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

Hi, I'm Linda Bolton-Weiser, senior analyst at D.A. Davidson covering health and beauty, leisure, including Mattel, which I have buy rating on. And Mattel is participating throughout the day today with one-on-one meetings. And we've got CEO, Ynon Kreiz. We're going to do a fireside chat for you. So I encourage you to send in your questions. I'll be looking through those, and I'll try to include those in the dialogue. And I believe Anthony DiSilvestro, the CFO, will be joining Ynon in the meetings throughout the day. So with that, I'll just say welcome, Ynon. Thank you for participating.

Thank you for inviting us.

So let me start out by just highlighting how much progress you've made in your turnaround of the company thus far. It's been really notable. The EBITDA has improved greater than 100% in 2019, greater than 50% in 2020, and you're guiding to more EBITDA growth of 8% to 11% in 2021. So a really good progression of improvement, continuing growth. What are the key drivers as you continue to improve profitability as you move toward your mid-teens operating margin by 2023?

Well, thank you, Linda, for your comments. Yes, our transformation strategy is showing very strong results, and we are starting to unlock the true value of Mattel. Over the last 3 years, we made significant progress on all key financial metrics and are now entering a growth phase for the company. We gave guidance for 2021 and growth for the next 2 years after that and expect to improve profitability, accelerate sales growth and increase market share globally. What you're seeing is that the Mattel playbook is working. This is clearly evident from our results, and our product is resonating with consumers at levels that we have not seen in years. But as proud as we are with the results so far, we're even more excited about the future. This is all part of a multiyear strategy that is tracking very well, which puts us in a very strong position in 2021 and beyond. As it relates to improved profitability, the Optimizing for Growth program, which we recently announced, will be a key driver there. It is designed to further improve operations and drive greater productivity to accelerate top line growth and, at the same time, continue to reduce our cost base. It is expected to -- we expect to achieve approximately, we said as a goal, $250 million of cost reduction by 2023, and this includes our Capital Light program. It comes off the back of the Structural Simplification program, which was a resounding success. That, together with Capital Light and additional actions we took this year, delivered over $1 billion of cost savings between 2018 and 2020. We expect to achieve $75 million of savings out of this program in 2021, with the majority of the savings contributing to operating margin expansion. So expect a lot of activity there, and we are very excited about how well we are positioned for further improvement in profitability and accelerating our top line growth.

Great. Can you talk about also -- you've talked really for a while now about your Capital Light program, and that's kind of being integrated with your new cost reduction program. Can you talk about the progress you've made there on Capital Light and what your plans are? And what might your manufacturing footprint look like by the end of 2023? And also, just to go along with that, do you think that maybe actually having your own production during COVID or when you've had actually high demand in certain categories, do you think that's helped you? Because some of your competitors have actually had issues with supply in certain product categories. So maybe you could talk about that.

Yes. We believe we are very well positioned in terms of supply chain. This is now a competitive advantage for Mattel and a real strategic asset. The Capital Light program has only made it stronger, more productive, more efficient. Capital Light is more than looking at our manufacturing footprint. It's about end-to-end improvement in how we make product, all the way from design and development and eventually put it on the shelves. With Capital Light, we reduced -- we've done many things among -- including simplifying how we operate. We reduced our SKU count by over 35% in 2020 and already achieved significant savings there. We, to date, closed 4 plants in Mexico, China, Indonesia and Canada and sold the AST business together with another factory. So this continues to track very well, and we're very -- we feel we're in a very good position with how we make product. It is, as you mentioned, was one of -- this was one of the reasons that we did so well in 2020 in how we make product, how we were able to deal with increased demand and eventually did better than expected in the fourth quarter in terms of our ability to meet the surge in demand in certain categories. The goal is to continue to optimize gross margins and shift some of the capital expenditure previously spent for manufacturing plans to be used for growth initiatives and growth drivers. So it is a comprehensive program. Some of the factories where we make product are unique and are in a good position. In certain cases, we intend to retain some of these capabilities, especially as it relates to diecast cars and dolls, for example, simply because there is no one else in the world that do what we do at that level and at that scale. So we intend to retain those capabilities but overall continue to make improvements and progress towards improving our supply chain. And all of that will continue to contribute towards improving gross margin and overall performance.

Great. And then you have alluded to some cost inflation in certain areas in 2021. Can you talk about how you're planning to mitigate those impacts as much as possible? And also, we're hearing from other companies about various shipping and port delays. Can you talk about if you're seeing any of that?

Yes. So we do see increases in inflation for materials, especially resin and logistics, as you mentioned, in ocean freight. In aggregate, the negative impact on gross margin for us will be about 200 basis points. We do expect savings from our Optimizing for Growth to mitigate some of this increase in inflation and overall benefit gross margin, but it will not fully offset this year the impact of the accelerated cost inflation. As a result, we expect 2021 adjusted gross margin to decline slightly by 50 to 100 basis points to a range of between 48.1% to 48.6% and overall achieve that level of gross margin. In the big scheme of things, we are very happy with our progress on gross margin, especially after 10 consecutive quarters of improving it year-on-year and increasing gross margin by more than 1,100 basis points in 3 years. On our fourth quarter call, we said that our supply chain was operating very well. And as I mentioned before, our 2020 performance is a testament to how well we did in dealing with significant disruptions in manufacturing challenges. What is important to say is that this is not just about cost improvement and simplification, it's actually a key part in being able to drive sales and help us with our top line growth. And with that, we continue to mitigate some of the disruption, both on cost and logistics, and believe we are in a very good position to leverage our capabilities there and continue to do well, both in driving productivity as well as accelerating our top line growth.

Great. Well, I guess that's a good segue into my next questions that are a little bit more about top line growth. According to NPD data, the toy industry was really strong, as we know, in 2020. I think it was up, like, 16% in the U.S., also good growth globally. What are you seeing thus far in 2021? I think NPD has said that some of the same growth trends are continuing. So what dynamics are you expecting this year? How are you exposed to the growth areas? And most importantly, do you think you can grow in the second half against harder comparisons?

Yes. So there is no question that the COVID lockdown drove strong consumer demand for toys, especially in the second half of 2020, and this is continuing so far this year. The -- it's important to note that the vast majority of the industry growth in 2020 came from 3 surge categories, which were outdoors, construction and games, where we actually have a relatively small presence. The categories where we are a global leader, dolls, vehicles and infant, toddler, preschool did not benefit as much from the increased demand related to COVID. Much of our overall performance was driven by our work and by the strength of our brands and the quality of our products. We did not just ride the wave, we actually outpaced the industry and gained market share on a global basis in the third quarter, the fourth quarter and the full year. So this is in spite of our categories not directly benefiting as much as other categories from COVID. We expect the categories, where we are a global leader, that they will continue to perform well. The -- our momentum exiting 2020 is expected to continue in '21, and we expect to see growth in dolls, vehicles and action figures, improving performance in infant, toddler, preschool and building sets and gains from our licensing partnerships. Beyond 2021, we believe in the long-term growth prospects of the industry given the strong fundamentals. And in that environment, we believe we are very well positioned to accelerate our growth and continue to increase our market share.

Great. Thank you. So we didn't have too many entertainment properties in 2020. And certainly, it looks a little better for 2021, although you're a little bit more of an evergreen brand company, but we do have some more entertainment. I think I recently read though that Minions has been pushed off to 2022. Is that the case? And can you fill those plans that you have for the Minion toys this year? Can you fill that hole with something else?

Yes. When we gave guidance for the year, we took into account the potential shift of some of the entertainment properties. And as you say, The vast majority of our business is based on our own brands, on evergreen brands, that are less dependent on third-party businesses or entertainment releases. So we're still very confident in the growth prospects and hold the guidance that we gave, irrespective of shifts in the entertainment calendar.

Great. And can you talk a little bit about Fisher-Price because it did start to turn the corner in the fourth quarter? What gives you confidence that Fisher-Price will continue to improve in in 2021?

Yes. We're very excited about the progress that we've seen with Fisher-Price, and we do expect to see continuing improvement with Fisher-Price Core and Thomas. In the fourth quarter, Fisher-Price Core was up 11% driven by growth in its Infant, Little People and Imaginext products segments. We are very encouraged by the performance overall, which is the first positive quarter we saw since 2016. Fisher-Price remains the #1 brand in the category, and we are the #1 manufacturer in the U.S. and globally. In 2021, we look to have new innovation across all product segments. Fisher-Price trends will no longer be a headwind as we've exited most of the underperforming licensed properties, and we will proactively add new brands, new partnerships where we see financial opportunities, so it will be accretive. We remain on track with our turnaround strategy, and we are confident in the long-term growth prospects of Fisher-Price, specifically in the category as a whole. We know this is a competitive space, but we are in a very strong position given the strength of our brands, the quality of the product, innovation and how we leverage our capabilities and global scale.

So in Thomas, you've probably seen that Spin Master is launching -- has launched content behind a new brand called Mighty Express, and they'll be launching some toys behind that in fall. Do you view that as a direct competitor of Thomas? And how is Thomas -- how is the positioning? And do you think you can head off a competitor that's new in that space?

Yes. This is a competitive industry in a competitive category. Thomas is a great play system. We are refreshing the brand with new product, new content that we are distributing on Netflix, Cartoon Network and other broadcasting partners internationally that we will announce soon. The brand has such strong legacy and built-in fan base that we believe Thomas is in a good position to turn around, and we're seeing early signs of momentum that we're very excited about. And overall, this is a competitive business. We believe we will be able to continue to perform well with competition and execute on our strategy.

So I believe that when you had your recent Analyst Day, Richard Dickson, your President, kind of called out Matchbox as the next sleeper brand that's going to emerge here for Mattel. Can you talk about what's going on with Matchbox? And how does that kind of fit with the growth of Hot Wheels? And how are the 2 brands different such that they won't cannibalize each other?

Yes, we're very excited about Matchbox. Matchbox is different to Hot Wheels in that it focuses on real-world vehicles where Hot Wheels creates vehicles that are about fantasies. As we look to Hot Wheels momentum, we have several exciting initiatives and product plan for 2021. And Hot Wheels could not be in a stronger position. We're very excited about the progress we're seeing there. And Matchbox is where we see our catalog IP and category growth strategies come together and converge in a way that we believe will be very productive and successful. Matchbox already has very good momentum. Sales were up over 20% globally in the fourth quarter with innovative, new real world-inspired vehicles, and it's looking to continue the momentum we saw at the end of last year. This year, we'll build on this momentum to accelerate growth with new packaging and innovative new products that connect kids to everyday vehicles that they know and love. The rollout will be supported by a very exciting and robust launch strategy and expect to see a lot of noise around that. Overall, our vehicles category is another great example for how our playbook is working and how we leverage our capabilities in terms of design and development and are able to find cultural connection and relevance with today's consumers. Expect to see more products, more innovation and how we leverage our capabilities to create demand and drive top line growth around this brand specifically but, overall, across our portfolio.

Great. And then switching a little bit to Barbie. Barbie has had tremendous momentum in the last couple of years, really strong, pretty consistent growth. It looks like -- from your analyst meeting, to me, it looks like the plans are really good for 2021. There's this new fashion forward Barbie Extra line and Chelsea is going to be expanded upon. Can you just talk about kind of the health of Barbie and how you see it going forward?

Yes. We could not be more excited about Barbie's momentum. It just continued to go from strength to strength. The Barbie grew double digit in the fourth quarter and for the year, with POS growing over 30%. And as you know, Barbie ended 2020 as the #1 overall toy property globally, which obviously speaks to the strength of the brand. We're very confident in the brand momentum for '21. As you mentioned, we -- there's a lot of exciting product, with strong activation plan throughout the year, including 2 animated series that we're launching on Netflix, extending characters like Chelsea, new fashion segments like Barbie Extra, Ken's 6th year anniversary program and continued surprise pop culture milestone moments to maximize the momentum. And overall, we really see significant franchise power and opportunities for further expansion and growth for Barbie. But what is interesting is to talk about Barbie as a proxy for the rest of Mattel because without taking anything away from Barbara's incredible success, this is a story about how we manage our categories and about the Mattel playbook because Barbie is based on the same approach, same methodology, same capabilities that are being applied across the portfolio. And in many cases, it's even the same people. It is about brand purpose, cultural relevance, design-led innovation and executional excellence. Our category structure and capabilities around design and development and the talent we have in the organization are working as a team across the entire portfolio to leverage the skills that we have, the capabilities across all of our brands. And what you see with Barbie is how we think about the rest of the portfolio. And how we manage the dollars category is how we manage all of the categories. And you asked me earlier about Hot Wheels and how we're doing overall in the vehicles category with Matchbox, it is about category management. It's not just about one single brand, as successful as they are, it's about leveraging the overall portfolio, managing the categories in a productive way and looking to improve performance across the entire offering, not just by specific brands. And it's working very well. We see that, at this point, across the board and are very encouraged about the momentum we're seeing.

Great. So dolls are clearly one of the highest profit margin things that you can make. So I imagine that you are looking for ways to increase your doll portfolio. And so it was interesting to hear that you're bringing back Monster High, one of the phenomenon that hit a few years ago when it had some phenomenal overall and then kind of declined thereafter. Can you talk about the plans for Monster High? When is that rolling out? When will we see the toys? And how do you think Barbie will perform even while you bring out Monster High?

Yes. Monster High, as you know, was one of the most successful dolls franchises in the toy industry. We are very excited to bring it back and relaunch Monster High. It is about how we're leveraging our playbook to relaunch the brand with brand purpose, cultural relevance, design and innovation and executional excellence. Monster High brand purpose is about diversity and inclusivity, belonging, representation and embracing uniqueness where flaws become the features. Given the cultural relevance, now is arguably even a better time to introduce and bring Monster High back in the market -- into the market than it was in 2010. We are looking to expand the brand this time around with a robust content strategy through our partnership with Nickelodeon where we will introduce -- will produce, sorry, an animated TV series and a live action feature film that are highly invested and will be of very high quality. We will expand the play system. We will manage Monster High as a franchise with the new capabilities we now have at the company. And overall, the potential is significant given what Monster High did in the past relative to what we think we can do today with the new capabilities we have, with the robust content strategy and overall franchise management approach, which we believe will allow us to really tap into the full potential of this incredible franchise. As it relates to Barbie, we believe our category management approach to dolls overall will work very well here as well. And the 2 brands can coexist, complement and do very well together. Different approach, different strategy, but thinking in terms of category management. And given the unique positioning of each, we believe both can continue to -- Barbie will continue to thrive, and Monster High will have a very large opportunity ahead of it.

Great. So that takes us into the next area of conversation, which is how you intend to capture the full value of the company's IP. You've talked about this a lot. You've put a strategy into place. Can you talk about that? And also, you've chosen a little bit more of an outsourcing strategy with regard to content development relative to like Hasbro and even Spin Master. So can you talk about your strategy and how you think it's the right way to go about it?

Sure. So we are the owner of one of the strongest catalogs of children and family entertainment franchises in the world. And next to Disney, we don't see a stronger catalog of franchises in our space. Our strategy is designed to commercialize our brands in highly accretive business verticals that are directly adjacent to the toy industry and capture the full value of our IP. This is in addition and incremental to everything we are doing on the toy side of the company. The areas we're talking about include film, television, digital games, consumer product and merchandise, music and live events. The -- on the film side, we have a very clear mandate, which is to leverage our IP and make great, quality movies that people want to watch. And as of now, we've announced 11 film projects with some of the biggest talent of our generation -- biggest film talent of our generation. We have a Capital Light strategy to content that allows us to work with the right studio and the right distribution partner on the right project, on the right terms. And this allows us the develop and produce multiple projects concurrently at scale. We believe we have in place the right economic model, which is not dependent on capital investment for Mattel. Film financing can be a risky business, and this is not our area of core expertise. Our currency is the strength of our IP, which allows us to secure the right economic terms and balance risk and reward and still retain meaningful economic upside which, in success, can be transformative. Given the scale and number of projects we have in the pipeline, this is -- there's a lot to absorb, and we are leveraging our relationship and partnerships to drive this project forward. And this is all part of our mid- to long-term strategy. So these projects are in progress, are shaping and taking a really good form, and we could not be more excited about where we are and the partnerships we have in place. But the key point is how we leverage the strength and appeal and demand for our properties to effectively create what we see as a mini major, without buying a studio, without building a studio and without risking our own capital. We're still in the business in a meaningful way. And in success, this can be transformative. Mattel Television has a similar mandate: to engage consumers through compelling episodic content, leveraging our iconic franchises as a complement to and in addition to our film strategy. Currently, we have 17 projects in production or about to be released and more than 25 series of specials in development. There's a lot of momentum there. We already announced several projects. This year, we are launching several new series, including 2 Barbie movie specials on Netflix; new seasons of Fireman Sam and Polly Pocket on linear television and streaming platforms around the world; the new Thomas & Friends series, which will air on Netflix and Cartoon Network at the same time in the U.S.; And 2 Masters of The Universe series that will premiere globally on Netflix. So there's a lot that is happening there. In many ways, we're ahead of where we expected to be, but there's more coming and many projects that are in the making that we haven't announced yet. So expect more to come around our content strategy.

Great. Thank you. Well, we're almost out of time, but I just wanted to kind of conclude by asking about your challenger categories and how maybe you intend to treat those. Do you think those could be added to through acquisition? And just on the sort of idea behind your capital allocation, I know you still want to pay down debt, but when would be the right time to reinstate a cash dividend?

Yes. So quickly on our challenging categories, we're seeing very strong momentum exiting 2020. We expect that to continue in '21. We are seeing our Games category in a very strong position, with UNO leading the charge, celebrating its 50th anniversary. We expect to see growth in Action Figures, we're introducing Masters of the Universe, and continuing improvement with MEGA. So with that, we expect to see continued momentum with our challenger categories. When you look -- when you take a step back and you look at our overall position, you're going to see continued momentum with our power brands, especially Barbie and Hot Wheels, holistic platforms that continue to expand with more opportunities with new product offering. You're seeing strong performance in flagship franchises and key brands such as UNO, Polly Pocket, Monster Trucks, and new white space that we're entering or that we have entered, such as Plush. You're seeing positive shift of momentum in the turnaround brands: Fisher-Price; Thomas & Friends; American Girl, that we haven't spoken about, that is also having very strong momentum right now; and MEGA. We are relaunching catalog IP. We touched on Monster High, but Masters of the Universe is a huge franchise that we're also introducing and Matchbox that we also talked about. So these are 3 catalog IP legacy brands that still have tremendous fan base and a very large existing consumers with strong pent-up demand. So that's another important growth driver. We're seeing new partnerships that we have entered with the entertainment companies, the major players from Universal, Disney, Nickelodeon, WWE, Microsoft, Nintendo. These partnerships are now ramping up, and we expect to see that as another growth driver for the company. There's more innovation that is coming. Last year, we introduced Color Reveal which, out of the gate, was already, what you can call, a successful global launch. Expect more such innovation from the House of Mattel. And of course, this is all in the short term. When you look at the mid- to long-term strategy between our momentum in e-commerce and our D2C plans, which we haven't covered today, and our ability to extend our IP into highly accretive business verticals, we believe we're in a very strong position to drive growth in the challenger categories that you asked about as well as the rest of the company and continue to accelerate our top line growth in 2021 and in the 2 years after that where we gave goals for. So expect more to come, exciting days ahead and a lot of momentum around our portfolio. As it relates to capital allocation, as you know, we just completed a refinance of our debt. We placed $1.2 billion of senior notes in 2 tranches, a $600 million 5-year note priced at 3.375% and a $600 million 8-year note priced at 3.75%. With that, we reduced our interest expense by approximately $40 million per year. This is another step in improving and strengthening our balance sheet, giving us more flexibility, more optionality and the ability to leverage resource -- our capital resources in an even more productive way. So all part of a comprehensive strategy, multiyear transformation that is tracking very well and expect to see further momentum building.

Great. Thank you, Ynon. I think that kind of puts us out of time here, but thank you so much. Have a good day with the remaining of your meetings, and thank you for participating.

Thank you, Linda. Thank you so much.