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

Good morning, everybody. We are very happy to continue on with our conference here today. And right now, we have Mattel, one of the top toy companies in the world. And we are very pleased to have with us Ynon Kreiz, Chairman and CEO of Mattel with us. Ynon, welcome, and thank you very much for your time.

Hello, Eric. Thank you for inviting me.

So let's jump right in here. It's been a crazy year like we've never seen before because of the pandemic. You started off the year with high expectations. Then you had the disruption with production in your supply chain. Now everything is back up and running, you're playing catch up. You had a really good revenue result in the third quarter. We've seen positive news about consumer spending for Black Friday and Cyber Monday. I wonder if you could spend a minute just talking about your expectations for the holiday season, but also more importantly, as we think about the year ahead and your view for growth next year.

Well, we still have 2 important weeks to go before the end of the quarter. And while it is too early to summarize the year, we already know that there are going to be many things we're going to be very proud of looking back. As we said on our third quarter earnings call, each and every one of our regions had shown growth in constant currency, and our supply chain was working very well. In the third quarter, in the midst of a very challenging time period, our brands resonated at the level we have not seen in many years. And our teams around the world came together and showed what we mean when we say that we're looking to be an IP-driven high-performing toy company. With this performance, we gained share in North America, Europe and Latin America in the third quarter. And in North America, we grew in the third quarter, 40% faster than the industry. And in EMEA, we grew at double the rate of the industry. If this momentum continues, we expect it will end up being a strong end of the year, definitely, when you compare it to the first half. We're not giving the guidance for 2021 yet, as you can imagine, but we believe we are well -- we will be well positioned to continue the momentum that you see that we're seeing with our key brands this year in 2020. And in addition, regarding our licensed entertainment properties, while it is too early to tell what will happen in 2021, if the calendar stays as planned, we expect to benefit from the extensive theatrical release schedule and the partnerships we have in place. Another thing to say is that the toy industry as a whole has been growing meaningfully, as you mentioned, and it continues to demonstrate its resilience in challenging economic times. While some of the growth that we've seen has been driven by COVID, the industry was expected to grow even before the pandemic. And we see the toy industry as a growth category and that it will continue to grow after the disruption is over. Within that universe, we are very confident about our overall momentum. And with our assets, capabilities and resources, we believe we are well positioned to continue to execute our strategy going forward.

That's great. And when you look at the big picture, I mean, there's -- you've engineered a great recovery for Mattel since you joined the company. As you think about the next 2 to 3 years and your strategic plan, what's going to be driving that growth? And sort of where do you see the biggest or the lowest hanging fruit at this point to fuel the continued surge -- resurgence in your business?

Yes. We still -- we definitely covered a lot of distance over the last 2 to 3 years, and we're not done. And as we exited the third quarter, we saw strength across our entire portfolio and see opportunities to grow the business, to grow -- continue to grow the business going forward. We operate in 7 categories: in 3 of which, we are a global leader; and in 4, we are a challenger. We manage the company as a portfolio with the ability to leverage our resources and capabilities across the full product offering. So we are not thinking by brand, but rather by portfolio. And this is how we manage the company. There are always going to be puts and takes, and our job is to manage the enterprise as a whole and to maximize the results from the portfolio as a whole. That said, as it relates to our Power Brands in the categories where we are a global leader, we believe Barbie and Hot Wheels have the potential for continued momentum. And we view the turnaround for Fisher-Price, Thomas and American Girl as strategic opportunities for the company in the future. If you just look at the third quarter, Hot Wheels' POS was up double digits. And assuming the momentum exiting the quarter continues, the brand could see its third consecutive record-breaking year after seeing a new record for its 50th anniversary in 2018 and topping that in '19. So we may be on track to doing that again this year. Barbie showed growth in 11 of the last 12 quarters on a year-over-year basis. So lots to be proud of and be excited by the momentum we're seeing in our Power Brands. And in addition, there's significant opportunity that we see in our challenger categories, including Games, Action Figures, Building Sets and Plush. And in addition, we believe we will benefit from our licensed entertainment partnerships post COVID and continue to position Mattel as a partner of choice for major entertainment companies and owners of global brands.

Okay. Well, let's talk a little bit and dig in a little bit on Barbie, which has just been producing stellar results for Mattel. And it appears the brand has the potential to surpass its all-time high of revenue of nearly $1.3 billion set in 2012. And so when you look at it, what's been the key in increasing revenue by several hundred million dollars since the 2015 trough? Where at that time, it was about $900 million. And how do you keep the brand reaching new highs in the coming years?

Barbie has done exceptionally well, and we couldn't be more proud of her success. And she continued to demonstrate the resilience and resonate with consumers on many levels. When it comes to Barbie, over the long term, the question we ask is, how high is high? Barbie is an industry-leading multigenerational cultural icon with so much potential and significant franchise value. The growth has been driven by a combination of really great products, new innovation, highly effective demand creation and cultural relevance. In the third quarter, we saw success in several launches. So we continue to innovate and introduce new product offering, and that is part of the success of being fresh and staying current. According to NPD, in the third quarter, Barbie finished the period as the #1 global toy property overall, not just in dolls. So just a really strong performance across the board. As part of our mid- to long-term strategy to capture the full value of our IP, we also launched new episodic content for Barbie and a movie that we produced for Netflix, which was among the top 10 movies on all of Netflix out of the gate on its first week. So this is something to -- we can spend a lot of time on and share more of Barbie's success. But when you look at Barbie, what is interesting to note is that the success that you've seen in that franchise can be replicated in other parts of the portfolio. As many of the people who [ work on ] Barbie also manage the rest of the IP that we have in our catalog with the same approach, same methodology and same focus on innovation, purposeful play and natural relevance. So much of the success that you see in Barbie is the result of the work that is being done across the enterprise, design and development, retail partnerships, demand creation, and the success that we're seeing in Barbie is driven by those capabilities, and in many cases, with the same people. Very few people are exclusive to Barbie. So this is very much how you need to think about Mattel as a whole. Think of Barbie as a proxy, as a reference for what Mattel is being shaped as and how we think about the portfolio as a whole, as one enterprise.

Okay. And then when you look at your other top brand, Hot Wheels, they're on track for a third consecutive year of growth. What's been the key variable with this segment's success? And what are the elements in place to keep the Hot Wheels brand on a positive trajectory?

Hot Wheels is just another success story that we're so proud of, another industry-leading multi-generation and iconic brand with so much more potential and significant franchise power. For Hot Wheels, we continue to build on the incredible performance we saw in 2018 and then 2019 with new digital marketing, content and some limited live and virtual experiences that we're launching this year. The brand momentum has been very widespread with -- as we continue to focus on expanding the play pattern, new product innovation across major segments, including Hot Wheels Monster Trucks, license entertainment such as a Super Mario Kart and strong growth in core tracks and playsets. We also continue to advance our digital gaming strategy with the launch of Hot Wheels' integration into the World of Tanks on console and Hot Wheels Open World on Roblox. In the third quarter, Hot Wheels' POS was up double digits. So clearly, the momentum is there. And like Barbie, we see a significant franchise power for Hot Wheels and the opportunity for further expansion and growth for the brand with new innovation, cultural relevance and very effective demand creation.

Okay. So you're in a really good spot with your top brands. Let's take a look at your challenger brands for a second. Fisher-Price, that was a $2 billion year brand for Mattel up until 2013. Revenue for the brand is now likely in the $1.1 billion, $1.2 billion range, suggests that there's a substantial opportunity in this still very relevant preschool market. So what's the key to, first, stopping the annual declines of Fisher-Price? And second, getting the brand back on a positive growth trajectory.

So we need to remember that Mattel led by Fisher-Price is still the #1 player in the Infant/Toddler/Preschool category, and we continue to be a valued partner for parents and families in child development and the journey of families with newborns. We are encouraged by what we're seeing with global POS growth in our entire Infant/Toddler/Preschool category for 2 consecutive quarters now, despite the declines in Fisher-Price Friends, which in itself, was a result of our decision to exit underperforming licenses. Our POS growth has been driven by Fisher-Price Core, by far, the largest component of the category, which has also delivered 2 consecutive quarters with positive global POS growth, global POS growth. This growth was driven by new innovation across all of -- across all segments and a very compelling marketing campaign that is called Let's Be Kids that continues to roll out globally. It's been very effective, and we're very happy with the results we're seeing so far. Fisher-Price is celebrating its 90th anniversary this year. So there's a lot of activity around brand engagement in relation to that. And the Fisher-Price brand is still a valued -- the brand and franchise by parents and is taken as a trusted partner at each state of a child's journey. And this is really an important relationship that can be further leveraged by Mattel. And the first handshake we have with consumers, in many cases, it starts at the prenatal stage. So given the strength of the brand, the quality of the product and the world-class leadership we have for the category, we believe Fisher-Price will be a strategic growth driver for us in the future, and it remains an important priority for the company.

Okay. And as we continue to work through the challenger portfolio, American Girl Doll, which has been having a turnaround, they're seeing very strong growth in the online channel. You've had stores close that -- your bricks-and-mortar stores close, which just create a headwind. But how do you think about the strategy now going forward with American Girl Doll?

American Girl is another cherished iconic brands, maybe one of the most engaging brands in the industry. Not in terms of size necessarily, but in terms of the offering, the depth and breadth of the offering around content and purposeful play. So we believe it also has tremendous potential going forward. We're now in the midst of a turnaround. We were barely down in the third quarter, and this is in the midst of a heavy retail disruption. Our online direct-to-consumer part of the strategy grew by 100%. So we saw very strong performance in direct-to-consumer. New offering, new product offering, Courtney is -- had a very strong launch. And we saw increase in consumer engagement, customer activation, average order value and conversion rates. So initial good signs. We're not celebrating victory yet. There's still some way to go. But the brand is seeing momentum, strong performance in D2C. And with the new product offering, the engaging marketing strategy, new content, focus on the digital flagship and rebalancing our [ retail footprint ], we are very positive about the trajectory and growth potential of American Girl.

And also, Ynon, one more segment there. MEGA and the blocks category and where -- how that's been performing and where that can go from here.

MEGA is a challenger brand and is a proud #2 in an interesting and growing category. We are well positioned there with a great product and a lot of innovation that is coming out of MEGA. And we, as the other challenger brands that we have or challenger categories, we believe we have significant upside potential in leveraging our capabilities in this category. We have the global scale, a retail footprint that reaches more than 450,000 doors when we sell, where our product is being sold. We have a very effective and successful demand creation. We have a strong supply chain. And with those capabilities, we believe we can be a very effective and strong competitor that will grow over time in the Building Sets category.

Great. And let's talk about your entertainment initiatives that you have planned. Since you've assumed the CEO role in 2018, there's been a number of announcements about movie and TV deals. Obviously, there's been some disruptions this year in terms of production. But how far along are some of these products -- are some of these projects? Do we have scripts in place? What's been green-lit? Like when do we start seeing things start to come to fruition here?

Well, we made so far 10 announcements for major theatrical projects, all with major studios and key talent at the highest level in the industry, and we're very excited about those. And while film and production schedules in general have been impacted by COVID, we have been actively advancing the creative work on several of our field and television projects, and we continue to make progress in our mid- to long-term strategy to capture the full value of our IP. We are very excited by the progress we made so far, and we see continued interest in our brands. Mattel Films is a player and definitely punching at the high level and working in collaboration with all these talents. And we're not done with the 10 announcements that we made, so expect more to come. All of our projects have significant talent attached and award-winning directors and actors. One example that we are particularly excited by is the Barbie project, which is being written by Greta Gerwig and [indiscernible] with Margot Robbie to play Barbie. A great cast that is being put together, and all of this is in partnership with Warner Brothers as our studio partner. And the list goes on and on with Hot Wheels and our Major Matt Mason, which we have in partnership with Tom Hanks and Akiva Goldsman and Paramount. We recently announced the new Thomas & Friends film project that would be coproduced and directed by Marc Forster, the director of James Bond: Quantum of Solace and Finding Neverland. And so just a slate of exciting projects. With that said, we haven't announced a release schedule for that, even more recently. But we do expect that to be made more -- to be more specific about those when the time is right. And we continue to look at the impact of COVID on release schedule and production -- sorry, release schedule and production time line with the industry trying to reorient and find its cadence in the world of COVID, and hopefully soon enough, post COVID. Important to say that there's more to come. We're not done with the 10 projects that we've announced. Separate but related to the progress we are making with Mattel Film, there's a lot that is going on with Mattel Television. We have 2 animated shows related to -- Masters of the Universe launching next year on Netflix. We recently announced 2 seasons for Thomas & Friends with 104 episodes. We launched Barbie Dreamhouse Adventures the movie and Barbie Princess Adventure movie project that are performing very well. And in total, we have almost 30 different television projects in different stages of development of production. So a lot is going on, on our content strategy without owning a studio [indiscernible] a studio. This is a capitalized approach that we believe is the right balance for us in terms of the potential upside and the required investment.

Great. Okay. So when you look at your turnaround, one area that has been a huge achievement for you guys has just been taking a lot of expenses out of the equation. So can you highlight all the costs that have been taken out of the business and the impact on gross margin and operating margin?

Sure. So we were very successful with the execution of our recently concluded structure simplification program and are making very good progress with our ongoing Capital Light program. These programs have driven significant efficiencies across the organization and delivered cost savings are very well reflected in our P&L, and specifically, in our profitability. Our third quarter gross margin were almost 1,000 basis points better than they were just 3 years ago, primarily driven by these programs. So, so far, with the cumulative savings of $875 million from structural simplification, the projected cumulative savings of $65 million from our Capital Light programs as well as the additional SG&A savings we expect to achieve this year, we are on track to exceed $1 billion of savings exiting 2020. There isn't one specific initiative that I can point to as part of our Structural Simplification program. This was driven by hundreds of different work streams and the emphasis was to focus -- the emphasis was to reshape the operation and improve how we work as an enterprise. In that time frame, we reduced our nonmanufacturing workforce by more than 30%, and we cut our capital expenditure by more than 60% and brought it to the lowest level on record, going back more than 25 years. So real significant structural engineering -- reengineering of the way we work and how we're structured as a company. And while Structural Simplification as a program has ended, our Capital Light program is ongoing. And we expect to see additional savings from the small payer program in the future. When we say capital-light, we -- what we want to emphasize is that we are rationalizing our plant footprint. We're improving productivity. We're reducing our SKU at this stage by -- on track to be more than 30% this year. And while we haven't provided any specific long-term targets, we -- this is going to be an important component of us getting back to our historical level of margin structure and build from there. The impact on these cost savings of these efficiency programs is not just on cost reduction, but it's about an overall improvement in the way we operate, how we function and how we run the company. And we believe it will help us drive top line as well, not just cut our cost, but also help us drive our top line. We continue to looking -- we continue to look for improvement in our business and look for additional cost efficiencies and ways to improve how we work as a company. And this is now becoming part of our DNA. It's part of our core DNA. And we will continue to look for efficiencies across the P&L and find ways to invest in the business going forward and improve our position on an ongoing basis.

And you do make a -- you did refer to -- obviously, you want to get back to your prior operating margin level of about 18%. And hopefully, now that you're capital-light, you should be able to get above that over time. But sort of what are the key building blocks you need to see to sort of get you back to that 18% level?

Well, we have not given guidance beyond 2020. But we have previously stated that we believe we can restore our historical levels of performance. Doing this is going to be driven by several factors, and it is part of how we -- part of our overarching goal of creating shareholders' value. Our job is to balance the factors and position the company towards sustainable long-term profitable growth. With every day that goes by, we are working towards improving profitability, increasing cash flow, reducing our leverage ratio, and overall, putting the company on much stronger financial footing. This is now part of how we were, part of our DNA, and we will always look for ways to improve our margins and remain disciplined in our cost management. At the same time, when we made so much progress on reducing our cost basis, last year, we also managed to grow our top line in constant currency, which was the first time we've done that after 5 years of decline. So not only we were able to push cost down, we're able to grow our top line with 30% -- more than 30% less -- smaller -- with a 30% smaller workforce than we had just 2 years ago. So you can do both at the same time. And with all of that, we have guided to growth that we expect in our top line in constant currency in 2020 on a full year basis. Growing our revenues is a key strategic priority for the company, and we do see Mattel as a growth platform. Where most of the focus to date has been about cost reduction and driving efficiency, this is a growth story, and we see Mattel as a growth platform. We are not declaring victory, and we do have some way to go, but we believe we are well on our way to becoming a high-performing toy company and expect to see that showing in our results and in the numbers.

Okay. And I understand you don't want to declare victory yet, but let's look ahead. And dividends used to be a big part of Mattel's capital deployment plans up until 2017. And what needs to happen or what hurdles need to be cleared before you start considering a reinitiation of a dividend or maybe share buybacks?

Well, we are focused on growing our cash flow and reinvesting in the business to drive growth and utilize excess cash or free cash flow to reduce our debt in the near term. We expect our leverage ratio to continue to decline and improve over time. And we are targeting to become an investment-grade [ rated ] company. At this stage, we're not going to comment on future uses of cash beyond this, but we remain very focused on creating strong long-term shareholder value. And we see that as our job and overarching goal and balance all the puts and takes in running the enterprise.

Okay. We have about 2 minutes left, and we do have a question from the audience. I wanted to know if you could speak to the opportunities for you guys in video games. You did mention you do have a partnership with Roblox, with Hot Wheels. How do you think about monetizing this vertical in your business?

Well, digital gaming as a whole is part of our strategy to capture the full value of our IP. There's been a lot of focus on film and television, but digital gaming, live events, consumer products and merchandising, music are all highly accretive business verticals where we believe we can capture significant shareholder value success. So it is part of our strategy. We have a partnership with NetEase for mobile gaming. We launched the UNO Game Phase 10 game. We're working on Scrabble in partnership with gaming -- with Scopely. Barbie Dreamhouse, Hot Wheels, all have games in the marketplace. And we see that as another area where we can drive growth and realize value from our intellectual properties. It's still early, and it's not as advanced in some of our other categories. But given the size and scale of this vertical, we believe it will be another area where we can capture value from our IP.

Great. Well, I see we've reached our time limit here. Ynon, thank you so much for being gracious with your time. We appreciate it. Have a happy and healthy new year, and we'll talk to you in 2021.

Thank you, Eric.

Thank you. Bye-bye.