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

Okay. Well, good morning, and welcome, everybody. So happy to have you here at our Barclays Eat, Sleep, Play conference. For those of you who don't know me, I'm Felicia Hendrix, gaming, lodging and leisure analyst at Barclays. And we are so pleased to have Mattel with us here today, especially Ynon Kreiz, Chairman and CEO of Mattel. This is the first year that Mattel is participating in our conference, and we're hoping that it's one of many. If we can kind of do a virtual -- live thing in the future, it is coming upon Christmas time. So it's a busy time of the year for Mattel. For those of you who may be unfamiliar with the toy industry, Mattel is one of the largest toy manufacturers in the world, major properties include Barbie and Hot Wheels, Fisher-Price, American Girl, to name a few. Ynon has led the company since April of 2018 and has been a major force behind the company's transformation into an IP-driven, high-performing toy company. I would also note that under Ynon's leadership, the company has significantly improved its balance sheet and most recently received an upgrade from Fitch. In the next 40 minutes, I'm going to host a Q&A session with Ynon. So welcome.

Ynon, for those -- just to start out, for those who may be generalists in our audience, just wondering if you could give us a sense for how Mattel has evolved over the last 3 years and what exactly does it mean to be an IP-driven and high-performing toy company?

Yes. Well, thanks for inviting me. I'm grateful to be here. After I joined, we set out a goal to transform Mattel to be an IP-driven, high-performing toy company. We put in place a clear strategy to restore profitability and regain top line growth in the short to midterm and capture the full value of our IP in the mid to long term. The easiest way to describe the change is that we moved from thinking of ourselves as a toy manufacturing company into being an IP company. We have a clear strategy and see a clear path to drive significant improvement from the toy side of the business by running the company well and optimizing the opportunity we see in our core toy operation. In addition, we now also recognize that we own one of the strongest catalogs of children and family entertainment franchises in the world with the opportunity to leverage the catalog outside of the toy aisle. This includes large categories that are directly adjacent to the toy industry, such as film, television, digital gaming, live events, music and consumer products. Many of these categories are bigger than the toy industry and have been relatively untapped by Mattel. This is not instead of what we do on the toy side of the business but very complementary and a key part of our mid- to long-term strategy. And we believe that we can create significant shareholder value from the toy business, success in leveraging the full value of our IP, can be transformative in addition to that.

That's a really great overview and I think a good springboard for our conversation this morning. And I'd just like to kind of back up for a second because you took over the CEO role of the company at a really interesting time for the toy industry. 2018 was a challenging year in general following the Toys "R" Us bankruptcy. And then on top of that, you were working on Mattel specific issues. Then 2019 was a bumpy year given the varied comps against the impact of Toys "R" Us. You had a tough first half given 2018 liquidation. The industry grew, and then there was a short holiday period, and there were tariffs. Now we have 2020. So -- which I don't think we definitely don't need to rehash. But despite all of that, year-to-date through September, NPD reports that toy industry sales are up 19%. So while Mattel and the industry have faced challenges in the first half of '20, your company posted strong growth in the third quarter and looks well positioned into the fourth quarter, excluding the unknowns. So can you just talk a bit about that path to where you were to where you are now? Because Mattel's made some great strides, not only in the U.S., but also globally, right? This quarter, the company grew faster than the industry. And so maybe we could just kind of back up, rewind a couple of years and tell us to how you got to where you are today.

Sure. We're firmly on our way to achieve our goal to become an IP-driven, high-performing toy company. We have developed a flexible and results-oriented organization. Many of the actions that we took before the pandemic to reshape our operations as part of our turnaround strategy are contributing to our strong performance and the results you are seeing now. We restructured the company around category management. We stimulated innovation across all of our categories. We turned our supply chain organization and global scale to be a competitive advantage. Historically, it used to be somewhat of a handicap. Now it's a competitive advantage. We established a global commercial organization to accelerate growth across all regions and throughout our retail network, which today spans more than 450,000 doors worldwide, where our product is sold. We positioned the company to capture the growth in e-commerce, and we currently are on track to exceed $1 billion of cost savings exiting 2020. If you look at our trajectory, we had -- we were at $126 million adjusted EBITDA in 2017, $200 million in 2018, $453 million in 2019. And we just guided to a range between $625 million to $650 million of adjusted EBITDA in 2020, which is $50 million more than we guided for before the pandemic. So you can see the trajectory and see the momentum in our bottom line performance. Our brands are resonating, and we are gaining market share in our regions and across categories. And overall, we believe we are executing very well and that we are well positioned to maintain this momentum.

Yes. And can we just step back for a second? And you had talked about the supply chain, and now it's -- provides a competitive advantage to the company. And having followed the company for a long time, supply chain issues, before you got there, have always kind of been -- kind of a topic of conversation. When you say the supply chain is now a competitive advantage, can you elaborate on that a bit?

Yes. So we took several steps, establish a capital-light model and a new management, new leadership that viewed supply chain as a business unit, part of the commercial approach of the company. This is no longer a service center or a cost center. It's part of the commercial mindset of the company, working in collaboration with the commercial organization, in partnership with our retail customers and looking to drive the business forward. And we've achieved great efficiencies across the board. It's a key reason why our gross margin is improving so significantly, and we're seeing the results not just in the bottom line but also in helping us drive top line performance, revenue performance, in increasing service levels and overall capabilities of the organization to carry for the demand we're seeing for our product.

And what can you -- and you also mentioned e-commerce. What can you attribute your successful growth trajectory in e-commerce to?

It's partly due to our capabilities that we -- that we've had before, but also a lot about -- a lot to speak about the focus that the organization has in reaching consumer wherever they are. We really did an incredible work throughout the year, but particularly in the third quarter where we grew 50% in e-commerce and online retail. As a whole, this part of the business represents about 30% -- or represented 30% in our third quarter top line revenues, and we see it across all regions. It's particularly strong with American Girl where we have a direct-to-consumer business that we manage directly. But overall, it's been a very strong performance and a key part of our strategy.

Great. And then just one last thing, just given the successes this year and the tremendous growth you're seeing, particularly in the second half, as you plan for next year, and I promise you I'm not asking you for guidance on next year, but as you plan and you think about next year, there are challenging comps that you will be facing. So how are you thinking about that?

Well, we always work in an environment that is competitive, and we always look to exceed and perform ahead of what we did in the past and relative to the industry. I can't give you guidance, of course. But given the assets that we have, our capabilities, the momentum that we are seeing, the demand for our product, and what we know is coming in terms of the quality of product, the innovation that we see in the toys that we put out there, we're confident about the path forward.

Okay. That's helpful. And then just kind of shifting gears from looking out a little bit farther to get looking now much closer, what would you say are some of the major secular industry drivers you're seeing that could -- that are driving toy holiday sales this holiday season?

What we're seeing is that the toy industry as a whole is growing meaningfully and continues to demonstrate its resilience in challenging economic times. Parents are spending money, buying trusted products for their kids and look for high-quality products at affordable price points. The trend to e-commerce has accelerated and is here to stay. And the toy category as a whole is proven to be a strategic category for retailers. And although we believe that COVID may have accelerated some of the revenue growth this year for the industry, including Mattel, our overall performance and significant increase in profitability has been driven primarily by our own work. And it's really all about strong brands that resonate with consumers, focus on innovation, quality product and purposeful play, which, in our mind, is proving to be a very effective way to increase engagement and drive demand. And what we do see is that parents do prioritize quality, do lean and trusted brands. And this will always resonate well with consumers, which is why it's such a key part of our own strategy to focus on those areas of how we think about product, how we think about innovation and how we think about our connection with consumers.

And I know you talked a lot on your last call about the market share gains that you have achieved. Can you just talk about where you think those gains are coming from?

Well, we've performed well pretty much across our portfolio. The third quarter that we just recently announced was very strong and that we did see performance -- very strong performance broadly across the portfolio in every region. We grew in every single region in constant currency. And it's a result of the work that we have across the business, across the enterprise. Of particular note was our performance in the Dolls category, which grew significantly. That was, in itself, driven by Barbie that performed exceptionally well, that it was up 30% and almost every segment with POS up 50% -- more than 50%, which really speaks to the strength of the franchise and overall momentum we have for the category. We also saw growth in vehicles. We saw growth in games. Fisher-Price stabilized, was down 1%, which speaks to the momentum that we're seeing in stabilizing the franchise. And of course, when you come to the regional performance, this is what we saw -- a particularly strong performance in North America, in EMEA. In North America, we grew at 40% ahead of the industry. And in EMEA, we doubled the rate of the industry growth. So overall, strong performance across the categories and regional performance, and we're seeing that momentum stays. And hopefully, it continues throughout the holiday period.

Now when you talk to the retailers, and they have a lot of companies that they can buy toys from, and there's a lot of different well-known brands, obviously, given the gains that you highlighted, you're leading and growing, particularly impressive POS numbers. When you talk to whether it's toy buyers or the retailers, what are they saying about your product portfolio that's kind of separating Mattel from the others?

This goes back to the strength of our portfolio, the fact that we own strong brands, trusted brands that resonate so well with consumers. What we've done particularly well is develop products that has purposeful play. We don't view what we do as simply making toys that don't have a purpose and the reason behind them. Everything that we make, whatever we make has what we believe is what we call purposeful play. And that is what resonates so well with consumers and families across the world. If you look at Barbie, again, a flagship brand that represents so much of what Mattel is, we -- when a person -- a consumer buys Barbie, they expect more than a system of play. Barbie today speaks for diversity, speaks for inclusion and really represent key core values that everyone can relate to and feel good about. Barbie, in that regard, is a very good proxy for Mattel as a whole. And when you think about the performance of Barbie and the success of Barbie, you need to know that many of the people that are behind Barbie manage every other part of the company. This speaks to the design and development team, the commercial organization, supply chain, marketing and demand creation. So the same thought process, the same DNA, the same approach that is behind the Barbie success is part of how we apply our methodology and thinking about across the portfolio at Mattel as a whole. And in that regard, you need to think of Barbie as a proxy for the rest of Mattel and what you should expect to come out of Mattel going forward by way of engagement -- engaging with consumers, connecting with families and making great product that resonate and drive demands.

And certainly, for those of us who go to toy fair every year, it'll be interesting to see what -- how you guys do it this year. But for those of us who go to toy fair every year, we've seen a real evolution in terms of your product portfolio over the past few years in terms -- we've seen it specifically in Barbie, like you were talking about, but in a lot of the other lines. What can you say that you brought to the table at the company in terms of like invigorating some of that creativity and getting everyone to kind of where you are today?

We, in many ways, brought back the core competence and capabilities of Mattel. We are a design-led organization. And what we did is really put that forward, put more resources behind our design and development capabilities. And as I said, by organizing the company around categories rather than by brands, we're able to amplify our capabilities across the portfolio as a whole. Where, historically, we used to focus on specific brands. Now we are able to operate across the entire catalog, think about innovation in relation to our power brands, the catalog IP that we own in our library, third-party partnerships that we're now able to drive and, of course, focus on new innovation, the next big thing. And by doing that, we were able to amplify creativity, do it at scale, and at the same time, achieve our business objectives, which is to restore profitability and regain top line growth. And it is important to say, in relation to the efficiencies that we drove, as we mentioned earlier, in reducing our cost base by over $1 billion, on track to achieve that at the end of this year, we have not impacted negatively in any way our creative capabilities or our commercial capabilities. In fact, we believe that by simplifying the organization, reducing costs and delayering Mattel, we're able to double down and amplify what matters. And you're seeing that in the results, both in terms of bottom line performance as well as stabilizing our top line and achieving growth in constant currency last year and having so much momentum in the third quarter and also expecting momentum to stay in the fourth quarter of a very challenging year in the midst of a pandemic in 2020.

And regarding the fourth quarter, you talked before about your guidance for the full year, your EBITDA guidance, the $625 million to $650 million, when you gave that color on the call, you did catch it in some conservatism, which is understandable given the environment that we're in and all of the unknowns. But setting aside kind of the COVID-19 uncertainty, what are the other key noncontrollable factors that might have an impact or have had an impact on the quarter could get you to the lower end of the range?

So we see still strong POS and continuing demand for our product. We are seeing a significant upswing in revenue that we talked about in the third quarter earning results where our top line now forecasted to be up high single-digit in the second half versus a double-digit decline in the first half. We do expect an improved second half, but what we did say is that we did not anticipate such a strong upswing in such a short time when we entered peak production and planned our inventory. So while our supply chain is fully operational, we are chasing extraordinary growth in demand for our product. We also said that we do expect to meet our gross sales guidance, but we cannot be certain that we will fully meet the surge, such strong surge in consumer demand.

That's understandable. And can you talk at all about the demand trends you've been seeing since October, especially since many major retailers have been offering earlier and extended sales periods?

Yes. Well, as it relates to consumer demand, our own internal shopper research shows that the vast majority of parents plan to spend the same or more on holiday toy purchases throughout the fourth quarter. Toys is still one of the most important categories during a holiday season, and we feel very good about our plans and our path through the holiday season in partnership with our retail partners. There is a lot of retail activity around the world designed to extend the holiday shopping season by offering many options for shoppers to start, continue and complete fulfilling the wish list through the season. In addition to extending the shopping season, which was an excellent move in our view, many retailers are offering flexible shopping options, online and home delivery, order online, pick up in store, curbside pick up and, of course, in store shopping, to ensure consumers can shop with maximum convenience. We're not compromising their safety. I can tell you that as we said on the third quarter earnings call, POS quarter-to-date remains very strong. Our shoppers seem to be responding to all of these activities, and we feel confident heading into the thick of the holiday season.

Great. Let's start talking a little bit more about your categories. You've touched upon it a little bit. I don't want to rehash a lot of this stuff that you've said about Barbie already because, clearly, that's been a strong success for you. Can you talk about some of your entertainment plans for Barbie and how that might tie into Barbie's growth? And what's in place and where can Barbie go from here?

When it comes to Barbie, the question is, how high is high? The brand is really doing so well and going from strength to strength with expanded product offering and a lot of activity to drive demand and increase engagement as -- even with -- as much -- as strong as engagement already is. We've done a really good job in continuing to develop product that resonate with consumers, but a lot of the success, as you alluded to, is related to the content and the adjacent activities we have around the brand. We launched several different content offering on Netflix. One in particular was the Barbie Dreamhouse Adventure made for Netflix movies, 70-minute long, that out of the gate, was a top 10 movie on all of Netflix, not just among the target audience. And in addition, we have different animated projects, shows as well as content on YouTube that is resonating very well. Barbie also speaks about -- or had several vlogs to promote good citizenship, antiracism, fair play and really important messages that speak to the value of Mattel, which resonated really well. And we see that continuing to be a strong part of the overall offering.

The other thing that I've noticed that you've done with Barbie, and you may have done this with other brands, is to kind of change the value proposition a little bit. I might not be saying that in the right way, but you have your -- the Barbie Camper, for example, which is a certain price point, but you also now have like mini camper, which I've seen in the stores, which was really kind of compelling to me, at a totally different price point but almost gives you a very similar -- gives a child a very similar play pattern, right, because not everybody can afford the big camper. How much of those kind of -- can I call them value propositions? How much of that is kind of new to the product line this year and is driving some of the strong POS?

Well, this is what we do. We develop and design product that is aiming to appeal for consumers of all works and [ old pace ] and all preferences. Barbie especially has a very strong, very wide offering of content. We recently launched Barbie Extra, which is yet another dimension of the Barbie franchise, and that will always be what we do. It's part of a comprehensive strategy to broaden the franchise and touch consumers on many levels. There's one ethos. There's one clear set of values that we always adhere to. But as a whole, it's all about creating innovating product and experiences that inspire, entertain and develop children through play. And Barbie is a great example, but it's not the only example. We do the same thing for Hot Wheels or Fisher-Price, American Girl and many of our core brands. This is what I mean when I say purposeful play. It's not just about one product, one type of experience. It's a comprehensive approach to systems of play and finding ways to connect with consumers and offering product that represents quality, safety and value that makes it accessible and appealing for consumers all over the world.

I definitely like to see that in the stores. Now let's move to my favorite brand, American Girl. So we've seen some stabilization. We've seen some different kind of creativity coming out of that property. Would you say that -- is the worst behind for American Girl?

Well, getting American Girl back on track is an important priority for the company. The concept and values behind this great franchise align closely with many of the key trends of today, especially of Mattel. We have been executing very well on the strategy to turn around the business, and this includes redesigning our website into a digital flagship, infusing new excitement and experiences into the flagship stores, driving new relevant content, specifically focused on digital, and restoring the premium quality and details back into the product. We're very encouraged by the results we saw in the third quarter, especially the performance that we saw in our direct-to-consumer business, which almost fully offset the COVID-related retail challenges that we saw in the third quarter. Being down only 2% to $1 million in a quarter where our retail business was heavily disrupted due to COVID speaks to the success of the D2C strategy. As we mentioned earlier, our direct-to-consumer business doubled, and at this point, represented -- or represents more than 50% of sales as of the third quarter. And in addition, we are seeing growth in customer activations, average order values and conversion rates. So a lot of reasons to be very encouraged. We are not declaring victory yet, but we believe the business is stabilizing and continue to see the franchise as a growth driver for Mattel.

Okay. Can American Girl get back to its former peak at some point?

We haven't given specific guidance, but I think I've said a lot about the momentum we are seeing and the confidence we have behind the brand being a growth driver for us.

The main issue that I see the brand is having is just the private label competition. The quality is certainly different, but the price points are, too. And as I've thought about the American Girl brand over the years and how to kind of grow through that competition, what are the strategies that you guys have employed?

Well, it is a premium brand. And when you go to a store or when you think about buying American Girl, you don't think about buying an 18-inch doll. You think, I would like to buy American Girl. It's a holistic experience. It's probably one of the richest brands in terms of overall play value and experience in the industry with a historical perspective, the different type of dolls and play patterns. And we intend to maintain that. There is no direct comparable in the industry. Yes, there are other dolls that are large size, but there is no other experience like American Girl as would -- as much quality and focus on premium and purposeful play. We intend to maintain that. And with that said, we are thinking of different price architectures to make the brand accessible, but we're not looking to compromise on the value, on the integrity of the brand and the premium that we are now putting back in the product.

Yes. Because I thought some of the competition is coming from lower-priced clothing or lower-priced accessories and stuff like that. So it seems to be more about the quality and the content versus price. Before we move on from American Girl, how's Courtney do in?

Very encouraged. I see that you know the brand pretty well.

I know them all.

It's looking good, and we are very encouraged by what we're seeing. And as I said, a lot of reasons to be optimistic and positive about the turn. Not declaring victory yet, but we're very encouraged and feel good about where we're heading right now.

Great. And let's move now to a topic that I know is on front of investors' minds, and that's the Infant, Toddler and Preschool segment. So what are the biggest challenges you had to overcome to get Fisher-Price core to growth again? And are you seeing anything on the horizon that could be a potential threat this year?

Mattel, led by Fisher-Price, is the #1 player in the Infant/Toddler/Preschool category, and we continue to be a valid brand by parents as a partner in child development. We are encouraged by the global POS growth we saw in our -- in the entire Infant/Toddler/Preschool category for 2 consecutive quarters now despite a decline in Fisher-Price Friends, which in itself is a result of our decision to exit underperforming licenses. Our POS growth has been driven by Fisher-Price Core, which is by far the largest component of the category, which also has delivered 2 consecutive quarters of positive global POS growth. This growth was driven by new innovation across the various segments and a very compelling marketing campaign that we call Let's Be Kids that continues to roll out globally. Fisher-Price is celebrating its 90th anniversary this year. The brand is valued by parents as a trusted partner at each stage of a child's journey. This is an important relationship, which can be further leveraged and further developed. And given the strength of the brand and the quality product that we are seeing, we believe Fisher-Price will be a strategic growth driver for Mattel and remain believers in the opportunity and potential of the brand. Within the category, I also want to spend a minute on Thomas, which remains an iconic franchise, and we also see that as a growth driver for the company. We expect Thomas to benefit from our new simplified and improved product range and refine content strategy. We recently announced a new film project that will be coproduced and directed by Marc Forster, the former Director or the Director of James Bond Quantum of Solace and Finding Neverland. We also recently green lit 104 episodes and 2 specials for a television series based on Thomas, and these shows will premiere next year, in the fall of 2021. So overall, we believe in the Thomas brand as part of the Infant/Toddler/Preschool category and see it as another growth driver and opportunity for us to expand further in the category.

Fantastic. And then just moving to Action Figures and entertainment. You do have some movies next year or some entertainment drivers. We have Minions, right, which got deferred, and then we have a few others. How do you view those as growth drivers next year? And then also, how do you think about balancing kind of those years when entertainment drivers are strong with your evergreen products? I know a lot of times, the investment community gets kind of excited about the entertainment drivers, but then also at the same time, a little bit kind of concerned about any potential cannibalization of evergreen.

Yes. Look, this is our business. Our commercial organization works closely with our retail partners to ensure alignment of marketing and promotional programs for our entire portfolio, both owned and licensed property. As it relates to the movie slate, it is too early to tell what will happen in 2021. But if the calendar stays as planned, we expect to benefit from extensive theatrical releases that are scheduled for 2021. We expect to launch products for Minions, as you mentioned, Spirit, Fast & Furious, Top Gun and the Olympics. And we do expect these movies and franchises to drive people to the toy aisles, which will be a good thing for our portfolio. We are very comfortable with our ability to balance demand for our own brands, our own evergreen brands or partner brands while competing effectively in the marketplace before COVID, during COVID and post COVID. We expect our own brands to continue to drive most of our growth. And while we are not dependent on theatrical releases, given the strength of our own IP, we do stand to benefit from third-party partner brands as another growth driver for Mattel.

And then you've mentioned before some entertainment that you had set up and just -- and you've talked in the past about your virtual studio initiatives. When -- and you're working with a lot of different studios on different things. When can we start seeing those? Acknowledging that this year has kind of taken everything a little bit off the path. But if we kind of, were talking in January, say, when do you think we can start seeing that product coming from Mattel?

Well, we haven't been specific about release schedule. And of course, we're now very mindful with any delays to the release schedule by studios given the COVID world. But while film and production schedules, in general, have been impacted by COVID, we have been very active and advanced the creative work on several film projects as well as television projects. As you know, we've announced today 10 live-action feature film projects in partnership with major talent. The interest in our IP remains very strong, and we are working on even more projects. So we're not stopping at 10. We are very encouraged by where we are. We do expect movies to start getting into production sometime in '21 or at the end of '21 or 2022, and we'll update you and the rest of the marketplace on those release schedules. This is meant to be part of our mid- to long-term strategy, and these projects do take time, but we are very encouraged about where we are. In many ways, we are ahead of where we expected to be sitting here today and see real momentum, real projects, big talent, major talent, relationship with major studios. And each of these projects have -- has a real potential. And as a whole, when you take a portfolio approach, we believe we have an opportunity to perform well given the strength of our brands, the capabilities that we now have within Mattel and the strong relationships and partnerships we have with key players.

Okay. Great. And we're in injury time, but I just want to ask one more question before we all have to go, and that's on your gross margins. You've come a long way. But in 2012 and 2013, your gross margins reached 53%. So is there anything structurally that could prevent you from getting there again?

Well, we did say that we expect to restore our historical levels of performance. We are doing very well, as you mentioned, in restoring our gross margin, being now 9 consecutive quarters of improving gross margin year-on-year. And we remain on track to continue to improve our results overall.

Great. Well, thank you so much for your time. I hope you enjoy the rest of your day. It was always great to talk to you. Appreciate it, and we'll talk soon. Have a merry Christmas, and happy Hanukkah.

Thank you. Thank you so much. Okay.

Take care. Bye.

Bye-bye. Thank you.