Ladies and gentlemen, thank you for standing by, and welcome to the Mattel Incorporated Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded and will be approximately 1 hour in order to accommodate Q&A. [Operator Instructions] I would now like to introduce your host for today's call, David Zbojniewicz, Vice President of Investor Relations. Mr. Zbojniewicz, 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; Joe Euteneuer, Mattel's Chief Financial Officer and Anthony DiSilvestro, Executive Advisor and Mattel's next Chief Financial Officer. As you know, this afternoon, we reported Mattel's 2020 second quarter financial results. We will begin today's call with Ynon and Joe providing commentary on our results, after which we will provide time for Ynon, Richard, Joe and Anthony to take your questions. To help supplement 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 and loss, adjusted earnings and loss per share, earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted EBITDA and constant currency. Please note that the sales figures referenced on this call will be stated in constant currency. In addition, please note that the gross sales related to our new plush products are included in our action figures, building sets, games and other categories breakout which are also referred to as challenger categories on this call. 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 related to the future performance of our business, brands, categories and product lines. 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 materially from those projected in the forward-looking statements including risks and uncertainties associated with the COVID-19 pandemic. We described some of these uncertainties in the Risk Factors section of our 2018 Annual Report on Form 10-K, our Q1 2020 quarterly report on form 10-Q, our earnings release and the presentation accompanying this call, and 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 for joining Mattel's second quarter 2020 earnings call. On behalf of Mattel I hope that you are staying healthy and safe. We entered the quarter with extensive retail closures and distribution challenges and had to absorb a full quarter of COVID-19 impact but we demonstrated our execution capabilities and the resilience of our brands. Although our total revenues were down they exceeded our expectations particularly in North America Barbie and games where we saw sales increases. Total company POS improved significantly and was positive in the quarter and e-commerce continued to grow strongly in all regions. Our ongoing efforts to restore profitability proved very effective with continued operational improvement, additional cost savings and a meaningful increase in gross margin. During this challenging time our top priority has been to protect the health and safety of our employees and at the same time mitigate the disruption to our business. We have also demonstrated our commitment to being a responsible corporate citizen and to drive positive social impact. We continue to leverage our expertise, products and resources to support our consumers, our communities and the many frontline heroes around the world. We also took a stand against systemic racism with the launch of our play fair program developed to drive change and create new ways to support the black community. Our commitment includes developing and recruiting black talent and creating products and experiences centered around diversity. We are continuing to cultivate a work environment that promotes equality, inclusion and empowerment. We recently announced our diversity and inclusion goals to increase female and minority representation at all levels of the organization. We proudly shared that we have achieved 100% pay equity in the U.S. for all employees performing similar work. We know that much of our success is grounded in being…

Thanks Ynon. I have admired Mattel for a long time and have been a consumer of its many toys. Mattel is a great company with a strong portfolio of brands which have stood the test of time and continue to be relevant with today's consumers. The strategy to transform Mattel into an IP driven high performing toy company is compelling. The toy industry is showing resiliency in these challenging times and Mattel is demonstrating that it is well-positioned to continue its path to long-term profitable growth. I am excited to work closely with and on the leadership team and the finance organization to execute our strategy and I look forward to engaging with our shareholders and the investment community at large going forward. Before I turn the call over to Joe I want to thank him for his support during the transition. Joe?

Thank you Anthony and good afternoon everyone. Before I begin let me just say it's been a pleasure working with Ynon and the entire Mattel team over the past few years. I'm extremely proud of our accomplishments and the progress made to-date. We have built a significantly more flexible and efficient business that will continue to serve the company well in the years to come. I wish everyone at Mattel and those of you listening to our call today nothing but success. I will now provide more details on the company's second quarter results. Starting with gross sales by category in constant currency; for the quarter dolls revenue declined 2% primarily due to own brands and American Girl partially offset by significant strength in Barbie. Barbie revenues grew 10% in the quarter. We saw revenue growth across almost all segments of the brand and continued to see strong momentum for Color Reveal a recent innovation. American Girl revenue was heavily impacted by continuing retail closures partially offset by strong direct to consumer performance which more than doubled year-over-year resulting in a 16% decline. We continue to build out digital flagship capabilities and launch new product offerings and are encouraged by the high double-digit online sales increase in the quarter. Vehicles category revenue declined 23% in the quarter primarily due to Hot Wheels and the expected decline of Disney's Cars vehicles in a non-movie year. Hot Wheel sales were down 19% primarily due to international retail disruptions including a high number of store closures. Despite double-digit positive POS in North America overall Hot Wheels POS was down mid single digits for the quarter. As we enter Q3, however, we are seeing improving trends and remain confident about the long-term prospects of this brand. Infant, toddler and preschool category revenue was down…

Thank you. [Operator Instructions] Our first question comes from the line of Michael Ng of Goldman Sachs. Your line is open.

Great. Thank you very much for the question. I just had two. The first one is on the retail closures exiting the quarter. You guys said 4% of retail outlets are closed exiting 2Q versus 30% exiting 1Q. Can you just frame for us the potential revenue benefit just from that alone assuming all else equal as we head into the second quarter?

Hi, Michael. What we said is that the impact in the first quarter was about a third, was on a third of our revenue, the 30% closure affected about a third of our revenue and by the end of the second quarter the 4% of retail outlets that were closed represent 8% of our revenue.

Okay. Thank you. And I was wondering if you could talk a little bit about the really strong growth that Barbie had in North America 43% year-over-year. It was really impressive. What made Barbie a standout relative to the rest of your portfolio and is the Barbie retail inventory at low levels or is that more of a general comment for the entire portfolio? Thanks.

Hi Michael, it's Richard. Look we're incredibly proud of the Barbie business and it really continues to resonate with consumers. It's a combination of incredible product, new innovation and cultural relevance as well as real active demand creation and finally new content that's really resonating with our core consumer. The trends for Barbie entering the second half going into fall are incredibly strong. I mean global POS was up more than 35% for the quarter with share gains per NPD, the brand strength is continuing as the number one fashion doll property globally. It's also by the way the number one toy property in the entire U.S. industry for five consecutive weeks per NPD. The strength that we have in for instance a segment like fashionistas today which is the most inclusive and diverse fashion doll assortment is incredibly culturally relevant and provides parents with an incredible play system that really talks about the day-to-day world that we live in and in addition the new innovation segment that we launched called Color Reveal has been unbelievable. We've got more waves, higher price point gift sets and new scales coming. Our estate segment it's been up significantly which is driven by large ticket items like the Dream Plane, Dream Camper and the iconic dream house which is already a top 10 item year-to-date in the U.S. The activity that we've got planned for the back half is strong, incredible new product, lots of great surprises to come from Barbie. So we're very confident in the back half here and to answer the inventory question lean, good inventory, great sets where retailers are open and incredible traction online.

Great. Thank you Richard. Thank you Ynon.

Thank you. Our next question comes from the line of Tami Zakaria of JPMorgan. Your line is open.

Hi, thanks for taking my question and congrats on a good quarter in a very difficult environment. So I also have two quick ones. First one is you're guiding to 150 to 250 basis points of gross margin improvement for the year. So my question is what level of sales do you need to be able to achieve that?

Yes. We haven't really given the guidance on that but we're confident because of the structural simplification takeout that we've done that will impact the back half of the year along with what's going on with raw materials that gives us the confidence that we can deliver that margin over a variety of revenue outcomes.

Got it. That's helpful and then my second question is what's your contingency if retailers have to shut the stores again in the back half if there's a second wave like is the impact going to be as big as you saw in the second quarter?

Well, we did look at different scenarios and obviously continuously analyze the way the market evolves from here but as we said on the call based on the momentum we're seeing right now the positive POS trends and low retail inventories exiting the quarter, we are planning for a strong demand for our products, and expectation of an improved revenue performance in the second half compared to the first half including the holiday season. There is uncertainty that remains in many parts of the world especially as it relates to retail closure particularly in some key international markets. So that is likely to negatively impact the second half relative to prior years but given the strength of e-commerce that remains a growth engine for us and the other initiatives that we are putting in place we feel confident heading into the second half.

Got it. That's super helpful. Thank you so much.

Thank you. Our next question comes from Garrick Johnson of BMO Capital Markets. Your question please.

All right. Thank you. Good afternoon. Hey just sticking with this guidance topic on revenue. So second half should be better than the first which was down 14. So I hope that happens but are you eliminating the possibility of actually being up in the back half? Is that a possibility that you could be actually up?

Well, we're not providing any guidance but our job is to continue to execute well. I think we demonstrated in the second quarter our strength as an operation, the resilience of our brands. We were able to increase our growth margin very meaningfully in spite of the decline and that work continues across the board both on the topline and the bottom line. There is uncertainty and we need to navigate the company in that environment but given our performance we feel confident as I said heading into the second half.

Okay. And American Girl with direct to consumer up significantly, why do we still have stores and what's the plan with the physical locations for American Girl?

Hey Garrick, we're really pleased with the performance of American Girl in the second quarter and specifically given the circumstances related to COVID and the impact that it's had certainly on our retail fleet. Obviously temporary closures and lack of progress that we've wanted to make on our flagship stores has encouraged the pivot to e-commerce which has been incredibly robust. The focus and investment that we've been putting behind our e-commerce and digital strategy is really starting to pay off with almost e-commerce up double digits in the second quarter more than doubling prior year. On the retail front, the retail environment obviously remains uncertain but the evolution of our momentum is going to be channeled into our e-commerce platform and while we continue to evaluate our retail footprint, last week we announced three plans to close three doors where leases were actually set to expire in early 2021. That was Kansas City, Atlanta and Denver. Look these decisions are never easy. Closures are a necessary part to optimize our store portfolio. We'll continue to evaluate the leases as they come up. But as I said we're really encouraged with the e-commerce business and continue to feel a lot of confidence in the back half on American Girl.

All right. Thank you Richard.

To emphasize the point on e-commerce as we said this has been really one of our star performers keep out of our strategy. We saw it growing strongly in all regions. POS more than POS doubling in North America now representing a third of our volume and seeing the momentum continues, it will be something we will talk about more in the future becoming an important part of our growth strategy.

Thank you Ynon.

Thank you. Our next question comes from Steph Wissink of Jefferies. Your line is open.

Thank you. Good afternoon everyone. I'm going to take a second stab at Garrick's question and just ask it differently but if you think about the second half versus the first half, is your expectation that the North American business stays relatively consistent to what you saw in Q2 or do you expect the big improvement to come from acceleration or betterment of some of the declines we've seen in some of the international markets?

Hi Steph. We're not providing any guidance or more detailed breakdown of how we think about the future but I would point to the strong POS that bodes well for the company. The fact that we're able to turn a decline in the first quarter to a high single digit growth across the entire portfolio is a strong message. So our product clearly resonates with consumers. We're able to find cultural relevance and continue to drive performance with very strong execution and we believe we're heading into the second half with momentum across the board both in terms of product and with local execution and as stores continue to open that obviously would be a benefit and with all of that said back to the comment I made earlier there's still uncertainty. So nothing is in the bag.

And could I ask one question Richard for you just on digital marketing and your comments on e-commerce intriguing. How are you thinking about your marketing mix as we go into the back half of the year. I think Joe you mentioned maintaining advertising in that 11% to 13% range for the full year which would imply some catch-up spent in the back half. How should we think about digital versus traditional legacy advertising?

Yes. Steph, thanks for the question but we've been working as over the last couple of years pretty significantly on balancing our demand creation strategies between linear and digital and really feel quite comfortable at this point in our set as well as making pretty tremendous progress against it. We obviously have a shift in an acceleration towards online mobile shopping and a digitally savvy consumer. E-commerce and entertainment continue to blend with new shopping platforms emerging all the time. We've got a really nimble digital marketing organization that's reacting in real time with active demand creation models that are taking advantage of the talent that we have and the landscape that we're operating in and we're going to continue with our demand creation strategies that are working incredibly well right now and I anticipate continuation in the back half.

Thank you.

Thank you. Our next question comes from the line of Arpine Kocharyan of UBS. Your line is open.

Hi, thank you very much. First Anthony welcome aboard and Joe that's really been a pleasure working with you. So I know you said you aren't going to provide guidance on revenue and sorry to go back to this but you are getting into peak production in just a couple weeks here. What kind of volume assumptions are baked into those production schedules for the back half and also could you talk a little bit about demand picture internationally? What was international POS for the quarter? I guess I'm just trying to understand inventory situation there and how that's set up for Q3 given that you didn't ship much there.

So we're not going to help you much on giving you guidance for the second half but we did enter the peak production season. We are balancing our production levels. We're working closely with our retail partners on key drivers and are aligning on the full advertising and promotional program which is something we always do. We will also prioritize production of evergreen products to ensure inventory remains healthy in the new year and entering the second half with the low retail inventories is a good thing. So that sorry again I can't help you much on guidance but with everything I said hopefully it will give you some reference to where how we think about the second half of the year and I'll let Joe answer the question on the inventory.

Well, in retail inventories are sort of down in absolute dollars and down in weeks on hand. So that obviously positions as well for the second half of the year and I'll just reiterate what Ynon said, I mean the one thing our commercial force does is really partner with our retailers and coming up with the plans for the back half of the year, so that as we have to remit a demand signal to manufacturing it's done with a lot of thought before we do that and we still have some time before it actually gets locked in. So we still have some time to see what's going to happen with the virus. In regards to your question, in regards to POS obviously the entire worldwide POS for all brands were up high single digits. North America was up double digits. International was down high single digits but remember that's the aggregate across the globe and some like you know EMEA was doing well as we were exiting the quarter versus where we started the quarter and you sort of saw that it just sort of went across the globe. So you need to take that into consideration.

All right. Makes sense and one more quick follow-up if I may. It seems like POS was up strong double-digit for Fisher-Price. So wondering what drove double-digit decline in sales there and why there's such a wide gap between demand and what you're able to ship? I guess I'm trying to understand why you couldn't ship to demand? Was it all licensed franchises that you're trying to eliminate?

Arpine, Fisher-Price revenues were down but it was in large part due to our Imaginext Toy Story 4 line. We did have positive double-digit POS for the quarter which by the way we have not seen in many years. We are incredibly encouraged by recent POS which shows significant improvement compared to the first quarter and look there's disruption obviously related to COVID-19 but we really do believe in the brand for the long term, remain confident in our plan and progress that we're seeing. As we roll out frankly our new product [indiscernible] new innovation that you're aware of and saw strong year two [indiscernible] we're pretty confident that we will maintain our number one leadership position in the infant, toddler, preschool category and continue to be an incredibly valued partner by parents which is more important than ever today.

Thank you.

Thank you. Our next question comes from Tim Conder of Wells Fargo Securities. Please go ahead.

Thank you and gentlemen congrats on again executing in a difficult quarter and Joe thank you and Anthony welcome aboard sir. A couple of things that has been hit in multiple ways so we'll try, we'll continue on here though. So if we rewind 90 days ago or so not quite you said look Q1 was down 13% or so and we expect Q2 to be down even more significantly and here we are kind of very comparable and now we've got strong POS. we've got trends improving throughout Q2, lean channel inventories and I know there's a lot of uncertainty and the back half of the year is heavier weighted than the first half but can you help us in any way the question was asked should back half of the sales be flat? You're saying it's going to be better than what was down in the first half but just any color I think would be much appreciated and then I guess one other way to an angle on that would be if theoretically all brick-and-mortar were shut down. How much bandwidth could be offset with incremental e-commerce well I guess what’s the excess e-commerce bandwidth or is there any to handle that if we assume that in the back half of the year?

Yes. So without them playing the success and achievement what we have done in the second half relative to expectation, there is still a lot of uncertainty in the second half of the year. There is still a question mark on the extent of retail closure particularly in key international markets. And there is just broad uncertainty with retailers as well managing their inventory more tightly than usual. The important thing and as you know this is foundational is the strength of POS. We know that. We also know that we are able to make product because our supply chain is up and running. So these are two good pieces of the puzzle, an important pieces of the puzzle. And the third is just the uncertainty which we can't control. So we are going into the second half confident. We know we can execute well. We know our brands resonate and we know there is demand. And with that environment we intent to do our best. But given the uncertainty we can't give you specific guidance.

Okay, no difficult questions and fair. Regarding the e-com how much ability would you be able to offset if we saw similar maybe shut downs for the first half or if all of that was shut down? Any color or framing that you could do there as to e-commerce's ability to make up any closures on the brick-and-mortar side

It's really hard to speculate but I can tell you that the market shifted and in many ways accelerated maybe a few years in terms of the way online retail and e-commerce is being consumed and managed. You see both from the supply side with retailers really stepping up advancing their infrastructure and catering for online retail as well as consumers who have a much high propensity now to buy, shop online including all the way to impulse purchase online. So the market is accelerated. We too have shifted our plans and are accelerating our efforts in online, retail and e-commerce and one way or the other we expect to remain a leader and be very proactive in capturing as much values we can from online sales as we have done that consistently for few quarters and even more so in Q2 that just finished.

Okay. Then lastly quick clarifications if I may. The $90 million year-over-year in SG&A is that off of the total reported SG&A? Joe, I think you said adjusted so we just look at that as the core SG&A excluding severance and one time correct?

Yes, the adjusted SG&A will be better by $90 million.

Perfect. Thank you gentlemen.

Thank you. Our next question comes from the line of Greg Badishkanian, Wolfe Research. You line is open.

Hey guys, it's actually Fred Wightman on for Greg. If we look at the gross margin guidance for the full year so up 150 to 250 basis points, I mean that implies pretty wide range of performance in the back half. Looks like it can be down little bit year-over-year. Is the high end of that range versus the low end really just matter of sales volume? Could there be some cost saves that are shifting? How should we think about volumes to that?

So remember you have a couple of things going on. The actions we have taken in the first half of the year that will benefit us in the second half of the year. You will have the tougher comparison because if you think about structural simplification in 2019 it was well back end loaded versus this year and then we do have the uncertainty on the topline.

Okay. And then just shifting the POS, North American POS up double digit this quarter but I think when you guys reported back in late April you talked about U.S. POS was also up double digit. So on the apples to apples basis did that trend improve significantly throughout the quarter?

The trend for that -- could you repeat that?

U.S. POS, I think you guys talked about it being up double digit in late April when you reported.

Yes. So North America across all brands POS was up double digits in the quarter.

And obviously a positive trend from where we were in the first quarter.

All right. But when you guys reported first quarter results I think you talked about April POS and the U.S. was up double digits so double digit to that is sort of a big range did it improve as you move throughout the quarter?

Yes.

Okay. Thanks.

Thank you. Our next question comes from Felicia Hendrix of Barclays. Your question please.

Hi, thank you very much. So just in terms of your caution on the second half, we've talked about that a lot, just wondering if you could maybe call out for us what segments you're most concerned about or is it just kind of more broadly across the board and then Richard I am just also wondering how we should think about Barbie in the second half? You certainly had extraordinary growth in POS. I mean in shipments rather in this quarter and in POS and you kind of walked us through that but would you expect kind of international to pick up in North America to normalize just or just how should we think about this superior growth that we're seeing now?

Yes. Well, let me take the last part of that first Felicia but the Barbie brand for the back half as I mentioned has incredibly strong product programmed as well as brand activations. The expansion of Color Reveal I mean obviously for spring we've done incredibly well. We anticipate with new product even higher price point gift sets and new scales that we're only going to gain more traction in that particular segment. As I mentioned back in New York Toy Fair which seems like a long time ago we were expanding Barbie's family Chelsea, Pets and various other new ways where that piece of our business was going to start to show up on the scoreboard which you will see in also the back half as well we've got an incremental fall Tentpole of entertainment, a new property for us called Princess Adventures which is a new a story that will air on Netflix in the fall with a robust program behind it that will continue to what we believe drive the momentum on Barbie. Last but not least as you know, Barbie is an incredible conversational brand and culture. We've got [indiscernible] inspiring women in careers that we will be sharing in the coming months and so you can imagine the momentum on this brand will certainly continue and we're quite confident in the programming. That being said international will also in our minds start to see the traction as well again the impact of COVID-19 on bricks-and-mortar and retail closures as we've seen as of recent POS incredible momentum in the portfolio particularly on Barbie and with an assumption that things will improve we maintain a great deal of confidence on the programming that we have coming.

Okay and then just as far as the segments that might be most impacted in the second half given your cautious comments?

There's really not a lot of I'd say concerning segments. I think there's an obvious segment within the context of the impact of entertainment. Clearly, action figures has been a challenging category for us as mentioned almost half of the decline of the company in the context of the quarter was due to action figures. We are obviously lapping Toy Story 4 post its movie launch and with the entertainment shift with Minions we've lost that piece of the business for the most part in ‘20 and we anticipate a real resurgence in 2021 on that particular category. There's really not a brand or a segment concern per se as much as conviction around the products and programs that we have currently going to the back half and it's supported by the POS and consumer sentiment that we see showing up on the scoreboards right now.

Great and just the final – you mentioned there's nine movies in development I believe there's a date for masters of the universe but are there any dates for any of the rest for of your pipeline?

No, we haven't announced any particular dates and we continue to do the work. There is impact on the industry as a whole in terms of production schedule and release schedule but we are continuing our creative work. The Wishbone announcement in partnership with the Universal Pictures is one project we talked about. There are more that we're working on and continuing to advance the project we already have in motion. So we're not losing momentum there or notwithstanding the impact on physical production.

Thank you and good luck to you Joe and welcome Anthony there are some folks at Barclays Research who've spoken very highly of you, so look forward to working with you in the future.

Thank you. Our next question comes from David Beckel of Berenberg Capital Markets. Your line is open.

Great. Thanks so much for the question. I just wanted to reach back on a previous question a little bit about recent trends. Obviously, the resurgence in the U.S. has sort of negated some of the progress we had seen throughout the quarter and I think a lot of the positive POS trending would correlate with the openings of retail stores but I'm curious if sort of re-closures in recent weeks and just general hesitance on the part of consumers has caused any sort of backtracking in POS trends?

Sorry David. No, we haven't seen that. If anything the momentum is improving the trend is positive. Again still uncertainty but as we sit here today we're seeing an improving trend.

Great and just as a follow-up, I'm curious here your conversations with very large retailers can you give us any sense for how they're thinking about the holiday shopping season? What are some of the puts and takes they're considering as it relates to order levels? Thanks.

I would point back to what I said before more generally without speaking on their behalf, it's a combination of strong demand, strong POS on one side and uncertainty and wanting to manage inventory smartly and prudently on the other side but for as long as there is demand and strong POS we are on the good side of the equation.

Got it. Thank you.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Kreiz for closing remarks.

As we know 2020 is a year that is being shaped by exogenous and macroeconomic factors. The second quarter results reflect the challenges that we were facing but also demonstrate our execution capabilities and the resilience of our brands. Given our performance, the strong POS trends and the momentum we had exiting the quarter we are confident in our ability to navigate through the balance of the year. We believe we have the assets, the resources and the capabilities that position as well to execute our strategy. Our goals remain the same. We are committed to our strategic roadmap to restore profitability and regain topline growth in the short to mid midterm and to capture the full value of our IP in the mid to long term. We are focused on transforming Mattel into an IP driven, high performing toy company and creating long term shareholder value. I'm grateful for the team's continuing hard work and dedication especially during these challenging times. We hope that you and your families are healthy and safe and I will now turn the call back to Dave to provide the replay details. Thank you.

Thank you Ynon 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 319-0108. Thank you for participating in today's call.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.