Mattel Stock

All right. Great. Thank you, everyone, for taking the time to join us this morning. My name is Stephen Laszczyk. I'm the Lead Entertainment Analyst here at Goldman. We're excited to welcome back to the retail conference this year Ynon Kreiz and Paul Ruh, the CEO and CFO of Mattel. Thank you both for being with us today.

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

Great. Maybe to start this off, Ynon and Paul, would love to just maybe start with theme coming out of last quarter's earnings, where you said consumer demand remained healthy. That top line growth has continued into the third quarter. Would love just with maybe another 5 or 6 weeks more of data behind you to get your latest sense of what you're seeing today in terms of consumer demand and retail ordering patterns.

Sure. So let's take 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. And in fact, this is broad-based. The primary drivers are games, trading cards, action figures, vehicles and building sets. And as a whole, the industry is growing strongly.

And in fact, according to Circana, which tracks 17 different general merchandise retail categories, toys is by far the largest driver. And even when you take out credit cards, which benefited from the World Cup, toys as a category remains a very strong driver.

We've talked about it before, toys is a growth industry. The industry has grown in 23 out of the last 25 years. And it has -- 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. And 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 for 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. And we are very confident about continued growth and expect to achieve our full-year guidance in this environment.

Great overview. I want to dive into a lot of those key themes a bit more. But maybe, Ynon, you mentioned the annual guide last quarter, you reaffirmed the full year guidance. And within that, there was some moving pieces. Would love if you could maybe just take a look back on the year and talk a little bit about what you've seen as the biggest drivers, both positive and negative in terms of how this year has played out

Sure. Happy to take about how the cadence the year we've evolved. So 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 said. 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. So 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 towards the fourth quarter.

So what you will see is more of a backloaded towards Q4 sales momentum, but it's also substantiated with the activations that we're seeing, with the movie slate that we're seeing. So all of that gives us confidence that over the second half of the year, we will be pretty good in the cars with the top line.

So 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.

But we also have things going our way, and we have some tailwinds as well. One of them is favorable ForEx inflation. And also the tariff assumptions that we planned as we went into the year, are materializing to be slightly lower. So all of that puts and takes, gives us comments that we will be within the guidance range of the 50% -- approximately 50% that we talked about.

And then 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.

So as you can hear, it's -- we're progressing well. There's some shifts between Q3 and Q4. There's tailwinds and headwinds. But overall, we're confident in the guidance that we just talked about.

That's helpful, Paul. Maybe just to put a finer point on that. So it sounds like the guide for approximately 50% gross margin this year, puts and takes. But on that, [indiscernible] into that range. And then would love just any cadence commentary on SG&A and advertising expense in the back half?

Yes. So in terms of the gross margin, as I said, still targeting approximately 50% for the full year. In terms of cadence, it's worth remembering a couple of things. Number one, we're seeing higher inflation. But remember, as we go into the fourth quarter -- last year, we had approximately 50 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're seeing, the product slate, the movie slate that we're 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 also our inventory are at the appropriate level. So we see less pressure to drive a more normalized in promotional environment. So that's 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 going -- from doing item-based advertising to a much more brand-building thematic advertising. So that will be spread out more evenly throughout the year.

As a result, we will be seeing in Q3, advertising as a percent of sales higher than we traditionally see compared to a Q4 that is going to be lower than we traditionally see as a percent of sales.

So we're managing the business very judiciously quarter-over-quarter. We're taking the puts and takes, but it's more about how the cadence will transpire between Q3 and Q4. And overall, given the momentum that we see in the industry, given our products and advertising slate that we see, we're very confident in delivering the full year numbers.

And 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 promotions, especially in Q4, and disrupted most of the year.

This has now stabilized, and we don't expect that to return. And this is a key change in terms of headwind and impact on gross margin and other factors that that were the headwind last year. This is no longer the case for this year, and it would be particularly important in the second half of the year and more so in the fourth quarter.

And that's 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, that's -- this improvement already started in Q2 this year, and you'll continue to see that playing to our benefit for the rest of the year.

Helpful. Paul, maybe touching on potentially another benefit that could come into purview this year, tariff refunds. We've seen some of your peers starting to receive tariff refunds. Could you maybe give us an update on what the latest tariff refunds for Mattel?

And then maybe more broadly, we've heard some retailers investing back into price. Assuming you receive additional tariff refund, how might you put that money to work?

Yes. Just as the rest of the industry, as you will say, we are participating actively in the tariff refund process. So to date, we have received approximately $90 million of IEEPA tariff refunds. We are evaluating closely what we do with the refunds. We will definitely prioritize brand-building activities. That is our first priority, and we will do that.

We will determine, and we will share with everyone more in the Q3 earnings how we will be utilizing those and what the impact will be to the P&L. But so far, we're tracking well. We're receiving the refunds and we are coming up with very precise plans to build -- continue to be the brands for 2027 and beyond.

Helpful. Maybe zooming out now, Ynon, taking a look across your power brands, Hot Wheels is on track to deliver in the ninth consecutive year of consecutive growth. I know you've done a lot of work to expand that brand into collectibles and the content beyond just the core toys business.

What do you think the main drivers looking ahead here are future growth for Hot Wheels, the drivers and levers worth calling out?

Hot Wheels has been an incredible success story that is not slowing down. The -- what we've done so well around Hot Wheels is taking a play pattern, continue to expand it and turn the Hot Wheels to become much more about car culture and lifestyle.

The brand is driven by incredible innovation in products. We continue to broaden the aperture across play patterns, more audience demographic, extending from young kids all the way to adult fans and collectors. And we do that across a very broad range of price points from $1.49 for Hot Wheels basically car all the way to $700 for a collector set.

And as we said, we expanded into content, digital games, consumer products and merchandise, location-based entertainment, traveling shows and exhibitions. And it's becoming stronger and broader and having more and more control impact.

We also continue to expand the play pattern into other categories. So from vehicles, we're now participating in building sets, and this is Mattel Brick Shop, which is itself becoming runaway hit for the company. Still early days, but getting stronger and stronger, and we expect that to be a meaningful contributor and growth driver for Mattel.

Hot Wheels has been our largest brand since 2024. It's on track to exceed $2 billion of sales at very healthy margin. And we couldn't be more confident about the momentum and the fact that it will continue to grow for years to come.

The important takeaway from Hot Wheels is not just the success of this particular brand, but it's how we are applying our strategy, our brand-centric strategy and the Mattel playbook to take a strong brand, make it even more relevant in culture and continue to expand it beyond the traditional toy aisle. And that's the opportunity. There's plenty of headroom to grow, and we're excited to take it to next year and beyond.

Could you maybe touch a little bit more on some of those key learnings from Hot Wheels and if you apply it to some other brands in portfolio where you think there's a parallel opportunity there?

So when we talk about our brand-centric strategy, it's about two aspects. One is how do you think holistically about the brand ecosystem to create a playbook that expands the brand beyond the toy aisle.

And this is where -- this is about the Mattel flywheel where we begin our journey in toys, success in toys drive success in entertainment and success in entertainment, which is about content, digital games, consumer products and merchandise, drives even more success in toys. And that flywheel will continues to grow and expand.

The second aspect is about fandom. We don't just sell to items of a shelf. We manage brands and we built on the very strong emotional connection that people have with our brands. That emotional connection is fundamental to what we do because it allows us to continue to expand the play patterns, the engagement and create multiple touch points for fans to engage and interact with our brands.

So between creating a full franchise ecosystem on one side and building fandom on the other is how you continue to strengthen the brand management capabilities and expertise that we have and ultimately drive much more growth for the company, both in top line and in profit.

Paul, I wanted to come back to you and maybe touch on the topic of capital allocation and maybe off the back of Ynon's comment, investing in the business. Mattel has a strong free cash flow generation outlook, its strong balance sheet, multiyear share repurchase framework that's been in place now.

I'd just be curious for an update on how you're thinking about investing for growth and balancing that against shareholder returns. And I'd be curious, looking ahead, if you think stronger free cash flow generation could possibly support an acceleration in buyback.

Yes. So Mattel is a strong cash flow generator, and we are also a very disciplined capital allocator. The capital allocation priorities are very, very clear. And number one, we will invest organically in our business. That's exactly what we have done with investments that we have talked about.

We are putting more investments to grow our brands, our toys, our digital games. And that's exactly what we did when we announced the investments that we're doing in 2026, which is an investment year, and we will see strong returns in 2027 and beyond. So that's exactly what we're doing from a capital allocation priority, #1, perspective.

Number two, we maintain a strong balance sheet that is investment grade. And we continue to do that, and we will maintain the flexibility that, that strong balance sheet gives us to be able to withstand the cycles of the business throughout the year but importantly, to continue to invest the cash when we need it.

Number three, it's about looking at strategic inorganic opportunities when they make sense, when they advance our strategy, when they create economic value for our investors and shareholders and when it drives acceleration of growth. When we see an opportunity such as Mattel163, when we acquired the remaining stake of Mattel163, we go for it, and that's exactly what we did. So that is priority number three.

And capital allocation priority #4 is share buybacks to manage our capital structure. As you know, we have bought back approximately $1.5 billion in shares since we resumed buybacks in 2023. That represents approximately 23% of our float, and we are still targeting the $400 million of share buybacks in 2026 that we talked about as part of our longer-term capital allocation and buyback program.

So as you can see, we generate strong cash. We are very disciplined in terms of our capital allocation priorities to be able to maximize our shareholder value.

Great. Maybe on the topic of investing back in the business, Paul, you've spoken throughout the year about some OpEx initiatives, $110 million of incremental strategic investments in 2026. But I think some of the $150 million maybe that you originally cited for this year is getting reallocated to next year.

Maybe you could just talk a little bit about that. And then more importantly, the brands and verticals investing most heavily in as well as what gives you confidence that these investments will pay back over the next 12 to 18 months.

These investments are in line with our strategy to grow our IP-driven play and family entertainment. And this is exactly the first capital allocation priority, which is invest in organic growth. These investments are in our capabilities, in our own brands, in our own IP, in areas where we see high return opportunities within a short period of time, and that can continue to grow and amplify our capabilities to grow the business.

Examples that we gave are mobile games, first-party data, direct-to-consumer, trading card, building sets, including Mattel Brick Shop specifically, as well as technology and infrastructure to improve how we work, accelerate our strategy, reduce time to market, lower cost and as a whole, we become a stronger company with better capabilities.

The investments are tracking to plan. We said that we expect to see a return on these investments within a year, in other words, starting in 2027 and beyond. And as a whole, we do see 2026 as an investment year where we proactively took some of our earnings and put back in the business to drive growth, but we will see a return on these investments in '27 and beyond.

Helpful. And then in terms of maybe things that investors should be paying attention to as we track the rollout of some of these initiatives, anything that just top of mind are important for investors to keep in mind?

So the investments that we are putting in place are both for capability building and to drive growth. And we monitor that with very strict KPIs, and we make sure that we maximize the return on our investments. I'll give you an example of the adaptation that we have done.

We announced in the last earnings release that the release of our latest digital game will be -- or will be delayed until the beginning of 2027. To be able to match the investments against that initiative, we also postponed the investment into the beginning of next year.

And that is because the window in the end of the year is very cluttered from a user acquisition perspective. And we do believe it will maximize the return on investments when we launch the game in full in the beginning of 2027. So that's an example of how we are closely monitoring the performance of each one of our businesses, how we allocate the investments.

On the other side, we continue to make investments on our DTC businesses. We talked about other areas of investments and trading cards that we are very excited about. So all of that gets measured on a very carefully monitored KPI dashboard. And we make the proper decisions so that we are judicious in terms of the impact in 2026, but also the longer-term impact and beyond.

And I'd like to put more emphasis on two areas that are important, that we haven't really spoken a lot about before in terms of investment areas.

One is trading cards, which is one of the fastest-growing areas in the toy industry and play. This is an area that we haven't participated at all in the past. And yet many of our brands land themselves perfectly to the collectibility play pattern. And we also own the #1 game in the market, which is UNO.

So we have the basic capabilities and getting into trading cards is a natural extension of what we do. It requires some investments because we don't have certain retail capabilities in terms of selling product into hub stores and other areas where we do -- we're not as present today. But with relatively low investment, we can become a meaningful participant in one of the most important areas in the industry.

The other one that we did touch on, but I want to put even more emphasis on is Mattel Brick Shop. Building sets as a category is also one of the key drivers in the industry. One of the most important areas within the category are cars. These are buildable cars, cars that you construct and build as part of the category.

When it comes to cars, we know that business better than anyone. We understand car culture. This is not just about building cars, it's about understanding fans, understanding collectors and the consumer journey, the fan journey within this sector. When we build cars or when we design cars that people build, they actually look like cars. They don't look like cars that are designed out of bricks. This is a performance for us.

And if you look at the Mattel Brick Shop products across different price points and different variations, it's work of art. These are not just stores. And collectors would not be more excited about engaging with this product. And we see this as an important growth driver for the company. We've said before that we are struggling to keep up with demand. This is one area where we're investing in capacity because we see tremendous opportunity to grow the business in a very meaningful way.

So these are two examples where we are leading into important growth drivers in the industry, where we see tangible opportunities, where we will already have one foot in those areas, but we look to accelerate that and enhance that opportunity in a much more meant way.

Any other brands just because you brought up trading cards and collectibles in such an important way that you feel like would be leverageable in those two categories?

Well, we haven't announced specific brands and products, but it's not hard to imagine some of the brands where we have particular appeal with adult fans and collectors.

As a whole, adult fans is becoming an important part of the industry driving significant growth. We don't see that as a fad. We see this as a way for people to engage with important brands. We know that play begins in childhood, but doesn't end there. And when you expand the concept of play, it's about engaging people in activity that brings them joy.

And we see Mattel not just as a toy company, but as a joy company, a company that drives joy and creates excitement for people, leveraging the strength of our brand, which is the initial way we connect and engage with fans. But then we create innovative products and experiences that inspire fans entertain audiences and develop children through play.

That's helpful. And then maybe with just a few minutes left here to bring the conversation together, Paul. Mattel at this moment, balancing near-term execution around interesting consumer dynamic, retail dynamic, you have tariffs out there as well as focusing the business on the long-term investing for the business.

We spoke a lot about those opportunities ahead. I would just love if you could maybe speak a little bit about what are the 1 or 2 milestones you think the company must deliver on over the next 12 months, 24 months that could maybe increase confidence around the earnings algorithm and the broader strategy moving forward for the business?

We are focused on achieving our guidance for 2026. This is an investment year but still, obviously, important to achieve our guidance. And we do that in the context of high inflation or rising inflation, as Paul said before, this is something that we are watching carefully.

Obviously, this will not impact just Mattel or just the toy industry, but the economy as a whole. And this is one area that we are watching carefully and then benefiting from some tailwinds as well. But 2026 is an important year that we look to achieve our guidance.

And then we're already turning into 2027, which we expect to be a high-growth year for the company, where our investments will play out. And as we said, we'll achieve positive return, where our brand-centric strategy that we are betting in 2026 will mature and become full-fledged in 2027 and beyond.

Part of the brand-centric model is also how we create demand. And Paul talked a bit about the cadence of [ A&P ], but that -- the broader point is that we are changing how we create demand. We used to be more item focused or specific product focused and very weighted towards the back end of the year, the holiday season. And now as part of our brand management strategy, are pacing ourselves differently throughout the year.

And what we are promoting is the brand more holistically, given that we do so many things around our brands, much more than a toy line or any specific product item. We do that obviously in close collaboration with our retail partners. We continue to position Mattel as an important partner for retailers all over the world. And don't forget, we sell products in 500,000 stores, brick-and-mortar stores, not including online and retail and e-commerce.

So '27 is where this will come together, and we expect 2027 to be a high-growth year for the company. We haven't given specific guidance. We'll do that on Q4 of '26 as we always do. But we are seeing momentum. We expect our key brands to continue to lead the way. We expect our categories to perform well and gain share in key markets and over time, continue to grow and pace ahead of the industry.

It's a great place to leave it. Ynon and Paul, thank you very much for taking the time to join us today. Please join me in thanking Mattel for participating in the conference.

Thanks.

Thanks, everyone.

Thank you for standing by, and welcome to the Mattel, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Katina Metzidakis, Mattel's Head of Investor Relations. Katina, please go ahead.

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; Paul Ruh, Mattel's Chief Financial Officer; and Roberto Stanichi, Mattel's President, Chief Marketing and Global Brand Officer.

This afternoon, we reported Mattel's second quarter 2026 financial results. We will begin today's call with Ynon and Paul providing commentary on our results, after which we will provide some time for questions. [Operator Instructions]

Today's discussion, earnings release and slide presentation may reference certain non-GAAP financial measures and key performance indicators, which are defined in the slide presentation and earnings release appendices. Please note that gross billings figures referenced on this call will be stated in constant currency unless otherwise stated.

Our earnings release, slide presentation and supplemental non-GAAP information can be accessed through the Investors section of our corporate website, corporate.mattel.com, and the information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicators is included in those documents.

The financial results included in the earnings release and slide presentation are preliminary until Mattel's Form 10-Q is filed with the SEC and actual results when disclosed in the Form 10-Q may differ from these preliminary results.

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. Any statements we make about the future are, by their nature, uncertain. 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 from those projected in the forward-looking statements.

We describe some of these uncertainties in the Risk Factors section of our latest Form 10-K annual report, our Form 10-Q quarterly reports, our most recent earnings release and slide presentation and other filings we make with the SEC from time to time as well as in 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.

Good afternoon, and thank you for joining our second quarter 2026 earnings call. We continue to execute our strategy to grow our IP-driven play and family entertainment business with multiple proof points across toys, digital and film.

Mattel achieved strong growth in net sales of 10% as reported and 9% in constant currency with a double-digit increase in North America. Growth was driven by both owned and partner IP and digital games following the full acquisition of Mattel163. Mattel was #1 globally in its three categories, Dolls, Vehicles, Infant, Toddler, and Preschool and gained share in Vehicles and Action Figures per Circana.

We continue to execute our capital allocation priorities, including investing in organic growth and buying back our shares, all while maintaining a strong balance sheet. As we have discussed, the investments in organic growth are designed to accelerate top and bottom line and capture even more value from our IP faster. Examples include self-published mobile games, building sets, trading cards, D2C, first-party data and technology and infrastructure.

These investments are progressing well, and we continue to expect that in aggregate, they will have high ROI with a net positive contribution to the bottom line in 2027 and beyond. Top-line growth has continued in the third quarter to date with positive POS year-to-date. We believe we are well positioned for the back half of 2026 and are reiterating our full year 2026 guidance.

As it relates to the global toy industry, it grew strongly in the first half, and we expect it to grow for the full year with a toyetic theatrical slate and continued expansion of adult consumers.

Looking at our category performance, we are seeing the benefit of our diverse portfolio and a complementary combination of owned and partner brands, which are managed as part of our brand-centric operating model. Growth was driven by Vehicles and Challenger categories collectively. Within Vehicles, Hot Wheels had another outstanding quarter, growing 12%, supported by continued strength across both kids and adult collectors. Our collectible diecast business continues to perform exceptionally well, demonstrating the expanding appeal of the brand.

Within the Challenger categories, growth was driven by games led by UNO, including the contribution of Mattel163 as well as Action Figures, including Toy Story 5 and Masters of the Universe. Dolls declined primarily due to lower revenue from streaming content for Barbie as well as Polly Pocket, partially offset by growth in K-Pop Demon Hunters and Disney Princess and Frozen.

We continue to expect Barbie trends to improve in the back half of 2026, driven by new content, including the Barbie Nutcracker animated special, along with product launches such as the new Barbie Dreamhouse. We continue to expect Barbie to return to growth in 2027. Infant, Toddler, and Preschool declined primarily due to Fisher-Price. Within Fisher-Price, Little People continued its strong momentum, growing high double digits, supported by new partnerships, including Nintendo and continued strength in its core offerings.

Little People is demonstrating potential to become an increasingly meaningful growth driver. As we shared before, we are actively assessing our Infant, Toddler, Preschool business to ensure it is best positioned to achieve its full potential. At the same time, we continue to focus on profitability and optimize the product lines. We are also making strong progress in digital games and film. In digital games, the integration of Mattel163, which we fully acquired in the first quarter, is progressing well, and we are leveraging our combined capabilities as we look to expand our pipeline of future games.

In addition, we launched our first self-published mobile game based on Masters of the Universe, establishing our publishing and digital customer acquisition capabilities. Our second self-published mobile game, UNO Wild, is in soft launch. The game has hit all its production milestones to date, and we are encouraged with the early progress. We are gearing up for a full global commercial launch in early 2027.

As the #1 traditional card game in the world, we have a unique opportunity to extend UNO's resonance beyond the physical format and deepen consumer engagement through mobile games. UNO Wild will expand the universe of UNO mobile games currently offered by Mattel163. We also recently announced 2 new licensed PC and console titles based on Hot Wheels and Barbie, which are scheduled for release later this year.

In film, Masters of the Universe was released in theaters globally and just recently launched on Amazon's Prime Video streaming service. It is now available to hundreds of millions of Amazon subscribers. In its first week, Masters of the Universe was both the #1 film on Prime Video globally as well as the #1 most watched movie across all streaming platforms in the U.S. The movie has brought excitement to this iconic franchise, introducing the mythology to a new generation and deepening engagement with long-time fans.

The full product line across toys, adult collectibles, apparel, publishing and digital continues to expand. Gross billings for Masters of the Universe has more than tripled year-to-date, and we expect significant growth this year as a result of the movie and for the brand to be an important action figure franchise for Mattel into the future. Our next movie, Matchbox, which we produced with Apple and Paramount Skydance, is set for release on October 9 on Apple TV, along with a strong product offering in the fourth quarter.

With that, Paul will cover the financials in more detail.

Thanks, Ynon. As you just heard, we achieved strong growth in net sales with toys and entertainment each contributing meaningfully in the quarter. Consumer demand in the first half of the year was up low single digits and remains positive through Q3 year-to-date. The acquisition of Mattel163 contributed nearly $49 million in revenue and approximately $14 million in adjusted operating income during the quarter.

Now that Mattel163 has been fully integrated going forward, we will not separately report these stand-alone results. Looking at gross billings by region. 3 of our 4 regions grew with North America up 12%, EMEA up 7%, Asia Pacific up 4%, while Latin America was comparable. We believe the shift in retailer ordering patterns in the U.S., which impacted U.S. gross billings for 4 quarters in a row, has now largely stabilized.

Moving down the P&L. Adjusted gross margin was 48.6%. The decline was primarily due to the negative impact of 170 basis points from the gross incremental cost of tariffs, 120 basis points from inflation, 110 basis points from higher royalties as well as 60 basis points of unfavorable foreign exchange. Going the other way, 120 basis points from the addition of Mattel163 and 80 basis points from other, including tariff mitigation actions and Optimizing for Profitable Growth savings.

Advertising increased $45 million to $124 million, including expenses associated with Mattel163 and brand marketing and consumer engagement activities and theatrical releases in the quarter. Adjusted SG&A increased $38 million to $384 million, primarily due to the strategic investments as well as expenses associated with Mattel163. Adjusted operating income was $39 million as compared to $96 million in the prior year period, primarily due to higher advertising and adjusted SG&A expenses as well as lower gross margin, partly offset by higher net sales.

Adjusted EBITDA was $95 million as compared to $170 million and adjusted earnings per share was $0.01 as compared to $0.21, both mostly due to the same factors that impacted adjusted operating income. Free cash flow generation on a trailing 12-month basis was $435 million as compared to $530 million in the prior year period. The difference was primarily due to lower net income, excluding the impact of noncash items and higher capital expenditures.

We repurchased $100 million of shares in the quarter, bringing repurchases to $300 million year-to-date, and we are on track to reach our target of $400 million for the full year. By now, we have acquired a total of $1.5 billion since resuming share repurchases in 2023, representing a reduction in shares outstanding of approximately 23%.

Turning to the balance sheet. Cash at quarter end was $524 million as compared to $870 million a year ago. The decrease was primarily due to share repurchases over the last 12 months, capital expenditures and cash used for the acquisition of the remaining 50% interest in Mattel163, partially offset by operating cash flows. Total debt was comparable with the prior year. Our leverage ratio was 3x, and we remain committed to maintaining an investment-grade rating in line with our capital allocation priorities.

Owned inventory at quarter end was $830 million, a slight decrease versus prior year. Retailer inventories declined low double digits compared to the prior year, and we believe we are well positioned overall for the second half of the year. As part of our Optimizing for Profitable Growth program, we achieved savings of $15 million in the quarter, bringing the cumulative total savings since launching the program in 2024 to $205 million.

We continue to target approximately $50 million of efficiencies this year or a program total of $225 million between 2024 and 2026. As Ynon said, we are reiterating our full year guidance for 2026, which includes net sales growth of 3% to 6% in constant currency, adjusted gross margin of approximately 50%, adjusted operating income of $580 million to $630 million and adjusted EPS in the range of $1.27 and $1.39. In terms of 2026 gross billings performance by category, we continue to expect Vehicles as well as Challenger categories combined to grow strongly, Dolls to be comparable and ITPS to decline.

This includes the following drivers: momentum in key brands, including Hot Wheels, Mattel Brick Shop, UNO, Little People and Masters of the Universe, the Matchbox film, products for major theatrical releases, including Disney and Pixar's Toy Story 5, significant partnerships, including K-Pop Demon Hunters and DC and the contribution of digital games following the full acquisition and consolidation of Mattel163. FX is expected to have an approximate 1% benefit on full year net sales based on current spot rates.

Gross margin is expected to improve in the second half. We do not expect a rebuild of the heavy promotional activities that occurred at the end of 2025. And while we are seeing some moderate inflationary pressures associated with events in the Middle East, we expect to mitigate them and achieve our full year guidance. The strategic investments of $110 million this year to accelerate growth and capture even more value from our IP faster are progressing well.

We now plan to deploy the majority of the $40 million of digital performance marketing investments to coincide with the commercial launch of UNO Wild in 2027. This is not expected to impact our full year guidance for 2026. Our guidance always includes a range of assumptions and scenarios. As a reminder, interest expense this year is higher as compared to 2025 following our debt refinancing last year, while interest income is lower due to the lower cash on the balance sheet. As we have shared previously, given the uncertainty around tariff refunds, our guidance does not currently include any material related benefit.

I will now turn it back to Ynon for some concluding remarks.

Thanks, Paul. In summary, this quarter, we made important strides in our strategy to grow our IP-driven play and family entertainment business and achieved strong growth in top line. Growth has continued in the third quarter, and we expect to achieve our full year 2026 guidance. Our world-class brand portfolio and product offering, driven by our brand-centric operating model and global capabilities position us well for the second half of the year.

Before we begin Q&A, I'd like to congratulate Roberto Stanichi, who has been promoted to President, Chief Marketing and Brand Officer of Mattel. As the leader of our global brand team, Roberto will be joining our earnings calls to provide additional perspective on our brand-centric strategy, portfolio and performance across categories.

I'll now pass it back to the operator.

[Operator Instructions] Your first question comes from the line of Arpine Kocharyan with UBS.

I wanted to start with your full year guide revenue maybe slightly better for the quarter, understandable why full year guide is unchanged given so much of volume is still ahead of you. But then on margin, mostly, again, consistent with what you said you will do in Q1 for Q2, that does imply back half needs to be up above 50% in gross margin.

Is that pretty much unchanged as you look for the back half? There has been so much volatility in crude and investors are just really focused on input costs and what that means for the back half? And then I have a quick follow-up.

Good. Thank you for the question, Arpine. Good to talk to you. As you well said, we just reiterated guidance, and let me start with the top line. We achieved a strong quarter and also a first half that was broadly in line with our expectations. And there remains a full half of the year ahead where we typically sell 2/3 of the normal volume for the full year. It's important to note that our guidance continues to reflect a range of scenarios and assumptions around consumer, macro and inflation.

So that's what is related to the top line. In terms of margin assumptions, which is the second part, we are also confirming our guidance of approximately 50% in terms of gross margin. For the balance of the year, we are expecting to improve sequentially for the second half. And we do not foresee any of the promotional activities that we saw at the end of 2025 and also the inclusion of Mattel163. So those are the factors that will allow us to deliver on the margin guidance.

There's also puts and takes in the bottom line, but they are all within the guidance range and opportunities that we have. We are monitoring clearly the events of the Middle East, and we have a set of plans and assumptions to be able to mitigate those impacts and achieve our full year guidance.

Looking forward, our expectation is that the full benefit of the incremental investments. Remember, 2026 is an investment year that will deliver benefits and fruits in 2027 with an accelerated top and bottom line and those expectations for 2027 and beyond remain.

Great. That's very helpful. And then I don't know if Roberto is on the call today or if he's willing to take questions. But just wondering if we can hear a little bit more on his recent promotion to President and Chief Brand Officer. We all know how good his leadership has been on brands like Hot Wheels. But what does this management change mean for brands like Barbie?

How you -- how he thinks about sort of the strategy there and kind of your overall view on where the most profitable brand you have in the portfolio is headed for the back half and for next year?

Thanks, Arpine. I'll take it first just to talk about Roberto's promotion, and then he will answer your question on Barbie. So first of all, Roberto's promotion is really about implementing our brand-centric operating model. This is about bringing together 2 concepts. First is to manage our brands holistically to capture the full value of our IP and create closer alignment between toys and entertainment, including content, digital, consumer products and experiences.

The second is to orient demand creation around fans and fandom and to nurture deep emotional connections with our brands across multiple touch points. The promotion reflects the importance of our global brand organization to Mattel's business and recognizes the significant progress Roberto has been establishing and driving to implement the model.

He's been instrumental in leading Mattel through this evolution. And the promotion is indicative of the Board's confidence in Roberto's leadership and supporting continued development as the company continues to execute its long-term strategy. So a lot on Roberto's plate, and I'll let him take the question on Barbie.

Thank you, Ynon, and thank you, Arpine, for the question and everyone for welcoming me into the call. I'm looking forward to working more closely with you all. So yes, absolutely, let's talk about Barbie because this is one of our key priorities. And we want to take a few minutes because it really deserves a fulsome answer, and I want to put it into the context of our brand-centric operating model.

So Barbie is obviously an icon and the #1 doll in the industry and has been for the past 5 years. And we have a new operating model, a new organization and a clear plan that is going to define this new chapter for Barbie. And giving you a little bit more detail, if you look at the back half of 2026, we do expect the trends to improve, and that's driven essentially by 3 main tenets.

First one is that we're significantly increasing our investment in content. So we're going to be doubling the amount of YouTube content that we're launching. We're rereleasing 7 of classic full-length Barbie animated specials in the platform, and we're launching a brand-new Barbie and the Nutcracker animated special that is going to be tied to the holidays. So put it all together, we're significantly increasing the amount of content that is going to be available for Barbie and our core fans in the back half of the year.

On the product side, we do have some exciting new launches, the most important one being the new Barbie Dreamhouse. And what's exciting is that with our brand-centric methodology, this is not going to be simply a product launch, but a whole brand campaign that we're calling Barbie's moving and it will come to life not just in toys but with brand partnerships, retail executions and even consumer products.

And the last thing to highlight is new packaging. So in the second half of 2026, we're rolling out a new packaging segmentation that was going to make Barbie products a lot easier to shop and increase the appeal on shelf. So when you put all of those things together and many more other initiatives, we do expect those trends to start to improve. And then for Barbie to return to growth in 2027.

When we look at that year, we believe that, that will be driven by even more content. We have another animated special coming in 2027, and we're going to be relaunching 6 more classic Barbie animated movies. From a product line standpoint, we're looking to solidify Barbie's place as a fashion icon. So you're going to see enhanced product value with more detailed fashions, accessories, better style that we believe is going to increase appeal on shelf.

And then last but not least, we're looking to accelerate our growth with our adult fan audience, and that's going to come to life through new partnerships and collections. As a company, we do know how to tap into our adult fans. You look at Hot Wheels, you look at UNO, Monster High, these are all brands that have significant business driven by adult fans and even Barbie herself. So we're just looking to accelerate that even more.

If you take a step back, much of this Barbie approach is based on the Hot Wheels methodology that we've been applying for many years. And you know that Hot Wheels has been an absolute runner for us in the past few years. It's been our largest brand since 2024. That business is approaching $2 billion for Mattel, and we believe that we can keep that momentum going for many years to come. So overall, it's an exciting time for Barbie as we see our brand-centric model being applied, and we're confident she will return to grow in '27.

Your next question comes from the line of Anthony Bonadio with Wells Fargo.

I guess to start, just a clarification. Can you just talk a little bit more about the shift of that $40 million in user acquisition spending in 2027? Just what drove that decision as it pertains to guidance, if that expense is shifting, does that imply your core is actually coming down by that much? Just any additional color there would be helpful.

Yes. Thanks for the question, Anthony. We now plan to deploy the majority of the $40 million of digital performance marketing investments to coincide with the commercial launch of UNO Wild in 2027. This is not expected to impact our full year guidance for 2026 because our guidance always includes a range of assumptions and scenario. And when we launch UNO with the full user acquisition investment, it's because we have a high confidence and expect a high return on our investments.

As we said several times before, the investments can be modulated and it's a very process-driven -- data-driven process with clear metrics that we're tying the investments to. So that's how we are modulating the investments and making sure they get the highest return. And we do believe that it will not impact our guidance in '26, and we continue to stand by a '27 guidance or outlook.

Got it. That's helpful. And just on the action figures and building sets line item, it seems like that was a lot stronger than people had modeled even after accounting for the Mattel163 benefit. So can you just talk a little bit more about what's driving the growth there? And just anything about how to think about momentum in the back half?

Yes. Thank you, Anthony. So from an Action Figures, it was really a highlight in the quarter, and we benefited from the theatrical from Toy Story 5 and Masters of the Universe as well as really strong WWE performance and early shipments for our new DC partnerships. And we have one of the best action figure portfolios in the industry. We have multiple IP that are performing across different consumer and fan demographics. And normally, we refer to Action Figures as part of our Challenger categories.

But Mattel is really becoming a market leader. And I think we had a great proof point in this quarter. Mattel is actually the #1 manufacturer in action figures for the month of June according to Circana. And this is a very attractive category for us because it caters to that adult audience, and we feel that there's significant opportunity for Mattel. I also want to highlight that the quality of our products is really unmatched, and it delivers incredible price value.

And this is one of the key reasons why we have the privilege of working with some of the best licenses in the business and it has allowed us to continue to position Mattel as a partner of choice for major theatrical releases, so we can leverage our scale, our capabilities and strong retail partnerships. For 2026, obviously, Masters of the Universe and that theatrical brought a ton of excitement to this iconic franchise. It helped us to introduce the mythology to a whole new generation and deepening the engagement with long-time fans.

And we've seen gross billings for Masters of the Universe more than tripling year-to-date, and we expect significant growth as a result of the movie and the entire ecosystem that it generated. When it comes to building sets, we're also very, very excited about that category. It's one of the fastest-growing drivers for the toy industry right now. We have Mattel Brick Shop Hot Wheels launching -- that launched last year. It performed really well, and we look forward to continue to expand it through 2027. And it's been an incredible hit for us.

It's an incredibly unique product line because it shows the commitment to automotive authenticity and innovation in the use of materials and fans are absolutely loving that. So again, as I said, successful introduction. It's yet another proof point of the strength of Hot Wheels, but really opening up opportunities for us in a new category that is very attractive.

Your next question comes from the line of Eric Handler with ROTH Capital.

I wonder if you could talk about -- a little bit about the Masters of the Universe franchise and brand. Unfortunately, the movie didn't perform as well as hoped for in theaters, maybe it has better success in home entertainment. But now that this is passed, like how are you thinking about the next couple of years for Masters of the Universe?

Thank you, Eric. As you said, the movie was released in theaters globally. And as you know, that just recently launched on Amazon Prime video streaming service. So it is now available to hundreds of millions of Amazon subscribers. In the first week, the movie was both #1 -- the #1 film on Amazon Prime Video globally as well as the #1 most watched movie across all streaming platforms in the U.S. So very strong reception.

As Roberto noted, the Masters of the Universe brand overall has more than tripled year-to-date. And for the most part, this is driven by the movie halo and energy and excitement and drive that the movie brought to the brand. So when we look at the success of the movie, box office is just one aspect. We're looking at it in terms of the overall impact on the franchise and what the movie did for Masters of the Universe overall.

And as a result of the movie, we expect Masters of the Universe to become an important action figure franchise for Mattel into the future. And when you take a step back and you look at what's happened to this brand that has been, for the most part, not commercialized for more than 40 years and how we brought it back into current culture with all of the awareness and excitement and new generation of fans, we're very happy with where it is. And this will be an important driver for the company in 2026 and beyond.

And this is part of the flywheel. We've always said that not every movie will be the next Barbie. But we also said that you don't need a movie to be that successful as Barbie to have real economic impact on the company because we own the IP, we own the underlying rights to -- in all categories for the IP. And all we need is to ignite and delight fans and then we capture value across multiple verticals. And this is exactly the flywheel and the brand-centric operating model that we've been implementing.

That's helpful. And secondly, if we could talk a little bit about Hot Wheels. The last 3 quarters, it's been up mid- to high teens, a little bit 20% in the fourth quarter. What is it specifically -- I don't believe that Brick Shop is part of the Hot Wheels segment line. Where is it that you continue just to see incremental growth of Hot Wheels?

Yes. The Brick Shop number is not part of the Hot Wheels line. So that's even more upside. But to your point, Hot Wheels was up double digits again, and it continues to show that widespread strength in the portfolio. It was the #1 vehicle property globally, and we continue to gain market share in the first half. And it's the clearest example of our brand-centric strategy, right?

We had clear audience segmentation and the success is really driven more than toys because Hot Wheels has evolved to become about car culture and lifestyle. And as I mentioned before, it's our biggest brand since 2024, and it's approaching $2 billion. We do see still a lot of headroom in the category. We see strength with adult fans, which is a growing audience, and the expansion of that fan ecosystem beyond traditional vehicles categories and into building sets and consumer products, experiences, digital gaming and content.

We still see that there is a ton of headroom in vehicles itself. And we believe that if we can establish Hot Wheels as the defining player in vehicles as a play pattern that we can believe -- we can continue to gain significant share. So Hot Wheels is a brand that we're continuing to invest in, and we expect to grow for years to come.

Your next question comes from the line of Christopher Horvers with JPMorgan.

So my question is -- wanted to get an update on the outlook for tariffs. There's been a number of other companies across U.S. consumer have given an outlook for expected tariff refunds, how they might account for it and sort of what use of proceeds is going to be. So I just want to get your thoughts there. How do you think about including it in operating income?

Do you think there's a need to perhaps invest in price and lean in as we get into the holiday season? Or I guess, alternatively, do you think any prior period numbers, do you think you might back out? So I want to get your current thoughts around that.

Yes. Thanks, Chris. We're, of course, actively engaged in the refund process, and we're working through the system. And as you know, the overall framework continues to evolve. And accordingly, the timing and the amount of such potential refunds remains uncertain. I want to stress this point that our guidance does not include any potential impact of tariff refunds.

So we're not projecting a specific refund amount, and we will continue to evaluate and consider the use of the refunds when they are received. I'm sure we're already thinking about it. So if -- and when we receive those, we will communicate such uses of tariff refunds.

Understood. And then as you think about the lift that you're seeing in gross margin from Mattel163, I guess, how is that coming in relative to your expectations when you made the acquisition? And perhaps was there any upside there relative to your plan in light of how you're thinking about offsetting some of that oil and resin pressure potentially in the back half? Is that one of those source of funds?

Yes. The acquisition of Mattel163 is performing in line with our expectations, both in terms of the top line and the bottom line. So the contribution to our margin enhancement is exactly what we expected it to do. And we continue to foresee that, that's going to be it for the balance of the year. We are counting on it for margin enhancements, not only as we saw in Q2, but also in the second half of the year as well.

Remember that Mattel163 is one of the factors, but we will also have additional ones like Optimizing for Profitable Growth savings and other factors, including, for example, lower discounts that gives us confidence to reiterate our margin guidance. And Mattel163 is one of the contributors.

Your next question comes from the line of Jim Chartier at Monness, Crespi, Hardt.

Earlier, you said Little People could be positioned to become a more meaningful growth driver for the company. Can you just talk more about that, what your plans are for Little People? And what gives you the confidence that, that could be a much more meaningful brand for you?

Jim, yes. So Little People has been really a standout within the Fisher-Price category. And we believe that the form factor and the styling is so unique and the brand has that cross-generational appeal. So when you put those 2 things together, you can really create a special product that has, again, broad appeal. And it's been a runner for us in 2026. We're seeing strong double-digit POS results year-to-date, and that's driven by strong partnerships like Nintendo Super Mario execution, Toy Story execution, Disney Princess, Frozen, Mickey Mouse and also some of our core offerings.

So we believe that this is a brand that shows tremendous growth opportunity in the future. And if we take a step back in terms of our ITPS portfolio, I think there's also in Preschool, another brand worth calling out, which is Thomas & Friends that we will be relaunching in the second half of this year. It's a new interpretation of that classic character. We're going to anchor that relaunch with premium animated content, new product lines and branding. So those 2 initiatives within the Preschool side of the house are very exciting for us to see.

I guess just on Thomas & Friends, the brand has been relaunched multiple times. What gives you the confidence that this time could lead to more durable growth for the business?

Absolutely. I think the team has done a tremendous job in finding the right line between keeping the classic elements of the character. So it continues to have multigenerational appeal, but updating it to today's moment. And also embedding some of the storylines on realities that the parents are dealing with right now.

There's a whole aspect about decelerating a little bit that parents are concerned about in terms of their kids being overstimulated. So we feel that there's a very unique positioning for the brand and maintaining, again, that classic with a modern twist approach to it, which is very different than some of the relaunches that were attempted in the past where they were bigger departures.

I think there is something else, which is we're anchoring the line on a very successful formula of diecast that we know from Hot Wheels, and we have incredible know-how in terms of managing the appeal of collectible lines like that. So it's a completely new approach, and we believe that it gives us a very good chance of reestablishing this franchise for the future.

Your next question comes from the line of Kylie Cohu with Jefferies.

You mentioned that U.S. retail ordering patterns have largely stabilized after 4 quarters of disruption and the inventory is down. So I guess I was just kind of curious, does that mean that we have kind of more normalized seasonality? Or is there's still a little bit of distortions that investors should keep in mind as we head into the back half?

Yes, Kylie. Let me specify exactly what we mean with the stabilization. We believe that the shift in ordering patterns in the U.S. that began last year that shifted the mix more towards domestic versus DI has stabilized at the current levels. It does not mean that it will go back to what it was pre the tariff disruption. But what we believe is going forward, that mix that I referred to will approximately remain the same.

So that's one factor. The second one is related to this is what we are seeing in terms of the time frame for the fall resets. Traditionally, the fall resets happened in August. Last year, there were some delays. Now we are seeing the return to the normal time frame, so August. So both of those elements are either going back to the traditional ways of doing things or stabilized. That means that there is less degree of uncertainty. And in addition, of course, as you mentioned, the retailer levels of inventory as well as ours are at lower levels compared to last year. So that's a good signal for replenishment as we move into the second half of the year.

Your next question comes from the line of Gerrick Johnson with Seaport Research Partners.

Paul, can you just go over the ad expense in the quarter, maybe break it out how much of that was 163, how much maybe for Skeletor and how much for toys?

Yes, Gerrick. The increase in advertising was $45 million more than last year, so up to $124 million. And that included expenses, as you well say, associated with Mattel163, but also increased brand marketing and consumer engagement, as you also say, associated with the theatrical releases that happened in the quarter, but not only.

We do not necessarily guide for advertising. We just reiterated our guidance overall within the expectations for adjusted OI. So that's the reason for the increase. And it's part of our holistic investment in our brands and the acceleration that we expect for 2027 and beyond.

Your next question comes from the line of James Hardiman with Citi.

Maybe a sort of, I guess, math question. Obviously, we can all do sort of the first half, second half math surrounding what you've done year-to-date and what your full year guidance is. Any color you can give us on that -- the phasing between 3Q and 4Q, particularly on the gross margin side. I think you just made the point that 3Q should have an easy comparison as sort of the resets return to August versus later in the year last year.

And then, I guess, also a related question, the $40 million shift, I'm still struggling with that a little bit from Anthony's question from earlier. Is it easier to hit that gross margin number now that, that $40 million is, I think, mostly moving into next year? And if so, I'm assuming that would come from 4Q and go into next year, but any help with how to think about that would be great.

Yes. Let me give you a more holistic answer on the cadence. Of course, starting with the fact that we don't necessarily guide by quarter, and we manage on a full year basis, but there's a few standouts that puts and takes that happened last year, and we also need to consider for the balance of the year. When it comes to net sales growth, and also when it comes to margin and those points are related. Remember that last year towards year-end, we had a heavy promotional activity. So that's one element that we do not expect to happen this year.

To your second point, as we are now doing the full commercial launch of our UNO Wild game, remember that we always expected it to have the full P&L impact in 2027. And in 2025, it was a combination of some top line, but also partially offset or mostly offset by incremental investments in user acquisition.

So that's why you don't necessarily see an impact to our guidance this year, and we continue to see the full impact in 2027. So both of those elements substantiate both our top line. Remember, Mattel163 is another factor that drives both margin enhancement and incremental top line. So all of that combined confirms and substantiates our 2026 guidance and our outlook for '27.

Okay. And then going back to some previous comments that were made on the portfolio, I'm hoping to maybe piece together a couple of these, but it seems like a big deal if you're confident that Barbie is ultimately going to grow next year. I don't know if that extends to sort of the broader Dolls segment.

But clearly, what's happened in the last couple of years is that Dolls would be down and Vehicles would be up, then those 2 things would cancel each other out in a lot of ways. It doesn't sound like you're any less bullish on the growth of Hot Wheels in particular. I don't know if it can continue to be a double-digit grower.

But as we sort of stitch some of these things together, obviously, you've got some of the digital acquisitions that should begin to pay off. UNO, obviously, a big one of them. But any initial thoughts on how to think about the top line opportunity for 2027, just given what sounds like a number of tailwinds heading into next year?

Yes, James, thank you for the question. And as we've said before, 2027 is shaping up to be a big year for the company. 2026 is an investment year where we still expect to grow top line, but clearly, bottom line is impacted by the investments. 2027 is going to be a big year. We expect to see growth -- continued growth in Vehicles. Barbie returning to growth will be an important driver. Infant, Toddler, Preschool will be a much lesser drag. We still need to do some work there, but it's going to be a much lesser drag.

And then the Challenger categories between Action Figures, Building Sets driven by Mattel Brick Shop and games driven by UNO, all going to be important drivers. Now take all of that and add on top of our organic growth with our own brands, 2 important additions to the -- to our offering between Teenage Mutant Ninja Turtles and Frozen 3 coming on top of our own IP, then add by next year, we will have 4 self-published mobile games in the market. K-Pop Demon Hunters will be in full year of the great product in the marketplace.

And the investments that we are making this year, which are impacting profitability, not just becoming neutral, but actually driving significant growth for the company. And I forgot to mention DC as well, full year of execution next year. So '27 is expected to be a big year. We have said already that we expect to see mid- to high single-digit growth in top line and strong double-digit growth in bottom line.

But of course, we'll give much more detail when we give you guidance for the full year. But we -- sitting here today, expect a big year in 2027, and beyond. To be clear, we're not stopping there. This is really important to say. This is the beginning of what we believe will be a strong growth period for the company.

Your next question comes from the line of Xian Siew with BNP Paribas.

You recently launched that -- your new app, your mobile app, the Skeletor mobile game. Maybe could you share a little bit about maybe initial learnings from the game and how maybe it can kind of influence or inform you for future launches?

Yes, sure. This was, as you know, the first mobile game, self-published mobile game that we put out in the market. It was a low-risk, low single-digit investment and was mostly about establishing our capabilities, testing the technology stack, the publishing capabilities that we're putting together in advance of the bigger releases that are coming.

So we achieved exactly what we wanted, and it's been part -- as it relates to Masters of the Universe, it was part of our franchise approach that was meant to support and be released in tandem with the movie, and we did exactly that on time and as planned.

What is exciting is to see how UNO Wild is shaping up. The game currently is in soft launch. It hit all of its production milestones to date. And we are encouraged with the early progress. The plan, as we've said, is to release the game commercially, globally at the start of '27. We know that UNO is a strong brand that has a huge following. People are proactively looking for opportunities to engage with this brand.

So we will -- we're making a great game. We feel very good about it. We'll put it out. We'll promote it. We'll do all of the required user acquisition investment and activities to support the brand. And we're optimistic, but it's still early to tell, of course. We'll have to put the game out and see how it performs. But we're doing all the right things, and we're tracking to plan and seeing everything we want to see at this stage for our second game that we're putting in the market.

Your final question comes from the line of Stephen Laszczyk with Goldman Sachs.

For Ynon and Paul, you called out the momentum in the broader box office this year. I just wanted to see if maybe you could speak to the benefits you're seeing in the toyetic film slate, what partner brands you're seeing the most benefit from? And then if there's any way to size perhaps the magnitude of the uplift to revenue you expect to see from the theatrical lineup stepping up this year?

Yes. Happy to take that question, Stephen. So in Action Figures, we are seeing a lot of benefit from theatrical releases. This year, Toy Story 5, Masters of the Universe, our own IP as well as WWE and the early shipments of our new DC partnership are clearly boosting the sales of the action figures. And we continue to see and we expect to continue to see that not only in the balance of the year, but with the amazing slate of movie titles that we have in 2027 and beyond.

Difficult to provide very specific numbers. Those are big properties that I can tell you and with both from our own IP and also from third-party IPs. And we treat them as our own, and we reap the benefits and see that to contribute to both our top line and bottom line.

And Stephen, I would add that this is really about establishing Mattel as a partner of choice to partner with the major IP owners. We treat these brands as our own. We look for brands that move the market, that have cultural impact. And then we bring to bear incredible capabilities, design, supply chain, commercial, all at the level that are unmatched in the industry. And all of this is part of a holistic brand management strategy as part of our portfolio strategy, organized by brands and managed by the best people in the industry per category.

So we feel very good about these partnerships. We know that when we bring our capabilities to the market, we win. And the results are pretty much in every partnership that we've been discussing today and more coming. So we're in a good place there and see it as a key part of -- another key growth engine part of the strategy.

Ynon, I guess just on the back of that point, I was curious how long the pipeline is of IP that potentially is out there for you to bring under Mattel. Is there IP that's coming up over the next couple of years that you would consider bringing in-house along those lines?

We haven't announced anything yet, and we'll continue to post you on any new developments. But the key takeaway is that we continue to strengthen our position as a partner of choice. This is incremental in addition to everything we do with our own IP and the strength and capabilities and resources that we can offer to big IP owners are very compelling. And ultimately, it's about the results, and that is what we continue to achieve.

That concludes our question-and-answer session. I will now turn the call back over to Ynon Kreiz for closing remarks.

Well, thank you. Thank you, operator, and thank you, everyone, for joining the call today. As you've heard today, Mattel's second quarter performance was strong and continue to demonstrate the successful execution of our strategy with growth driven by both our own as well as partner brands. Our own IP partner brands and also digital games, which is becoming an important part of our growth algorithm.

It is good to see the top line growth continued into the third quarter to date with positive consumer demand for our product year-to-date. And we are very well positioned as we are heading into the second half of the year.

I also just want to welcome our new Head of Investor Relations, Katina Metzidakis. Thank you for joining us, Katina, your first earnings call. Katina has already hit the ground running, and we are glad to have her perspective and leadership with us at Mattel. So welcome. Thank you, everyone, for your time. Thank you for joining the call, and we'll continue talking. Thank you.

Ladies and gentlemen, this concludes Mattel's Second Quarter 2026 Earnings Call. Thank you all for joining. You may now disconnect.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jen Kettnich, Vice President and Head of Investor Relations for Mattel. Jen, please go ahead.

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; and Paul Ruh, Mattel's Chief Financial Officer. This afternoon, we reported Mattel's First Quarter 2026 financial results. We will begin today's call with Ynon and Paul providing commentary on our results, after which, we will provide some time for questions.

Please note that during the question-and-answer session, we respectfully ask that you limit to 1 question and 1 follow-up so that we can get to as many analysts and questions as possible today. Today's discussion, earnings release and slide presentation may reference certain non-GAAP financial measures and key performance indicators, which are defined in the slide presentation and earnings release appendices. Please note that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise.

Our earnings release, slide presentation and supplemental non-GAAP information can be accessed through the Investors section of our corporate website, corporate.mattel.com. And the information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicators is included in those documents. The preliminary financial results included in the earnings release and slide presentation represent the most current information available to management. The company's actual results when disclosed in its Form 10-Q may differ as a result of the completion of the company's financial closing procedures, final adjustments completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results.

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. Any statements we make about the future are, by their nature, uncertain. 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 from those projected in the forward-looking statements.

We describe some of these uncertainties and in the Risk Factors section of our latest Form 10-K annual report, our Form 10-Q quarterly reports, our most recent earnings release and slide presentation and other filings we make with the SEC from time to time as well as in 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.

Thanks, Jen. Good afternoon, and thank you for joining Mattel's First Quarter 2026 Earnings Call. We are off to a good start to the year with growth in net sales and positive consumer demand for our products in the first quarter. We continue to make progress on our strategy to grow our IP-driven play and family entertainment business and are seeing top line acceleration in the second quarter to date.

Key financial highlights for the quarter as compared to the prior year. Gross billings grew 2% in constant currency with increase in vehicles and challenging categories overall, partly offset by a decrease in dollars and [indiscernible] and preschool. Net sales grew 4% as reported and 1% in constant currency and adjusted earnings per share declined $0.18. Per circana, Mattel was #1 globally in our later categories dolls, vehicles and infant partner and preschool and gained share in vehicles and action figures. We also executed on our capital allocation priorities including closing the acquisition of full ownership of Mattel 163 mobile game studio and repurchasing $200 million of shares in the quarter while maintaining a strong balance sheet.

The toy industry grew in the first quarter, and we continue to expect it to grow in 2026 with the benefit of a toetheatrical slate and further expansion of adult consumers. As it relates to current geopolitical events, including the war in the Middle East, there has been minimal impact on our business to date, but we continue to monitor the situation and hope for a swift resolution and peaceful days ahead.

Turning back to our portfolio performance in the quarter. Several standout brands grew double digits or higher across own brands, including Hot Wheels, Uno and Monster High partner brands such as toy story and WWE relaunch franchises like Masters of the Universe and innovative new product lines like Mattel Brick shop. We are making strong progress on our digital strategy, including the integration of Mattel 163 as well as the upcoming launch of our first 2 self-published mobile games, acquiring full control of Mattel 163 meaningfully strengthens our digital games business and adds significant development, publishing and digital customer acquisition expertise.

As it relates to self-published mobile games, our first game is based on masters of the universe and currently in soft launch ahead of the theatrical movie premiere on June 5. The second game is in advanced development and targeted for release later this year. We plan to share more details soon. We are also expanding our presence on creative platforms. On branded digital game experiences were launched on roadblocks and Fortnite with strong reach and engagement in our Barbie Dreamhouse Tycoon roadblocks game continues to rank in the top 10 among hundreds of branded games on the platform.

Our digital game licensing business contributed to overall growth in the quarter and benefited from partnerships, including Pictionary with Netflix and scramble with scope. The upcoming Masters of the Universe movie will be released with wide distribution in thousands of tiers globally. A robust multi-platform marketing campaign spanning digital out-of-home and strategic brand partnerships is underway, led by Amazon MGM and Mattel. A full cross-category product line across stores, adult collectibles, apparel, publishing and more began rolling out this past weekend. We are very excited to bring this classic methology to life on the big screen and reimagine the franchise for original fans and a whole new generation.

We are also gearing up for the Matchbox movie in October and have a robust slate of films in development, including Hot Wheels, Poly Pocket, Barney and Rock Soken Roberts, among others. As we've shared, we're making strategic investments totaling approximately $150 million in 2026 and to drive accelerated growth and profitability consistent with our capital allocation priorities. These investments are designed to allow us to capture even more value from our IP faster such as in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure.

We believe these investments in aggregate will have high ROI with a net positive contribution to the bottom line in 2027 and beyond. Before I turn it over to Paul, I would like to touch on the recent leadership announcement that Steve Totzke, President and Chief Commercial Officer, will step down from his role effective May 1, and Sanjay Luthra, Managing Director of EMEA and Global D2C will succeed Steve as Chief Commercial Officer, overseeing Mattel's global sales and commercial operations. We thank Steve for his many contributions, and I'm personally grateful for his years of partnership. Sanjay is a 23-year Mattel veteran. In his most recent role, he has steered the emails transformation to achieve record sales and growth and expanded Mattel's leadership across the region in key categories. We look forward to his impact on driving our strategy to grow our IP-driven play and family entertainment business.

Over to you, Paul.

Thanks, Ynon. As you just heard, we're off to a good start to the year. Looking at key financial metrics as compared to the prior year quarter, net sales grew 4% as reported and 1% in constant currency to $862 million ahead of expectations. Adjusted gross margin declined 450 basis points to 45.1%, primarily due to the gross cost impact of tariffs that we previously mentioned as part of our guidance as well as unfavorable foreign exchange and inflation and adjusted earnings per share declined by $0.18 to a loss of $0.20.

Turning to gross billings in constant currency. Total gross billings grew 2% with Mattel's global POS up mid-single digits. Vehicles momentum continued with a 13% increase. Hot Wheels and Disney and Pixar cars each grew double digits. Total declined 11% due to Barbie, partially offset by growth in Monster High. American Ger was comparable. Infant dollar and playschool declined 18%, primarily due to Fisher price. Within Fisher price, little people grew double digits. Challenger categories collectively increased 17%, and Games grew led by Uno, including the benefit of the partial quarter contribution of Mattel 163. Action Figures growth was driven by a robust slate of owned and partner properties. Mattel Brief shop also performed exceptionally well as it continues to expand following a successful launch.

As it relates to gross billings by region, international was up 8% and with growth in each of EMEA, Latin America and Asia Pacific. North America declined 4%, including the impact of the shift in U.S. retailer ordering parents from direct import to domestic shipping. Based on what we are seeing today, we believe U.S. retailer ordering patents are stabilizing and expect our North America region to grow in Q2.

Moving down the P&L. Adjusted gross margin in the first quarter was 45.1%. The decline was due to the impact of 240 basis points from the gross incremental cost of tariffs, 140 basis points from unfavorable foreign exchange and 90 basis points from inflation. Going the other way, tariff mitigation actions and OPG savings, partially offset by several factors contributed a benefit of 30 basis points. Advertising expenses increased $23 million to $93 million, reflecting the timing of Easter this quarter and the inclusion of Mattel163 expenses.

Adjusted SG&A expenses increased $19 million to $366 million, primarily due to the strategic investments previously discussed. As mentioned in our earnings press release, beginning in fiscal 2026, we are excluding the impact of amortization of acquired intangible assets from non-GAAP measures to facilitate period-over-period comparisons of underlying business performance and have also recast these non-GAAP financial measures for prior periods. Adjusted operating income was a loss of $70 million as compared to a loss of $8 million in the prior year period. primarily due to higher advertising expenses, lower adjusted gross profit and higher adjusted SG&A.

Adjusted EBITDA was a loss of $12 million as compared to a gain of $57 million and adjusted earnings per share was a loss of $0.20 as compared to a loss of $0.02, both primarily due to the same factors that impacted adjusted operating income. Free cash flow generation on a trailing 12-month basis was $335 million as compared to $582 million in the prior year period. The decline was primarily due to the lower net income, excluding the impact of noncash items. We repurchased $200 million of shares in the quarter, bringing the total to $1.4 billion since resuming the share repurchases in 2023, representing a reduction in shares outstanding of approximately 21%.

We continue to expect to buy back a total of $400 million of shares this year as part of our $1.5 billion share repurchase authorization, which we expect to complete by the end of 2028.

Turning to the balance sheet. Cash at quarter end was $866 million compared to $1.24 billion a year ago. The decrease was primarily due to $640 million of share repurchases over the last 12 months and $75 million of cash used for the acquisition of the remaining 50% interest in Mattel163, net of cash acquired, partially offset by free cash flow generation. Total debt was consistent with prior year. Owned inventory at quarter end was $677 million, a modest increase versus prior year, primarily reflecting tariff-related costs. Our gross leverage ratio was 2.7x and we continue to manage our balance sheet in line with our capital allocation priorities.

Retailer inventories declined low digits compared to the prior year and we believe we are well positioned overall for Q2. As part of the optimizing for profitable growth program, we achieved savings of $16 million in the quarter bringing the community total savings for the program to date to $189 million. We continue to target approximately $50 million of efficiencies this year for a program total of $225 million between 2024 and 2026. 2026 guidance is unchanged with the exception of recasting adjusted operating income and adjusted EPS to exclude the impact of amortization of acquired intangible assets.

Our net sales guidance is unchanged, and we still expect growth in the range of 3% to 6% in constant currency. At current spot rates, FX would be a tailwind of 1 to 2 percentage points on full year reported net sales. We also continue to expect adjusted gross margin of approximately 50% for the full year. The recast guidance includes expectations for adjusted operating income of $580 million to $630 million, reflecting a $30 million adjustment attributable to non-Mattel-163 amortization of acquired intangible assets from prior acquisitions.

For clarity, Mattel163 amortization of acquired intangiable assets was not included in prior 2026 guidance. This results in adjusted EPS guidance in the range of $1.27 and to $1.39. In terms of 2026 gross billings performance by category, we continue to expect vehicles as well as challenger categories combined to grow strongly. Those to be comparable and ITPS to decline. This includes the following growth drivers: continued strong performance in key brands, including Hot Wheels, Mattel Brick shop, Uno and Little People further amplified by masters of the universe, global theatrical release and product line, the Matchbox film product for major theatrical releases, including Disney and Pixar's significant new toy partnerships, including KapopDiemon Hunters and DC, upcoming self-published digital game releases and the consolidation of Mattel163.

The guide for 2026 full year adjusted gross margin of approximately 50% includes an expectation of sequential improvement in the second quarter, although we expect it will remain below 50% in Q2 and then also improved in the second half. Looking to 2027, we continue to expect mid- to high single-digit revenue growth in constant currency and strong double-digit growth in adjusted operating income, benefiting from our brand-centric strategy, innovation in toys, major partnerships and the anticipated returns of strategic investment, including digital games.

We are monitoring developments related to the current events in the Middle East as well as possible changes related to tariffs, and our guidance includes a range of assumptions and scenarios. Conditions remain fluid and current guidance is subject to market volatility, unexpected disruptions as well as other macroeconomic risks and uncertainties, including further developments in the Middle East and regulatory actions impacting global trade.

With that, I will turn it back to Ynon.

Thanks, Paul. In summary, we are off to a good start to 2026. We are seeing momentum in the business and continue to execute our strategy to grow our IP-driven play and family entertainment business. We are seeing top line acceleration in the second quarter to date and expect to achieve our full year 2026 guidance.

With that, I'll now hand the call off to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Megan Clapp with Morgan Stanley.

I wanted to start maybe, Paul, you left off, you said you're monitoring what's going on in the Middle East. Obviously, things are fluid and the guidance assumes a range of assumptions and scenarios. You said, I think, Ynon, you mentioned there's minimal impact to date as well. I guess as we think about the cost side of things, resin and freight have both moved significantly higher, just obviously, as oil has -- and so can you maybe just remind us of your exposure to those 2 cost buckets and maybe walk us through your hedging and contracting and what you're kind of embedding in the guide at this point? I understand there's some inventory timing as well. So maybe the potential headwind is pushed out. But just trying to kind of understand and frame the degree of potential cost pressure we could see? And how are you thinking about managing it? .

Of course, and thank you for the question. As we said in the prepared remarks, we see minimal impact on our business year-to-date. But of course, we continue to monitor closely. -- we did reiterate our guidance, and that includes a range of assumptions and several scenarios. We are not immune, but it's too early to speculate. And it depends, particularly on how long the disruption last and also how long the oil prices remain elevated. We are experienced. We have a team on the ground that's managing this situation. And we are, at this point, reiterating our full year guidance both in gross margin of approximately 50%, with all these puts and takes.

Okay. And then maybe just on the top line, the 4% reported growth in the quarter and 1% in constant currency was better than what you had laid out when we talked a couple of months ago, I think you're expecting down low single digits in the first quarter. So maybe you can just talk through the drivers of what came in better than expected? Was there any sort of Easter timing benefit we should be aware of as we think about the second quarter? And yes, that would just be helpful.

Yes, Megan. As we said on the call, we had a strong start of the year. The growth came from several sound out brands that grew double digit, including in our own brands, Hot Wheels, Uno, Monster High masses of the universe. -- ahead of the movie release and Mattel Brick shop, which is becoming a proper hit for Mattel as well as partner brands like Toy Story and WWE. The consumer demand POS was positive, and this is in the context of strong growth in the industry. So what we are seeing is consumers are buying toys -- the toy industry is in a healthy position. And for Mattel, we are continuing to see demand.

And as we said, we saw acceleration of shipping quarter-to-date, second quarter to date. So we're well positioned to grow in the second quarter, consumer demand is positive, and we continue to execute our strategy.

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

To follow up on Megan's margin question, actually, I was hoping you could go through what EPA tariff rollback means for you for the year? And then how much of wiggle room that gives you to basically offset some of the impacts you might see through 2027, as I understand most of your raw materials are locked in for the year. But we are hearing of fuel surcharges for freight. Just if you could kind of give a little bit more on those puts and takes? And then I have a quick follow-up.

Yes. Thanks, Megan. So our guidance related to tariffs includes a range of assumptions and scenarios. And specifically, what we have included in the guidance is the expectations of the actions that we're taking back in 2025 will fully offset the annualized dollar cost impact of 2026. We said that, and we are, at this point, reiterating that point. But you know that the tariff situation is fluid. We started the process of refunds. We're actively working through the systems. And more broadly, the overall framework is still evolving including potential appeals. So the time and ultimately, the outcomes are not clear. So that's why I say that our guidance includes a range of assumptions and tariff rates for the year. But it's important to say that our guidance does not factor in a refund given the uncertainty at this point in time.

And then maybe for you, you talk about digital strategy integration of the JV going well ahead of the releases to digital games. Anything else you would like to share kind of on your investment cadence as we progress through the year, anything that has changed in your outlook maybe for 2027 and what kind of returns you could be looking at? Anything else you feel like you should share sort of as you think about 3 months that have passed through to us gave an update.

Thanks, Arpine, Yes. So we did close the acquisition, as we've said on March 2. The integration is tracking according to plan. We have a cross-functional team that is focused on all the relevant activities. And as we've said, acquiring full control of the JV meaningfully advances our digital games business, and it will add significant development publishing and digital customer acquisition expertise to the company. So this is a good development. The deal is done, and we are in full integration mode. When it comes to our strategic investments, as we've shared, these investments are meant to drive accelerated growth and profitability, which is consistent with our first capital allocation priority to invest in organic growth. It's in line with our strategy to grow our IP-driven play and family entertainment business.

The investments, as we've said before, are in areas that are designed to allow us to capture even more value from our IP and do that even faster. And the examples we gave were in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure. When it comes to self-published mobile games, this is also progressing very well. As we've said in the prepared remarks, we are ready to launch the first game, which is based on the site of the universe firm. The game is now in soft launch, and all the metrics are where we want to see them. And the second game is in advanced development, also would be a soft launch soon and will be released later this year.

We'll be able to share more down the road, but I can say that it's tracking well. all of the testing and metrics that we are monitoring or where we want to see them. And it's exciting to be in a position where we would launch our first published games that can have asymmetric impact on the company. All of that is part of our investment in areas that can accelerate top line growth and profitability.

Your next question comes from the line of Jim Chartier with Monness, Crespi, Hardt & Company.

Last quarter, you said infant/Toddler/preschool would be a 2% to 3% headwind to the business this year. That implies like a mid- to high-teens decline in that business. Can you just give us some more color on what's driving that and when you think that business could stabilize? .

Yes, Jim, it's exactly what we said. It will be a 2% to 3% headwind this year, and this is still where we see things tracking. But as we also said that the drag is becoming smaller, especially from baby gear and power wheels. We do expect to see growth in key segments within Fisher-Price, including specifically Little People, which is growing double digit. And this is driven by new partnerships that we have with important players like Nintendo, with Disney across Toy Story and making friends and other brands.

And overall, this is a fast-growing high-margin business that is growing within Fisher price, and it's great to see that. We're also getting ready to relaunch Thomas in the second half of the year. There'll be animated content, premium content that we are producing. It will be on all the major leading kid platforms with new product line, new branding and more engagement. And we continue to assess the business, the category as a whole because the category is an important part of the toy industry overall.

Fisher Price is the market leader. It's a brand that has been around for more than 90 years, globally recognized and cherished by generations of parents and families and the significant vested value in that brand. And then, of course, we're looking at the numbers and want to make sure that the business is in the best position to grow and achieve its full potential. And we'll come back with more information down the road.

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

First, Ynon, maybe away from the digital gaming strategy. I was curious if you could maybe talk a bit more about the strategic initiatives you laid out last quarter and some of the changes the organization and organizational structure that has taken place over the last couple of months, really where are you investing in the business today? And how should investors expect to see some of these initiatives and some of these changes playing out over the balance of the year as you work towards that goal of capturing more value from your IP faster?

Yes. Thanks, Stephen. This goes back to our strategy that to -- that is oriented around being more brand-centric where this is no longer about toys versus non-toys or toys or entertainment. This is about growing our brands holistically. And the strategy, a new operating model that we are deploying right now is designed to accelerate the value that we will capture out of our brands. Toys remains a key pillar part of this strategy. Toys is a foundational part of our business and we believe there is significant upside in the toy industry, and we're seeing it playing out this quarter as well as last year, and we expect that will continue for the full year in 2026. That said, we would like to leverage the success we have in toys and the strength of our brands outside of the toy aisle.

And in order to do that, we believe that a holistic management of the business with our plans with the brand -- a brand-centric strategy would allow us to do that in the most optimal way and also be very effective in how we create demand. In the past, the orientation was more about promoting certain toy lines or other lines of the business. We are shifting more towards brand marketing, not specifically just on certain lines or certain products, but more holistic marketing and are looking to leverage the significant resources that we spend in demand creation across the business overall. The other thing that it does, it allows us to manage the business holistically where success in toys, great success in entertainment and success in entertainment will reflect and inflect back on the pop business.

So if you think about digital games or mobile games. When we are now developing titles or game titles based on our brands, we do it with a holistic strategy to promote both the games as well as stories, content, location-based entertainment and other executions holistically. And we believe if we do that right as we are now deploying the strategy that we're now deploying, it will accelerate our business significantly and drive also a higher margin and stronger performance overall.

Your next question comes from the line of Eric Handler with ROTH Capital.

Ynon, I wonder if you can talk a little bit about Mattel Brick shop. I mean, reviews have been really strong for the product line. And just wondering how fast can this ramp so that it's a meaningful contributor to the business? And where -- how -- at what point will we start seeing full shelves at retail? And just talk about some of the dynamics going on there, please?

Thanks, Eric. The Building Sets category is 1 of the fastest-growing parts of the toy industry wall. This is obviously driven by LEGO. But it is an and fast-growing category. And within the category, within the building site category, building search for cars specifically is 1 of the fastest-growing segments. When it comes to vehicles, we are by far the global leader. We understand culture better than anyone. And what we did around material Breakshop is bring our expertise in cars together with the incredible capabilities and innovation we have within Mega that is our footprint within the building sits category, and created an incredible product.

And what is unique about Mattel brick shop is that these are not just cars that you construct and put together. These are cars that by the time you finish building them, look like cars. And we infused metal parts, rubber wheels, and just great packaging, branding, an incredible manual itself is a book that you would put in your library. The quality is that high. And we're very excited to see the initial reaction. The consumer demand is stronger than we can accommodate. We are chasing demand. It's growing double digits. And we believe there's significant runway ahead of us, not just in '26 or 2027. This can be a runner for years to come and really leveraging the Mattel playbook beyond cars and beyond building search in infusing innovation, brand purpose, cultural relevance, great partnerships and a franchise mindset that extends the play pattern and create multiple touch points across multiple entertainment verticals and other opportunities to engage fans.

Okay. And then as a follow-up question, when you look at the mobile gaming industry, it is the largest segment within the video games business, but has become very mature, really flat lining for the last several years, growing maybe low single digits. Very competitive cost a lot to scale a game. So I'm wondering why is -- why do you view that this is a business that you want Mattel to be in? And sort of how are you going to measure success in the genre.

Yes. The -- you're right in the premise that it is competitive and it's a relatively competitive -- well, competitive place to be with other players that are in it. But a few things changed over the years in terms of the dynamics within the industry. It is now not very costly to develop a game. You don't need to own a studio to develop a game and you don't need to own the game engine. And so for a cost of under $10 million, we see it as single-digit million dollars, you can fund the development of a game.

What is more capital intensive, and you said that as well is that it's more capital -- it's more -- you need more capital to drive demand, to acquire users, although what is also unique in our days now is that the user acquisition is all driven by performance marketing, where you know the ROI of your spend you know exactly what to expect when you spend the money and it's almost scientific in terms of how much money you spend and what do you get in return. So while you do spend capital, you only do that to the extent you know that the marketing and the consumer acquisition will yield the return that you expect. What is unique to Mattel and where we stand out is with the strength and appeal of our brands. Our economics are different, different to a radial player because people are proactively looking for opportunities to engage with our brands.

People are searching for opportunities to engage with our brands. When we put out a Barbie branded game on roadblocks, it was the #1 branded game for more than a year with 0 marketing. When we put out an UNO experience on Fortnite, on the first day, it became 1 of the top 10 most active or engaged experiences on the entire platform against more than 100,000 different islands and experiences in the platform. So we know that our brands percolate to the top and people are proactively searching for them. Because of that, our economic equation is different in terms of demand creation and user acquisition. And we expect that with good execution and it's not enough to have strong games, you still need to deliver on the execution. So we believe that strong -- with our capabilities and with the partners we work that develop the games for us, we'll be able to drive successful experiences that will deliver have the potential to deliver asymmetric return for Mattel. And we're excited to participate in this large important part of the ecosystem.

Your next question comes from the line of Anthony Bonadio with Wells Fargo.

So just to start on masters of the universe. It seems like some of the forecasting services have is doing pretty well at the box office. Can you just talk a little bit about how we should think about the lift to earnings, if that's the case? And just maybe walk us through what's embedded in guidance around this.

Yes. You're right, things are tracking well. There's a lot of excitement around the trailers and the initial marketing campaign and the actual company is about to kick off. So you will see a lot more activity around masters of the universe. At the same time, we know it's hard to predict box office, this is Hollywood. But what we can say already that Masters of the Universe movie is already a big win for Mattel. They are -- even the buildup towards the movie is driving awareness, strengthening relationship with fans. We have dozens of partners around the world. We're seeing product sales ramping, growing double digits, and it's only going to get stronger and better from here.

What's unique about this movie specifically is that it's bringing to life and it reimagines this classic methology it's going to engage classic, the fans, the fans of the generation that used to watch it when there were kids, but also appeal to young kids and be very contemporary and timely and culturally relevant. So it is an important addition to our portfolio. It will drive sales, toy sales, the movie is toyetic. The movie is very toyetic. We just rolled out our product offering this past weekend, a combination of mainline as well as collectors, and it's just great. So we're very positive about it. We said it will be a driver. We expect double-digit growth, and we expect it will give a whole new generation of fans and opportunity to engage with this great franchise.

That's helpful. And then maybe framing Megan's question another way. If commodity and freight prices remain where they are today, does that mean guidance remains intact for '26? Or does that become more of a challenge as the year progresses?

I'll take that one. As we said before, we're not immune, but at this point, it depends how long the disruption lasts and how long the oil prices remain celebrated. So at this point, the guidance remains intact with those assumptions in mind. .

Your next question comes from the line of Kylie Cohu with Jefferies.

I apologize if you've already kind of addressed this. but I just want to dig a little bit into the expected sales cadence for the year. Obviously, Q1 turned out better than you expected. Do you still expect kind of a large step-up in sales growth in Q2? And really just any changes in how retail like inventory posture has changed over the quarter would be helpful.

Yes, Kyle, I'll take that one. So we had a good first quarter overall from a performance perspective, but we still have 3 quarters to go and Q1 is a small quarter. Now what we see into Q2. We have certainly acceleration in the early times of the quarter in POS, and we then continues to -- we will then continue to see acceleration in gross billings. So actually, POS, let me clarify that. POS, given the seasonality in Easter is not -- is flat. I would say it's flat to slightly down. But we're encouraged by what we're seeing from an acceleration in shipping in Q2 year-to-date, that is the point. And our full year guidance remains unchanged. So a strong start of the year, acceleration in Q2 and then we continue to see the strength in the second half of the year.

Great. And then just any update on the strategic review of infant, toddler, and preschool.

Can you repeat the question? I heard strategic review. I didn't hear the first part.

Just any update on the strategic review of infant, toddle, and preschool?

So yes. Thanks, Kyle. No update. We continue to assess the business. We talked about the importance of the category in the industry. We talked about the importance of fisher price within the industry and within the category specifically, and we'll come back with more detail about our review of best positioning this business for -- to maximize its potential.

Your next question comes from the line of Gerrick Johnson with Seaport Research Partners.

So on the investment spending, the $150 million, I should actually say the $110 million, let's exclude the $40 million in user acquisition, $110 million. Is that still the target, $110 million for the year? And how much has been incurred so far?

Yes, that is still the target. We are not breaking out the spend by quarter, but we are tracking on plan full execution mode, all the initiatives we mentioned, it's still early in the year, but we're happy with the progress and very confident that these investments in aggregate will have high ROI with net positive contribution to the bottom line in 2027 and beyond. We talked about the different parts of the different areas where we invest -- this is all about our own brands, our own organic business and designed to accelerate and improve the performance of the business overall. .

Okay. And perhaps related, maybe not. CapEx for the quarter looked like it was $65 million the highest first quarter CapEx since 2017. So what's your CapEx guidance for the year? And why was it so high in the first quarter?

Yes. We don't necessarily guide CapEx specifically, but what we are doing is we are investing in our infrastructure and this is in line with our guidance in terms of cash flow in general. So we are tracking to our expectations. And overall, this is pretty much in line with the 3% to 4% net sales that we have executed on over the last few years. And we are doing the normal upgrades that we increase our productivity, our efficiency and pretty much in line with our expectations.

And Gerrick, just to emphasize what Paul said, still within the framework of 3% to 4% of net sales, which is -- we believe is still very healthy and very much controlled in line with our capital-light orientation and capital allocation priorities.

Your next question comes from the line of Chris Horvers with JPMorgan.

I wanted to follow up on the tariff question. As you think about -- not take refunds off the table, in the back half of the year, you'll be shipping product presumably at a lower tariff rate. If that happens, how do you think about how the retailers behave in terms of do you get the gross margin rate back? Or do you think that the retail partners will look for you to bring prices actually lower given how important the category is to driving traffic to the stores?

Yes, Chris, I wouldn't necessarily speculate on what the future tariff rates will look like. It's early days, but what we are doing is constant conversations with our retail partners. It's early days, and we want to see how the refund process works out. But also keep in mind that we do not set the prices the retailers do. So what we do is we work closely with them on a variety of issues, and this is actually one of them.

Got it. And then I wanted to clarify the POS comment. So quarter-to-date, it's flat to slightly down, and that includes an Easter headwind. How do you think about it on a year-to-date basis, and then as you think about the shipping strength that you're seeing right now, you're also lapping some deferred retail orders from last year. You've got masters in the universe. You've got Toy Story coming as you try to disaggregate sort of the improvement in the second quarter, is there a way to give us some insights around how much of it is comparison driven versus some sort of more organic uptick in the business.

Yes. I don't want to get deep into POS. We do not guide on POS and -- but what I can tell you is that our gross billings are coming in strong for the second quarter. Remember, last year, it started -- we started to see the disruption that was as a result of the uncertainty around tariffs. But it's a combination of both what we are comping from last year, but also our strong portfolio and our strong innovation, and we are adding this year on top of what we had last year. So it's a combination of both.

And Chris, I would add the comment that we said in the prepared remarks that the shipping -- the ordering parents in the U.S. is stabilizing. And this is an important comment. What we've seen in the last 4 quarters, if you remember, the shift in ordering panel was a big headwind for us. We believe U.S. retailers ordering patterns are stabilizing. And in line with that, we also expect our North America region to grow in the second quarter. And so this is something we said in the prepared remarks. I just want to make sure you -- I mean it's captured. .

Your final question for today comes from the line of James Hardiman with Citi.

So I just want to make sure I understand. Obviously, revenues were better than you guys were anticipating in the first quarter. If I think about gross margins and the magnitude of the compression there, at least versus where we were modeling that was worse than expected. Maybe the bridge on Slide 12 is certainly helpful. Maybe walk us through some of those buckets and how those performed relative to your expectations? And then any color you can give us on how those trend as we move through the year.

FX looks like it was a headwind, I think you're expecting that to flip to a tailwind. Any thoughts on the timing there? And then obviously, the inflation piece doesn't sound like that has anything to do with the fuel cost in the Middle East stuff. But as we think about 2Q and beyond, any help on what those buckets look like from a gross margin perspective?

Yes, James, remember, we previously said that we expected in Q1 gross margin to be down. So the decline was due to the expected gross margin incremental cost of tariffs, as you see in the bridge, unfavorable or an exchange and also inflation -- that inflation, by the way, is unrelated to the Middle East because it hasn't hit our P&L. And going the other way, we had tariff mitigation actions, including our optimizing for profitable growth savings, and those were partially offset by several other factors. And all these elements were expected. So keep in mind also, that's an important consideration that Q1 is a small quarter. So small dollar shifts can cause big swings in margin percent.

So when it comes to the outlook for the year, with all of that, we are on track to achieve our full year adjusted gross margin guidance of approximately 50%, and this includes an expectation of sequential improvement in the second quarter, and although we expect it to remain below the 50%, specifically in Q2, but then also to improve in the second half to get to an average of the guidance that we talked about of approximately [indiscernible]. So those are the puts and takes on the trajectory that we expect.

Okay. And then a similar question on the OpEx side, the SG&A side. I guess, in particular, the advertising and promotional expense was up, call it, 32%. It sounds like maybe there was some timing that affected that number. But maybe any thoughts about how to think about how that trends over the course of the year. and sort of the incremental investment spend, how to think about the timing of that? What do we see in the first quarter and how we sprinkle that into our models for the remainder of the year?

Sure. So for SG&A, let me start with that one. SG&A increased $19 million, primarily due to the investments that we talked about to the strategic investments. And of course, we do not guide to these lines for the year. But keep in mind that this includes incremental investments that we talked about since last quarter. There's also a little bit of timing when it comes to the A&P, and that is also associated with the shift in the Easter holiday. But we are tracking to what we said overall since in the beginning of the year, and that is associated, of course, with the pacing of our investments.

Okay. We don't have another question. Thank you. Thank you, everyone. Thank you for joining us today and for all your questions. Just to say in closing, we are closely monitoring macroeconomic developments. Clearly, a lot of things are going on, and we are watching how things pan out. Yet we have a lot to look forward to this year. Our outlook reflects the momentum of our strategy to grow our IP-driven play and family entertainment business and are excited to continue to execute the strategy for the rest of the year. We appreciate the time. Thanks again for joining the call.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Why don't we get started? I'm Arpine Kocharyan, leisure, gaming and lodging analyst with UBS. And it is my pleasure today to introduce Ynon Kreiz, Chairman and Chief Executive Officer of Mattel. Ynon has been in the CEO role at Mattel since 2018, leading the company's turnaround into a more IP-driven toy company that owns one of the most concentrated portfolios of iconic evergreen brands. Also joining us today from Mattel is Paul Ruh, Chief Financial Officer.

Just before we begin, a quick note on format. We'll start with a brief presentation by Ynon, followed by a fireside chat with Ynon and Paul and then open -- hopefully open it up with your questions, which you can send through the -- through electronically. And with that, please join me in welcoming Ynon Kreiz.

Thank you, Arpine. Great to be here at the UBS conference, always a great event. Thank you, everyone, for joining us. We are going to talk about Mattel today. I'll present for 20 minutes, as Arpine said, and then we'll do some Q&A.

Mattel is a leading global play and family entertainment company. We introduced recently a new strategy to grow our IP-driven play and family entertainment business. And this is really about 2 things. First is the increased orientation around the holistic management of both our toy and entertainment business, which will allow us to capture full value from both areas. The second part is the focus to continue to capture more value outside in addition to physical product, in addition to toys. And this new strategy, we believe, will be an important part of our growth going forward.

As we enter 2026, it's important to say this is an important year for the company. This is a year where we expect growth to come from innovation in toys, major partnerships with entertainment companies. We're looking to leverage the strength of our portfolio of iconic brands. We expect an inflection in entertainment, obviously, very focused on operational excellence, which is something we've been executing on for over the last few years and continue with our share repurchase program, which I will expand about.

The underlying asset of the company, the strength of the company is underpinned by the value and quality of our portfolio. We own one of the strongest portfolios of children and family entertainment franchises in the world. And this is at a time where brands are more important than ever, big brands are more important than ever. This is applicable not just in toys, but in every part of entertainment and media and any area that is consumer-facing. Big brands make all the difference in the world. And this is at a time where there's unlimited shelf space, ubiquitous distribution, big brands are more important than ever.

We operate in 6 categories: dolls, vehicles, infant toddler preschool, action figures, building sets and games. And the opportunity we have is to continue to engage consumers and fans across multiple touch points and capture full value from our intellectual properties.

When it comes to toys, we see several growth factors. First of all, the industry is a growth industry. The toy industry has grown in 23 out of the last 25 years. And in the last 5 years alone, it's grown at over 3% annually. So this is an important aspect to remember. It's a healthy industry that is playing to a fundamental human behavior of play. Parents will always prioritize spending money on their children, especially when it comes to quality experiences, quality product.

And of course, for retailers, this is a strategic category in that it drives foot traffic, it's experiential and people who buy toys, spend more money or have a bigger basket, I should say, and more time at the store. We look to continue to innovate in toys. Mattel at the core is a creative company driven by innovation, and this is something that we continue to focus and invest in and expand and strengthen our product offering.

We're also seeing growth within the adult fan and collector business. This is one of the fastest-growing areas in toys. And given the strength and heritage value of our brands, this is an exciting opportunity for Mattel, especially through our direct-to-consumer site, Mattel Creations, where we see double-digit growth and strong demand continue to increase.

And we also continue to position Mattel as a partner of choice for the major entertainment and IP owners -- major entertainment companies and IP owners. And just recently, we announced a few important additions to our portfolio in DC. This is Batman, Superman and some great brands that Warner Bros. own, KPop Deamon Hunters in partnership with Netflix. This is the most successful movie in Netflix history, and we're very proud to partner with Netflix on this property. And very recently, the announcement that we partnered with Paramount around the Teenage Mutant Ninja Turtles.

When it comes to entertainment, 2026 will be an important year for us. This -- we see as an inflection year in our entertainment strategy with 2 major movie releases, Masters of the Universe and Matchbox. Masters of the Universe will be in theatrical distribution in June, and Matchbox will be distributed in Apple TV in October. So big movies, very excited to roll them out. And in many ways, that will show the breadth of our offering.

Our next movie, Masters of the Universe will take us all the way from the Pink World of Barbie to the dark world of Eternia and everything in between. So that will be a great representation of the breadth and scale of our portfolio.

We're also looking to scale our digital games. This is really about growing our self-publishing business, where we see a very asymmetric opportunity for Mattel to invest in a very capital-light way and capture significant value potentially from these games that we are releasing directly ourselves. And this will be amplified by the recent acquisition of Mattel163 that we now wholly own. This is a business that we invested in, in 2018. We launched it in 2018, invested $7 million together with our partner, NetEase, and it's a very high-margin business that is doing more than $200 million revenue. Now that it's wholly owned by Mattel will allow us to benefit from the scale, efficiencies, cross-promotion and increased coordination in release schedule and how we grow this important business.

We also see exciting opportunities in growing our consumer product business, a new business model. This is more about licensing our IP to third parties, but also looking for ways to innovate and capture more value from our portfolio. Recently, we launched a Book, the Barbie Dreamscape, which was a major success, all the way to an Erewhon shake, Barbie branded that is selling like -- well, like Barbie milkshake. So it's great to see the reaction and the demand in the marketplace for things like that. Everything Barbie, Hot Wheels, American Girl, UNO, people are chasing. People are proactively looking for opportunities to engage with our brands in different ways, and we are very happy to offer these opportunities for our fans.

And in location-based entertainment, this is another important area for us. Currently, there are 7 permanent attractions in development between the Mattel Adventure Park, water parks and other opportunities where we expect to see growth, whether it's the Barbie Cafe, Barbie concert or UNO Social Club all the way to Hot Wheels attractions, stunt shows and Legends Tour.

And I should say before I move on that this is really about creating this virtuous cycle where success in toys, we bid success in entertainment and success in entertainment, we bring back and drive even more success in toys. And this is really the -- creating this ultimate flywheel to capture full value from our intellectual properties. We've been also very focused on driving efficiency and performing at a very high level operationally. We are very focused on margin expansion. Since we started the turnaround of the company, we took our gross margin from the 30s to the 50s and continue to focus on operating income margin.

As we move into entertainment and more licensing revenue, this is very high margin and will be margin accretive and will continue to improve and strengthen our margin performance. Cost savings is part of our algorithm. We've been executing on that strongly. Since we started the turnaround, we achieved cost savings of over $1.5 billion, and we expect another $50 million this year in 2026. We continue to operate in a capital-light way for a $6 billion company or so. Our CapEx is at between 3% to 4%. So it's light capital. And where we do spend the money, it's in very high ROI areas where we expect to see a return in a short time frame.

And we've been doing a lot of work to continue to optimize our supply chain, which is capital-light. But importantly, it's very flexible and very dynamic and able to respond and react to changing market conditions. And we do see our supply chain as a competitive advantage for the company.

Given the strength of our balance sheet and cash generation, we've been executing a robust share repurchase program. Over the last 3 years, we bought $1.2 billion worth of shares. This is about 18% of the float, and we guided for another $1.5 billion that we're targeting over the next 3 years. We believe that our current share price doesn't reflect the intrinsic value of the company, doesn't reflect the potential for the company. And given the fact that we have the cash and we have the resources, we are using it to invest in an area where we see significant value in our own stock.

And then what we also announced recently is that we are going to invest approximately $150 million in the company to scale our organic business and invest in digital game performance marketing. This is very consistent with our capital allocation priority where the #1 priority that we've been very consistent about is investing in organic growth. So we are doing that.

This is about capturing even more value from our IP faster and finding ways to accelerate our strategy. We're investing -- we're investing in areas that are very -- we believe are high return on investment potential, where we expect to see the return in 2027 and will be accretive, will be dollar accretive and payback within less than a year. And of course, we'll continue to be accretive in years to come after that.

The single largest investment is in mobile games, and this is really about accelerating our self-publishing business given the exciting potential we see in this area. When it comes to digital performance marketing, this is really about user acquisition. It's to support our first 2 self-published games.

And the unique aspect of this part of the investment is that it's -- given that it's performance marketing, you know upfront what is the return on investment, you know what you expect to achieve and you only spend the money to the extent you know you will get positive return. So we -- it's a different profile from the $110 million investment, which is more about investing in future growth, where we also have high confidence in achieving the return on investment. Performance marketing is different in that regard because you know upfront what is the expected return.

We expect these investments -- or we said that these investments will impact our profit in 2026, but we expect that to drive ROI and incremental growth, both top and bottom line in 2027 and beyond. We guided for growth of 3% to 6% in 2026. Some of the drivers that we talked about are growth in toys. This is areas where we see exciting opportunities for the company in vehicles, in games and action figures. Those will be comparable. And we expect to continue to see strong momentum in Hot Wheels, UNO and Mattel Brick Shop, which is becoming a hit -- real hit for the company.

We talked about inflection in entertainment with our 2 self-published mobile games amplified by the acquisition of Mattel163 and the launch of our 2 movies, Masters of the Universe and Matchbox. The important partnerships we have in 2026 are Disney's Toy Story 5, obviously, Pixar, KPop Deamon Hunters that is going to be in full release by the spring and DC Supergirl. These are all coming in 2026. And of course, as we said, the strategic investment will impact profit in the short term, but will be highly accretive in 2027 and beyond.

And then when it comes to 2027, too early to give specific guidance, but important to call out directionally what we expect to see next year in 2027. We do expect to see mid- to high single-digit revenue growth and strong double-digit growth in operating income. What we expect to see is growth in toys -- strong growth in toys, Hot Wheels, UNO, Mattel Brick Shop will continue to grow, and Barbie will grow in 2027. Barbie is positioned to grow in 2027. We're doing a lot of work around Barbie, very confident about the performance -- future performance of Barbie and the strength of this incredible franchise.

Digital games will scale even more. By next year, we will have 4 mobile games in release, 2 that we are launching in '26 and at least 2 in 2027. So assume 4 mobile games in full distribution in the marketplace. And then the full year integration of Mattel163. 2026 is a partial year. 2027 will be a full year integration plus all the work that we're doing around it to bring it into the Mattel fold.

Next year, we'll also see the release of major theatrical releases where we are partnered with on the toy side. With DC, there will be Superman and Batman, Disney's Frozen 3, Ninja Turtles. There will be a major movie in 2027 and another one in '28, by the way, but 2027 is the year to focus on. And of course, full year of KPop Deamon Hunters in release. So major IP partnerships on top of the organic growth that we expect to see from our own brands.

And then importantly, the benefit from the strategic investments that we're making in 2026 that will come to fruition in 2027. So in 2027, there will not be a line -- there will not be an investment line as we have in 2026 that is impacting profit, it will become a positive contributor given that we expect to see a positive return on investment -- positive return on investment on what we're making in '26 to come to fruition in 2027.

This is our story. A lot to digest, a lot to talk about, and I'm sure Arpine will dig in further.

Thank you. Great introduction. I have a few questions to start off, and then we'll try to weave questions from the audience into our chat through the app. You can send them to me, and I'll see them hopefully here.

Before we begin, just a quick note as a research analyst, I'm required to provide certain disclosures relating to the nature of my relationship and that of UBS with any company on which we express a view today. These disclosures are available at ubs.com/disclosure. Also, please reach out to me, and I can provide them to you after this meeting.

With that behind us, Ynon, thank you. That was a great interaction, very comprehensive. I wanted to start off with your tenure at Mattel. You've been at the company for a number of years now, and Paul is coming up on his first year as CFO. Can you maybe both speak to sort of what attracted you initially to join Mattel, what you were trying to accomplish and what those -- what that looks like today?

For me, at the core, the most exciting part of the company was the underlying assets that we own, which is this incredible portfolio of iconic brands that have incredible heritage value. We own one of the strongest portfolios in the world in children and family entertainment. And these are vibrant, active, thriving cultural brands. This is the hardest thing to achieve to have -- to own brands that have that much resonance and value. And the journey that we've been on is to transform Mattel from being a toy manufacturing company, which is how the company used to think of itself back in the day to become an IP company, and now we're evolving to become a brand management company.

And yes, we -- the biggest vertical for us is toys, and it will be such for years to come, given that it's a wholesale business for us, and it's a great business when it works, highly cash generative, and we can see a lot of upside from where we are today in toys. And in addition to that, the opportunity to capture value outside of physical product is very exciting.

And we saw a glimpse of that, a showcase of that around the Barbie movie, which was a great representation of the impact, the potential of our brands. But this is not just about Barbie and not just about movies. This is one example of the strength and impact that our brands can have in modern culture. And we're very excited to be on this journey. It's still early in the process. 2026, as we said, is an inflection year is what we expect to see the acceleration. But the opportunity to grow in addition to physical product was very exciting for me.

Thank you for the question. In my case, it's about 2 things. Number one, it's the foundation and number two, the potential. The foundation is very clear. We have one of the largest portfolios of valuable IP, as Ynon just mentioned. And in addition to that, very dear to my heart, we have a very strong balance sheet. So the potential is significant. And I do believe I timed my entry very well. We are at an inflection point, and we are about to see how the entertainment verticals come to life and how entertainment will drive excitement and growth in toys and toys will drive growth in entertainment. So that's why I believe it's the foundation, a very strong foundation and the potential that I see going forward.

Ynon, you just talked about incremental investments you're making in 2026 that are impacting profitability this year, but are obviously highly accretive next year. Could you maybe give a little bit more detail on what you're investing in? Why are you investing now? What's incremental and how you see each of those opportunities playing out?

Sure. The first example that we mentioned earlier is in mobile games. This is where we invest single-digit million in developing a game. This is something that we outsource to third parties. So we don't actually develop it ourselves. We don't need to stand up a studio from the ground up and where by owning the underlying game, we capture most of the economics.

And in today's world, you don't need to own the game engine, you don't need to own the studio. It's about demand creation, user acquisition and monetization. And this is something that we can do very well. We have a small team that is -- what we brought into the company, all experts in the field. And this investment will allow us to accelerate that and capture even more value from our -- from the games that we are launching and self-publishing.

Another example is Mattel Brick Shop. This is our Hot Wheels branded building sets that we launched last year, and it's off to a very, very strong and promising start, growing at high double digit, and it's a proper hit for the company. We expect that to grow strongly in '26 and in 2027. But this investment will allow us to inflect that even more and capture more value earlier.

Another example is trading cards. This is one of the fastest-growing segments within toys. We own incredible brands that have a collectability part of their core DNA of the play pattern. We own UNO as the #1 game, #1 card game in the world. And that combination will allow us to play in this area and capture even more value. And so by investing in 2026, we will be able to be in this business in a meaningful way in 2027.

We're also investing in breakthrough innovation. This is about finding the next big thing, leveraging technology, leveraging AI into play patterns. So a small investment will allow us to take more shots on goal outside of our traditional form of innovation. And it's important to say we always invest in our business, but this is about incrementally driving even more growth in addition to what we do normally.

Another area that is very exciting for us is to invest in first-party data capabilities. We are now touching more and more fans directly through our D2C business, self-published mobile games. We know that people are searching for opportunities to engage with our brands. And by owning the funnel, by owning more of the funnel and having that capability in-house, we'll be able to convert that relationship to drive more demand and capture more value.

This is -- all of this is really about how do we accelerate the value that we can capture from our IP and do that at a larger scale faster. Given the fact that we have such a strong balance sheet and we have the cash, it's -- we believe that this is a great place to put our money to work, investing in our own brands, our own capabilities, our own business, investing in our organic business to inflect and accelerate that even more than we expected before we made these investments.

Great. Great. And you know, Ynon, your strategy really has focused on sort of expanding your entertainment offering for several years now. You have had very successful Barbie movie that was a record, I think, for Warner Bros. Could you discuss the size of that business today and its potential contribution to growth over time?

Yes. We haven't sized the number specifically, but what is important to know that when you talk about the toy industry, which is north of $100 billion, people refer to market share and the potential and people try to frame it in that context. The interesting thing about our entertainment strategy is that it's uncapped. We are playing across multiple verticals, and it really is about how far your imagination goes in terms of the areas where you can commercialize your brands.

When it comes to brands like Barbie, Hot Wheels, UNO, American Girl, Masters of the Universe, these are brands that -- Masters of the Universe will be a lot more known after the movie. These are brands that are -- where you see the obvious potential. But what is interesting is that even other brands have incredible opportunities to become great games or mobile games, content, film, television and other experiences.

And as I said earlier, this is really what this game is about, owning big brands that have a large built-in fan base that people want to engage with. And then it's really up to you to imagine in what form that can manifest. I would have thought that there will be Barbie Erewhon shake. Of course, this is not a big business, but it's more about the example that people are looking for ways to engage with the brand and all the way to meaningful businesses like the Barbie movie, which went on to become Warner Bros. most successful movie ever in 100 years relative to all the great properties that Warner Bros. owns.

So we know that our brands can play across multiple verticals that people are looking for ways to engage with our brands. And I'll give you 2 examples. One is that the Barbie branded game on Roblox was the #1 branded game on the platform for more than a year with 0 marketing. And this is against thousands and thousands of games on the platform. Barbie just percolated to the top. because people are looking for opportunities to engage with it.

And recently, about 2 weeks ago, we launched an UNO Island on Fortnite. Again, Fortnite has, depending on how you count it, well over 100,000, 150,000 islands on the platform. UNO became a top 10 island on the first day with no marketing. So people are looking, people are finding opportunities to engage with our brands. Of course, we need to create quality experiences. It's not enough just to put a branded experience out there and hope for the best. We are investing in quality experiences. We partner with the best players out there, best partners that execute these opportunities. But we do see that when we put experiences that are branded out there, people find them and people engage. And this is the opportunity we have in front of us.

You mentioned Masters of the Universe, less known. We have a bunch of analysts that are super excited about Heman. They grew up with it. So I would argue that it's actually more known. There's more nostalgic association with it than you might think. No, that's great. Ynon, could you give us a little bit more detail on -- to zooming on a little bit on some of this gaming strategy on Mattel163 acquisition. First of all, has the deal closed or not? You just announced the acquisition. Why now versus continue with the JV? How does this fit within your road map and capital allocation strategy?

Yes. The JV was very successful on its own for -- since we launched it in 2018. As we are looking to roll out our self-publishing business, the timing was perfect to bring this together and harmonize the businesses, whereby we can coordinate and synchronize the release schedule, the experiences, leverage our scale, resources, cross-promotion, best practice and capabilities that we have between what we do at Mattel with the experience that Mattel163 has built over years.

And I'll give you one example, which is around UNO. UNO is a game that the Mattel163 has 2 versions of. And you can assume that we will launch another game, another UNO game, self-published UNO game. The opportunity to manage these 3 games together and make sure that each game has its own play pattern demographic and that you can optimize this offering together is very meaningful as opposed to the JV, which was run relatively independently, doing one thing over there and Mattel is doing something over here was just -- would not be optimal.

Bringing these 3 games under one strategy in how we release and market and promote is going to give us the maximum impact in how we reach and engage fans with the ability to cross-promote. Now the Mattel163 deal is closed, and it's now fully integrated into Mattel. It was -- we've always said that when we do an M&A, it will be strategic, it will be accretive and it will be obvious. And this is very much all of that.

We own -- this is all about our brands in a business that is directly related to a core part of the strategy, a core part of our opportunity and will be accretive on closing. And so very excited by this opportunity. We are very responsible when it comes to our capital allocation priorities. This is the first acquisition that we've done since we started the turnaround and speaks to the discipline and how we think about M&A opportunities for the company going forward.

Absolutely. Paul, over to you. We're almost in mid-March, not a seasonally high, right, not a period where you sell a lot of toys. But could you give us an update on how the quarter and year is shaping up? How you're tracking against your expectations, given the disruptions in the Middle East, what impact could this have on the business? We've also had some good news on the tariff front. But obviously, with oil prices, we are probably looking at some freight cost increases. How do you summarize all of that in terms of where you are?

Yes. We just provided our outlook and guidance for the year, and we also talked about the quarter only a month ago when we provided our earnings release. So what I can tell you is that, yes, it's a small quarter. Q1 is a small quarter, and we're tracking in line with our expectations in terms of the top line.

But also recall that we talked about a low single-digit decline in the top line in the first quarter and also the fact that we have the full impact of the tariffs as compared to the absence of it in last year. So it will be a tougher margin comparison this year versus last year.

When it comes to the Middle East conflict, first of all, we are watching carefully the developments and hope that we get to a resolution soon. And it's early to say. It's early to say what the impact will be in our business, and it depends on the length and the impact, the depth of the impact, but what I can tell you is that our supply chain team is very much used to these types of disruptions, and we're ready to reroute and continue with our optimization programs as we always do. So we are watching carefully, and we are -- we'll be ready to tackle the challenges that come our way.

Great. I do have a follow-up for you. I was hoping you could talk a little bit more on the capital allocation strategy, investing in organic growth, M&A, share buybacks. Can you maybe give us your latest on how you prioritize that list in your capital allocation and what the business needs today most?

Yes. We have a very clear capital allocation priority framework and it's all geared towards driving long-term shareholder value. The #1 priority is investing in organically in our business, and that is exactly what we're doing in 2026. We talked about the very strategic targeted investments that we have done that will have an impact in 2026, but will drive accelerated profitable growth in 2027 and beyond. So that is the #1 priority.

The #2 priority is maintain our capital structure, and we have a very strong balance sheet. And an example of that is what we recently did at the end of last year, where we refinanced $600 million of debt and maintain our investment-grade rating. Number three is strategic, thoughtful innovation that advances our strategy and that drives incremental growth. And that is exactly what we did again with Mattel163, where we've been very thoughtful, and it's an example of how we think about them in a very strategic way. We haven't done too many of those. But when we do them, it's very obvious at this one, as we just mentioned.

And then the last one is share buybacks. In the prepared remarks, in the presentation that Ynon talked about, we highlighted the fact that over the last 3 years, we bought back $1.2 billion of share, which is about 18% of our float. And we have also said that we expect or intend to buy back another $1.5 billion in the next 3 years. So that is the fourth capital allocation priority to maintain our capital structure. All of the actions are very consistent with our priorities, and it's all geared towards driving long-term value creation.

Great. We are almost out of time. So I'm just going to integrate questions that I've gotten with one last one for you, Ynon. There's a lot that you've done in toys, and you've made obviously many announcements around your entertainment verticals, film, digital gaming. Could you maybe define what success in all of these verticals could mean for Mattel 3 to 5 years from now? And if you want to maybe address the margin side of it or the size of the business in whichever way you could?

Look, this is really about growing our IP-driven play and family entertainment business. We do expect to see growth within toys, significant upside for us given the quality and strength of our brands, product innovation, market standing, relationship with retailers and the fact that the industry itself is growing and also driven by innovation. So we believe we can capture significant value in the toy aisle.

What you will see over the next few years is growth in entertainment, high-margin entertainment. The impact will be more in the bottom line because given that it's mostly royalty, it's less about top line growth, more about bottom line contribution, but there will be growth both in top line and bottom line at higher margin.

We expect also to increase our cash generation over time. We've been doing it consistently and be very disciplined about our capital spend and how we use our cash. But in terms of cash generation, strength of our balance sheet, we expect that to continue to get -- to become even stronger.

So very excited about where we are. It's -- we believe it's rare to have a combination of a company that owns such quality assets in a world where everybody is looking for these quality assets in terms of the strength and appeal of our brands with a built-in fan base where we can play across multiple verticals and capture value from these opportunities underpinned by a very strong balance sheet with significant upside potential.

The question -- and you followed the story for a while, as you remember, the question used to be, can your brands play outside of toys? And then the question was, well, even if they can, can Mattel do it? Because you've been around for decades and you've never made one movie. Why now? What changed? Now the question is not anymore about the strength and quality of our brands or whether we can do it. It's whether we can do more of it because we've been executing well, but whether we can do that at scale. And this is exactly where we are today. We are now executing this at scale. We have the assets, we have the right strategy, we have the right people, and it's now down to execution. And this is exactly what we're doing and very excited about what is in store for the company.

Wonderful. Well, we are, I guess, a couple of minutes past the 9:45. Thank you so much, Ynon and Paul. Thank you very much. Have a great rest of your day. Thank you.

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Greg Gilbert, Investor Relations. Greg, please go ahead.

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; and Paul Ruh, Mattel's Chief Financial Officer.

This afternoon, we reported Mattel's Fourth Quarter and Full year 2025 financial results. We will begin today's call with Ynon and Paul providing commentary on our results, after which, we will provide some time for questions. Please note that during the question-and-answer session, we respectfully ask that you limit to 1 question and 1 follow-up so that we can get to as many analysts and questions as possible today.

Today's discussion, earnings release and slide presentation may reference certain non-GAAP financial measures and key performance indicators which are defined in the slide presentation and earnings release appendices. Please note that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise. Our earnings release, slide presentation and supplemental non-GAAP information can be accessed through the Investors section of our corporate website, corporate.mattel.com, and the information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicators is included in those documents.

The preliminary financial results included in the earnings release and slide presentation represent the most current information available to management. The company's actual results, when disclosed in its Form 10-K, may differ as a result of the completion of the company's financial closing procedures, final adjustments, completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results.

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. Any statements we make about the future are, by their nature, uncertain. 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 from those projected in the forward-looking statements. We describe some of these uncertainties in the Risk Factors section of our latest Form 10-K annual report, our Form 10-Q quarterly reports, our most recent earnings release and slide presentation and other filings we make with the SEC from time to time, as well as in 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.

Thanks, Greg. Good afternoon, and thank you for joining Mattel's Fourth Quarter and Full Year 2025 Earnings Call. In addition to discussing our financial results, we have several strategic updates to cover, including our agreement to acquire full ownership of Mattel163 announced today, details on the evolution of our strategy, guidance for 2026, as well as midterm expectations and an update on our capital allocation priorities. In the fourth quarter, we achieved 6% growth in gross billings, including 7% in North America and 4% internationally. However, the growth in the U.S. was less than anticipated, which impacted our full year results relative to expectations.

2025 was marked by uncertainty in U.S. trade dynamics that affected retailer ordering patterns for much of the year. After 2 challenging quarters where U.S. retailers delayed orders, there was a significant acceleration in orders through most of the fourth quarter. December, however, ended up growing less than anticipated in the U.S., and our full year results finished below expectations. The challenge was specific to the U.S., while our international business performed in line with expectations with growth in every region in the quarter. POS was positive in all regions, including the U.S. and grew approximately 3% overall for both the quarter and full year. Our supply chain excelled in a volatile environment, adjusting for the shift in shipping patterns from direct import to domestic fulfillment and our teams effectively manage our owned inventory to finish the year well positioned for 2026.

As it relates to our full year portfolio performance, vehicles continued to grow strongly. Challenger categories combined grew driven by outstanding performance in Action Figures, while Dolls and Infant/Toddler/Preschool declined. Hot Wheels and UNO continued to perform strongly, and we saw improving trends in Barbie, which was flat for the quarter, although it declined for the year. Mattel Brick Shop had a very successful launch and is on its way to becoming an important growth driver for us. We gained market share in 2025 in key categories, including vehicles, dolls, action figures and traditional games. We ended the year with over $1.2 billion of cash after repurchasing $600 million of shares. With that, we have acquired more than $1.2 billion of shares in the last 3 years, representing approximately 18% of shares outstanding. Given the strength of our balance sheet and cash conversion and confidence in our strategic plan, our Board has authorized a new program to acquire another $1.5 billion of shares, which we expect to complete by the end of 2028.

Today, we announced that we have reached an agreement with our joint venture partner, NetEase, to acquire full ownership of the Mattel163 mobile games studio. Since its inception in 2018, Mattel163 has released 4 games based on Mattel IP with approximately 20 million monthly active users and over 550 million downloads worldwide. The acquisition values Mattel163 at $380 million with a purchase price of $159 million for NetEase's 50% interest. More than half of the purchase cost is expected to be funded from Mattel's share of the JV's cash, which is not consolidated on Mattel's balance sheet. The transaction is expected to be completed by the end of the first quarter, subject to customary closing conditions and will be immediately accretive for the company, both strategically and financially. The Mattel163 team has done remarkably well, building this business from the ground up, and we look forward to welcoming them on board.

Our vision is to extend physical play to the virtual world by creating digital experiences and games based on Mattel IP that drive sustained engagement for fans of all ages. Acquiring full control of Mattel163 meaningfully advances our digital games business and will add significant development, publishing and digital customer acquisition expertise. Mattel will leverage Mattel163 capabilities to increase our mobile games output and enhance alignment with the broader Mattel product road map. Integrating Mattel163 with Mattel's digital business will create scale benefits in performance marketing and cross-promotion as well as greater synergy with Mattel brand marketing. Our portfolio of iconic brands lends itself perfectly to the digital world. The acquisition is in line with our strategy to capture the full value of our IP in high-margin, highly accretive entertainment verticals.

We also announced that Mattel has been awarded global multiyear rights to develop and market a full range of Teenage Mutant Ninja Turtles products starting in 2027 ahead of Paramount's 2 worldwide theatrical releases in 2027 and 2028. Teenage Mutant Ninja Turtles has been a global phenomenon for more than 40 years, and we're excited to add this franchise to our portfolio. This significantly expands our Action Figures category and further reinforces our leadership position as a partner of choice to major entertainment companies and IP owners. Recent additions include KPop Demon Hunters with Netflix, DC with Warner Bros. and the renewal of Disney Princess and Frozen as well as ongoing partnerships for Jurassic with Universal, Minecraft with Microsoft and WWE.

Our company's mission is to create innovative products and experiences that inspire fans, entertain audiences and develop children through play. Our purpose is to empower generations to explore the wonder of childhood and reach the full potential. Over the last few years, we have successfully broadened our reach outside of toys into accretive entertainment verticals and expanded to new audiences and fans, including adults.

We are evolving our strategy to grow our IP-driven play and family entertainment business. This brings together 2 important and fundamental concepts. The first is the continued expansion beyond physical product. We see content, licensing and digital games as key high-margin growth drivers and the acquisition of Mattel163 is an important building block of this strategy. The second is an increased orientation around brand management, which will allow us to capture full value of our IP across both toys and entertainment. It is important to note that toys are foundational to Mattel, and there is significant upside in this industry. We believe success in our toy business will drive success in entertainment and success in entertainment will drive greater success in toys. We are looking to fully capitalize on this virtuous cycle.

Going forward, the 5 key priorities of our strategy are: to grow toy brands with more breakthrough innovation, adult fans and collectors and evolve demand creation, to expand D2C and commercial reach through first-party data, retail development and new channels, to broaden content offering in film, television and short form, accelerate licensing in consumer products, location-based entertainment and publishing and expand with new business models. To scale digital play through mobile game self-publishing, Mattel163 licensing and creative platforms and to optimize operations and leverage AI across our systems and supply chain. Our new brand-centric organization and integrated operating model supported by the Mattel playbook will allow us to manage our brands more holistically and drive the success of our strategy. 2026 will be an important year for Mattel as we implement our new brand-centric strategy to grow our IP-driven play and family entertainment business. We expect growth to be driven by innovation in toys, major partnerships with leading IP owners and an acceleration of our entertainment offering.

Vehicles as well as challenger categories combined are expected to grow strongly, dolls to be comparable and ITPS to decline. Hot Wheels, UNO and Mattel Brick Shop are expected to have another strong growth year. For Barbie, we expect improving trends for the year, driven by new line architecture and product innovation. We are very confident in Barbie's strength as one of the most recognized and beloved brands in modern culture and that it will return to growth in 2027. We will benefit from strong partnerships with major entertainment companies and IP owners, including new launches for Netflix, KPop Demon Hunters, Disney and Pixar's Toy Story 5 and DC's Super Girl. Mattel Creations, our D2C platform serving adult fans and collectors with premium products is expected to continue to perform strongly, in line with our strategy to further expand consumer demographics. 2026 marks an inflection year in our entertainment offering with 2 movie releases based on Mattel IP, Masters of the Universe on June 5 and Matchbox on October 9.

The worldwide theatrical release of Masters of the Universe with Amazon MGM Studios will bring to the big screen, one of the most iconic superhero franchises in the industry. The Matchbox movie with Skydance Media will be distributed globally on Apple TV, introducing this heritage brand to a new generation of fans. And we expect to benefit from exciting momentum in digital play, including the release of our first 2 self-published digital games and the addition of Mattel163 to our growing digital portfolio. As it relates to the toy industry, following mid-single-digit growth in 2025, we expect it to grow in 2026 with the benefit of a more toyetic theatrical slate and continued growth in adult consumers. Consistent with our capital allocation priority to drive organic growth, we plan to make several targeted strategic investments in new capabilities and technology to scale business opportunities of approximately $110 million in 2026.

These include digital games, which will be the largest area of investment, first-party data, D2C and breakthrough toy innovation as well as AI and infrastructure. In addition, we are planning to invest approximately $40 million, primarily in digital performance marketing and user acquisition for our 2 self-published mobile games launches where the ROI is measurable and can be adjusted up or down based on specific targets and results. These investment decisions follow a rigorous assessment that identified opportunities for capital deployment within our capital-light framework in scalable, highly accretive growth areas to create long-term value. In aggregate, these investments will impact our bottom line in 2026 and then are expected to be high ROI and self-funding in 2027 and beyond. and drive accelerated growth and profitability. In 2027, we expect to achieve growth of mid- to high single digits in constant currency in revenue and double digits in adjusted operating income.

This growth will be driven by the benefits of our brand-centric strategy and organization, new partnerships and the 2026 strategic investments. I will now turn it over to Paul to cover our financial results and outlook in more detail.

Thanks, Ynon. As you just heard, gross billings grew 6% in the fourth quarter, including 7% in North America, and POS was positive across every region, including the U.S. However, U.S. gross billings in December ended up growing less than we anticipated, impacting our full year results relative to expectations. Looking at what transpired in the U.S., trade-related uncertainty led retailers to shift orders from the second and third quarters into the fourth quarter, adopting a more just-in-time approach despite positive POS trends in Q2 and Q3. Entering Q4, POS continued to grow and retailers' orders accelerated significantly ahead of the holiday season. However, while POS in the U.S. ended positive for the quarter, December finished lower than anticipated. In response, we took actions to manage owned inventory and support our retail partners, which had a larger-than-expected impact on margins and profitability.

These dynamics were specific to the U.S. market, while our international business grew in line with expectations in Q4. Global POS was up approximately 3% for both the quarter and the full year. In looking at fourth quarter results, beginning with gross billings in constant currency, Mattel grew 6%. Dolls and Barbie were comparable. American Girl grew for the fifth consecutive quarter. Vehicles impressive strength continued, growing 16%. Hot Wheels grew double digits and Matchbox and Disney and Pixar's cars performed well. Infant, Toddler and Preschool declined 10% due to continuing strategic exits in Baby Gear and Power Wheels as well as preschool entertainment. Fisher-Price declined modestly. Challenger categories collectively grew 14%. Action figures performed particularly well, driven by Jurassic, Minecraft and WWE. Billing sets grew driven by the very successful Mattel Brick shop launch. Games also grew, primarily driven by UNO, which achieved its 10th consecutive quarter of growth.

Turning to the full year. Total company gross billings were comparable. Dolls declined 7%, primarily due to Barbie and Polly Pocket, partially offset by Wicked. Barbie's performance was impacted by softer overall category trends and headwinds from noncore segments such as mini Barbie land. Vehicles grew 10% and Hot Wheels performed exceptionally well, growing double digits and achieving its eighth consecutive record year, while portfolio vehicles momentum continued. Infant, Toddler and Preschool declined 18%, primarily due to Fisher-Price, Baby Gear and Power Wheels. Challenger categories collectively grew 13%, driven by very high growth in Action figures, which benefited from the strong performance in Jurassic, Minecraft and WWE. Mattel Brick Shop performed very well in its launch year and is becoming a key part of our offering. Turning to gross billings by region. We achieved growth in each region in the fourth quarter. For the year, North America declined due to the U.S., while international grew 4%.

In the quarter, total company net sales were $1.77 billion, up 7% as reported and up 5% in constant currency. For the year, net sales were $5.35 billion, down 1% as reported and in constant currency. Moving down the P&L. Adjusted gross margin in the fourth quarter was 46%, a decline of 480 basis points, primarily due to higher discounting, inflation and foreign exchange as well as the timing lag between pricing actions and the recognition of tariff costs in the P&L. These pressures were partially offset by optimizing for profitable growth cost savings. Given trends in the U.S. in December, we took steps to manage our own inventory, including an increase in promotional activity, which impacted our margins. For the full year, adjusted gross margin was 48.9%, a decline of 200 basis points.

The same factors that impacted the fourth quarter gross margin impacted our full year gross margin. However, pricing and other mitigating actions fully offset tariff costs on a full year basis as the benefits of those actions were realized over time. Mitigating actions included accelerating the diversification of our supply chain, optimizing product sourcing and product mix and selective pricing actions. Fourth quarter advertising expenses decreased 1% and adjusted SG&A expenses decreased 5%. For the full year, advertising increased 3% to support consumer demand, while adjusted SG&A decreased 1%. Adjusted operating income in the fourth quarter was essentially flat at $160 million. For the full year, adjusted operating income was $620 million, a decline of 16%, primarily due to lower gross profit. Adjusted EBITDA in the fourth quarter was $234 million as compared to $249 million. For the full year, adjusted EBITDA was $927 million as compared to $1.06 billion.

Adjusted earnings per share in the quarter increased from $0.35 to $0.39, primarily benefiting from share buybacks and certain onetime discrete tax items. For the full year, adjusted EPS decreased from $1.62 to $1.41. Free cash flow generation was $411 million for the year as compared to $598 million in the prior year. The decline is primarily due to lower net income. Cash from operations was $593 million compared to $801 million in the prior year. We repurchased $188 million of shares in the quarter, bringing full year repurchases to $600 million, in line with our target. As Ynon said, since resuming share repurchases in 2023, we have now bought back more than $1.2 billion of shares, reducing our shares outstanding by approximately 18%. Cash at year-end was strong at $1.24 billion after completing $600 million in share repurchases. Owned inventory at year-end was $563 million, a modest increase versus prior year, primarily reflecting tariff-related costs and impact from foreign exchange. Long-term debt was consistent with prior year at $2.33 billion.

Our leverage ratio was 2.5x within our target range of 2 to 2.5x for our capital allocation priorities. Our balance sheet is in a strong position with the next debt maturity in December 2027. Retailer inventories finished lower in absolute terms as compared to the prior year. We continue to execute on our Optimizing for Profitable Growth program. Fourth quarter savings totaled $24 million, bringing full year savings to $89 million and cumulative savings of $172 million already achieved since we launched the program in 2024. We are tracking ahead of our 3-year $200 million savings target, and we are now projecting approximately $50 million of savings in 2026, bringing the total target of the program to $225 million of savings. We are also executing on our multiyear capital allocation priorities to drive long-term shareholder value. Consistent with our first priority to invest in organic growth, as mentioned, we plan to make several strategic capital-light investments totaling approximately $110 million in 2026 to drive growth in future years.

In addition, we plan to invest approximately $40 million this year, primarily to support our 2 self-published mobile game launches. These targeted investments are expected to impact our bottom line in 2026 before driving incremental revenue and profit starting in 2027. On our second priority to manage our capital structure, we continue to benefit from a strong balance sheet. In the fourth quarter, we refinanced $600 million of debt and maintained our investment-grade rating. On our third priority, to pursue external development opportunities, we just discussed our agreement to acquire full ownership of Mattel163, which will be accretive both strategically and financially. In terms of our fourth priority to buy back shares, we have repurchased $1.2 billion of shares over the last 3 years, representing approximately 18% of shares outstanding. Mattel intends to repurchase $1.5 billion of its common stock over the next 3 years, including $400 million of shares in 2026.

The timing and amount of repurchases in any 1 year will be determined by market conditions and other uses of cash. As we look ahead to 2026, we expect net sales growth in the range of 3% to 6% in constant currency, which includes the expected partial year contribution from Mattel163. At current spot rates, FX would be a tailwind of approximately 1.5 percentage points on reported net sales. In terms of cadence, we expect a low single-digit decline in the first quarter given the continued shift from direct import to domestic orders in the U.S. and the timing of the launch of new product lines. Adjusted gross margin of approximately 50% for the full year. This includes savings as part of our optimizing for profitable growth program and the benefit of the margin-accretive digital games that we are launching in 2026, partially offset by product cost inflation and the net dilutive impact to gross margin percentage of the tariff costs versus related mitigating actions.

Adjusted operating income of $550 million to $600 million. This includes the impact of approximately $110 million of the strategic investments and $40 million primarily in performance marketing, an adjusted tax rate of approximately 24% and adjusted EPS in the range of $1.18 and $1.30. Mattel's guidance considers what the company is aware of today, but is subject to market volatility, unexpected disruptions, including further regulatory actions impacting global trade and other macroeconomic risks and uncertainties. Here is more color on key growth drivers for 2026 by category. Dolls is expected to benefit from the new KPop Demon Hunters product, which will ship in the spring, Vehicles is positioned for another year of strong growth with Hot Wheels continuing to benefit from expanding kids and adult audiences, top partnership with licensing deals and innovation in track and play sets.

Mattel Studios Matchbox film will be supported by sales of related toy and consumer products, while Disney and Pixar Cars will celebrate its 20th anniversary with a range of executions. Infant, toddler and preschool is expected to decline and have a 2% to 3% headwind to our total gross billings. For the year, we expect a significantly smaller impact of Baby Gear and Power Wheels as we lap the majority of our strategic exits, while Thomas is expected to benefit from its fall relaunch. ITPS is an important category in the toy industry, and Fisher-Price is a clear market leader. Given the headwinds, we are actively assessing our ITPS strategy and business to ensure it is best positioned to achieve its full potential. Challenger categories collectively are expected to grow primarily in Action Figures with key drivers being Mattel Studios Masters of the Universe, Disney and Pixar's Toy Story 5, the addition of the DC license in the back half of 2026 and continued contribution from WWE, among others.

In addition, we expect games to grow driven by the new launches for UNO and for Building sets to benefit from the promising expansion of Mattel Brick Shop. As mentioned, we also expect to benefit from our scale digital play strategy, including the partial year addition of Mattel163. With that, I will turn it back to you, Ynon.

Thank you, Paul. We achieved strong top line growth in the fourth quarter and consumer demand was positive in every region for both the quarter and full year, but December gross billings in the U.S. ended up growing less than expected. Our international business was positive for the year, and we gained market share in key categories globally. 2026 will be an important year for Mattel as we implement our new brand-centric strategy to grow our IP-driven play and family entertainment business. We expect growth to be led by innovation in toys, major partnerships with leading IP owners and an inflection in entertainment with 2 movie releases and an expansion of digital games, amplified by the full acquisition of Mattel163 Mobile Games Studio. We are making strategic investments that will impact the bottom line this year, but are intended to accelerate growth in top and bottom lines in 2027 and beyond. I will now pass it to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Arpine Kocharyan with UBS.

I was wondering if you could unpack a little bit the revenue guidance. It seems like underlying growth is flat to up about 3% because JV integration adds around, by my calculation, about 3% of year-over-year growth. I guess, could you explain what does the lower end versus the higher end entail? Because it's a bit lighter than expectation given the strong film slate that you have, both third-party IP as well as owned as well as new licenses for this year? And then I have a quick follow-up.

Can you hear me better now?

Yes, I can hear you. Yes. Now I can.

Sorry I was saying thank you for the question. We put together a plan for 2026 and expect to achieve 3% to 6% growth in constant currency. There are several drivers that we talked about in the prepared remarks, but I would highlight a few. The -- first of all, it will be an important year for Mattel as we roll out our entertainment strategy or inflecting our entertainment strategy as part of our new brand-centric strategy to grow our IP-driven play and family entertainment business. We expect to grow in toys with a lot of new innovation, major partnerships with leading IP owners and more growth in digital games, specifically self-publishing as well as the integration and full ownership of Mattel163. The key drivers by category will be vehicles and challenger category as a whole, driven primarily by Action Figures and games as well as Mattel Brick Shop, which will scale quickly within the building sets category.

We are seeing growth expected to come from Hot Wheels, UNO, which are very strong drivers. So another strong year for these 2 very important brands for us. The major entertainment partnerships that we are scaling will be with KPop Demon Hunters, Pixar Toy Story -- Disney Pixar's Toy Story 5 and DC Super Girl. Also, I would highlight that we expect to see growth for Mattel Creations, our D2C platform, which serves adult fans and collectors with premium product. this will be another important year for us to scale that business. And of course, we're very excited with the 2 movie releases based on our IP, Masters of the Universe in June and Matchbox in October. Masters of the Universe particularly is expected to be very toyetic. Movie is tracking well. Too early to tell, of course, and you don't know until the movie is out. But so far, we couldn't be more excited with where the movie is positioned and the momentum we have heading into the year.

Great. And then it sounds like most of this $150 million of reinvestment you have to make is in OpEx. This is around 1/4 of earnings base for you, a significantly large investment. You talked about these investments will become self-funding with high ROI starting in 2027. Can you maybe talk about what gives you confidence about returns as early as next year?

Yes. So this is very consistent with our capital allocation priority. In fact, the #1 priority is to drive organic growth. And this is exactly what we're doing here. We are putting capital behind very specific targeted opportunities where we see high ROI, high margin opportunity to scale these businesses. And we expect all of these investments in aggregate to be profitable and accretive and contribute to bottom and top line in 2027. I would also say that these investments in areas like first-party data, D2C, breakthrough toy innovation, AI and infrastructure that will support -- and some of it will support specifically our challenger categories where we see white space opportunities such as Mattel Brick Shop in building sets, investments in the games category and more expansion with adult fans and collectors.

These investments are flexible, very much in line with our capital-light strategy. We can modulate these investments and put more money to work where we see opportunities or conversely adjust downwards if we don't see the return. But this entire plan follows a very rigorous assessment of these investments where we prioritize areas where we see asymmetric opportunity in terms of risk or level of investment relative to the upside. So we're going into this, very excited. Yes, it will impact our bottom line in 2026, but we expect it to be highly accretive to both bottom and top line in 2027 and beyond.

Your next question comes from the line of Eric Handler with ROTH Capital.

Ynon, I wondered if you could talk a little bit about the learnings that you're taking away from your partner, NetEase, and why you felt now was the right time to buy in that part of the joint venture?

Sure, Eric. I should start and say that this is a very important strategic acquisition for Mattel. As you know, it's the first acquisition that we've done since we started the turnaround. And the reason it's important is that it is going to be something that will help us accelerate and scale a very important part of our digital strategy in self-publishing. We've seen the growth of Mattel163. We've talked about it before. It was a very clear demonstration of the strength of our brands in the digital space when executed well. And we've been seeing the growth of the JV, both in top line and profitability. Based on just 3 brands, 4 games based on 3 brands, very strong growth and high margin. And the acquisition of Mattel163 or taking full ownership will meaningfully advance our capabilities, expertise. It will give us the ability to scale our business across both Mattel163 and our self-publishing initiative.

It will help us grow the output. It gives us economies of scale, more synergy, more opportunities for cross-promotion and a holistic management of the games that we're releasing into the market. And all of that is as part of expanding beyond physical play. It will allow us to capture full value of our IP in a high-margin, high-growth, highly accretive entertainment vertical. And when you do that and you build on top of the relationships we have already with strong publishers such as Take-Two, Xbox, Supercell, Netflix, Apple Arcade, high-margin licensing business as well as all of the work we're doing with the creative platforms such as Roblox and Fortnite, it's becoming an exciting growth driver for us as part of our entertainment strategy. Let me just add that, Eric, just one more comment on Mattel163. We said in the prepared remarks, and I want to emphasize that this is a highly accretive deal already upon closing immediately, both financially and strategically.

The acquisition itself, the transaction, we believe, is very favorable for Mattel. And as we mentioned, more than half of the acquisition cost is paid by cash that is sitting on the balance sheet of the JV, not on the Mattel balance sheet. So the actual cash outlay by Mattel is not significant, especially relative to the strategic value that we will generate from this acquisition.

Okay. And then just as a follow-up, I'm assuming the 2 games you have coming later this year are probably beta testing in a handful of international markets right now. Can you maybe talk about how those are going and when you think these games might see a full-scale launch?

Yes, we are targeting soft launch in the first 6 months of the year. With all these things it's hard to tell until you're actually in the market. But so far, all the testing that we're doing and all the work that the team is driving, all of this looks very positive. But again, it will all be tested in real time. But so far, very happy with the progress. Games look great. They're testing well, and we're very proud of what we're seeing so far.

Your next question comes from the line of James Hardiman with Citi.

So I was hoping maybe we could just rewind a little bit and maybe any color you could give us on what you saw in December? Obviously, as of early December, it seemed like you were ultimately going to hit the number. Maybe as we think about retail, just how bad was the December performance? And then as we think about wholesale and ultimately inventory, trying to figure out if you finish 2025 in a position where there's cleanup to be done in 2026, just given sort of the sharp turns of retail. I don't know if -- as we think about the 2026 guidance, if there's some sort of cleanup involved in that number.

Yes, James, let me take that question. So let me just state very clearly that it's all about December in the U.S. not growing as much as we expected. As simple as that. We expected strong growth in December, and we did see the growth in December, but it was less than anticipated in the U.S. and our full year results finished below expectations. We also saw a more promotional environment than usual. Given the trends in the U.S. in December, we took steps to manage our own inventory, including an increase in promotional activity, and that impacted our margins, but it positions us well for 2026. Let me put this in context for you. POS was positive across every region, including the U.S. in Q4 and for the full year. The total company POS grew 3% for both the quarter and the full year. And then specifically, entering -- if we take a step back, 2025, as we know, was a very unique year that was marked by uncertainty in the U.S. trade dynamics, and that affected retailer ordering patterns.

So you had a specific question, what happened in December. We entered the fourth quarter and we saw an acceleration of retail orders and continued POS growth that gave us confidence in achieving our full year guidance. And remember that December is historically the biggest month of the year for POS. But because of the shift in retailer ordering pattern this year, orders were more back-end loaded and the volume of orders expected in December was significantly higher. In December, POS in the U.S. finished lower than anticipated and the retailers managed inventory more conservatively than we anticipated. On the positive side, having taken all those actions, we are in a good starting position for 2026 when it comes to our own inventory and through the promotional activities that we put in place, we also work with the retailers to make sure that they have a balanced, good starting position from a retail inventory perspective as well. So all these actions helped us have a good starting point for 2026.

That's helpful. And I guess along those lines then, obviously, 2026, as we think about your operating income guidance or your EPS guidance is significantly short of, I think, where the Street was thinking. A big part of that are the investments that you guys are going to be making. But I guess if I think about 2026 as a transition year, I think you said 2027, maybe a double-digit operating income growth next year, but I'm still not sure that gets us back to even where we thought 2025 would be. So I guess maybe talk to the idea that not only is the 2026 guidance feel like it's meaningfully worse than we would have thought a few months ago, but even sort of beyond 2026 feels like it's been downgraded to some degree based on some of the numbers that you've given. Is there something big picture that we haven't talked about yet that would lead to such a sort of downward revision?

Yes. James, the outlook we provided for '27 is directional when we talk about double-digit growth in profitability is directional. And of course, we'll give you more information as we head closer to the start of '27. That said, the investments we are making in '26 are -- we believe will be highly accretive, as we said, and will help us drive the meaningful growth, both top and bottom line in 2027 and beyond. So yes, we are -- we're going to see 1-year impact in bottom line given these investments, but they're all -- we believe, not just get us back to normal, but will help us accelerate growth in top line and profitability. And this is on top of all the other things that we are doing as part of our day-to-day in innovating in toys, growing our entertainment business, continuing to strengthen the company with more partnerships, entering new white space opportunities and driving operational excellence.

We expect to be back at the 50% gross margin level in '26. And we haven't guided to anything beyond that, but we do expect to see numbers and financials improving in '27 and beyond. The investments are designed to accelerate growth, not to underpin growth. And that will help us execute our strategy at a faster rate and again, very much in line with our capital allocation priorities with the #1 being investing in organic growth. So we've had that as the #1 priority on the list for a number of years. And we actually are now doing it, having identified very clear, measurable, high ROI, high-margin, exciting opportunities for us to accelerate growth.

Your next question comes from the line of Gerrick Johnson with Seaport Research Partners.

I have a couple of questions here. First, can you give us -- or how are you thinking about Masters of the Universe and Matchbox in your guidance? And maybe could you give us any sort of metrics or assumptions or guideposts that would help us modeling those?

Yes. Gerrick, the Masters of the Universe movie will be a large global theatrical release. The movie will be Toyetic. It will be, in fact, I would call it, having seen the directors got very toyetic. And the testing also -- testing that we've seen so far is very positive. And again, I would caution and say you don't know until the movie is actually in market, but it's shaping up to be a very exciting movie, a big event, big production, super hero coming of age, incredible story. So we're very proud of the movie. Travis Knight, the director is a big fan himself. And the way he designed and brought this movie to life, we believe will speak to both the die hard generational fans all the way to new audiences, young audiences that never seen the He-Man before. So we're very excited about that. Matchbox will be released on Apple TV. So it will not have the theatrical exposure, but it's a great action movie.

John Cena in the lead is just incredible. It's a great cast. Sam Hargrave, the director, also did a masterful job in putting together a super exciting action movie. And there's a whole line of toys that will accompany the movie release. So we're very excited about both. The -- beyond the movies themselves, we are excited because when Masters of the Universe comes out, you will see the breadth of our offering for the pink world of Barbie all the way to the dark world of Eternia and everything in between. And just the breadth of the genre and execution, we believe, will be very, very telling. So I'm not -- I guess I'm not giving you specific numbers for modeling, but I'm trying to give you color on the opportunity and the potential of these 2 pictures.

Yes. Okay. All right. Okay. Did you say that first quarter revenue is going to be down low single digits, is that right?

Yes, Gerrick, that is exact what I said. We expect a low single-digit decline in the first quarter given the continued shift from direct import to domestic orders in the U.S. and the timing of the launch of new product lines.

Your next question comes from the line of Kylie Cohu with Jefferies.

Just kind of pivoting back to holiday for a moment. I'm curious how products under $20 performed relative to the big ticket items? And just kind of any read-throughs on the customer behavior and kind of customer health heading into 2026?

Yes, I can take that question, Kylie. We saw an elevated retail promotional environment in Q4. And what we did is we took actions to manage the inventory, both our own inventory and also to support our retail partners, which had a larger than anticipated impact in our margins and profitability.

In general, for 2026, we expect to continue to see a promotional environment, and we are factoring this into our guide. But very specifically, what we saw in December was a more promotional-driven environment and a price-sensitive consumer looking for deals. And we reacted on a timely basis. That's what we've been doing season after season, and we did that to make sure that we have the right starting point from an inventory perspective for both us and our retailers.

Awesome. That's super helpful color. And then just a follow-up on that. How would you classify retail inventory levels now? I know you said that they were being conservative during the holidays, but just kind of curious. Are they continuing to be conservative, we're not kind of going to get a build back of that? How should we kind of think about the health of the market right now?

Yes. Retail inventories finished lower in absolute terms compared to prior year. So that's why we mentioned that the retailers are much more cautious in terms of inventory management. And we do continue to see a shift from DI to domestic into 2026. So we are observing those behaviors and the impact on our shipping carefully. And we are taking the learnings from 2025 and making sure that we have the proper plans in place to continue to drive growth.

Our next question comes from the line of Megan Clapp with Morgan Stanley.

I had a couple of questions on SG&A. I wanted to start with -- if I look at the implied SG&A guide for '26 and then think about the investments that you called out, I think the guide implies kind of core SG&A growth, if I take out the $150 million of investments of like high single digits year-over-year, which I guess just feels a bit high to me relative to what you're expecting for the top line and considering you still have some tailwinds from your cost savings program. So Paul, maybe you could just start with just helping us understand as we think about kind of that underlying core SG&A guide, what's embedded in that?

Yes. We did not necessarily provide specific guide on SG&A to be clear. What we talked about is that we are putting in place strategic investments to accelerate our profitable growth for 2026 and in '27 and beyond. So the majority of those investments are in the SG&A line, and we talked about the $110 million of investments in digital games. And we also talked about the $40 million in digital performance marketing that we are controlling. The ROI is measurable. We went through a thorough and very rigorous assessment process to make sure that they have a high return on investment. So all of those investments are going to be something to consider in 2026, but you will see the return in 2027 and beyond because these are self-funding and will drive accelerated growth and profitability in '27 and beyond.

Okay. Fair enough. Maybe just as a follow-up there -- and I know RP&A asked about it, but when you say these investments become self-funding, does this imply a net positive contribution to operating income or simply that kind of incremental spend moderates as revenue scales? I'm just trying to understand with this the $110 million in particular, is that just structurally higher in the base coming out of '26? Or do we kind of get any of that back as maybe some of these costs roll off?

It's the former, Megan. And we are expecting those investments to be self-funding in 2027 and beyond and drive accelerated growth in profitability.

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

Maybe as a follow-up on Mattel163 for Ynon. Could you perhaps talk a little bit more about how you expect the strategy to evolve over time from where it's at today, perhaps in terms of the output of the studio or the type of game you hope the studio can produce? And maybe as a part of that, are there any additional investments you feel like need to be added into the studio or funding for capabilities to go after the opportunity you have in mind when making this acquisition?

Yes, Stephen, the -- what is unique about mobile games is that for a relatively low amount of investment, you can develop high-quality games without owning necessarily heavy production capabilities. So the capital invested in those games, we regard as light. What is more capital intensive is user acquisition. But in today's world, this is all performance marketing with a very clear ROI, and you only spend the money to the extent you know it will achieve the results you're targeting. There is a lag in terms of investment when you -- relative to when you actually see the return, but it's very -- it's highly measurable and you have clear visibility into the expected return. We talked about publishing 2 -- 1 to 2 games per year. We are already, as we said, targeting 2 games in 2026.

We expect that the acquisition will increase the output of course, give us more scale in capabilities, resources, expertise and at the same time, give us a built-in very high-quality team that can help us accelerate our business overall. So this is really about scale. It's about benefit -- leveraging the combined resources and assets. It's about cross-promotion and holistic management of our brands together and as part of our brand-centric strategy. The one thing that we didn't really cover here, even though we mentioned today, is our brand-centric organization. This will be -- this is really a new way of how we think about what we do and how we do that. It's about holistic management of our brands in order to capture value across both entertainment and toys and creating a virtuous cycle where one feeds off the other. And it also helps us focus even more sharply on expanding beyond physical product.

And so when you bring it all together, more scale in digital games, more resources, more capabilities, more expertise, managed as part of a holistic brand management approach, we believe will benefit not just digital, but also the toy business. And that's how you achieve the -- you really create this virtuous cycle. The -- as we said, the deal will be immediately accretive. The acquisition of Mattel163 will be immediately accretive, both strategically and financially. It will be -- we expect it will be highly accretive going forward and happy with the terms of the deal that made it even more attractive, putting aside all the strategic benefits that we would drive.

Great. And then, Paul, just quickly, I wanted to see if there is any more help you can maybe give investors on the trajectory of margins throughout the year, just given your expectations for the underlying business and then some of the investments you're making in the cost structure, anything directionally would be helpful.

Yes, happy to do that. So first of all, on the gross margin line, we do expect the return of adjusted gross margin to approximately 50% in 2026 and that includes our OPG savings, the discipline that we constantly display in terms of cost management, the benefit of margin-accretive digital games that we're launching in 2026, and that will be partially offset by product cost inflation and the net dilutive impact of gross margin percentage to the tariff cost. But the important thing is, keep in mind, we are aiming for 50% gross margin in 2026. And then when it comes to 2037 and beyond, the investments are going to deliver on the returns, and we are expecting to see profitable growth, i.e., an acceleration in growth and profitability as well.

Your final question comes from the line of Chris Horvers with JPMorgan. Chris Horvers, your line is open.

I'll squeeze them both in at the same time here. Can you talk a little bit about Barbie? I mean if you think about the magnitude of the shift to the fourth quarter of orders, it was up slightly year-over-year and not compensated for the declines in the third quarter. What are you thinking about like the innovation? And when would you expect Barbie to return to growth? And then my modeling question is basically, can you talk us through the dynamics of how the acquisition will play out in terms of grossing up revenues and how that affects the margin structure of the business post acquisition?

Sure. Thank you, Chris, for the question. The -- Barbie saw improving trends in the fourth quarter. It was flat, although down for the year. It was impacted, as we said, by the category trends, overall category trends and some noncore segments such as mini Barbie land. With that, Barbie is the #1 doll in the industry, has been so for the last 5 years. And we could not be more confident in Barbie's strength as one of the most recognized and beloved brands in modern culture and that it will return to growth. And we guided for Barbie to be down in '26, although we will see improving trends, and then it will return to growth -- healthy growth in 2027. There's a big part of the -- of our new brand-centric organization was keeping Barbie in mind and making changes that will put our best team and resources behind the brand.

Barbie as a brand is healthy and poised for growth. When we launch a new doll or a new experience or a partnership, it's a cultural event. And we know how strong Barbie is. It really is about repositioning it for growth, executing our brand-centric strategy and having multiple touch points around the brand, not just in toys but around entertainment with more content, experiences, games and other ways to drive fan engagement and at the same time, also continue to broaden the demographics with adult fans and collectors. So very confident about Barbie's long-term growth trajectory, and we'll share more at the upcoming New York Toy Fair even for 2026. But given the time lag and the putting new product in market, it will take a bit of time until we see the result of this work. But very confident about Barbie. In terms of the acquisition, I will let Paul address that, how do we consolidate the acquisition?

Thank you. So in terms of the acquisition, as we mentioned in the release, we expect in 2026, a partial year contribution of about $150 million in sales. And going forward, the equity method investment will disappear from Mattel's P&L. Royalties will be replaced by full year revenue recognized by the JV. But more importantly, Mattel163 financials will be integrated into the business. We will not be providing specifics on Mattel163. And we -- this is part of our integral digital game strategy that is accretive from a top line and also from a margin perspective.

That concludes our question-and-answer session. I will now turn the call back over to Ynon Kreiz for closing remarks.

Thank you, operator. In closing, 2026 will be an important year for Mattel. It is an important year for Mattel already, and we will see growth in top line while we are investing to accelerate growth in future years. These investments will help us accelerate the work that we're already doing. And we believe we'll be -- we'll see the results in 2027 and beyond.

There's one other thing I would like to call out, which we didn't really mention on the -- in the Q&A is our share repurchase program of $1.5 billion that we expect to execute in the coming 3 years. This obviously reflects not just our cash position, our cash flow generation, but also confidence in our plan and our ability to create long-term shareholder value while we continue to drive growth, both top and bottom line.

And with that, I thank you all for joining us today, and we'll talk again soon. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.

Okay. Good morning, everyone. A quick disclaimer before we start. Important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. For any questions, you can reach out to your Morgan Stanley sales rep.

So again, good morning, everyone. Welcome, day 2 of the Morgan Stanley 2025 Global Consumer and Retail Conference. I'm Megan Clapp. I am the U.S. food and leisure analyst here at Morgan Stanley. And really glad to be here today with Mattel, the company's CEO, Ynon Kreiz; and CFO, Paul Ruh.

Mattel probably needs no introduction, but global toy and family entertainment company, leading brands like Barbie, Hot Wheels, Fisher-Price. Company operates an IP-driven model spanning toys, consumer products, digital gaming and a growing film and TV partnership business through their company, Mattel Films.

So again, thank you both so much for being here during what's a busy time.

Thank you for inviting us.

So Ynon, last year, sitting on the stage at this time, you described Mattel as an IP company managing franchises rather than just a toy maker, which is maybe how people have thought about the business historically. As you think over the past year, can you just talk about how your perspective on the company's position has evolved beyond some of the organizational changes we've seen you implement this year? What other tangible shifts have you seen in how you manage the business and allocate resources?

Yes. Thank you for inviting us. Always great to be here. Our journey over the last few years was to transform Mattel from being a toy manufacturing company that was making items to become an IP company that is managing brands. So today, we are very much a brand management company with toys being a key vertical, where we are a global leader. But we see incredible opportunities to extend our brands outside the toy aisle and capture significant value from highly accretive business verticals that are all driven by big brands.

In today's world, it's all about access to big IP, big brands with a built-in fan base. This is what the entertainment industry is all about. And we are in a very fortunate position to own one of the strongest portfolios in the world in family entertainment. That's been our journey. It's never ending and we see so many opportunities ahead of us. 2026 is shaping to be a pivotal year in our entertainment strategy. And in many ways, what we've done in 2025 is to set the stage for future growth.

The recent announcement in our organizational change was designed to create closer alignment between our toy and entertainment business. We see an opportunity to become much more brand-centric organization. So it's not about toys versus non-toys or toys versus entertainment. It's about managing our brands holistically with a global strategy, global perspective across all consumer touch points.

And the other thing that we've done is we brought our marketing and activation together. One of the biggest challenges today, not just in toys or children but overall, is to reach and engage consumers. In today's world, with the proliferation of distribution platforms, with the fragmentation of entertainment outlets, it's becoming harder and harder to reach the consumer.

We have a unique advantage in that our brands are very strong. People are proactively looking for opportunities to engage with our brands. And our job in marketing is to find ways to reach and engage more and more consumers and build this emotional connection that will drive our business in play and family entertainment.

Great overview. We're in the midst of the holiday season. It's a bit of a near-term question. Last year, sitting on the stage, you called out a strong Black Friday. Now that we're December 3 here today, can you just give us an update on how Black Friday and Cyber Monday results came in this year versus your expectations and comment broadly on what you're seeing in terms of promotional activity, both from yourselves and competitors?

Well, we had a positive Black Friday. We see POS positive for Mattel year-to-date and quarter-to-date. We expect to have a good holiday season, and we feel very good about how we are positioned in the marketplace with strong product offering and a lot of innovation in our portfolio.

Okay. And as it relates to the guidance, you reiterated your full year guidance back in October. There were some shifting U.S. retail ordering patterns. Just given the comments on Black Friday and positive POS, can you just talk about how you track today relative to that guidance?

And as you've seen the POS come through, through to Black Friday, how have those kind of retailer conversations around replenishment evolved and how are you thinking about it? Just first your guidance at the end of December.

Of course. First of all, Mattel POS both year-to-date and quarter-to-date is positive. Our orders from the retailers are positive in the year as well, and therefore, our guidance remains unchanged. From an industry perspective, we also see that Circana is saying that the industry is actually growing high single digits. We are gaining share within that industry. We're gaining share in dolls, in vehicles, in action figures and in plush as well.

So we are very well positioned ahead of the holiday season. So that's why we are continuing to work with our retailers. We want to make sure that the shelves are fully stocked, and we also want to make sure that we land the year with adequate inventory position ahead of 2026. So we are in a good position based on our strengths, based on our scale and based on how we prepared the year.

Okay. That's helpful. Can you also talk a little bit about brand performance? You talked about some categories there specifically. Hot Wheels has done quite well this year. Barbie, Fisher-Price have lagged a little bit. But you've talked about some better trends more recently in some of those brands that have lagged. So maybe a two-part question.

Can you just spend some time talking about the underlying drivers that you've seen behind what's going on in Hot Wheels, how sustainable you think those are? And then on Barbie and Fisher-Price, as we've moved through part of the holiday season, are you still kind of seeing that momentum build? And just anything to share as we think about the recovery trajectory for those brands into '26?

Yes. The success of Hot Wheels has been just incredible, on track to its eighth consecutive record high for 58 years of play. What is unique about Hot Wheels or what is really special about Hot Wheels is that it manifested the Mattel playbook in the best possible way in terms of establishing a very clear brand purpose, cultural relevance, consumer-centric innovation and a franchise mindset.

Hot Wheels is so much more than a toy. Hot Wheels is about car culture. And our team has been able to establish that relationship, drive innovation across the entire product offering, tap into the adult collector, create events around the brands in terms of -- examples would be the Hot Wheels Monster Trucks as one offering or the Legends Tour that we established across the world. And we're seeing more and more opportunities in content, a very strong show on Netflix called Let's Race, a movie in development at Warner Bros. with J.J. Abrams as producer, Jon Chu as Director. And you can't get a better, stronger combination of the creative talent behind this project.

So we feel very good about Hot Wheels. But importantly, it's the ultimate showcase of our playbook. And this is exactly what we're looking to establish across the portfolio.

With Barbie, we feel very confident about the brand. The brand is in great health notwithstanding the decline recently. The brand is in great shape. And we see more opportunities to leverage cultural relevance around the brand, innovation around packaging, enhanced segmentation in the toy aisle, innovating with more play patterns and form factors and tapping into the adult collectors, where Barbie has incredible opportunity given the heritage value of the brand.

We expect to see improving trends for Barbie in the fourth quarter and beyond and see a great future for the brand with more partnerships. And looking forward towards the animated Barbie movie, in partnership with Chris Meledandri and Illumination. Chris is much more than a filmmaker, he's an innovator, just like Barbie is much more than a toy. And the opportunity there to create something very special in an animated feature is very, very exciting in what this will bring forward.

We also expect to see improving trends with Fisher-Price in the infant, toddler, preschool category. We're seeing growth in Little People collectors. We see opportunities around Fisher-Price Wood launch on Amazon with the Montessori line. And we also expect to finish trimming the underperforming or less productive parts of the line in 2025 so there will be less comp headwinds in future years.

And overall, I would say, when we look at the entire portfolio, brands like UNO, Masters of the Universe, which is going to see a movie coming out next year, and many others of our brands are in great shape. We're very excited about innovation, about new product offering. And the new brand-centric organization is set to drive growth and continued improvement in execution across all categories.

Great. Definitely, I want to come back to Masters of the Universe, but you talked about collectors with Barbie. So this adult collector segment, kidults, if you will, has become an increasingly important growth driver topic in the toy industry over the last couple of years.

For Mattel specifically, how significant is this segment to your overall growth? And you talked about it a little bit with Barbie, but how are you thinking about kind of tailoring your innovation pipeline and product strategy to engage these collectors as we look ahead?

We need to remember that play starts in childhood but doesn't end there. Everybody likes to play. And when it comes to important cultural brands, we're seeing the adult collector segment becoming an established part of the industry. It's already about 25% of the toy industry today. And we don't see that as a temporary trend or phenomenon. This is here to stay.

And what is interesting for Mattel, given the heritage value of our brands, the fact that we have brands that go back 2 and even 3 generations of fandom is that we can tap into the adult collectors and see significant opportunities for us in this area, brands like Barbie, Hot Wheels, UNO, Monster High, incredible brands that have heritage following. We know that these brands stood the test of time, and our job is to take these brands that are timeless and make them timely and continue to innovate with more cultural relevance and find ways to excite and delight the fans of today.

Mattel Creations is our direct-to-consumer site that offers a highly curated and exciting offering for the adult collector business. It's very fast growing. It's already becoming -- if it was a customer, a third-party customer, it would have been today the fifth largest actually in the world and for Mattel. And we see more opportunities around this service. And I encourage you to log online and see the offering there. It's very exciting.

And we sell product there in the hundreds of dollars. And often, these products sell out in hours. We also leverage the site not just for Mattel IP, but also for partner brands. Recently, we launched the KPop Demon Hunters collector set that was literally sold out in an hour, this is the presale, sold out in an hour. The product is only coming out next year and it was sold out in an hour.

And other brands, other offering and partnerships, such as a recent offering that we created with MoMA. And you should also check that out. The innovation and creativity about how Mattel and MoMA came together and interpreted work of art in our product. That is also selling out very fast. So the opportunity for Mattel to tap into the adult collector market is very exciting, especially given the strength and heritage value of our IP.

You mentioned the entertainment slate for next year. You brought up KPop Demon Hunters, which is a new win that we'll see in April. But you've also got Moana, Toy Story 5. You recently had major renewal wins with Disney Princess and Toy Story. You'll have, as I mentioned, KPop Demon Hunters.

As you think about just for the partner IP, and sticking with partner IP as we look into next year, can you talk about how incremental you expect these entertainment tie-ins and licenses to be to top line growth for 2026?

Yes. No, we are in a very fortunate position that the majority, the vast majority of our business is based on our own IP. For the rest of the industry, most of other companies' business is licensing brands. This is the traditional toy side of the industry. But for Mattel, we own incredible brands. So we are in a very fortunate position.

But given our scale in design, in supply chain, in commercial execution, the fact that we sell product in 500,000 brick-and-mortar stores and, of course, we also have a thriving online partnership with all the major retailers as well as Mattel Creations, we have a global platform that we can leverage and benefit and partner with important brands that we can represent in partnership with all the major entertainment companies.

So this, not just it doesn't cannibalize our business, but it creates a more fulsome product offering. And a rising tide lifts all boats. And that's the opportunity we have, is that by adding third-party brands, important global cultural brands to our portfolio, that gives us even a stronger opportunity to enhance our brand management strategy. We think about these brands as our own. There's no separation of how we run these brands.

So when we brought on board DC as an important partnership that we will launch next year or the extension of Disney Princess and Frozen that we'll launch in 2027 with a big movie, these are important partnerships that we treat as our own brands and manage as part of our brand management strategy holistically.

The same people that manage Barbie and Monster High and American Girl, which is also having a great run, will manage Disney Princess and Frozen, managed Wicked with exciting success this year. And that gives our partners the confidence that we put our best people, best resources and manage our portfolio holistically. So we see that as an exciting opportunity for Mattel and expect to see more wins down the road.

So is it fair to say, just what we talked about, with the core and Hot Wheels continuing its strength and Barbie and Fisher-Price momentum and what you've talked about with the partner, that you expect the quarter to grow next year and then these entertainment tie-ins or something on top of it?

Look, we'll talk about '26 -- at the end of this year, we'll give proper guidance. But it's fair to say that 2026 is shaping up to be an exciting year for Mattel with continued strength that we expect to see in Hot Wheels and UNO, improving trends in Barbie and Fisher-Price, a thriving portfolio for Mattel, more partnerships with third-party brands.

We have 2 big movies that are coming out next year: Masters of the Universe on June 5, which is going to be a very exciting reflection of our portfolio when it will be compared to Barbie, the vast offering in terms of range from the pink of the Barbie Land all the way to the dark world of Eternia and everything in between. So this will be -- we're very excited about this launch of this movie, Masters of the Universe. And Matchbox will follow suit shortly after that. This is another exciting movie around heritage brands in partnership with Skydance. Very excited about that movie as well.

Also we will have 2 mobile games that we are self-publishing, first out of our new strategy that will be a new for Mattel. So important development of our strategy in the way we're looking to leverage the strength of our brands in the mobile gaming space, where we'll make a very minor investment in return for asymmetric potential upside in success. So we are very excited about that opportunity as well as continuing to expand our digital offering in third-party licensing. Mattel163, our joint venture with NetEase, that already generates over $200 million of revenues, and important partnerships and play within the creator networks such as Roblox and Fortnite. So a lot to look forward to in 2026.

Okay. I want to follow up on some of those. So Masters of the Universe and Matchbox, you talked about it a bit. But obviously, the last big Mattel IP movie we saw with Barbie. Huge global success. As we think about Masters of the Universe and Matchbox, how would you frame maybe the potential scale and brand impact of these movies relative to Barbie? And second part, what learnings are you taking from the Barbie movie and applying to these movies in '26?

So our goal is to release 2 movies per year after 2026 in partnership with major Hollywood talent and Hollywood studios. What we see and what we learn out of the Barbie experience is that our brands matter. Our brands have an incredible following and tap into culture in a way that very few brands can do. This is more than releasing movies. This is about creating emotional engagement and touch points with global fans that love our brands and have that built-in relationship.

And as I said before, people are proactively looking for opportunities to engage with our brands. And big movie releases will be an important part of that strategy. We know that not every movie will be the next Barbie in terms of box office success. Barbie went on to become the fourth highest grossing movie ever and Warner Bros. biggest movie in terms of box office in 100 years. So we know this is not easy to replicate. Not to say we cannot exceed that. And we still have, of course, exciting projects in the pipeline.

But the point is that we don't need every movie to be the next Barbie for those movies to have real economic impact on Mattel. The Barbie movie was actually not very toyetic. It targeted adults. A movie can have less of a box office success and have more impact in the toy aisle and broader consumer product offerings. And the approach is to have a portfolio of brands across different genres, different partners, different commercial models.

So it's a holistic strategy, a portfolio strategy that we expect will have a meaningful economic impact on the company and, importantly, continue to proliferate our brands across the world and strengthen the emotional relationship that fans have with our brands. But it's important to say, this strategy is not just about Barbie and not just about movies. It's a holistic strategy to extend our brands into other entertainment verticals.

And as I said earlier, in today's world, it's all about accessing big brands that matter. It's harder and harder to rise above -- with everything that's happening in the world, it's harder and harder to reach the consumers and stand out in a very crowded marketplace. So strong brands, unique brands especially in children and family entertainment have an incredible advantage. And we see an asymmetric opportunity for Mattel to participate in these other verticals in a meaningful way.

Just to put a finer point. Masters of the Universe and Matchbox, any way to frame how we should think about this being toyetic versus Barbie? Just given you mentioned Barbie wasn't that toyetic.

Yes. We do expect Masters of the Universe especially to be very toyetic. The initial footage that we are seeing is very exciting. Of course, it will have to come together, the alchemy of great footage and a great storyline and a great cast, director. All the creative elements are there. We feel very confident about it. But obviously, ultimately, it will be about what fans out there will say.

But it is a toyetic movie. And what happened in the movie is that Travis Knight, the creator, was able to bring to bear the incredible legacy of the franchise. It's a big world creation project. It's of epic proportions. So he was able to bring that historical heritage legacy brand and make it very contemporary, very current and a lot of fun. So we do expect it to be toyetic, and we'll speak more to that when we give more specific guidance for 2026 at the end of this year.

Great. And you talked about this a little bit, but you announced 2 self-publishing game launches for next year, a little bit of a new venture for Mattel. Can you just talk about the economics of these games? You mentioned it's a little bit low investment, high asymmetric return potential. But what do the economics look like that you can share? What KPIs are you looking at and just how to think about the expected contribution for Mattel's P&L broadly?

So what is unique about the mobile game side of the industry is that it evolved dramatically over the last few years. It used to be that you needed to own a game engine or own a studio to actually develop these games. Today, you can create games through relationship with third-party studios, outsource the development and own the underlying game. And the cost of producing these games, developing these games came down significantly. So today, for between $5 million to $10 million, single-digit number, you can actually develop a mobile game.

The other thing that changed is that the way you reach consumers through performance marketing is much more scientific. It is capital intensive to acquire users, but it's performance marketing and you get clear visibility into the ROI on your investment. And you only spend the money to the extent you know it's actually yielding result in acquiring users down the road. So relatively speaking, this is regarded as low-risk investment and accessible, much more accessible than it used be.

Now because of that, there are more games that are coming out. So the market is crowded. But this is where owning a strong underlying brand that has a built-in fan base is becoming a very clear advantage for Mattel. So we see an asymmetric opportunity for us to develop mobile games within our capital-light construct, very low risk, that is not consequential for us in terms of our capital resources. But in the event of success, there's significant upside.

And the approach is to develop a portfolio. We have multiple games in development. We will release 2 games in 2026, and the plan is to release at least 2 games thereafter. And you only need moderate success, I'm not saying home run, but moderate success for that to have meaningful economic impact on the company. And given the strength of our brands, the quality of the games we're developing, our expertise in creating demand and tapping into culture, we see exciting opportunities for us in this important area.

And in combination with Mattel163, where we're already seeing success with just 3 games that the JV launched, we know that people are looking for our brands. Barbie was the #1 branded game on Roblox. With no marketing, out of thousands of games in the platform, Barbie for more than a year was the #1 branded game on the platform.

And this was yet another showcase of the fact that if you create quality product, and this goes without saying, that it's not enough to just put a game and call it Barbie or Hot Wheels. There's got to be underlying quality offering behind it. But if you put quality product out there, people would find it, people are searching for it and will engage with our brands. And that is our opportunity.

Great. Paul, maybe we can talk about gross margin. So 3Q down around 300 bps. 4Q, you expect to be down again but to a lesser degree. Can you just talk about the various puts and takes and your 4Q expectations, how what you've seen from a promotional perspective so far this holiday season kind of plays into how you're thinking about the fourth quarter and as well as the tariff impact continuing to flow through, how that's impacting your expectations?

Of course, happy to talk about gross margins. So Q3 gross margins were impacted by four factors: number one was ForEx, number two was inflation, number three was tariffs and number four was sales adjustments. And if you fast forward to how we see the balance of the year, remember, we talked about our guidance is for the full year approximately 50%. And given the Q3 year-to-date trends, we expect Q4 to be below the 50% mark that I talked about.

We are expecting to see slightly more impact of tariffs as the tariff costs has been flowing through the inventory. But we are within the guidance range that we talked about of approximately 50%. If we look at the different puts and takes and how we see this going forward, we continue to drive efficiencies to offset those headwinds.

From a tailwind perspective, we have our Optimizing for Profitable Growth program that impacts gross margins. We will continue to drive accretive mix. Ynon talked a lot about how the entertainment part of our business is going to grow, and that's going to be accretive from a gross margin perspective. It has a better gross margin. And our scale will also be a tailwind that will allow us to drive gross margins. We do not see any reason why we should not continue to drive gross margin enhancements over the foreseeable future.

Great. Okay. That's helpful. That was kind of my next question. But maybe taking a step back, as we look to '26, I think in the last call, you talked about you're still evaluating your pricing strategy for '26. I think tariffs will continue to be with you, at least into the first half.

So as we think about the framework for mitigating tariffs into 2026, how are you thinking about protecting gross profit dollars versus gross margin rate? And you answered it a little bit, but just bigger picture as we think about puts and takes in '26 on gross margin.

So on gross margin, and then I'll talk about overall operating margin. Adjusted gross margins, we do see continued impact of tariffs given the current situation. But remember, if we look at how our sales behave every year, about 1/3 of our sales happens in the first half, 2/3 happens in the second half. And if we do the math, about $100 million or shy of $100 million is the full year impact in 2025. So in doing the math for next year, you will see less than half of 2x that -- less than 2x that amount just given the math.

Against that, we have a continued array of initiatives. We took pricing this year and we are assessing opportunities to take further pricing, of course, keeping the consumer in mind, first and foremost. We want to make sure that we provide value to our consumers. We have a broad array of products within our portfolio so that we have multiple offerings for multiple price points. And we will continue to drive our efficiencies, our scale and optimizing for profitable growth.

Just to give you some numbers. Optimizing for Profitable Growth, Q3 year-to-date 2025, we have accomplished $148 million. We are on track to deliver $200 million by 2026. So that will be also something that will help us to continue to drive the margins. So we are preparing for those headwinds that we talked about. We have demonstrated we can do it. We have efficiency in our DNA. That's what we do. We have the scale and that's what Mattel is built for. And we are getting ready for 2026 and to continue to drive margin enhancement, as I said before.

I think just to make a final point. At the start of the year, the question was about the cost impact of tariffs in terms of how much tariff will impact your cost. Then we mitigated for that. The question then became, okay, how will consumers react to price increase? And as we've said, we haven't seen impact on consumers so far this year. POS is up for the industry overall and for Mattel as well.

Then the question was about the change in the way retailers behave in ordering patterns and shifting from the direct import to domestic shipping, basically postponing their decisions given the tariff uncertainty. And this is really now the issue. It's not about consumer demand. It's not about cost. It's about the logistics of fulfilling, meeting consumer demand in the holiday period. So important to say that it's actually not about tariff, per se. It's about tariff uncertainty.

And we believe that once the market settles and people understand the lay of the land, we will move forward and it will no longer be an issue that people talk about. And so beyond this year and even more so, beyond Q3, Q4 transition, we see much clearer visibility into 2026 and beyond in terms of the ability to plan ahead and be ready to address different market conditions.

And as a final point on that is that what we've done at Mattel over the last few years is develop a resilient, flexible and modular organization and operating model that allows us to respond and address different and changing market conditions. It used to be COVID, the trade dynamics and other factors. There's always going to be something, some change, some unexpected change in the marketplace. And our job is to be able to respond and address and even come out on the other side stronger and increase our market share as we have done during COVID.

So beyond the current situation which is very specific to this current time frame, looking forward, it's about your ability to respond and address and be adaptive to changing market conditions. And we feel very strongly, very confident about our organization and capabilities to be able to withstand disruptions in different forms.

Okay. Can I just follow up, maybe just to clarify on -- and you talked about the shift, domestic versus DI. You've been talking about that since Liberation Day. And you said your guidance is unchanged.

But are you still seeing retailers be a little bit -- tariff regime is changing every day, seemingly. Are you still seeing retailers be cautious as it relates to replenishment? Or so far, has that kind of played out as you thought?

We are seeing it played out as we thought. We talked about the fact that there was a shift from direct imports to domestic shipping. Fast forward into Q4, that's exactly what's happening. If you look at the retailer behavior, they are picking up the domestic orders. They are replenishing. The orders are pretty much within the expectation, online stronger than off-line. But it's playing out pretty much as we expected it.

Okay. Great. I know that we've got about 2 minutes left. I want to open up to the room to see if there's any questions in the room. Otherwise, I can keep going. Anyone? Okay. I'll keep going.

Capital allocation is always a good topic to end on. $600 million of share repo, I think, you're going to do this year. If you look to '26, maybe you can just talk about -- you've done a lot of share buyback over the years. But how are you thinking about balancing buybacks, some of these new investments you're making on self-published games, other strategic initiatives you're focused on?

Yes. Our capital allocation is very clear. It starts with investing for profitable growth and growing our business. Number two, maintaining a very strong balance sheet, which we actually have. We recently refinanced $600 million at investment grade. So we're back to the investment grade market. And we aim to maintain our gross leverage ratio between 2 and 2.5.

And the third one is potential corporate business development opportunities, if the right one were to come along that advances our strategy, that drives profitable growth and that makes sense overall. And the last one, as you very well say, is share buybacks, which is a means that we use to manage our capital structure.

But keep this in mind. By the end of the year, we will have bought back $1.2 billion since we came back to buying shares. That is about 20% of our shares outstanding. So every one of the shareholders has about 1/4 more of our company. So we have been really, really disciplined in how we manage our capital allocation based on those principles, and we expect to continue to go along those lines into 2026 and beyond.

Great. Well, that's a perfect place to end. Thank you, Ynon and Paul, for being here. Thanks, everyone, for joining. And I hope everyone has a great holiday.

Thank you.

Thank you.

Ladies and gentlemen, thank you for standing by. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

And I would now like to turn the conference over to Jen Kettnich, Head of Investor Relations. You may begin.

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; and Paul Ruh, Mattel's Chief Financial Officer.

This afternoon, we reported Mattel's third quarter 2025 financial results. We will begin today's call with Ynon and Paul providing commentary on our results, after which we will provide some time for questions.

Please note that during the question-and-answer session, we respectfully ask that you limit to one question and one follow-up so that we can get to as many analysts and questions as possible today.

Today's discussion, earnings release and slide presentation may reference certain non-GAAP financial measures and key performance indicators, which are defined in the slide presentation and earnings release appendices. Please note that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise.

Our earnings release, slide presentation and supplemental non-GAAP information can be accessed through the Investors section of our corporate website, corporate.mattel.com, and the information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicators is included in those documents. The preliminary financial results included in the earnings release and slide presentation represent the most current information available to management. The company's actual results when disclosed in its Form 10-Q may differ as a result of the completion of the company's financial closing procedures, final adjustments, completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results.

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. Any statements we make about the future are, by their nature, uncertain. 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 from those projected in the forward-looking statements. We describe some of these uncertainties in the Risk Factors section of our latest Form 10-K annual report, our latest Form 10-Q quarterly report, our most recent earnings release and slide presentation and other filings we make with the SEC from time to time as well as in 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.

Thanks, Jen. Good afternoon, and thank you for joining Mattel's Third Quarter 2025 Earnings Call. This quarter, our U.S. business was again challenged by industry-wide shifts in retailer ordering patterns. That said, consumer demand for our products grew in every region, including in the U.S. and gross billings increased in our international business. We continue to operate with excellence and maintain a gross margin above 50%. We repurchased $202 million of shares, bringing the total this year to $412 million and are on track to repurchase $600 million for the full year.

Since the beginning of the fourth quarter, orders from retailers in the U.S. have accelerated significantly and POS for Mattel continues to grow in the U.S. and internationally. These trends are tracking in line with our full year outlook for 2025. Looking into the balance of the year, we expect a good holiday season for Mattel, strong top line growth in the fourth quarter and are reiterating our full year guidance.

We have made important strides in advancing our strategy to grow our IP-driven toy business and expand our entertainment offering. Here are some of the key highlights. We implemented a new brand-centric organizational structure with integrated marketing to enhance and accelerate Mattel's global brand management capabilities. We launched two new standout product lines, which are off to a strong start, Mattel Brick Shop in the building sets category and the Hot Wheels speed snap track system in vehicles. American Girl achieved its fourth consecutive quarter of growth, driven by strength in both direct-to-consumer omnichannel retail and wholesale channels. We made meaningful progress on our first two self-published digital games, which we expect to launch next year with several more in development and preproduction.

Mattel Studios recently announced the development of two new live-action television series entering an exciting new programming genre. Our strategic collaboration with OpenAI is taking shape as we embed AI capabilities across the organization. And as just announced today, Mattel has been awarded global licensing rights to develop and market a full range of KPop Demon Hunters products across major categories. This includes dolls, action figures, accessories, collectibles, play sets, collaborations with co-brands and more. We are excited to partner with Netflix on their most popular film of all time and bring this vibrant imaginative world to life. This, in addition to the recent renewal of our multiyear licensing agreement for the Disney Princess and Frozen franchises, further reinforces our leadership position as a partner of choice to major entertainment companies and IP owners.

Looking at key financial metrics in the third quarter as compared to the prior year, net sales, adjusted operating income and adjusted earnings per share declined primarily due to U.S. retailers moving from direct import to domestic shipping shifting orders to the fourth quarter.

As always, we are working closely with our retail partners to manage through this trade environment. Notwithstanding the shift in retailer ordering patterns, Mattel's POS increased overall with growth in every region, including the U.S. As it relates to category gross billings, vehicles grew as well as our challenger categories combined, while dolls and infant, toddler and preschool declined. Per Circana, we gained market share in key categories, including dolls, vehicles and action figures. The toy industry also grew high single digits in the third quarter, well above the low single-digit trends of recent years, reflecting momentum heading into the holiday season and beyond.

An important priority for the company is to scale digital games where we are looking to extend physical play to the virtual world by creating games and experiences that drive sustained engagement for fans of all ages.

We recently announced three licensed games for console and PC for Hot Wheels, Masters of the Universe and Barbie as well as a partnership with Netflix to bring Pictionary into living rooms around the world. We expanded our collaboration with Roblox with a new slate of games and experiences for Barbie, Hot Wheels, Masters of the Universe and UNO as well as Monster High, which launches this week. A Fortnite Monster High experience also launched last week. Mattel163, our joint venture with NetEase, recently released its fourth game, UNO Wonder, which is off to a promising start. And our digital game self-publishing strategy is progressing well with two games expected to launch in 2026 and additional games in development and preproduction.

Mattel Studios continues to add more projects to an exciting slate. In film, the Polly Pocket live action movie will be codeveloped with Reese Witherspoon’s Hello Sunshine and Amazon MGM Studios. Two-time Golden Globe nominee, Lily Collins will co-produce and star in the movie. In television, we are entering a new phase as we expand into cinematic quality episodic series designed to profitably reach new audiences.

Recently, we announced our first two premium live-action scripted TV series in development. The first is a series based on Shani, Mattel's first stand-alone Black fashion doll line in development with Amazon MGM Studios. And the second is a series based on Mattel's iconic Magic 8-ball franchise directed by acclaimed filmmaker, M. Night Shyamalan and written by Glee and American Horror Story creator, Brad Falchuk.

To conclude, while our U.S. business was challenged by ongoing shifts in retailer ordering patterns, our POS increased in every region. and gross billings grew in our international business. We continue to operate with excellence and made meaningful progress advancing our IP-driven toy business and expanding our entertainment offering. Notwithstanding the impact of the current trade dynamics, the fundamentals of our business are strong. Consumers are buying our products and the toy industry is growing. Our supply chain expertise and global commercial capabilities are competitive advantages, putting us in a strong position to work closely with retailers to place the right products at the right amount on the right shelves at the right time. As the environment normalizes, we expect to accelerate growth and continue to successfully execute our strategy.

Now I would like to turn the call over to Paul to discuss our results and outlook in more detail.

Thanks, Ynon. As you heard, while our U.S. business was challenged by shifts in retailer ordering patterns, we saw continued growth in consumer demand for our products across every region as well as gross billings growth internationally.

Looking at key financial metrics for the quarter. Net sales decreased 6% as reported and 7% in constant currency to $1.74 billion. Adjusted gross margin decreased by 290 basis points to 50.2%. Adjusted operating income decreased by $117 million to $387 million and adjusted earnings per share decreased $0.25 to $0.89. Total company gross billings decreased 5% in constant currency. It is important to note again that POS increased in the quarter with growth across all regions, including the U.S., indicating healthy consumer demand for our products.

Looking at gross billings by category. Dolls declined 12%, primarily due to Barbie and Polly Pocket, partially offset by growth in Wicked, Monster High and American Girl. We expect improving trends for Barbie in the fourth quarter and into next year, driven by cultural relevance, packaging innovation and enhanced product segmentation, new form factors and play patterns and expanding adult demand.

Vehicle strong momentum continued, growing 6%. Growth was widespread across the portfolio with Hot Wheels up 6% and on track for an eighth consecutive record year. We are successfully driving demand across all ages with adults being the fastest-growing audience for Hot Wheels and over 100 million adults identifying themselves as toy vehicle owners.

ITPS declined 26% due to declines in Fisher-Price and preschool entertainment as well as the planned exit of certain product lines in Baby Gear & Power Wheels. We expect new product lines and expanded distribution for Fisher-Price to drive improving trends. Challenger categories collectively grew 9%, primarily driven by action figures, including Jurassic World, Minecraft, WWE and Masters of the Universe. These gains were partially offset by declines in building sets.

In Games, UNO grew for the ninth consecutive quarter and maintained its position as the #1 card game for Circana.

Turning to gross billings performance by region. North America declined 10%, reflecting the significant shift in retailer ordering patterns that impacted our U.S. business. All other regions collectively increased 2% with growth of 3% in EMEA and 11% in Asia Pacific, partially offset by a 4% decline in Latin America.

Moving down the P&L. Adjusted gross margin was 50.2%, a decrease of 290 basis points. The decrease was primarily due to the impact of unfavorable foreign exchange, inflation, tariff costs and higher sales adjustments, partially offset by cost savings. Advertising expenses increased $13 million in Q3 versus the prior year, supporting higher consumer demand. Adjusted SG&A expenses decreased $5 million, driven by several factors, including lower compensation-related expenses. Adjusted operating income decreased by $117 million to $387 million, primarily due to lower net sales and lower adjusted gross margin. Adjusted EBITDA decreased to $466 million and adjusted earnings per share decreased to $0.89.

We repurchased $202 million of shares in the third quarter, bringing our year-to-date repurchases to $412 million as we continue to target $600 million for the full year in accordance with our capital allocation priorities. Year-to-date, cash used for operations was $203 million compared to $62 million in the prior year.

On a trailing 12-month basis, we generated $488 million of free cash flow compared to $688 million in the prior year period, with the decline primarily due to lower net income, net of noncash adjustments. We ended the quarter with a cash balance of $692 million, a decrease of $32 million as compared to the prior year quarter after buying $202 million of shares in the third quarter this year. Total debt remained the same at $2.34 billion.

Our inventory level was $827 million, an increase of $89 million as compared to the prior year. The increase reflects tariff-related costs, foreign exchange and the buildup of inventories in response to retailers shifting from direct import to domestic shipping in the U.S. as we prepare for a strong fourth quarter. Retail inventories are modestly lower as compared to the prior year and are of good quality, positioning us well for the holiday season.

Our leverage ratio, debt to adjusted EBITDA was 2.5x compared to 2.3x a year ago. We are committed to maintaining a strong and flexible balance sheet with a disciplined approach to leverage and capital allocation, in line with our capital allocation priorities.

We continue to execute on the Optimizing for Profitable Growth program. In the third quarter, we achieved $23 million in savings. We are on track to reach our 2025 cost savings target of $80 million with $65 million in savings for the year-to-date. Since launching the program in 2024, we have now realized $148 million of savings out of a total program savings target of $200 million by 2026.

As Ynon said, since the beginning of the fourth quarter, orders from retailers in the U.S. have accelerated significantly and POS for Mattel continues to grow in the U.S. and internationally. Assuming these trends continue, we expect strong top line growth in the fourth quarter and are reiterating our full year 2025 guidance of net sales growth of 1% to 3% in constant currency, adjusted gross margin of approximately 50%, adjusted operating income of $700 million to $750 million, an adjusted tax rate of 23% to 24%, adjusted EPS in the range of $1.54 to $1.66 and free cash flow of approximately $500 million. As mentioned, we continue to target $600 million in share repurchases for the full year.

Mattel's guidance considers what the company is aware of today, but is subject to market volatility, unexpected disruptions, including further regulatory actions impacting global trade and other macroeconomic risks and uncertainties.

In summary, key financial metrics for the quarter were impacted by the ongoing shift in retailer ordering patterns. That said, we maintain an adjusted gross margin above 50%. There is growth in demand for our products, and we continue to operate with excellence. Our balance sheet is strong and both our owned and retail inventory levels position us well for the holiday season. As we enter the fourth quarter, we see improving trends in orders from retailers in the U.S. and POS growth, tracking at the appropriate levels and in line with our full year outlook for 2025.

I will turn it back to the operator now for Q&A.

[Operator Instructions] And our first question comes from the line of Megan Clapp with Morgan Stanley.

I wanted to start with the top line maybe unsurprisingly and kind of a two-part related question just because there is a lot going on here, as you talked about with the shifting ordering patterns. I just want to make sure we all kind of understand. So first, is it possible to quantify POS in the third quarter? I know you said positive, but could you put a finer point on it and maybe where you are year-to-date in the U.S.?

And then related to that, if we look at where North America billings are year-to-date, I think down 10% year-to-date versus what sounds like at least positive POS growth. So when you think about that 10-plus points of retail destock that's happened, how much are you assuming gets recaptured in the fourth quarter? And maybe you can just help us understand how much visibility you have at this point in the season.

Thank you for the question, Megan. Let me start by addressing the POS in the third quarter. So, Mattel POS in the third quarter increased with -- in all regions, including the U.S. And POS generally outperformed gross billings in Q3, which is actually a good leading indicator for upcoming orders.

Now to your question also, what does that mean for Q4? At the beginning of Q4, POS for Mattel has continued to grow both in the U.S. and internationally, and the orders from retailers in the U.S. have accelerated. So we monitor this on a monthly, weekly basis as well, and it's moving in the right direction to substantiate our -- supporting the guidance. Retailers are restocking to meet the expected consumer demand ahead of the holiday season. So all of this bodes well for a strong holiday season and also for a good ending of the year.

Now you also asked us about gross billings in Q4. I just wanted to reiterate our guidance of 1% to 3% in constant currency. And as I said before, with any timing shift, there's always a risk that sales will fall into the following year. But the outlook that we have is supported by the current trends, both in POS and shipments.

Great. Okay. So it does sound like you're seeing that restock, so shipments are ahead of POS at this point, which is helpful. My second...

That's exactly.

Okay. Great. My follow-up on gross margin. I was curious if you could just talk about how the tariff-related price increases impacted gross margin this quarter. It doesn't look like from the slides, there was much of a benefit in the bridge. Is that timing because of the shipment dynamics? Or were there other offsets that kept it from coming through? And how should we think about the fourth quarter in terms of pricing net of inflation?

Yes. In terms of gross margin, adjusted gross margin for the quarter was 50.2%. And the impacts in the quarter were foreign exchange inflation and tariffs, as you mentioned, and higher sales adjustments, and they were partially offset by cost savings. You're right, we don't necessarily see the full impact of the tariff costs yet as they are flowing through our inventory, and they will be seen more towards the fourth quarter. the full year guidance that we just reiterated, which is about 50%, generally implies the continued impact for these factors into the fourth quarter.

And our next question comes from the line of Arpine Kocharyan with UBS.

I was wondering if you could give a bit more detail on what you think is driving the retailer order acceleration here. Do you feel that the consumer at this point has sort of seen the full impact of tariffs and that is partly kind of giving some level of visibility into what that elasticity looks like for retailers and they're gaining more confidence here? Or what do you think is driving that acceleration in orders? And then I have a quick follow-up.

Yes. Arpine, let me start by maybe taking a step back and take you through the dynamics that are playing out this year, which is all about the retailers shifting their ordering patterns from direct import to domestic shipping as well as how our scale and capabilities position us well to navigate this year.

Let me start with direct import. Direct import is when the retailers take ownership of the product at the sourcing country and handles the importation and warehousing themselves, and they take advantage of their own logistics network to improve their margin. Direct import orders occur normally a couple of months in advance, and they are in larger quantities per order. On the flip side, domestic shipping is when Mattel handles the importation of the goods and warehousing as well. And the retailers take the ownership in the destination country. It's a more just-in-time and with more frequent order mechanism. And given our scale and supply chain capabilities, at a high level, the economics to us are similar for both direct import and domestic, which is actually different for other players in the industry who are more geared to direct import.

Now this year, given the macroeconomic environment and the trade dynamics, this was an anomaly and retailers shifted more from purchasing from direct imports to domestic shipping because they wanted to give themselves time and more flexibility to commit to orders.

Now this shift, as you well say, is resulting in more domestic shipping towards the back end of the year and into the fourth quarter. But given the positive increase that we are seeing in POS, retailers are now accelerating domestic orders. They see what we are seeing. They see an increase in POS. So they want to be ready for the season, and they're stocking up their inventories to meet the expected consumer demand. These trends are tracking in line actually with our full year outlook for 2025.

Hope I took a little bit more time to walk through the dynamics that are happening, but I think it's important that it's clear why this is an anomaly in 2025.

Great. That's super helpful. So it sounds like you don't really have to see retail accelerate from current levels to meet that guidance of about 12.5% or close to, call it, low double-digit revenue that your midpoint of your guidance implies for Q4. It seems like even steady state will allow you to meet that guidance. Is that correct?

Yes, Arpine, on Q3 ended with strong POS growth in every region, including the U.S. And since the beginning of the fourth quarter, as I mentioned before, we track month by month, week by week, POS for Mattel and for our product lines is continuing to grow very strongly. The orders are following. The orders from retailers are following in the U.S., they have accelerated significantly. So not only was POS strong in Q3 and it's accelerating in Q4 and the orders are following now. That's what is underpinning our guidance for the fourth quarter, therefore, for the full year.

And our next question comes from the line of Stephen Laszczyk with Goldman Sachs.

One on international and then one on the U.S. Maybe first on international for Paul or Ynon. International business has performed quite well so far this year, I think pacing up 3% through the third quarter. Curious, any headwinds or added tailwinds that you think we should be factoring in as we look into 4Q? Or is the expectation that current trends persist as they are into the holiday season on the international side?

And then on the U.S. front, curious on the market share side of the equation to the extent you're seeing any smaller or midsized toy companies maybe pull back on the U.S. market, to what extent you're seeing opportunity for Mattel to take market share into year-end or even as you look out into 2026?

Stephen, regarding the international market, this -- what we're seeing is in line with our expectations. Many of our brands are resonating with consumers. Commercial execution is strong, and we're seeing increased POS in all regions. In EMEA, we saw a fourth consecutive quarter of growth, driven by strong consumer demand and very disciplined execution across markets and brands. In Asia Pacific, we're seeing growth across key markets, including Australia, New Zealand and China. In Latin America, there's some industry softness in Mexico, but we continue to execute well. And as a whole, we look forward to continuing to grow our international business this year and over the long term.

In the U.S., there's no particular trend to note. We continue to gain share in dolls, vehicles and action figures. Very excited about the momentum we're seeing, of course, in vehicles, but also in Action figures, particularly this year, very strong performance. We see Barbie, Hot Wheels and Fisher-Price as #1 in their respective categories with UNO being the #1 card game globally.

So, all in all, based on the strength of our brands and product road map, we are very well positioned in the fourth quarter. We expect to see strong growth overall for Mattel in the fourth quarter. And as Paul said, achieve our guidance.

And our next question comes from the line of Alex Perry with Bank of America.

And I wanted to start on content and then I have a follow-up on tariffs. But just on content, how much content support should we see in the fourth quarter, especially with the Wicked movie here? And then any initial thoughts on how you're thinking about next year, even if it's just from sort of a content lineup perspective?

Yes. Thanks, Alex. Yes, the Wicked movie is going to be an important addition to our lineup in the fourth quarter. First movie was strong. And of course, we expect continued strong performance in the -- for the second movie. So this is all great.

Where we saw particular strength this year was in Jurassic, Minecraft, Jurassic World movie and Minecraft movie. And next year, we are very well positioned for Toy Story movie, the Moana live action movie and of course, our own two movies, Masters of the Universe and Matchbox, which will be released next year. So, on the film side, an exciting slate of projects, both Mattel IP and third-party partnerships. And let's not forget the KPop Demon Hunters, a big win for Mattel. This is an important partnership. We were awarded key very valuable categories, including dolls, action figures, collectibles, placets, very valuable categories and that this will be another important addition next year. We're actually starting the presale this November, but the lion's share of the business will happen next year.

That's incredibly helpful and exciting. I guess my follow-up is I wanted to ask about tariffs and ask about the sort of full annualized tariff impact. There's any color that you can give in sort of the tariff impact for the fourth quarter and as you start to think about fiscal 2026.

Yes. Let me just reflect a bit on what we've seen this year. So, initially, there were two levels of exposure when it came to tariffs. This was about cost impact and consumer reaction to price increases. We fully addressed the cost impact. It's already embedded in the numbers and fully addressed. We -- and then we are not seeing any slowdown in consumer demand so far. So the two issues that were on the table are taken care of. We're not seeing any slowdown in consumer demand. That's important to say.

What we are seeing is what Paul talked about earlier is that given the macroeconomic environment and trade dynamics that retailers shifted more purchasing from direct import to domestic shipping.

But as we also explained, given the positive consumer demand for Mattel, coupled with the fact that the toy industry is growing strongly, we are seeing significant increase in retail orders. And the reason they do it is because they are seeing the same thing. They expect strong demand for the holiday and they are restocking. So, in that sense, we expect to see strong growth in the fourth quarter, continued demand from consumers, and this will all play out in the numbers as we explained.

And maybe, Alex, I just want to add one quick point on the annualized value of the tariff impact. I would not extrapolate what we saw in 2025 times 2. Remember, we cited a number of short of $100 million. But given the historical annual sales rate of approximately 1/3 in the first quarter -- sorry, in the first half and 2/3 in the second half, it should be less than 2x the $100 million that we cited for 2025.

So, just for your planning purposes and calculation purposes, I would go with those assumptions. And the $100 million is, of course, before mitigating actions.

And our next question comes from the line of Kylie Cohu with Jefferies.

I wanted to double-click on Barbie. I'm just kind of curious what you guys were expecting for Q4. Obviously, we've had several quarters of negative there. Do we expect that to go positive? And any other color you can just add on the brand in Q4 and beyond would be helpful.

Sure, Kylie. Barbie as a brand is very strong, and it has been the #1 doll property in the industry for the last five years. And as you know, Barbie stands among the most recognized and beloved franchises in the world. This is well out of toys.

We expect to see improving trends in the fourth quarter and into next year, driven by cultural relevance, packaging innovation and enhanced product segmentation, new form factors and play patterns and expanding product for adults, which is a very fast-growing segment for us. We also see continued momentum in brand partnerships. Of course, we have the animated movie in development with Illumination, which we're very excited about. And we also expect that the new organizational structure that we recently announced will ensure and improve and strengthen our collaboration, coordination and alignment in terms of execution across all aspects of the brand.

So, all in all, very confident in Barbie's long-term growth trajectory -- and we look forward to sharing more next year, especially at the New York Toy Fair with more product introduction and a lot of things to celebrate.

That's super helpful color. Just also wanted to mention, you mentioned it already a little bit, but on the KPop Demon Hunters license, obviously, very exciting. Can you remind us, you said a little bit before, but when some of those products we can expect them to hit shelves and any other details you can share?

Yes. So, as we said, we've been awarded a multiyear licensing rights to develop and market the full range of the KPop Demon Hunters franchise across dolls. Action figures, collectibles, playsets, accessories as well as collaboration with co-brands, which is an extension of some of these rights. Very excited to partner with Netflix on the most popular film of all time and bring this very exciting vibrant world to life in 2026. The collector presales will begin in November on Mattel Creations with additional product to be available at retail in the beginning of spring 2026 and of course, heading towards the holiday season next year. This licensing agreement builds upon the strong relationship that we have with Netflix that span various brands such as Stranger Things, Squid Games and Bridgerton.

And I should also mention and remind you that we just announced yesterday that we are extending the multiyear relationship with Disney for Disney Princess and Frozen. And together, these two announcements reinforce our leadership position as a partner of choice to the major entertainment companies and IP owners. So it's another important building block as we continue to position Mattel in that regard. We see these brands as our own. We treat them as our own and as we manage them as a portfolio with the best team in the world when it comes to franchise management.

And our next question comes from the line of Chris Horvers with JPMorgan.

It's Christian Carlino on for Chris. Following up on the prior question, you laid out a few points on the horizon for Barbie. But to put a finer point on it, when specifically do you see that brand returning to more sustainable growth given it's been trending below where it was in 2023, excluding the.

Yes. Well, as we said, we expect to see improving trends in the fourth quarter and into next year. We can be more specific about what we are planning for next year. But I can share with you that we continue to focus on key trends especially around fashion, continue to tap into cultural trends that define Barbie and separate it from the rest of the industry. Just recently, we teamed up with the rugby doll team to celebrate the International Day of the Girl. We, as you know, launched the Barbie doll with type 1 diabetes. And just recently, the You Create line was recognized as one of Time Magazine 100 Best Inventions of 2025. So we continue to put out very exciting products and innovate across the portfolio.

We also continue to focus on packaging. This is an important feature in terms of audience segmentation. We are serving the growing adult collector fan, more demand there. We have very exciting partnerships for Barbie and for Ken. We are creating new form factors and play systems beyond the traditional dollar offering and continue to introduce new content activations and games to deepen engagement and have multiple touch points with fans of all ages.

Got it. That's helpful. And on pricing, you've taken all the pricing you plan to take this year, that's phasing into the P&L based on the timing of delivery. So how are you thinking about taking incremental price next year to maybe recoup some of the gross margin rate headwinds from tariffs? Do you currently have plans to take more price maybe on newer products next year, but it really comes down to how the consumer reacts to this holiday. So just curious how you're thinking about that.

Yes. The goal overall is to keep prices as low as possible for our consumers. So that's, first and foremost, something that we constantly pursue. And we did implement pricing actions in the U.S. in the end of Q2, beginning of Q3. And all of this was done in collaboration with our retail partners. It was one of the several elements that we use to mitigate the cost impact of the tariffs. And let me make it clear, we are not intending to take additional prices this year. The important thing is that we offer a variety of toys along a very wide range of price points to meet our consumer needs.

Now we are looking at the impact of tariffs and other inflationary items into 2026, but we have not made a decision on pricing. We will let you know as soon as we talk about the guidance next quarter. But we will always use an array of levers that include efficiencies to be able to mitigate the impact.

And our next question comes from the line of Eric Handler with ROTH Capital.

First, let's start off. I don't really know what normalized years are anymore for this business. But if you think about retail inventory volumes that are expected this year, are they any different from what we saw three, four years ago?

To answer it very simply, it's not. We believe that the combination of both owned and retailer inventories are at a very appropriate level as we prepare for a very strong Q4.

Just to give you more specifics and numbers, our inventory level at the end of Q3 was $827 million, and that's an increase of $89 million. So we're talking about something in the range of 10% as compared to prior years. The retail inventories on the flip side are modestly lower. So the addition of retail inventories plus our own inventories are at the appropriate levels. And they're of good quality and they position us well for the holiday season.

And the other thing that it's worth noting is that our supply chain expertise and also our commercial capabilities are advantages that we believe put us in a strong position because we work closely with our retail partners with the right products, right amount at the right time on the shelves. So net-net, inventory management is something that we constantly look at in partnership with our retailers and the behavior that we're seeing this year is not abnormal. The levels are very appropriate for a strong ending of the year.

Okay. And then with regards to new organizational structure, can you maybe give us some high-level details on sort of what is changing on a day-to-day operation? And is there any financial impact from this?

Yes, Eric, we are at an important inflection point in our journey and strategy. And the recent announcement reflects an evolution in how we grow and manage our business overall with a new brand-centric organizational structure and operating model. The goal is to manage our brands holistically and create closer alignment between our toy and entertainment businesses. This new organizational structure will accelerate our brand management strategy and franchise flywheel and put us in an even better position to drive profitable growth across the enterprise and continue to operate with excellence.

As part of it, we also integrated marketing across global brands and franchise teams to further align brand management in all consumer touch points. And this is a very important point. The Roberto Stanichi, who is the new Head of our brands team, the global brands team has been managing the vehicles category and Hot Wheels. And as you know, this has been a star performing category for us, which consistently applied our playbook and methodology in the most articulated way, driving growth in vehicles overall and also demonstrating the textbooks implementation of our brand strategy across product, franchise management, adult collector and content with continuous innovation.

Now play is a core competence for Mattel and the strength of our brand differentiates us in a world where every company is looking for strong IP to stand out in the marketplace. And we believe that success in our toy business will drive success in entertainment and success in entertainment, including content, consumer products, experiences and digital games will drive more success in toys. And the opportunity now is to fully capitalize on this virtuous cycle.

So when all is said and done, by the time this organization is vetted, we are very confident that we have the right team to capture the full potential of our brand offering and continue to innovate and excite our fans with great products and great experiences.

And our next question comes from the line of James Hardiman with Citi.

So I wanted to circle back to sort of the implied Q4 top line. I think we're looking at, call it, mid-teens type sales growth. I think if -- just by judging by aftermarket trading, I think there may be some skepticism in that, right? And so I was wondering if you could help us with any nuggets that might shine some light on what percentage of that has already been booked? What the run rate of sales in 4Q is? I know it's only been three weeks, but ultimately, how much of this is optimism versus grounded in whether it's quarter-to-date sales or sort of forward-looking indicators?

And maybe to that latter point, I don't know, take us behind the curtain of the conversations you're having with retailers and what they're saying about their order intentions for the remainder of the season. It seems like you're confident that the -- the quarter-to-date trend will continue. Maybe give us some data points behind that.

Yes. Let me start, Jim. We just reiterated our full year guidance, including the expectation of a good holiday season for Mattel. And that means a strong top line growth for the fourth quarter indeed. And we are strongly behind this for several reasons. Number one is we ended Q3 with POS growth across every region, including the U.S. We have seen that POS, which is a leading indicator of shipments, has continued to be growing strongly. And also since the beginning of the fourth quarter, both POS for Mattel continues to grow in the U.S. and internationally, and the orders are following. The orders are following in the U.S. and also in international. And in the U.S., they have accelerated significantly. As I said, we monitor this week by week. And based on what we see today, these trends are tracking in line with the full year outlook for 2025. The other thing that underpins our balance of the year projection is our supply chain expertise and global commercial capabilities, which are a competitive advantage for us.

And you asked about what's behind the curtain in terms of those relationships. It is a very close interaction. We do joint planning. We look at POS, and we make sure that we have the right product assortment in the right store at the right place at the right time. So the fundamentals of our business are strong and the consumers are buying our products. And now what we are seeing in terms of the acceleration in terms of the POS and now the shipments, that's what gives us the reassurance to substantiate our guidance for the full year.

But I want to also pass it on to Ynon because I think there's important elements in terms of product offering that have us excited about the balance of the year.

Yes. So, James, as you know, the most important KPI that we always look at is POS. Consumer demand has been strong all year, and it's still strong now. We've seen that all along. And this is, by the way, not just for Mattel. We talked about the fact that the industry is up high single digits. So toy industry is probably in terms of level of growth is much higher than the traditional low single digit at this time. So a lot of momentum overall.

In terms of Mattel, we are very excited about what is -- what we're bringing out this holiday season. If you look at what we are putting out category by category, there's a lot of exciting product in vehicles, of course, Hot Wheels is on a continuous momentum, but now we're adding the F1 offering and the new Speed Snap Track system, which we just launched recently. This is a whole new impetus of buyers of the track system, which we innovated for the first time after decades of having display pattern.

In action figures, we see continued success with Jurassic, Minecraft, WWE, Toy Story 30th anniversary and Masters of the Universe ahead of the movie year. In games, UNO is performing strongly with more innovation and more line extensions. In building sets, we recently launched the Mattel Brick Shop offering, which is off to a very strong start. And that is another promising opportunity for us, a whole new business or product line that we introduced and is performing strongly. In dolls, we talked about the weaker second movie, improving trends for Barbie and performance overall across the portfolio. And in infant, toddler, preschool, we expect to see improving trends for Fisher-Price with more innovation, product launches, Fisher-Price Wood, Montessori launch on Amazon, more points of distribution. So, all in all, a lot to play with. We have a lot of drivers in the fourth quarter.

We work very closely with our retail partners. they're also looking to fulfill the demand. And ultimately, it's all about our consumers looking to buy your product. And if the answer is yes, it's now about fulfilling the demand and working closely with retail to put product on shelves.

Got it. And to that very point, I wanted to drill down maybe a little bit on the inventory commentary from earlier. Paul, I think you mentioned that if we combine the sort of owned inventory and retailer inventory, it's pretty normal for this time of year, although obviously, the owned inventory piece is, I think, up 12%. And I think you mentioned that retailer inventories were down modestly. I guess where do you expect -- and more specifically, where does your guidance assume those two numbers finish the year? Do we think retail inventories get back to 2024 levels? Or do we think there's going to be more channel fill to happen as we look to 2026?

We believe that over time, the trends will move in the normalized direction. This has been a particular distortion. But as we have adjusted our supply chains and our retailers have adjusted their supply chains as well, they -- both combined inventory levels will gravitate to what was a normal level of inventory.

It's early to say, and we will closely observe and act with agility. And that's what characterizes us, right? That's why we have such strong commercial capabilities. We've been doing this for many decades. And we will be continuing to work with our retailers to make sure that the product is on the shelf. So confident about that.

And with no further questions, I will now turn the conference back over to Mr. Ynon Kreiz for closing remarks.

Thank you, operator, and thank you, everyone, for the questions. In conclusion, while our U.S. business was challenged by industry-wide shifts in retailer ordering patterns, the key takeaway for the quarter is growth in consumer demand for our product in every region. We continue to make meaningful progress in advancing our IP-driven toy business and expanding our entertainment offering strategy.

Looking into the fourth quarter and the balance of the year, with continued growth in consumer demand in the U.S. and internationally and significant acceleration of orders from U.S. retailers, we expect a good holiday season for Mattel and strong fourth quarter top line growth. We will share a review of our full year performance after the end of the next quarter and provide a detailed outlook for next year. We have much to look forward to in 2026.

Thank you, and I will now turn the call back over to the operator.

Thank you. And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.