Ynon Kreiz: Yes, Arpine, thank you. We talked about our M&A approach before – consistent with our capital allocation strategy, we are going to – first of all, when it comes to deploying capital, first of all, it’s about organic growth and maintaining our investment grade rating with a leverage ratio between 2 times and 2.5 times debt to adjusted EBITDA. Now with our strong balance sheet and significant cash balance, we have the flexibility to look at more opportunities to grow the business, and this is M&A and share repurchases. As it relates to M&A, the criteria is going to look for opportunities that are strategic, that are accretive, that will help us improve our growth profile and create economic value for our shareholders.
And the terminology we used in the past, the way we said is that we are looking to do things that will be obvious to our investors. We’re going to be smart, methodical. We work very hard to put the company on a very strong financial footing as we are today. And we will make sure that we will not change that if we do an M&A or pursue external opportunities for growth.
Arpine Kocharyan: Thanks. very much.
Ynon Kreiz: Thank you.
Operator: We will take our next question from Jim Chartier with Monness, Crespi, Hardt. Your line is open.
Jim Chartier: Hi. Thanks for taking my question. Anthony, the deflation is a big driver of gross margin in fourth quarter. Can you just kind of walk through the drivers of that? And then how does that play into the gross margin outlook for 2024?
Anthony DiSilvestro: Sure. As you saw in our bridge, we increased gross margin 570 basis points in the fourth quarter and 340 of that was deflation. So we did see deflation in both logistics, primarily ocean freight as well as on our resin cost, and that’s coming through in the P&L in the fourth quarter. Mean together with lower inventory management costs and cost savings and favorable mix, we feel really good about where we ended on gross margin. As I look to the full year, right, inflation was a slight benefit, primarily driven again by ocean freight and resin. And as we turn to 2024, we do expect 100 to 150 basis points of gross margin expansion. And the two primary drivers are actually savings from our Optimizing for Profitable Growth Program as well as fixed cost absorption benefits as we resume normal production levels following the pullback in 2023, and those will be partly offset as we wrap some of the Barbie movie related benefits.
We don’t expect inflation/deflation to have a material impact in 2024, although we do expect to see favorability in ocean freight. We do see a headwind on wages and salaries within our cost of goods sold line. And then in terms of phasing, probably some deflation in the first half and that reversing in the second half.
Jim Chartier: Thanks. And then you highlighted the Mattel163 growth in the year. Could you just kind of walk through that business, what is kind of the growth going forward for that business? And then I noticed that the equity income line was actually down for the quarter and year despite the revenues growing for that business. So just curious why the profitability is lower?
Anthony DiSilvestro: Yes. So we have been very successful with our Mattel163 business. Sales grew to almost $200 million in 2023 inside of the joint venture with – behind the success between Uno, Phase 10, Skip-Bo. The reason on the P&L that our earnings from equity affiliates is down slightly is that we are making investments in that business, both marketing current gains and development costs around innovating around future gains.
Jim Chartier: Right. Thank you.
Operator: And we will take our next question from Stephen Laszczyk with Goldman Sachs. Your line is open.
Stephen Laszczyk: Hi, great. Thank you for the question. For Ynon or maybe Anthony, on Barbie, could you perhaps impact some of the underlying assumptions in your outlook for the brand in 2024? I think you mentioned that you expect sales to be down year-over-year. I appreciate that there is the $150 million revenue hard comp from the movie last year, but maybe adjusting for that, to what degree do you expect to see any sustained momentum from the brand in 2024? Thank you.
Ynon Kreiz: Yes. Hi, Stephen, the Barbie had a very strong finish for the year with the fourth quarter growing 24% and this was across the brand, toys and the benefits associated with the movie. The movie continue to play very well, was a cultural phenomenon, it lifted the brand. It brought in the audience, and it played well also with adults and especially with collectors. Within that, the Barbie DreamHouse had an excellent year as well. And Barbie as a whole continued to gain share and perform very strongly. A lot of it was due – was related to the movie. It was the benefit of the movie, but not only. It’s just the strength and the cultural resonance of the brand. And we did a lot of work around that, to make sure we capture the moment and build on that.
In 2024, we will be celebrating Barbie’s 65th anniversary, with a lot of activations around that and more products that will celebrate the brands past and future. We are looking to leverage the broader audience to launch new products, especially for adult collectors and trying to reach and engage pop culture fans and also reach all the kids and brought in the audience after the movie success. We also expect to see shelf space expansion in the second half, and more customized product line that we will support with a unique system of play that we will talk more about in our March investor presentation. And separately from that, there will also be content on Netflix that will continue to play – offer the drumbeat of the content engagement with fans around the brand.
Stephen Laszczyk: Great. Thank you, Ynon.
Ynon Kreiz: Thank you.
Operator: And we will take our next question from Christopher Horvers with JPMorgan. Your line is open. Please check your mute button.
Christopher Horvers: Thanks and good evening. So as you think about – I have two questions. So, first as you think about like the excess inventory that is in the market. Can you talk about where you’re seeing that in terms of what categories? And then as a follow-up, as you think about the prospect for your cost deflating, do retailers typically try to go and recapture some of that in terms of better pricing or better margins? And is it your expectation that, are you planning for these current freight rates to sort of stay intact at these levels into the back half of the year? Thank you.
Anthony DiSilvestro: Yes. As it comes to the retail inventory levels, as we said, they are slightly elevated. I think slightly is the key word there. And I can’t point you to any specific category or any geographic region where we have the issue. It’s not that significant. As we said, we made significant headways in bringing down retail inventory levels in 2023. And in fact, as we wrap it, it’s going to be a tailwind in 2024. As it relates to your other question, if you go back in time, we have experienced significant cost inflation over the last several years. And it isn’t until the second half of 2023, that we actually saw some deflation come through. And so in terms of working with our retailers, we will manage the situation accordingly. We don’t plan for any broad-based pricing changes in 2024. And again, work closely with our retailers on this front.
Christopher Horvers: Got it. And then just in terms of the – how you’re planning for freight rates. Obviously, there’s a lot of noise in the world, and ocean freight rates are up globally, not like they were certainly in 2021. But I guess, how are you planning for freight rates? And is that – are you expecting them to remain elevated through the back half of the year when a lot of the shipments start churning through? Or how do you manage that sort of contracting versus spot process?
Anthony DiSilvestro: Yes. This is a situation. Obviously, we’re monitoring very closely. I would say, to-date, it has not had a material impact. And we’ve made some assumptions around ocean freight declining in 2024 versus 2023. But like I said, we’ll continue to watch what’s happening.
Christopher Horvers: Thank you.
Operator: We will take our next question from Megan Alexander with Morgan Stanley. Your line is open.
Megan Alexander: Thanks very much. I wanted to go back to James’ question at the beginning and just your comments on lapping the destock being a tailwind this year. You’re guiding to flat sales, you quantified $125 million of Barbie related movie sales. So if you have to kind of – if we assume you give that back this year, that more or less implies underlying, call it, low-single-digit sales growth. You’re talking POS expectation, I think, is flat. So is that, call it, 2% benefit, the tailwind from lapping the destocking? And just from a timing perspective, you’re saying we’re back to more historical shipping patterns, the – but retailer inventory is slightly elevated. So do we see that two points in the first half, just given the lap or is it or the back half opportunity?
