioned earlier, we have opted to invest $300 million in our own stock rather than pursue other assets. We take all factors into account with a focus on creating long-term value for our shareholders while assessing the associated risks.

James Hardiman, Analyst

Hi, thanks for taking my call. I wanted to clarify some points you've made. The first quarter showed a stable top line, and our guidance for the full year indicates we expect a similar trend. However, we shouldn't anticipate flat results every quarter. Anthony, you mentioned two opposing factors: we're seeing a decline in retail inventory, which should positively impact us, while the loss of the Barbie boost could negatively affect us. Am I correct in thinking that the main advantage will come in Q2, while the significant downside will occur in Q3? We should expect growth in Q2 and a downturn in Q3. According to consensus estimates, analysts expect Q3 to decline significantly. I'm curious if you agree with that assessment and whether you believe growth in Q2 can help mitigate the Q3 decline.

Anthony DiSilvestro, CFO

Yes, while I won't go into details about any specific quarter, the Barbie impact will mainly come in Q3 and somewhat in Q4. The advantages from the retail inventory should be more significant in Q2 compared to Q3.

James Hardiman, Analyst

Got it. And then I guess just more broadly, I mean, literally nothing changed in your guidance. I don't want to assume that everything has gone as planned over the past three months, but you did meaningfully beat our estimates at least on the bottom line. I think sales were a little worse, but certainly, margins were significantly better. I'm curious if you think just the Street was mis-modeling the first quarter or whether the first quarter was actually in some ways better than you would have expected and maybe it was just some timing as to why that didn't flow through to the full year. Just trying to sort of tease out how much of the beat versus our expectations and the non-raise is conservatism versus timing versus just we weren't thinking about it right. Thanks.

Anthony DiSilvestro, CFO

Yes. So as you know, we don't get too specific on any individual quarter. I mean, we certainly saw strong margin gains in the first quarter. And we are reaffirming our full-year guidance, right, for net sales to be comparable on constant currency for adjusted gross margin to be up 100 basis points to 150 basis points. So again, we're off to a good start there. And EBITDA, $975 million to $1,025 million, and for EPS to be up double-digits. So again off to a good start and confident that we will get to achieve this guidance.

Ynon Kreiz, Chairman and CEO

And I would add, James, that in the context of a soft industry, we look to continue to gain share, as we said. And the emphasis for us this year is about profitability, gross margin expansion, and free and strong cash generation to continue to strengthen the company and position it for long-term growth, and we expect to resume growth at the top line and bottom line, but just emphasizing the top line in 2025.

Operator, Operator

Your next question comes from Linda Bolton-Weiser from D.A. Davidson. Please go ahead.

Linda Bolton-Weiser, Analyst

Thank you. I noticed that American Girl sales were not reported separately in your results, and Imaginext has been moved out of Fisher-Price into another category. Could you provide some insight on this? Will Imaginext be discontinued, out-licensed, or what is the plan? Also, how is American Girl performing in the first quarter and what are the future plans for it? Thank you.

Ynon Kreiz, Chairman and CEO

Hi, Linda. Yes, we have integrated American Girl into our North America commercial segment. It is no longer isolated as it was in the past; it now forms part of our North American business. We mentioned that we are advancing our strategy for American Girl, which saw growth in the first quarter. It remains a valuable asset within our portfolio, supported by a strong fan base and excellent products, and we are pleased with its growth. We exceeded the performance of both the large doll and total doll categories in the U.S., primarily driven by the core 18-inch business, which grew significantly. We are encouraged by this strong start to the year and are optimistic about the future of these treasured brands, focusing on further innovation, better execution, and ongoing enhancements to our retail presence and flagship stores. Imaginext has now been moved to Preschool Entertainment within the Infant, Toddler, Preschool category, which emphasizes brand and character rather than just products, unlike Fisher-Price. We will discuss Fisher-Price as the main brand, which includes Infant, Toddler, Little People, and the new wood line. Preschool Entertainment will be addressed separately. Additionally, there is the third segment of Baby Gear and Power Wheels, from which we are exiting or out-licensing, and you can expect to see a decline in that area over time.

Linda Bolton-Weiser, Analyst

I’m curious about your manufacturing operations in China, particularly in relation to the recent closure of your Tier 1 plant. Could you share the current percentage of your manufacturing in China compared to three and five years ago? Also, what is the long-term plan regarding this? Many investors are interested in understanding your different exposures to China, especially concerning manufacturing and its potential implications. What are your thoughts on this? Thank you.

Ynon Kreiz, Chairman and CEO

Yes, today we are producing about 50% of our products in China. The industry average is between 80% and 85%, and we are at 50% and decreasing. This shift is less about geopolitical risks and more about diversifying our manufacturing footprint, exploring different countries, and optimizing our operations in terms of cost, fulfillment, and services with various suppliers. This is part of our ongoing effort to enhance our supply chain, which is currently a competitive advantage for us, and we believe there is still room for further improvement. Approximately 70% of our profitable growth optimization program will come from the cost of goods sold, which is directly influenced by the advancements we are making in our supply chain.

Operator, Operator

Our last question comes from Jaime M. Katz from Morningstar. Please go ahead.

Jaime M. Katz, Analyst

Hi, guys. Thanks for squeezing me in. I would be curious if you have any insight into demand across price points. Are there different demographics that you're seeing that are really struggling to convert the sale or is there anything else consumer-wise that might be helpful to understand?

Anthony DiSilvestro, CFO

Yes, I would say it's too early in the year to comment. We're not seeing any specific trends in that regard. And as Ynon stated a few minutes ago, you know, our portfolio is well-positioned to compete across all price points from a single diecast car to a Barbie Dreamhouse, right? So we have a great portfolio and we are developing our plans with our major retailers and now look forward to executing them.

Jaime M. Katz, Analyst

Okay. Since you haven't mentioned it before, could you provide any information about the economics of the new adventure park? I'm unsure about the potential number of locations or the total addressable market, so any insights would be appreciated.

Ynon Kreiz, Chairman and CEO

Yes, we haven't provided specific details on the economics, but we have mentioned that this is a capital-light strategy where we license our brand and engage in various ways within the park’s financials, while also having the option to sell products on-site. This is a very profitable business area, particularly considering the strength of our brands. We view this sector as a significant growth opportunity and anticipate more location-based entertainment options beyond the two parks already announced, along with other initiatives discussed during Investor Day, such as the Monster Truck tour. Our strategy focuses on leveraging strong brands that foster engagement and have a substantial fan base to capture value outside of the toy market through lucrative business opportunities.

Operator, Operator

That concludes the question-and-answer session. I will now turn the call back over to Ynon Kreiz for closing remarks. Thank you.

Ynon Kreiz, Chairman and CEO

Thank you, operator, and thank you, everyone, for joining us today. As we said, we are off to a good start for the year with positive consumer demand, significant gross margin expansion, and very strong improvement in cash flow, which is exactly in line with what we were aiming to achieve. We expect to outpace the industry and gain market share in 2024 and are on track to achieve our full-year guidance. We continue to successfully execute our strategy to grow our IP-driven toy business and expand our entertainment offering and are very well-positioned to create long-term shareholder value. Thank you for listening today. Of course, we'll follow up over the next few days and answer any more questions, but we appreciate the time. And now I'll turn the call over to Dave.

David Zbojniewicz, Head of Investor Relations

Thanks, Ynon, and thank you everyone for joining the call today. A replay of this call will be available via webcast beginning at 8:30 PM Eastern Time today. The webcast link can be found in the Events and Presentations section of our Investors section of our corporate website, corporate.mattel.com. Thank you for participating in today's call.

Operator, Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.