Good day, ladies and gentlemen, and welcome to the Mattel's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Whitney Steininger with Investor Relations. Ms. Steininger, you may begin.

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; Richard Dickson, Mattel's President and Chief Operating Officer; and Joe Euteneuer, Mattel's Chief Financial Officer. As you know, this afternoon, we reported Mattel's 2018 full year and fourth quarter financial results. We will begin today's call with Ynon and Joe providing commentary on our results and then we will provide time for Ynon, Richard and Joe to take your questions. To help guide our discussion today, we have provided you with a slide presentation. Our discussion, slide presentation and earnings release, reference non-GAAP financial measures, including gross sales, adjusted gross profit, and adjusted gross margin, adjusted other selling and administrative expenses, adjusted operating income or loss, adjusted earnings or loss per share, earnings before interest, depreciation and amortization or EBITDA, adjusted EBITDA, and constant currency. Additionally the sales that is referenced on this call will be stated in constant currency. The information required by Regulation G regarding non-GAAP financial measures is included in our earnings release and slide presentation and both documents are available in the Investors section of our corporate website, corporate.mattel.com. Before we begin, I'd like to remind you that certain statements made during the call may include forward-looking statements relating to the future performance of our business, brands and product lines. These statements are based on currently available information and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ materially from those projected in the forward-looking statements. We describe some of these uncertainties in the Risk Factors section of our 2017 Annual Report on Form 10-K, our 2018 Quarterly Reports on Form 10-Q, our earnings release and the presentation accompanying this call, in other filings we make with the SEC from time to time, as well as in our 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.

Thank you, everyone, for joining our fourth quarter earnings call. We're happy to announce our fourth quarter results, which demonstrate meaningful progress in executing our strategy and significant improvement over last year. As we described last quarter, we have a two part strategy to drive our transformation to become an IP driven high performing toy company. In the short to mid-term, our priorities are to restore profitability and regain top line growth by reshaping operations, growing our power brands and expanding our brand portfolio. In the mid to long-term, we will capture the full value of our IP through franchise management and develop our online retail and e-commerce capabilities. Today we can report that this strategy is continuing to demonstrate tangible results. In terms of restoring profitability, we're tracking ahead with our structural simplification program. Exiting 2018 we achieved $521 million of run rate cost savings. We now expect to exceed our overall cost savings target of $650 million exiting 2019. This helped us achieve a reported gross margin of 46.6% in the quarter and 39.8% for the full year. This is the first time we have delivered a gross margin improvement for the fourth quarter and the full year since 2013. Our adjusted operating income was a positive $113 million in the quarter, up $276 million compared to a loss of $163 million in the prior year. With that, we achieved the largest year-over-year improvement in operating income for each of the fourth quarter and full year since 2009. In terms of regaining top line growth Barbie and Hot Wheels continued their momentum throughout the year. We executed well in our two largest regions North America and Europe and maintained our strength in Latin America and global emerging markets excluding China. As a result of this performance, we are…

Thank you, Ynon and good afternoon, everyone. Today I'll begin by walking you through our financial results then I'll provide an update on our strategic investments and our continued progress towards structural simplification. Our fourth quarter demonstrated our ability to consistently execute on a quarter-by-quarter basis. We have strong results in both the fourth quarter and the full year. Our full year results exceeded expectation on both the top and the bottom-line. Starting with the top-line, gross sales in the quarter were down 9% year-over-year in constant currency, driven by a negative 8% impact from Toys "R" Us and a negative 2% impact from the slowdown in our China business. As expected POS [Technical difficulty] similarly for the quarter has consumers transition from Toys "R" Us to other retailers. For the full year, gross sales exceeded expectations, declining 7% year-over-year in constant currency. We finished the year with retail inventory down mid-single digits globally year-over-year at our current customers and are well positioned for 2019. In the quarter our adjusted gross margin was 46.6% of net sales up from 32% in the fourth quarter of 2017. The significant improvement of 1,460 basis points was primarily driven by a $114 million benefit from structural simplification initiatives, a favorable year-over-year comparison related to significant write-downs of excess owned inventory in Q4, 2017, favorable brand mix and decreased sales adjustments, driven by the timing of expense recognition higher than expected fourth quarter sales and improve trade spend management. These drivers were partially offset by a negative 350 basis point impact from inflation in the cost raw materials and plant labor. Adjusted gross margin for the full year of 40% of net sales exceeded expectations and was up 230 basis points from 37.7% in 2017. The full year improvement was driven by the same…

[Operator instructions] Our first question comes from Michael Ng with Goldman Sachs.

Great, thanks for the question. I have one for, Joe and one for, Ynon, if I could. Joe, I just wanted to better understand how much ahead of schedule on the cost savings you are. It seems like this $521 million run rate savings in the year was significantly better than I think what was originally expected, which was I think the 40% of $650 million, is that the right way to think about it. What went better than expected and also what inning are you in, in total cost savings do you think?

So the answer to your question, is yes. It was supposed to be 40%, so yes we are ahead of schedule. Look, there's still a lot more to do, but we're very confident because we now are seeing that we're going to exceed the $650 million.

Okay, great. Thanks. And then Ynon, I was just wondering if you could elaborate a little bit more on the content strategy. You're doing a lot of exciting things there, are these content initiatives expected to be kind of profitable in and of themselves. What is success looks like for you there? Thank you.

Yes sure. So what - the fundamental advantage that we have is that we are the owner of one of the strongest portfolios of children's and family entertainment franchises in the world. And the opportunities that we see are to expand our IP and franchises into a highly accretive business areas in and of themselves. So we do expect incremental transformative upside potential from these initiatives. And of course, at the same time there will be a halo effect on the core toy business. So we would expect to see uplift in the toy space as well.

Great, thank you, both.

Thank you. Our next question comes from Arpine Kocharyan with UBS Investment Bank.

Hi. Thank you. Thanks. Could you give a little bit more detail on global POS for the quarter. I think the fact that Barbie and Hot Wheels were up might not be surprising I think in the channel, both of those properties showed strength in the holiday season. But your shipment rate even in those products seemed to be a bit ahead of retail sell through, which was I think you said mid-single digit for Barbie and low-single for Hot Wheels. I guess, what could you say to eliminate any concern that there is inventory buildup even though we know that retail sales in those franchises were stronger than the industry for sure for the quarter.

Yes, why don't I take that I mean we've worked really hard all year to start getting aligned demand and supply and our retail inventories are probably down mid-single digits as a result of that work. So I think that would be the answer to your question.

In Q4 global POS all together was down - I'm sorry I couldn't hear you. Down mid-single digit for the portfolio overall.

No, I said retail inventory was down mid-single digits. We worked hard to drive retail inventory down along with our own by mid-single digits. So...

Right. And in terms of global POS for the quarter, could you quantify how much it was in terms of sell through?

Well global POS was down double digits.

Great. And I had a quick follow-up and maybe question for Ynon. You've put out several content related updates over the past several weeks related to Barbie and Hot Wheels, but those announcements didn't have specific timeline and economics and I understand why you wouldn't want to disclose some of that in terms of economics. But in terms of just general timing of when you are targeting some of those - some of that content to come. Could you elaborate on that a little bit?

We haven't been specific because it's too early to share with you the timeline. We did say that we expect to announce more initiatives in the near-term. And I can say and just to dispel a misperception that I read in a couple of places is that while we're not looking to take financial risk, we do expect to have meaningful upside from these opportunities. And the reason is given the strength of the franchises we're seeing very strong interest from some of the best and strongest partners in the industry to collaborate with us. And we as a result expect to generate meaningful return for Mattel, notwithstanding the fact that we're not taking our own financial risk.

That's helpful. So outside of toy sales upside you will participate in economics beyond royalty payouts for your brand. In other words, you will share that economics with a studio at some point because that would be participating economically, right?

Correct, that's right.

Okay, thank you.

Thank you. Our next question comes from Ray Stochel with Consumer Edge Research.

Great, thanks for taking my question. I wanted to ask how you feel you are in terms of your inventory position when comparing new retailers or new doors that you opened relative to older doors. And then, if you could give a metric as to what percent of your sales this year came from new doors in either the U.S. or globally? And also I'd love an update on SKU count year-over-year. Thanks.

Right. So we typically don't give out the retailer-by-retailer information. In regards to inventory, we - I just said that we were down mid-single digits at our retail store level. In regards to new accounts obviously we stayed focused in making sure that demand drove supply to make sure they had adequate inventory. I think the execution demonstrated how we were.

Okay. Our next question comes from Felicia Hendrix with Barclays.

Hi, thanks for taking my question. So, Joe, just the balance sheet one for you, first, the cash burn that you had for the year was roughly in line give or take is what we were expecting and in your prepared remarks you kind of laid out some of the drivers of that. For 2019, we're modeling moderate free cash flow generation. And I'm just wondering if that matches with your plans or could 2019 be another year of cash burn?

So for 2019 we're going to be at Toy Fair next week and we'll give you all of the plans we have for 2019.

Not just a little pace now.

We want to give you a wholesome picture, so that nothing could be taken out of context.

Okay. And then - okay I'm kind of reassessing here because I think I might ask you a bunch of things where you are going to say the same answer. But when I look at - when we kind of look at the successes that you guys have had thus far they mainly been in Barbie and Hot Wheels and you guys have talked about the initiatives that you're looking at to drive the other lines. But at least - and you've made it clear what's happening with an American Girl. But with Fisher-Price and Thomas could that grow in 2019?

It's Richard. I mean, obviously we're going to share a lot more with you at Toy Fair when we get to New York and we're very confident about our programs in place. The Fisher Price as you know single largest it's in preschool brand in the world. Lot of great progress that we're making there and there's specific focus in 2019 improving price value, reinforcing the digital dialogue with millennial moms. We're working on presenting to you in 2019 you'll see some great new innovation and new products and segments and we're very confident in the brand. And certainly it stay power and future growth. Thomas as well. Thomas is an incredible brand almost 75 years' rich of heritage. It's a multi-generation franchise for us theme parks, programs, live events, products, consumer products. It is a really important brand and we're taking a holistic approach to it. From a consumer perspective we're going to be spending a lot of time on our retail presence and merchandising assortments. And again, we'll share a lot more with you on our products and programs, when we get to New York.

Okay. And this might be one more that, we'll have to hit on actually. But just wondering I think it would be helpful for a lot of people on the call just to give us some color or bring us up to speed in terms of where you are in terms of transitioning to manufacturing asset light face. Is that something you can update us on now?

As I said in the prepared remarks, we are proceeding towards a capital-light model. We have several scenarios that we are evaluating. And we expect that whatever benefit we will generate from this strategy will be incremental to the structural simplification program. On top of the target of $650 million that we also as you know, by now expect to exceed.

Okay. But there's no more details that you can give us on what you're - on how you're progressing with that?

Not at the stage.

All right. I really look forward to asking other questions next week. Thanks.

Okay, thank you.

Thank you. Our next question comes from Tim Conder with Wells Fargo Securities.

Thank you. Maybe I'll just follow on please question there with the exiting the manufacturing timeline. Ynon or Joe whoever wants to take this, would you say that by 2021 is that a fair that you should be basically purely an asset light organization?

We don't want to give specific timelines, but there's clearly an opportunity. As you understand we today have 13 manufacturing plants. We employ tens of thousands of people. It's fair to say that these plants are actually doing a great job. These are great factories, But the there's no question that we can achieve significant benefits if we adapt our model to the new economy and leverage other options that we have.

Okay. And then gentlemen, again, to what degree you answers we'll see early next week, but just a broader timeframe of Fisher-Price, American Girl stabilization and then collectively then how does that fold into I think you said in a year ago, an intermediate goal of re-achieving a mid-teens margin?

It's Richard, I think we talked about fisher price clearly and we'll share a lot more of our growth strategies moving forward, which we're very confident. On American Girl, this is another one of our premium brands. It's a long standing again generational franchise with an incredible fan base. And I would mention like Barbie, another big generational brand that's weathered cycles overtime. And we really believe that American Girl has the ability to make a very strong come back. That being said, we have said that it's going to take a multi-year approach to implement the changes that need to be made. We've been restoring the brand's premium position, which I will again share with you some of those deals and we get to New York. But this includes revitalizing brand experiences in our store, digital flagship approach online and certainly the content experiences and storytelling that girls and moms love about the American Girl franchise. These are really important aspects that we're continuing to work hard on and we do believe in the franchise long-term and again we'll share more detail with you in New York.

Okay. And then that mid-teens margin goal just any update there gentlemen?

We haven't come off our goal to achieve mid-teens I mean, it's still something we believe we can get back to. So yes, that hasn't change.

Okay. See you next week. Thank you.

Thank you. Our next question comes from Derek Johnson with BMO Capital Markets.

Good evening. First question, DC license. Can you hear your side of the story there? Did you not want to resign it the bid master update you what happened there?

Well, we can get into specifics, but I can tell you that we do have DC license as through 2019 and actually we have Wonder Woman through 2020. And we do expect to continue to be in partnership with Warner Brothers going forward. As you noted we also already in business with them with two big film franchises and that should give you a reference to the strength of the relationship between us.

Okay. And on the cost savings of the $521 million run rate. Are there any cost saving, you'd actually like to have back perhaps certain people or positions where you may not have appreciated their value until they were gone?

Look I'll give you an answer, but it's a taking a bigger picture, which is when we've developed a structural simplification program within it from the ground up. This was not a mandate from the top to reduce the organization by X percent. This was designed together with leaders across the world, across the entire organization to define and optimize our structure to simplify the organization, to remove layers that were unnecessary and to improve efficiency and performance. So I can't tell you that we got everything perfect, but we're very happy with where we sit and believe that we can achieve more savings and efficiencies all the way through the end of 2019.

Great. One more if I can. So retailer shifted their fulfillment practices putting more pressure on you guys and vendors to hold more inventory to ship just in time. How do you think you perform there? Did you have enough inventory in place? Did you leave any sales on the table? Do you think you maximize yourself in the fourth quarter?

Yes, I think first and foremost, I mean, we really worked hard to make sure that demand was driving supply. By not having TRU, and having retailers that hold less inventory, it required us to get our supply chain in place to have more inventory turns. And if you recall, we put in the Pennsylvania distribution facility that we had up and running in the back half of the year that actually contributed to the positive margin and it executed well. So yes, I think we did really well in this fourth quarter. Did we leave some sales on the table? I don't think there's a quarter that goes by that you don't need some sales for some reason. So - but then we optimize the fourth quarter. I think our execution demonstrated that.

Great, thanks a lot, Joe.

Thank you. Our next question comes from Greg Badishkanian with Citi.

Great, thank you. You had mentioned that retail inventory levels were down mid-single digit globally. So I'm just wondering how that will impact restocking at the retail level as well as the markdown money on a year-over-year basis in the first quarter?

We don't anticipate any issues in regards to the first quarter. We've been very connected with our retailers and making sure that we got the right inventory in there that spinning the right way. So you saw our obsolescence was down obviously dramatically, but even more than a typical year. So I think we're in pretty good shape starting off 2019.

So on a year-over-year basis, I'm assuming that it's going to be more favorable it's actually going to be a tailwind for you, right?

Yes, I mean look, I don't think it's material I guess is how I would look at it.

Okay. All right. And just how do you think retailers will approach the toy category in 2019 versus how they did in 2018, some of the mistakes they made and what do you think they're going to do differently?

I mean, from my perspective, I think look with the loss of TRU, it was all about having a plan to gain market share from the lack of TRU. And I think we worked with them a very effectively in doing that. I think we exited the year with, great shelf space. And any game plan you're executing to as you go through, you can always turn the screw one way or the other to refine your process and execution. And we'll make those things as we go through the quarters ahead.

And I would add that the toys is a strategic category for many retailers. This is not just another product that they sell from the aisles. It drives traffic, engagement and obviously there is a product that have emotional connections with the consumers. So the toy industry is in a good place. We talked about the different research that we see that are projecting continued growth through 2022, solid growth. The latest research that we are looking at is a Euromonitor research that studied 32 markets that represent about 80% of the industry. And they're talking about 4.7%, CAGR through 2022. We see demand, we see retailers leaning in, we're seeing consumers looking to continue to be entertained, inspire and play with our product. So we remain very positive about our relationship and collaboration with the different retailers to step in and optimize for the result.

Thanks for extra color, Ynon. Take care.

Thank you.

Thank you. Our next question comes from Eric Handler with MKM Partners.

Yes. Thanks for the question. Wonder if we could talk a little bit more about Fisher Price. And this is a segment that's been in perpetual turnaround for a number of years now. But when you look at where you are, maybe you could talk about, since there are so many different businesses within Fisher Price, maybe what are the three areas where you're most optimistic right now? Where are the troubled areas? And also, maybe you could talk a little bit about Thomas, originally when this was acquired from HIT, there was tremendous optimism and this was a crown jewel within HIT Entertainment. And it seems like the business has tapered off in the last couple years. What's functionally changed with Thomas and what sort of needs to happen to get it back on an upward trend?

So I'll start and my friends can chime in as we see fit. There important part of the Fisher Price narrative this year that's of note. The brand was heavily impacted in 2018 by Toys "R" Us. The disruption of course Babies "R" Us and as we mentioned the challenges that we've had in China, so it clearly has exasperated the results that you're seeing. The price value equation of the brand has been one that we've been working on for some time. And there have been some mechanical changes this year that have been attempted that have proven effective and we will continue to learn as we go through our tests and some of the execution that we have planned for 2019 should start some of the momentum that we've seen in some of these tests for 2018. There's a also the reality of the millennial mom and the demand creation model, which we've been practicing more of and testing and learning. As I mentioned, the digital dialogue that we've been having an investing more in demand creation through digital platforms for Fisher Price will increase for 2019 and beyond. And as well least of which is innovation. The value proposition also must have an important innovative component from a product. And again, as we look forward to seeing you at our galleries in New York, there's some specific new segments that we're going to be introducing that answer consumer insights, trends and innovation. So as you watch the space again, despite the fact that we've obviously been experiencing challenge with the Fisher Price brand, we do remain the number one in the category. The category is an incredibly important category for the industry, preschool, infant toddlers is the number one category in the space. And we do see opportunities for growth across the board, in particular in the preschool space. So as we share more with you in New York, hopefully we'll get more details for you that will give you the confidence that we have in the franchise. As it relates to Thomas. Sorry, question…

No, go ahead. Go ahead.

Okay. So on the Thomas front, as you know, we were slow to reinvent if you will or revitalize some of the content. The new content is resonating in international markets, especially in the UK. In the U.S., there has been a bit of a longer than expected release timeframe for the new content. And it has had a result in limited incremental exposure. We're taking a really fresh look at Thomas from a holistic consumer perspective. Content is incredibly important and is part of the heritage of the brand, but consumer products is also a very important component as well live events. And also as part of that innovation within the toy line, so all of which is being looked at significantly. And again, not punting every question to New York, but we will have more to share with you in New York. As I mentioned on one previous question earlier, we're working on strengthening our retail presence and merchandising assortment. If you go into a lot of the various different locations where Thomas is featured, the consumer is buying into Thomas in the depth of purchase of the characters. And what we're concentrating on is making sure that the assortment is there to meet the demand. We've got a really strong fan base and great relationships around the world with consumers on this brand. And we're going to be sharing a lot more of what we believe are the mechanics to turn it around in New York.

Great, thanks, Richard. Just one quick for, Joe, since Richard brought up China, you had a big inventory overhang there, where does that stand now?

So we're a good way through it fourth quarter was very helpful. We will still have some to get through in the first half of the year, but feel very good about the position we're in right now.

Thank you.

Our next question comes from Jaime Katz with Morningstar.

Thank you for taking my question. I'm curious about the Toy Box. Obviously there are ongoing declines in there and MEGA was called out as a brand that continues to struggle. Could you give us any inside as to where you guys sort of see that stabilizing? And how you feel about MEGA at this point in time it was a very promising business at the time of acquisition. Thanks.

MEGA remains a strong number two challenger brand with enormous opportunities ahead of it. We love the construction space. It's a great category and MEGA is a strong challenger brand. We do have exciting new products and propositions for the brand in 2019 and one that we're incredibly excited about is the fantastic partnership that we have with Pokémon. As you know the Pikachu movie is coming out in the first half of 2019 and we believe there'll be great excitement over our product line and assortment related to that partnership. We've got some other new items that we're going to be sharing with you at Toy Fair and some specific retail programs driving a challenger mindset with the MEGA brand. And we believe really strongly in the category, we think it has tremendous upside potential for us and it represents a great opportunity for us for growth around the world.

Okay. And then any inside into sort of when maybe the growth would start to level out there in the Toy Box.

The question was…

When will toy box are leveling out.

Okay. I think on that again we will have to share with you the overall strategy related to how we're approaching the categories. And within the Toy Box how we're driving growth both in our partnerships business and across the specific categories that we manage.

Thank you.

Thank you. Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to Ms. Whitney Steininger for any closing remarks.

Thank you operator and thank you everyone for joining the call today. The replay of this call will be available via webcast and audio beginning at 8:30 PM Eastern time today. The webcast link can be found on our investor page or for an audio replay please dial 404-537-3406. The passcode is 668-94-95. Thank you for participating in today's call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.