Mattel, Inc. (MAT) Earnings Call Transcript & Summary

Hi. Thank you, everyone, for joining today's fireside chat with Mattel's CEO, Ynon Kreiz, who is leading Mattel's transformation into an IP-driven toy company. During our conversation today, we're going to talk about Mattel's strategy to unlock the value of its IP, the current state of the toy and retail industry and do a deep dive on Mattel's brand portfolio and growth opportunities. My name is Mike Ng. I'm Goldman's toys and video games analyst covering Mattel, and I have the privilege of moderating this discussion with Ynon. So Ynon, first, thank you very much for making yourself available.

You've been the CEO of Mattel since April of 2018. Can you reflect a little bit on your time and talk about some of the biggest challenges for Mattel and some of the most important strategic shifts and initiatives put into Mattel's -- put into place from Mattel's sense? What are you most excited about over the next few years? And how does that fit into the vision of being an IP-driven toy company?

Thanks, Mike, for the question. Looking back, reorienting the company to align on our new strategy and advancing the culture were 2 key themes. Once we had the organization focused and empowered to transform Mattel into an IP-driven, high-performing toy company, we began to see the change and momentum building. Our first priority was to reshape our operations, stabilize the shift and restore profitability, and we have done very well on that front. The implementation and execution of our structural simplification program over the last 2 years was very important for the company and really put us on much stronger operational and financial footing. As you know, we successfully completed the program in 2019, reaching $875 million of run rate savings exiting the year, exceeding our own savings target by $225 million. So with the additional actions we are taking this year, we will exceed $1 billion of cost savings. And of course, the benefits of this will continue to have a lasting impact on the business for years to come. We are clearly seeing the results in all profitability metrics, which have been consistently improving over the last 2 years. We talked about our adjusted EBITDA that went from $126 million in 2017 to $200 million in 2018 and $453 million in 2019 with momentum. So really, looking ahead, transitioning the company from being a toy manufacturing company into being an IP-driven company is very exciting. I'm also very excited about the numerous opportunities we have to grow the business. We expect to do that in the short to mid-term through multiple avenues, including growing our flagship franchises, expanding our brand portfolio and also drive growth through our own IP catalog, entertainment partnerships and new innovation. And in the mid- to long term, we are looking to drive growth by capturing additional value from our IP through franchise management and online retail and e-commerce.

Great. That's a really fantastic overview. I'd love to dig into each of those things in turn. Maybe just starting out with the current state of the industry. At the beginning of the second quarter, I think about 1/3 of Mattel's retail outlets were closed. At the beginning of the third quarter, I think it was only about 4%. Could you talk a little bit about how stay-at-home measures have affected Mattel and the broader toy industry and where we are today? Are things getting back to normal for Mattel's sell-in and sell-through?

Yes. In the early days of COVID, there was a lot of uncertainty. Significant store closure with retailers being very cautious with question marks around how the industry will react to the disruption. As you said, the retail landscape improved over time with the pacing of reopening being really different between each region. But overall, it's been improving over time. The market returned to normal consumption pattern with the Dolls category where we are a global leader, coming back very strongly. Another shift that we talked about was the major transition into e-commerce and B2C, which became a very important sales channel, and we also kept momentum there. In the second quarter, we saw strong improvement in our POS that was up single digit compared to what we saw before, was very strong in North America. And we saw growth especially strong in e-commerce across all regions. The momentum we saw was across the portfolio, especially for Barbie and Games led by UNO, which we talked a lot about during the second quarter earnings call. Games performed exceptionally well. It was our best second quarter ever and our best first half ever. Game POS grew significantly, up double digit. We saw the fifth consecutive quarter of POS growth. And UNO was the #1 game in the U.S. according to NPD with 9 consecutive quarters of year-over-year growth. Since then, consumer demand for our product across the portfolio stayed strong. We stepped up to the plate and have been working hard in partnership with our retailers to cater for this demand. This is where our work, our own work, over the past 2 years to develop a flexible and result-oriented organization is serving us well, especially during this time. Our supply chain is up and running. We are working closely with our retail partners as they're heading towards the holiday season. Our teams are always innovating, always innovating, and we see opportunities across all of our product lines. And as we said on our second quarter earnings call, based on the momentum we are seeing, the positive POS trends and the low retail inventories exiting the quarter, we are planning for strong demand for our product in expectation of an improved revenue performance in the second half of the year, including the all-important holiday season. With that said, we still say that there is some COVID uncertainty out there. While things are improving, there is uncertainty, and it potentially could have a negative impact on revenue not just for Mattel, but impact on revenue and pressure on revenue on a year-over-year basis.

Yes. I would love to dig into that a little bit further. As you pointed out, since the start of the pandemic, consumer demand has been incredibly resilient and arguably very strong. Could you just talk about your expectations for consumer demand this holiday? Do you expect any pull forward of demand or pantry stocking? Have you begun seeing retailers lean into the holiday already?

We are seeing continued momentum in the second half following the high single-digit POS growth we had in the second quarter and the low retail inventory exiting the period where retailers were cautious during the early month of the COVID disruption. At this point, the strong consumer demand for quality toy product is obvious. And it bodes well for the second half and the holiday season, especially for known and trusted brands as entertainment properties, especially movies got shifted. Over time, we expect POS and shipping to be aligned since retailers are unlikely to take their inventory to 0 and toys continue to be a strategic category for them. We do not believe that the strength in the toy industry is due to pull forward or pantry loading. This is intrinsic. People are buying product because they look to spend money on children, and toys are not an expensive item. This is not a big decision. So we see the spend. And in addition to that, the holiday shopping season this year will start early. Retailers are moving the shopping period earlier, starting in October, effectively extending the bank period, which would help as well. Looking beyond this year, we have been consistently demonstrating our execution capabilities and the resilience of our brands throughout the last 2 years, especially during the pandemic and believe we can regain the momentum we had before the disruption. We expect to grow in the short to mid-term through the multiple avenues I've talked about before and also looking to drive growth from our IP in the mid- to long term and over time, expect to restore our historical levels of performance, both bottom line and at the top line.

Great. We've talked a lot about the domestic toy industry. Would you just give us an update on the health of the toy industry internationally, which regions or countries are doing well and which areas are not doing so well? And what are some of the potential risks as you think about the second half and next year?

Yes. As I said before, the toy industry has proven again that it is resilient in the face of economic disruption. It is a strategic category for retailers, and parents prioritize spend on their children and look for high-quality products at affordable price points. We are seeing POS momentum globally. U.S. is clearly leading the way. But we also see retail in Europe, Middle East and Africa pretty much back to full capacity. Asia Pacific really varies by country. The biggest challenge we see right now is in Latin America. The region is struggling with COVID and especially, well, in brick-and-mortar. And this is given the fact that it does not have as robust of an e-commerce infrastructure as we have in other regions. So as a result, it is likely to be a headwind in the near term relative to other regions. But over time, we expect Latin America to come back and normalize as well.

And stay-at-home measures, I think, have only accelerated the shift toward e-commerce, which I think people generally think is a channel that carries lower inventory. And I think a lot of omnichannel retailers are also adopting leaner inventory strategies. Are there any impacts to Mattel's margins due to this customer shift? And does Mattel need to do anything to address, I guess, what I would describe as increased working capital requirements from these demands?

Yes. So we have seen a significant increase, you can call it, a shift to e-commerce and continue to work closely with all of our omnichannel retailers and e-commerce partners. In the second quarter, e-commerce continued to grow strongly for us in all regions. Online consumer demand more than doubled in North America where it represented approximately 1/3 of our total volume. American Girl e-commerce also more than doubled. Our supply chain is up and running, and we are in a position to meet consumer demand both online and at the brick-and-mortar locations. Looking ahead, we, of course, will continue to support the growth of omnichannel and pure e-commerce partners, and we'll also look to accelerate our own efforts with our B2C where appropriate. This part of the strategy sits firmly on our one-page strategic road map. But what we see now, the progress there will accelerate given that people have a high propensity to spend money online and that, that side of the industry really accelerated its growth. Overall, there is not a margin -- a significant margin differential between e-commerce and brick-and-mortar sales. Pure e-commerce partners tend to maintain lower inventory levels since they do not have to stock brick-and-mortar toy aisles. So you may see us holding a little more inventory to fill demands. But overall, the economics are comparable.

So let's shift gears and talk a little bit about the cost savings programs. So with the conclusion of structural simplification and the continuation of your Capital Light program, I think Mattel is on track to achieve a cumulative savings of $1 billion by the end of this year in 2020. Could you talk about these cost-saving efforts and how Mattel has benefited from these changes and what those main changes have been?

Sure. Well, we are very proud of our success with the recently concluded structural simplification program. As I said before, with a cumulative savings of $875 million that we have already achieved combined with the additional $90 million of SG&A savings and $50 million of Capital Light savings we expect to realize this year, we will exceed $1 billion of savings exiting 2020. You can expect to see more savings from our Capital Light program in the future. When we say Capital Light, we refer to a multiyear, comprehensive program to optimize our manufacturing footprint, increase productivity and drive efficiencies across the entire supply chain. We already consolidated 3 owned plants in 2019 in Mexico, China and Indonesia and announced the consolidation of our plant in Canada this year. We are retaining plants that have competitive advantage in cost, quality and service. But at the same time, we continue to reduce our SKU count and already exceeded our year-end target in April. The target was to exceed our SKU by 30%, and we already achieved that in April. So at this point, we expect to exceed the target by the end of the year. These programs have driven significant efficiencies across the organization and delivered cost savings that are reflected in the P&L with gross margin being up over 700 basis points from 2017 as well as meaningful reduction in SG&A. The impact is not just on costs, but an overall improvement on the way we operate, which we believe will help us drive top line growth as well. And as part of the structural simplification, we reduced over 30% of the workforce of the company in 2 years. And at the same time, we managed to grow top line for the first time in 6 years. So that kind of tells you the story how we think about the journey there. And while we haven't provided any specific long-term targets, we are looking to get back to our historical margin structure and build from there.

Okay. And as you think about the potential revenue opportunity as Mattel transforms into an IP-focused toy company, can you talk about whether or not you have all the capabilities in the organization to accomplish that goal? Do you need to develop or acquire any new capabilities, whether that's in consumer product licensing or content creation, for instance?

Well, we made significant changes to the organization both in terms of structure and capabilities. We absolutely believe we have the right leadership and world-class talent to execute our strategy. It doesn't mean we are running around to -- and hiring a lot of people. What we are hiring is the right people. If you look at Mattel Films, we have a very small organization but already announced 9 major live-action feature film projects with all the best partners that the industry can offer. These projects include Barbie, Hot Wheels, Masters of the Universe, American Girl, Magic 8 Ball, View-Master, Major Matt Mason, Barney and Wishbone, with more coming. Our big library of iconic franchises continues to offer cinematic storytelling opportunities. We have also been very active in our TV and short-form entertainment content with a number of projects in the works, including the new Thomas series; 2 Masters of the Universe animated series with Netflix; the Barbie movie, Barbie Dreamhouse Adventures, that recently launched on Netflix on September 1 and more. We also continue to be very active in the digital gaming space and remain focused on accelerating our growth in e-commerce, as I said before, and build out our B2C capabilities, leveraging the American Girl platform as a foundation. So we do have the resources. We have the capabilities. We have the talent and believe we can capture value from our IP and do that well.

Let's do a deep dive into some of the key brands, maybe starting out with Barbie. And despite the tough macroeconomic environment, POS for Barbie was really strong. I think it was up more than 35% year-over-year globally in the second quarter. Can you talk about what's driving Barbie's success? And what is the brand doing to prepare for heightened competition in the fashion doll category?

Yes. Barbie has done so well. We couldn't be more proud. As you said, it grew 35% in POS in the second quarter and 10% in shipment in constant currency. Barbie really has been a standout performer for us even before COVID, by the way. But really, it's been always in a perpetually competitive category performing well the last few years. It's a combination of great product, new innovation, cultural relevance, effective demand creation and great content that we continue to put out. Our team has done a great job being on point with the brand messaging and keeping the brand culturally relevant, especially in today's environment. Barbie is seeing growth across almost all of its segments with especially strong momentum for Color Reveal, which we recently introduced. So it isn't driven by one SKU or one segment. It's just across the category. Even the Barbie Dreamhouse has been consistently a top 10 selling item in the U.S. across the industry year-to-date. Normally, it's a holiday selling item, and here we are, it's a top 10 selling item year-to-date already. As I said, we have already launched new content recently on Netflix, which is doing very well out of the gate. The Barbie Dreamhouse movie was #8 most watched content in its first week on Netflix across all genres, not just kids. So we're seeing great momentum, and you will see additional innovation coming out of the brand in the fall. So stay tuned, more coming.

Great. So let's talk about Hot Wheels. Hot Wheels had its best year ever in 2019 and had pretty good sales growth and market share gains early in the year before being hurt by retail closures in the second quarter. As we move into the back half of this year, do you see Hot Wheels being able to regain some of its prior momentum?

Yes. As you pointed out, Hot Wheels had its best year ever in 2019, and that was lapping a record year in 2018 when the franchise celebrated its 50th anniversary. We expect to see continued momentum from Hot Wheels. We're very excited and very confident about the franchise. The first half results were impacted by brick-and-mortar retail closure, which hurt the input sales of die-cast cars. But in the second quarter, we saw POS up growing double-digit in North America, and I'm very confident the brand will resume its momentum in the second half of the year.

Yes. On Fisher-Price, that saw an improvement last quarter. Infant, toddler and preschool POS was up double digits. Thomas & Friends and some of Fisher-Price Friends are still underperforming a little bit. Could you talk about some of the strengths in the Fisher-Price core product as well as some of the things that you need to execute for the noncore brands? How do you measure which licenses are underperforming? And as a follow-up to all this also, what -- can you talk a little bit about [ tuck-in this top ] areas of focus?

Yes. Look, we are seeing positive POS trends in our Fisher-Price core business, which, as you know, is by far the largest part of the category. This is very encouraging. We are seeing new innovations. There's a new marketing campaign that we launched a few months ago. And generally, just better pricing, better value for consumer. All of this will be key to our success. Don't forget that we remain the industry leader in spite of the decline in the infant or the preschool category, and we are seeing tangible progress at this point. So we remain very confident about the execution of the strategy. We still expect to see headwinds this year as we exit the unproductive licenses in Fisher-Price Friends part of the business. But this is really a small part overall of the category at this point, so we do expect that to tail off in the near term. For Thomas, we are improving the content and are launching 2 -- or starting with 1 series on Netflix and also going to have a much better product line out in the fall. So Thomas, another great brand that is in turnaround. We have great leadership for the category overall. We have great people, great talent, strong strategy, and we believe we have what it takes to turn the category around and turn it into a growth driver for the company.