Megan Alexander: Okay. Thank you.
Ynon Kreiz: You’re welcome.
Operator: Your next question comes from Eric Handler from ROTH MKM. Please go ahead.
Eric Handler: Good afternoon. Thank you for the question. Anthony, wanted to just talk a little bit about the cash flow statement. Your cash flow from operations was nicely positive. I think that’s the first time that’s happened since 2014, a huge swing year-over-year. Yes, net income loss came way down, but there was also a pretty significant working capital benefit. If you’re keeping your free cash flow guidance unchanged around $500 million, no change to CapEx. Does that mean the working capital benefit that you received in 1Q will progressively unwind in the back — in the remaining quarters of this year? How do we think about that?
Anthony DiSilvestro: Yes. A couple of points. One is, there is some timing inside of our working capital performance and I’ll point to two things. One is related to incentive compensation. We didn’t accrue incentive comp for 2022, we did for 2023 and we’re going to pay out the 2023 incentive in the second quarter of 2024. So we ended the first quarter with an accrued liability with respect to that program. That was a benefit. There’s also some timing related to our inventory performance. Our owned inventories were down significantly in 2023. We’re going to maintain those levels in 2024. So less of a benefit. So those kind of will unwind as we go through the year, which is why we’re still guiding to that $500 million 2024 free cash flow generation.
Eric Handler: Very helpful. And then secondly, I imagine Barbie held up pretty well in the home entertainment window. I wonder if you’re willing to sort of parse out the impact of ongoing — Barbie movie contributions? And how do we think about that for not just 1Q, but the rest of this year?
Anthony DiSilvestro: Yes. I would say it’s not material to our overall results. There is some carryover benefit. But again, I wouldn’t say it’s material.
Eric Handler: Thank you.
Operator: Your next question comes from Christopher Horvers from J.P. Morgan. Please go ahead.
Christian Carlino: Hi, good afternoon. It’s Christian Carlino on for Chris. Could you speak to how retailers are planning early holiday orders? And are they looking for more value? And do you expect the ASP or deflationary pressure in the category to continue at retail?
Ynon Kreiz: Yes. It’s hard to get too specific. At this point in the year, we are certainly engaged with all of our major retailers around planning for the upcoming holiday season around product price point, shelf space, promotions, advertising. So it all goes into the plan. And we believe we have a robust plan with those — with our retailers and are optimistic regarding the holiday season, but a bit premature to talk about specific orders.
Christian Carlino: Got it.
Anthony DiSilvestro: Yes. One thing I would add when it comes to — when it comes to pricing is that we have such a large portfolio and such a broad range of product that we really cater for all level of pricing and this is one of the strength of managing a large portfolio like ours that we really can partner with the retailers at different price points and offer something for consumers at all price levels.
Christian Carlino: Got it. That’s helpful. And were you able to recapture any of the fixed-cost absorption impact in the first quarter? And how should we think about the phasing of that over the year now that we’re back to normal seasonality and POS trending in line with shipments?
Ynon Kreiz: Yes. I think it’s more in the year to ago period and not so much in the first quarter. So as we ramp up production going into the second quarter and third quarter, that’s when we should see that absorption benefit.
Christian Carlino: Got it. Thank you very much.
Operator: Your next question comes from Stephen Laszczyk from Goldman Sachs. Please go ahead.
Stephen Laszczyk: Hey, great. Thank you for taking the questions. Maybe just a follow-up on the retail sentiment at the moment. I’m curious if you could just maybe talk a little bit more about what you’re hearing from your retail partners on the consumer and the demand side of the equation at the moment and how that might compare to what you expected coming into the year. Any pockets of the industry that are maybe outperforming or underperforming your expectations so far?
Ynon Kreiz: Okay, I would say so far things are in line with expectations. Retailers are leaning in. We always talk about the importance and strategic value that retailers are putting on this category because it’s experiential, it drives food traffic, the items are affordable and you play into a fundamental human behavior that of play that is not going away, especially when it comes to big brands and quality product. What we’ve seen so far is that as we’ve said in the prepared remarks is that we believe the industry benefited from — in the first quarter from an earlier Easter and year-to-date through mid-April has been comparable to last year. But we do expect some decline in 2024, although at a lesser rate than last year. The decline is due to the same factors that impacted 2023 in terms of a lighter theatrical film slate and the impact of a shift in consumer spending towards a product — sorry, towards the experiences and services, but that trend is moderating and we believe it will further improve when that the industry will return to growth and continue to grow over the long-term.
We do expect to outperform the industry. We did see a positive consumer demand with the improving trends that we talked about, we expect to outperform the industry and gain market share for the full year.
Stephen Laszczyk: Got it. Thanks for that color. And then maybe just a follow-up. On to the extent you’re willing to expand on the M&A point, is there any type of assets or features of assets that you’re particularly considering at the moment or think would be best-suited for Mattel’s strategy at this point? I think in the past, you said you were not looking to do something that would surprise the investment community. Any sense of what that means?
Ynon Kreiz: Yes. What we did say is that to the extent we are looking at M&A opportunities, we would expect them to be additive and very much in line with our strategy and ways where we can accelerate our strategy. We did say that we — where we look at acquisitions, we are very mindful of the risk in implementing an acquisition successfully. And if we do something, we would expect it to be accretive, additive, strategic and we always use the term obvious in that we wouldn’t expect the market to be surprised, not by the type of asset and not by the price we would pay, in terms of being disciplined financially and commercially. We worked very hard to put the company on a very strong financial footing. The company today is in the strongest position it’s been in terms of balance sheet, cash generation, leverage ratio at investment grade.
So we covered a long distance and we wouldn’t risk that. And so the message is we’re being very thoughtful and prudent. And as I said before, the fact is that so far we chose to spend $300 million on our own stock rather than buy other assets. And so we are taking everything into consideration all under the heading of long-term value creation for our shareholders and adjust that for risk.
Stephen Laszczyk: Great. Thank you.
Operator: Your next question comes from James Hardiman from Citi. Please go ahead.
James Hardiman: Hi, thanks for taking my call. So I just wanted to connect some of the dots that you guys have given us here. So you guys put up a flattish top line in the first quarter. Our full-year guidance is for flattish top line. Obviously, we shouldn’t expect it to be flat every quarter. But Anthony, you talked about two different issues that are going in opposite directions, right? You’re lapping the retail inventory decline and then you’re — which should be a benefit and then you’re lapping the Barbie benefit, which should be a headwind. Am I reading too much into this to think that the bigger piece of that benefit will come in Q2 and the bigger piece of that headwind will come in Q3? So we should see a growth in Q2 and a decline in Q3.
I’m just looking at consensus numbers, the Street is assuming that Q3 is going to be down pretty meaningfully. I’m just wondering if you think you can — if that’s right and if you think you can offset that with some growth in Q2.
Anthony DiSilvestro: Yes, without getting too specific on any given quarter, certainly the Barbie wrap will be predominantly in Q3 and to a lesser extent in Q4. And directionally, the benefits of the inventory — retail inventory wrap probably should be more in Q2 than Q3.
James Hardiman: Got it. And then I guess just more broadly, I mean, literally nothing changed in your guidance. I don’t want to assume that everything has gone as planned over the past three months, but you did meaningfully beat our estimates at least on the bottom line. I think sales were a little worse, but certainly, margins were significantly better. I’m curious if you think just the Street was mis-modeling the first quarter or whether the first quarter was actually in some ways better than you would have expected and maybe it was just some timing as to why that didn’t flow through to the full year. Just trying to sort of tease out how much of the beat versus our expectations and the non-raise is conservatism versus timing versus just we weren’t thinking about it right. Thanks.
Anthony DiSilvestro: Yes. So as you know, we don’t get too specific on any individual quarter. I mean, we certainly saw strong margin gains in the first quarter. And we are reaffirming our full-year guidance, right, for net sales to be comparable on constant currency for adjusted gross margin to be up 100 basis points to 150 basis points. So again, we’re off to a good start there. And EBITDA, $975 million to $1,025 million, and for EPS to be up double-digits. So again off to a good start and confident that we will get to achieve this guidance.
Ynon Kreiz: And I would add, James, that in the context of a soft industry, we look to continue to gain share, as we said. And the emphasis for us this year is about profitability, gross margin expansion, and free and strong cash generation to continue to strengthen the company and position it for long-term growth and we expect to resume growth at the top line and bottom line, but just emphasizing the top line in 2025.
James Hardiman: Got it. Thanks, guys.
Ynon Kreiz: Thank you.
Operator: Your next question comes from Linda Bolton-Weiser from D.A. Davidson. Please go ahead.
Linda Bolton-Weiser: Yes, thank you. So I was curious, I just — I noticed in your results, I think unless I missed it somewhere, the American Girl sales were not really broken out separately. And also you moved Imaginext out of Fisher-Price into the kind of other category. So maybe you could just kind of comment if there is any meaning behind those things. Is Imaginext going to be discontinued or is it just going to be out-licensed or what exactly? And then American Girl, what are the plans there? And how did it do in the first quarter? Thanks.
Ynon Kreiz: Hi, Linda. Yes, we did, as you know, made American Girl now part of North America commercial. So it’s not isolated or not segmented out as before. It’s part of our North American business. But we did — we did say that we are progressing our strategy on American Girl and grew in the first quarter. It is a valued asset within our portfolio with significant fan base and great product and we feel very good about it and was good to see growth in the first quarter. We outpaced both large doll and total doll categories in the U.S., led by the core 18-inch business, which was up double digit. So we are encouraged by the strong start of the year and confident in the future of these treasure brands with more innovation and more execution and continued improvement of our retail footprint and flagship stores.
Imaginext is now part of the of Preschool Entertainment. This is part of the Infant, Toddler, Preschool category that is driven by brand and character versus Fisher-Price, which is more product-driven. And it will now be when we talk about the category, Infant, Toddler, Preschool category, we will talk specifically about Fisher-Price as the power brand, that as we said earlier includes Infant, Toddler, Little People, and the new wood line. We’ll talk about Preschool Entertainment. And separately, as you know, there is the third bucket of Baby Gear and Power Wheels, which we are exiting or out-licensing that you will see declining over time.
Linda Bolton-Weiser: Okay. And then I was just curious, you had mentioned — you referred Tier 1 — your manufacturing plant closure in China. And I was wondering, can you comment on your percentage of manufacturing in China, how it stands today versus, say, three and five years ago? And kind of what is the longer-term plan for that? Just a lot of investors are asking about different exposures to China, both you know, on the manufacturing side and what that could mean? So what are your thoughts on that topic? Thanks.
Ynon Kreiz: Yes, we — today, we are at about 50% of products that are being made in China. Industry average is between 80% to 85% and we now at 50% and declining. It’s on the way down. And this is not — it’s not so much about geopolitical risk as such, but more about diversifying our footprint and working in different countries and continue to optimize our footprint in terms of cost, fulfillment, services by different suppliers and part of our journey to continue to strengthen our supply chain, which is now a competitive advantage for us, but we believe we can continue to improve it even further. And as you know, about 70% of our optimizing profitable growth program will come from cost of goods sold, which is, you know, directly driven by the performance and improvement that we’re driving in supply chain.
Linda Bolton-Weiser: Okay. Thank you very much.
Ynon Kreiz: Thank you.
Operator: Our last question comes from Jaime M. Katz from Morningstar. Please go ahead.
Jaime M. Katz: Hi, guys. Thanks for squeezing me in. I would be curious if you have any insight into demand across price points. Are there different demographics that you’re seeing that are really struggling to convert the sale or is there anything else consumer-wise that might be helpful to understand?
Anthony DiSilvestro: Yes, I would say it’s too early in the year to comment. We’re not seeing any specific trends in that regard. And as Ynon stated a few minutes ago, you know, our portfolio is well-positioned to compete across all price points from a single diecast car to a Barbie Dreamhouse, right? So we have a great portfolio and we are developing our plans with our major retailers and now look forward to executing them [indiscernible].
Jaime M. Katz: Okay. And then just because you haven’t discussed it in the past, now that there is another adventure park coming out, are there any economics of that you could share with us? I just — I don’t know how many locations that could ultimately be or what that total addressable market is. So any insight on that would be helpful.
Ynon Kreiz: Yes, we haven’t broken down the economics, but we did say this is a capital-light approach where we license our brand and participate in different forms in the economics of the park and of course, can sell products there. This is a highly accretive business line, especially given the strength of our brands. And we do look at this area as an important growth lever and expect to have more location-based entertainment opportunities, in addition to the two parks that we already announced. And the other executions we talked about during the Investor Day, such as the Monster Truck tour and other opportunities. But this is — this is the strategy to take strong brands that drive engagement and have a large fan base and capture value outside of the toy aisle in highly accretive business opportunities.
Jaime M. Katz: Thanks.
Operator: That concludes the question-and-answer session. I will now turn the call back over to Ynon Kreiz for closing remarks. Thank you.
Ynon Kreiz: Thank you, operator, and thank you, everyone, for joining us today. As we said, we are off to a good start for the year with positive consumer demand, significant gross margin expansion, and very strong improvement in cash flow, which is exactly in line with what we were aiming to achieve. We expect to outpace the industry and gain market share in 2024 and are on track to achieve our full-year guidance. We continue to successfully execute our strategy to grow our IP-driven toy business and expand our entertainment offering and are very well-positioned to create long-term shareholder value. Thank you for listening today. Of course, we’ll follow up over the next few days and answer any more questions, but we appreciate the time. And now I’ll turn the call over to Dave.
David Zbojniewicz: Thanks, Ynon, and thank you everyone for joining the call today. A replay of this call will be available via webcast beginning at 8:30 PM Eastern Time today. The webcast link can be found in the Events and Presentations section of our Investors section of our corporate website, corporate.mattel.com. Thank you for participating in today’s call.
Operator: This concludes today’s conference call. Thank you for your participation and you may now disconnect.
