Mattel, Inc. Goldman Sachs Global Consumer and Retail Conference

Thank you, Steven, for inviting us. Always good to be here.

Sure. Let us take a big picture view of the toy industry as a whole, which is having a very strong year. The toy industry as a whole is growing double digit. In fact, this is broad based. The primary drivers are games, trading cards, action figures, vehicles, and building sets. As a whole, the industry is growing strongly. In fact, according to Circana, which tracks 17 different general merchandise retail categories, toys is by far the largest driver. Even when you take out trading cards, which benefited from the World Cup, toys as a category remains a very strong driver. We have talked about it before. Toys is a growth industry. The industry has grown in 23 out of the last 25 years, and it plays into a fundamental human behavior.

It's a strategic category for retailers, and we expect the toy industry to remain healthy and continue to grow. That growth, by the way, is driven both by units and price so far year to date. Within this environment, we are also seeing growth and momentum in our business in consumer demand, which is positive quarter to date. We are seeing growth across categories driven primarily from Mattel by vehicles and action figures, and in some areas that are importantly becoming a key part of our portfolio, including building sets and Mattel Brick Shop. We are very confident about continued growth and expect to achieve our full year guidance in this environment.

Sure. Happy to talk about how the cadence of the year we've evolved. Overall, as we say, we are reiterating guidance. We are confident in what we are seeing in the balance of the year. There are some puts and takes, as you well say, and it's more a matter of how things will evolve between Q3 and Q4 rather than how the full year will look like. If I go down the P&L, if I start with the top line, we have a wonderful array of activations for the balance of the year. That will certainly be a driver. On the other side, given the shift in retailer ordering patterns that we observed last year, now they're largely stabilized, but that will shift sales more toward the fourth quarter.

What you will see is more of a back-loaded towards Q4 sales momentum, but it's also substantiated with the activations that we're seeing, with the movie slates that we're seeing. All of that gives us confidence that over the second half of the year, we will be pretty good in terms of the top line. If I go down the P&L, when it comes to gross margin, there's some puts and takes as well. We have definitely seen on the headwind side, we have seen higher inflation. That's a reality given the Middle East conflict. We've seen higher inflation in commodities, in packaging materials, in labor, in shipping costs. We also have things going our way, and we have some tailwinds as well.

One of them is favorable forex inflation. Also, the tariffs assumptions that we planned as we went into the year are materializing to be slightly lower. All of that puts and takes gives us confidence that we will be within the guidance range of approximately 50% that we talked about. Going down further into the P&L, we continue to manage our expenses very judiciously. As you heard us talk in the last earnings release, we are managing the digital advertising spend prudently to make sure that it matches the launch of our digital games and that we are maximizing the return on our investment. As you can hear, we are progressing well. There are some shifts between Q3 and Q4. There are tailwinds and headwinds, but overall, we are confident in the guidance that we just talked about.

In terms of the gross margin, as I said, still targeting approximately 50% for the full year. In terms of cadence, it is worth remembering a couple of things. Number one, we are seeing higher inflation, but remember, as we go into the fourth quarter, last year, we had approximately 500 basis points of higher promotional spend. We do not expect that to happen anymore this year given a couple of things. Number one is the innovation that we are seeing, the product slate, the movie slate that we are seeing, but equally important, we do not see the highly promotional environment materializing this year any longer. The industry has come in with a proper level of inventory, both the retail inventory and also our inventory are at the appropriate level. We see less pressure to drive a more normalized in promotional environment. That is on the gross margin side.

On the SG&A side, on the advertising side, as part of our brand-centric model, we have shifted from doing item-based advertising to a much more brand-building, thematic advertising. That will be spread out more evenly throughout the year. As a result, you will be seeing in Q3 advertising as percent of sales higher than we traditionally see, compared to a Q4 that is going to be lower than we traditionally see as percent of sales. We are managing the business very judiciously quarter-over-quarter. We are taking the puts and takes, but it is more about how the cadence will transpire between Q3 and Q4. Overall, given the momentum that we see in the industry, given our products and advertising slate that we see, we are very confident in delivering the full year numbers.

I just want to add one important point is that, as you remember, last year, there was a meaningful impact of the change in retail order patterns from direct import to domestic shipping. This headwind was a reason why we had so much needed to do promotion, especially in Q4, and disrupted most of the year on gross margin and other factors that were the headwind last year. This is no longer the case for this year, and it will be particularly important in the second half of the year and more so in the fourth quarter. That is the cadence Paul was talking about, where most of the improvement you will see in the fourth quarter in terms of gross margin and sales to reach the 50% gross margin number.

This is important to say, and again, this improvement already started in Q2 this year, and you will continue to see that playing to our benefit for the rest of the year.