Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. David Zbojniewicz, Head of Investor Relations. You may begin your conference.

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 Anthony DiSilvestro, Mattel's Chief Financial Officer. As you know, this afternoon, we reported Mattel's 2023 second quarter financial results. We will begin today's call with the Ynon and Anthony providing commentary on our results, after which, we will provide some time for Ynon, Richard and Anthony to take 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 may 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 into '22. 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.…

Thank you for joining our second quarter 2023 earnings call. Mattel's second quarter financial results were in line with company expectations. But this moment in time will largely be remembered as a key milestone in our company's history, the release of our first ever theatrical movie to a global audience as part of our strategy to expand our entertainment offering and capture the full value of our IP. We will talk more about the Barbie movie shortly. Turning to financials. Sales trends improved significantly from the first quarter, but were down versus the prior year. This was primarily due to the continued impact of retailers managing inventory levels and industry softness as well as comparisons to the year ago quarter, which benefited from retailers building inventories earlier in the season. Looking at key financial metrics for the second quarter as compared to last year. Net sales declined 12% as reported, or 13% in constant currency. Adjusted EBITDA declined $37 million to $148 million and trailing 12-month free cash flow increased by $214 million to $361 million. POS was down high-single digits in the quarter and down low-single digits for the first half of the year. POS continued to exceed shipping. per Circana in the second quarter and year-to-date, Mattel gained share globally and in our three later categories, Dolls, Vehicles and Infant, Toddler and Preschool. Reflecting our strong financial position and confidence in our strategy, we continued to repurchase shares in the quarter and we look to make further repurchases this year. Our retailers have made considerable progress in adjusting their inventories of Mattel products and are below prior year levels. While the toy industry declined more than we expected in the second quarter, we believe consumers are deferring purchases in anticipation of increased spending during the holiday season. However,…

Thanks, Ynon. While comparisons improved from the first quarter, our second quarter financial results were negatively impacted as retailers continued to manage inventory levels compared to the buildup in the prior year. And while we gained share, we saw some overall industry softness. Net sales of $1.087 billion declined 12% or 13% in constant currency, compared to the prior year. Adjusted gross margin of 44.9% was comparable to the prior year and a significant improvement from the first quarter comparison to the prior year. Adjusted operating income was $75 million, a decline of $47 million compared to the prior year due primarily to lower sales. Adjusted EPS was $0.10 compared to $0.18 a year ago. And adjusted EBITDA of $148 million was $37 million below the prior year. We continue to expect consumer demand for Mattel product will be positive for the full year and revenue comparisons to improve in the second half as shipping patterns revert to historical trends. Given our first half performance and outlook for the balance of the year, we are reiterating our guidance, including for net sales growth in constant currency adjusted EPS and adjusted EBITDA. Turning to gross billings in constant currency, first, by category. Overall, gross billings declined 12%, including a 2-point negative impact from Russia. Our POS in the quarter, which excludes Russia, declined by high-single digits. That said, we continued to significantly outpace the industry and gain market share globally. Dolls grew 9%, driven by Disney Princess and Disney Frozen and the global rollout of Monster High, partly offset by Barbie. POS for dollars declined mid-single digits, reflecting overall declines in the category. Barbie declined 7% with POS down low-double digits. Barbie POS continued to be impacted by the shift of promotions to better align with the theatrical release of the…

Thank you. [Operator Instructions] Your first question today comes from the line of Eric Handler with ROTH. Your line is open.

Good afternoon. Thank you for the question. So in looking at Barbie and trying to sort of figure out the growth trajectory for this year, I wondered if you could talk about maybe give us some directional expectations and how much of the growth is from the Toy aisle, how much is increased licensing, and then maybe give us a hint on movie economics?

Yeah. I'll start, it's Richard. Clearly, I’m a Barbie fan, we are incredibly pleased with the Barbie brand performance. I mean the success of the Barbie movie is a milestone moment for Mattel and it really is a showcase for the cultural resonance of the brand. As we've seen, the success is far beyond the film. We've seen POS impacted on our toy business, on our consumer product partner business, which has really begun to accelerate meaningfully. We all see the world is playing with Barbie, whether it's our toys, fashion, accessories or content. I mean there's no doubt that the brand has reached a new level of cultural relevance. Tie-ins to date have been extraordinary with a movie soundtrack, television shows. We've announced over 165 different consumer product partnerships and live experiences. So all in all, it has been just a tremendous moment for the brand. And our guidance includes expectations for significant growth for Barbie in the second half and to be positive for the full year, certainly with the halo effect of the movie and its economics benefiting Mattel over the next several quarters and years. And ultimately, we've never been more confident in Barbie and our Dolls portfolio's future in both the back half and certainly years and beyond.

Okay. Great. And by the way, Richard, congratulations well deserved, and good luck to you.

Thank you.

And on -- maybe you could talk a little bit about the big picture for what's next for the movie business. Does the success of Barbie make it easier to get other films that have been in the pipeline may be greenlit (ph) starting to move forward with -- I don't know -- I have no idea how far along scripts are or where they are in the process. But maybe you could talk a little bit about how to think about that, strike issues notwithstanding.

Yeah. So let's start by saying that from the beginning, this was not just about making a movie. This was about creating a cultural event and leverage our brands in a way that we've never done before. What we saw in this movie with this project and the way the Barbie movie was released and received in the marketplace, it was really a showcase for the cultural resonance of our brands, the way we work, attract and collaborate with top talent and our marketing and demand creation capabilities to create what effectively became a cultural phenomenon. So this is not just about releasing a movie, but really executing our strategy at the highest level. You've been following us for a while. This has been the strategy. This is what we were aiming to achieve. And it's great to see it playing out in that way in real time. We're not saying that every new movie will achieve the same level of success, but we absolutely plan to execute the same strategy, the same approach, the same methodology in collaborating with top talent in inspiring, in amplifying and trusting and promoting top talent and then bringing our marketing machine and demand creative capabilities to create special, iconic moments in culture. And yes, there is momentum right now overall, not just for Barbie, the brand, but for other brands. And of course, even on Barbie, this is not just about one movie. The goal was to create -- to build the film franchise and continue to extend the brand in more ways and success breeds success. We believe we're in a very good place and hope to achieve more with Barbie and other brands.

Thank you very much.

Your next question comes from the line of Linda Bolton-Weiser with D.A. Davidson. Your line is open.

Yes. So I'm just curious, in terms of this year needing to have -- the retailers needing to reduce inventory, did that affect the original plans for how big of a product line for Barbie related to the movie that you actually shipped into retail? I mean was that affected by the macro situation or not versus original plan? Thanks.

No. Linda. There are really two independent issues. In our original and our current guidance, we're anticipating a macro retail inventory impact of 3 percentage points to 4 percentage points. That continues to be our expectation. The movie, toy line is kind of separate from that and it's going very well.

Okay. And then can I just ask about it seemed when you gave the shipment and the POS data for the outside the U.S., Latin America and Asia, it seemed like the shipment growth exceeded the POS growth. So I'm just curious was that – the retail was actually build – rebuilding inventory or should we be concerned because the POS wasn't stronger in those markets? Thanks.

Yeah. We feel good about the performance internationally and I think in both Latin America and Asia-Pacific, they didn’t start with the retailer inventory situation that the other markets did. So we didn't expect to see that divergence, right, that we're seeing more in North America and EMEA where most of that inventory correction actually has occurred. And sitting here at the end of Q2, we believe that the inventory correction is now mostly behind us, right? And this will bode as well as we get into the second half with the expectation that will go back to those historical trends of two-thirds of gross billings happening in the second half and that will certainly support an accelerated growth rate for us in H2.

Okay. And if I could just sneak in one more. So in terms of the Barbie movie, I think you said that in a couple of quarters or something, if the box office was really big, you would share in the economics. And we might actually see it affect your earnings in a positive way. So I guess why given the success of the box office, why would that not be something that could make you raise your guidance for the year? Is it just not material enough?

Yeah. So in terms of the guidance and as Ynon stated, the second quarter results were in line with company expectations. We are reiterating our guidance for net sales in constant currency to be comparable to 2022. And as I mentioned, this includes the retail inventory headwind of 3 points to 4 points. And if you break down our guidance, it implies significant growth in the second half, including for Barbie, which we expect to be positive for the full year. That said, in the context of our overall portfolio, some industry softness we saw in Q2. And given it's still early in the year, we've got two-thirds of our sales still to go, we are maintaining our guidance. That said, we're off to a good start in Q3. Q3 quarter-to-date POS for the total company is now positive as well as for Barbie, and we continue to outpace the industry and to gain market share.

Okay. And let me slip in a congratulations to Richard. Good luck.

Thank you, Linda, very much.

Your next question comes from the line of Stephen Laszczyk with Goldman Sachs. Your line is open.

Hey. Great. Thank you. First on Barbie, Ynon. I was wondering if the success of the Barbie movie this past month has changed the way you look at capital allocation at all. Are there opportunities that you think make more sense today, perhaps committing more capital towards future media productions or acquiring other forms of IP that you think make more sense today than they may have a few months ago?

Okay. At this point, we still absorbing and amplifying the initial rollout of the movie. It's early to comment on further plans. We're not changing strategy in the near term, but as we continue to strengthen our balance sheet and drive more cash and see a significant increase in cash flow, we continue to look for ways to invest in organic growth, always in the interest of our shareholders. So whatever we did the most prudent and impactful way, risk adjusted strategy to amplify return for our shareholders.

Got it. And then maybe one for Anthony. You called out overall industry softness in your prepared remarks. I was hoping you can maybe unpack that a little bit more for us. What areas of the retail market are you seeing the most softness in? Looking ahead, I'm curious if there's anything you're hearing specifically from your retail partners that gives you confidence in achieving your top line guidance for the year? Any commentary around that would be helpful.

Yeah. So as we've said, we are seeing some industry softness. We believe that consumers are deferring some of their current purchases and intend to spend more in the second half and the holiday season. And that’s why we are calling for a positive holiday season, with the inventory correction now behind us, we're working closely with our retailers to meet the demand, the anticipated demand for our product in the second half. So we think we're in a very good position and look forward to the holiday season.

Great. Thank you.

Your next question comes from the line of Jason Haas with Bank of America. Your line is open.

Hey. Good afternoon and thanks for taking my questions. It sounds like there's an incremental to -- I think you called out a 2 percentage point benefit from FX. So I guess my question is, why not raise the EPS guidance on the back of that? Is there anything that's incremental that's going to pressure EPS that wasn't contemplated in the guidance before?

Sure. Look, inside of our gross margin, there are always kind of puts and takes. We had already anticipated some uplift from foreign exchange. Now we're quantifying it for you that -- based on current exchange rate, it's a 2 point positive to the top line, but there are other puts and takes and at this point, we are reiterating the guidance, which is 47% on the year. And given our first half, that does imply significant gross margin in the second half, which will come from a number of factors, continued savings on our optimizing for growth program, the benefit of the top line. We're wrapping some one-time inventory management costs in Q4 of last year and those all kind of factored in. So we feel good about where we are and the second half.

That's great. Are you able to give any color on what the cadence of revenue should look like between 3Q and 4Q? Will those also follow a normal seasonality?

Yeah. I think you'll see more of an acceleration in Q4, as we wrap the atypical inventory decline that happened in the fourth quarter of last year.

Great. Thank you. And if I could squeeze one more in. Just on the Barbie movie, it sounds like things are off to a really good start. There's always this big question around this movie just because it's geared towards an older audience. The question was around how well the toy sales would do alongside it? So I know it's early, but is your initial -- the initial read that you are seeing those incremental toy sales alongside the movie? And then how about from the retailers? Are they seeing the success of the movie at the box office? And are they increasing their orders for Barbie at this point?

The initial take-up in movie related product has been selling out very fast. We've said that before. In terms of the actual toy brands and over 165 retail partnerships that we've had, so we've seen very strong success of that. We haven't commented yet on Barbie classic toys, which is what is factored into our full year guidance. But all in all, the -- we're clearly seeing a halo effect of the movie. But important to say that the -- this is not just about the quarter or about the year, this is about long-term franchise management. And we absolutely expect to see continued momentum with the brand on the back of such a strong initial release. And what is interesting to note is that with this move, we're seeing a real expansion in fan base, more male audience that go to the theaters. We're seeing very strong performance internationally. This is important to say because there was some commentary before the movie release, the people thought it would be more successful domestically in the U.S., but we're actually seeing -- in spite of -- on top of the success in the U.S., we're seeing a very strong performance internationally, and this is before Japan even release, which will happen in August. So within the movie store there is some very important indications about the strength of the band, the take-up and the continued expansion of the fan base and audience overall.

That’s great to hear. Congratulations on the success you’ve been having.

Thank you.

Your next question comes from the line of Arpine Kocharyan with UBS. Your line is open.

Hi. Thank you. This is Arpine. This is probably a question for Ynon. You are approaching peak production period, I believe, right around August. What goes into that thinking in terms of upside and downside to your plans? Buyers seem to be very cautious on inventory. At the same time, they are in some cases, running below target in stock levels, at least in toys, yet not taking inventory. Do you see a risk that some of that cautious outlook that the retailer maintains sort of has the potential to be reflected in their purchase orders? How do you think about that?

Thanks, Arpine. We continue to work collaboratively with our retail partners. This is what we do every year. This is what we do as we head towards the production season and all important holiday period. We continue to monitor the market. We receive input and data points from retailers all over the world, from our own people on the ground in every major market and look to continue to adjust and reflect that in how we map our plans going forward. The -- overall, the fundamentals are strong. The portfolio is very well balanced. We're seeing strength in -- not just in Barbie, but we talked about Hot Wheels a lot. Hot Wheels is on track to achieve its sixth (ph) record year. We have some important incremental drivers that we haven't had in past years, including Disney Princess and Frozen, Disney's Wish, Trolls. Monster High is rolling out globally. We've talked a lot about the Barbie movie. And that in itself will have its own potential momentum -- expected momentum. And of course, the continued strength across the portfolio. So we are not done. We look to continue to drive the business going forward. We just announced another partnership with Warner Brothers to grow our third-party licensing business as well. So expect to continue to outpace the industry, gain market share and achieve our full year guidance.

Thank you very helpful. And then would be able to size how meaningful could consumer product partnerships be for your profitability over time. I think you said more than 160 for Barbie franchise alone. How should we think about the opportunity over time because, obviously, that can be a very high margin business for you?

Right. You said it right. It's a very high margin business. We continue to look at the Barbie movie as a template. We think of it as a template in terms of our ability to execute such comprehensive program of consumer product partnerships. And what is interesting in one of the takeaways of the success of the Barbie movie is our ability to execute our demand creation expertise outside the toy aisle. As a company, our focus to date has been doing that within the toy side of the business and now we were able to take -- bring that expertise into amplifying the movie and turning it into a cultural event. Of course, it starts with having a great movie, reflecting the creative vision and masterful execution of a great picture by Greta Gerwig, having superstar cast with Margot Robbie and Ryan Gosling (ph), having an amazing sound track that is now becoming an album and an experience in and of itself produced by Marc Ronson. But -- and of course, Warner Brothers in terms of their incredible marketing campaign and everything they brought to the table. But it is also very much about our expertise in amplifying all of that and turning it into a cultural event and continuing to drive business, important business outside of our core toy expertise.

Great. Thanks. And just really quickly for Fisher-Price. What are some of the underlying reasons the brand is still under so much pressure? How much of that decline is sort of clean up to shift to more profitable SKUs and get out of, for example, BabyGear, if you can quantify that quickly?

Yeah, Arpine. It's Richard. First off, Mattel outperformed the category. We gained 60 points -- basis points of market share year-to-date. We are the number one toy company globally in the category of Infant, Toddler and Preschool. We did decline in the second quarter, but it really reflects the impact of retailer inventory movements and the overall category weakness, we continue to expect trends to improve as we progress through '23. We're supporting it by Imaginext, expanding its core audience with the release of Trolls later this year, which we're really excited about. We've got continued expansion of Little People that's gaining more and more momentum with our core brands, Barbie and Hot Wheels, which have extended into that property. We've got new strong innovation that is planned for the back half with great demand creation to support the brand. So there's a lot in the pipeline for Fisher-Price. Of course, we believe in the brand, its position in the market. the opportunity to grow. We'll continue to optimize the category that we're in, both in revenue and most importantly, profitability to extend our leadership position.

Thank you. Thank you, both and congratulation on Barbie success and all the best to you, Richard.

Thank you, Arpine. Thank you.

Your next question comes from the line of Fred Wightman with Wolfe Research. Your line is open.

Hey, guys. Thanks for the question. I just wanted to ask about the inventory correction time line. It seems like that got pushed out a little bit versus what you guys were expecting last quarter. So wondering what if anything changed? And then just how we should rationalize that with the gross margin impact that we saw? I mean, it was a pretty big sequential change in terms of what you called out that was tied to inventory closeouts. So how does that all work?

Sure. I would say the retail inventory situation is unfolding as we expected, right? We made some progress in Q1. We made further progress in Q2. We ended the quarter with retail inventory levels down double-digit percent in dollars and a high-single digit percent as measured in weeks of supply. And we certainly had less inventory management costs in Q2 than we did in Q1. So as we sit here today, we would say that the correction is mostly behind us. And what that means looking ahead, as gross billings are expected to return normal patterns with two-thirds in the second half, we should see an accelerated growth rate, particularly in Q4, as we wrap last year's movement.

Okay. And then there was a comment about some of the POS impact in 2Q as far as consumer shifting spending to the holiday. What exactly is informing that view? Is it tied to survey work or what are you sort of basing that on?

Yeah. It's based on our own internal research that we do every year in terms of talking to consumers and trying to understand how they're thinking, why they're making purchases or not making purchases. But I would also say -- I would also add to that. I think the economic data also supports what we're expecting in terms of -- consumer spending is expected to increase in the second half. Unemployment remains low. Inflation seems to be subsiding and consumer sentiment seems to be on the ride, if you look at a number of indices as well.

Makes sense. All the best, Richard.

Thank you so much.

Your last question today comes from the line of Drew Crum with Stifel. Your line is open.

Okay. Thanks for squeezing me (ph) in and Richard, best of luck, and congrats. My first question is how does the current Hollywood labor disputes impact your business this year or is this something that if it lingers as more of a headwind in 2024?

It is delaying some projects that are in development, but we've made significant progress before the strike, and we expect to continue to make progress after the strike. We're watching the space and we'll manage accordingly.

Okay. And then, Ynon, I think you responded to a question concerning the entertainment strategy in light of the success you've had with Barbie to date. I wanted to drill down maybe a little bit further on that. Maybe it's a little bit premature to be asking this, but given the film hasn't been in release for more than a week, what are your thoughts around what's next for Barbie theatrically. Do you intend to sequel a film? Do you -- can you do spin-offs? Can you improve your participation or economics on the next project? What's next for Barbie?

We haven't announced anything and it's probably a bit early to talk about sequels. But obviously, with the success of the film with a phenomenal release less than a week already at well north of $400 million of box office and very strong momentum and as I mentioned repeat viewing and broad demographics, very strong global performance, that would invite more opportunities. We operate in an industry where everyone is looking for this moments, for these brands, for these cultural events. And they don't -- they happen, but they don't happen often. So we're very proud to be the owners of such an important, iconic brand. We should remember that Barbie has been already successful before the movie, very -- the number one brand for two years in a row, globally. And last year was number two only behind Pokemon, but continuing to show strength on very strong footing. So we expect the brand to continue to grow. We expect to have more opportunities in content. And this is not just film, but also television and other areas where we continue to engage people who are -- have an emotional connection with the brand. And on this, I just want to make the point that the biggest shift in our strategy and in our DNA was to realize that people who buy our product are not just consumers, they are fans. And once you have an audience, the more opportunities open up to engage with your fans in many ways and continue to create value from that engagement. So expect more. Too early to talk about sequel specifically, but we absolutely believe there are more opportunities to continue to extend the Barbie brand.

Okay. Thanks.

This concludes our question and answers for today. I now turn the call back to Ynon Kreiz for closing remarks.

Thank you, operator, and thank you, everyone, again, for your questions. Always a good discussion. I would like to close by congratulating the Barbie and Mattel Films teams and the entire global organization on the milestone moment we achieved together in bringing Barbie to life for the first time on the big screen in live-action and advance our entertainment strategy. Congratulation again to Lisa McKnight, Josh Silverman and Chris Down and their well-deserved promotions. We look forward to their continued strong contributions to Mattel. And of course, thank you, Richard for helping to make Mattel the company it is today. You will be missed. You're a friend, you're a personal friend to me. You're a colleague will always be friends, of course. We are going to miss you, but we wish you all the best in the new role and thank you for everything you've done. And now I'll turn the call back to Dave.

Thank you, Ynon, and thank you, everyone, for joining today's call. A replay of this call will be available via webcast beginning at 8:30 p.m. 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.

This concludes today's conference call. You may now disconnect.