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

Great. Thanks, Alex, for letting us in. So I want to thank everyone for participating and dialing in today to our Corporate Access Day at Citigroup, Leisure Day. We're going to focus on toys and outdoor recreation, as most of you all know. I am Shawn Collins. I am the North American Leisure and Recreation analyst here at Citi Research. I initiated on a host of leisure and recreation names last summer. And then I initiated on Mattel and Hasbro at the end of last year, so in December 2020. I am very pleased to be joined today by Toy and Entertainment Companies Mattel and Hasbro as well as by Toy Expert, Lutz Muller. After a brief lunch break, we will transition to outdoor recreation, where we will talk with RV companies, LCI industries, Winnebago. And we also have a bunch of private dealers that sell RVs, boats, off-road vehicles and motorcycles. So that will be after lunch today. So with that, first off, I'm very pleased to host the CEO of Mattel. We have Ynon Kreiz here. We also have the Head of IR, Dave Z, on the line with us as well if we need him. Good morning, Ynon. Great to have you today.

Hi, Shawn. Great to be here. Thank you for inviting me.

Absolutely. We're thrilled to have you, and I know a lot of folks on the line are thrilled. So you're not -- I thought we'd do a fireside chat naturally. I thought I'd start off. You had very, very positive first quarter earnings in April. You've made a bunch of progress on the turnaround. I'm newer to the story. You arrived at Mattel in 2018. You walked into a turnaround. You have done a great job. You've increased revenue growth for the guidance for '21. You're moving towards a mid-teens operating margin thereafter in 2023 and thereafter. I wanted to ask you if you could kind of think about the progress you've made and some of the drivers of that performance, whether it might be culture, or execution, management, discipline, any reflections there might be very interesting.

Sure. Well, there's no question that the new Mattel is very different from what the company was just a few short years ago. The biggest change is that we transitioned from being a toy manufacturing company into an IP driven, high-performing toy company. We achieved substantial progress across all key financial metrics over the last 3 years. We took our EBITDA from $126 million to $719 million last year, and we just guided to up to $825 million of EBITDA. Improved gross margin for 11 consecutive quarters by over 1,100 basis points over the 3-year period. Improved cash flow by almost $500 million. Operating income by more than $650 million and reduced our leverage ratio from 25 to just around 3 that we've had at the end of the first quarter. So a lot of progress. This is driven by many actions that we took, one key area of -- that has performed so well was our Structural Simplification project, where we achieved over $1 billion of cost savings. This is together with our Capital-Light. We just announced another program to reduce costs and achieve more efficiencies equal to $250 million by 2023. And all in all, it was a transformative change for the company. While -- and what's interesting to say is that while growth has largely been driven by strong performance from category flagships like Barbie, Hot Wheels, we're also seeing strong performance in other brands in new areas, including strategic white space like Plush. We are seeing positive shift in momentum from brands that have been in turnaround, including Fisher-Price, Thomas & Friends, American Girl and Mega. And as you noted, we just had a record quarter with net sales going up 47%. This was the highest quarterly growth rate and record for the last more than 25 years. This is the first quarter of 2021. So the transformation strategy is paying off. We're starting to unlock the true value of Mattel. Our product is resonating with consumers at level we have not seen in years. And we believe we are in an excellent position to continue to improve and accelerate top line growth. And as much as we're excited about what we've seen and what we've achieved to date, we're even more excited by what is coming.

That's great. That's good color. Just a kind of follow-up there. You've been there 3 years plus when you first got to Mattel, what surprised you maybe that was maybe more challenging than you expected? And maybe what surprised you that might have been more encouraging and more positive than you expected?

The first 3 years have been about major restructuring. I know there will be opportunities. And I have to say what I saw was even better than I expected, the opportunity to reduce our cost rate prospects was significant. Initially, the plan was to reduce our cost by $650 million and as I said, we exceeded $1 billion of savings. And on the -- in terms of momentum, value of the asset base, this is also more than I expected. We are now seeing real momentum across the portfolio. The value of our intellectual property is very strong. We're seeing a lot of interest and demand and excitement in the new areas as well companies such as film television, online gaming. The company is becoming a magnet for talent. So we always knew that there are -- there's real value in the IP that we are and I'm seeing it within the company. CEO has arrived very exciting and more than I expected. So a lot has happened, but lot of interesting products as well.

Great. Great. That's helpful. And it's a pleasure getting to know Mattel on my side. And maybe moving to some of the -- today's business environment and some of the challenges there. Cost inflation, we all read about it. It's in the papers every day. You guys are certainly very transparent. And you talked about input cost rising. You talked about resin costs and transport costs, mainly ocean freight from Asia. We've also heard about labor rates increasing here more domestically. But do you want to talk about how that is shaping up in the second quarter? And kind of how you're thinking about that challenge or that headwind for the rest of 2021?

So we cannot comment specifically on the second quarter. This we will do in our earnings cycle. But as we said on the first quarter earnings call, what we did see is some volatility created by COVID. We saw that there were certain factors impacting materials and trade and although it's still difficult to determine how much of it is temporary versus long term. Despite inflation, we did increase our guidance, our EBITDA expectation for the year and expanded our margin and profitability. We do expect that the combination of pricing and the initial actions we're taking as part of our optimizing growth, this is the $250 million program that we established to achieve by 2023. That this will more than offset the impact caused by inflation over time, and that we will expand our gross margin and continue to drive profitability towards achieving our goal of reaching operating income goal by 2023. So we are taking the right action and believe we have the resource capabilities to address that.

Great. Great. Makes sense. On a similar subject, but supply chain and kind of we're June. So obviously, we're approaching the holiday season. I know you guys are working hard on that. West Coast ports have been congested. Certainly in the beginning of the year, we've got some crazy storms. We've had a lot going on, obviously. Can you just talk about where that situation is now? And more importantly, kind of where you think it might be kind of in the important summer shipping season ahead of the holiday season? And just in general, kind of how you're -- what you're seeing -- how you're thinking about it and how you're mitigating it, if you could?

Sure. So generally speaking, we believe that supply chain was a key contributor to our success over the last 3 years. And it is now becoming a strategic advantage for Mattel. And a really important part of our plan and how we are driving that profit improvement and grow top line. This is not just about cost, this is really about being able to service our customers, continue to make great high-quality products and put them on shelf at the right time. During the first quarter earnings call, we did say that Mattel's manufacturing and distribution effort was fully operational. Suez Canal had a minor temporary impact on us. The challenges related to LA Port congestion have already been in place since the fourth quarter of 2020 and we were able to manage through those. On our first quarter call, we also said that our supply chain was continuing to effectively manage through these disruptions. And we've seen no material impact to our business at that time. And as we said in the past, the situation does remain floated. Our supply chain and commercial organization continue to work hand-in-hand in collaboration with the retailers and do an incredible job in this [ planning ], the changing landscape in a very dynamic manner. So we feel very confident about the processes that we have and remain flexible and nimble to be able to respond to [indiscernible].

Okay. That's great. That makes sense. That makes a lot of sense. Maybe moving kind of towards some of the products, and you've had great momentum there. But maybe we'll talk about Hot Wheels at your Analyst Day, I know Richard Dickson called out Matchbox as having a great future potential. I think he called it a sleeper brand within Mattel. Do you want to talk about that brand and maybe the opportunity there? And sort of how it fits in with Hot Wheels as well?

Yes, of course. So Matchbox -- the Matchbox relaunch is a really good case study of the Mattel playbook, how we manage our brand and how we grow our franchises. Matchbox is where our catalog IP and category growth strategies come together. And as we said, it is a new sleeping giant in our vehicle category. It's really a legendary IP that we believe has incredible potential and the opportunity to become a growth driver. It was already up 21% globally in the fourth quarter of 2020. It has great and new innovative product, new real-world inspired vehicles, like the -- what we do with cars and trucks. The recent Tesla Roadster that we've announced that we'll launch next year. And this is really designed to complement Hot Wheels, not compete with Hot Wheels, but complement Hot Wheels. So Matchbox is about relaunch, Hot Wheels is about fantasy. And the 2 brands complement each other, leverage our capabilities in die-cast cars and the [indiscernible] that really complement consumers in [indiscernible]. This year, we're taking Matchbook to the next level. We're building on the momentum that we already have. We're accelerating growth with new packaging and innovating new products and expect to connect kids in new and exciting ways. And it's really about -- it's all about quality of the product, a very strong brand with marketing in the way that we believe we are uniquely positioned. So in terms of what you should expect to see the same capabilities as we point them at Mattel is driving the success of Hot Wheels, is what is behind MatchBox. And this is why we're so confident about the potential this brand to become another part of our growth engine, and be part of our successes for becoming a high-performing toy company.

Got you. Great. That's helpful color. Maybe thinking about sort of as you pivot from toys to toys and entertainment. I now refer to you guys as toys and entertainment, not a toys company. I was talking with Dave Z yesterday. And I know you're going to relaunch Masters -- Master of The Universe. I think he called it MOTU or He-Man. I actually have an investor question on this subject. So I'm going to read it, Master of The Universe has been on the shelf for a while. Thus, the relaunch seems like it could be a large driver of incremental revenue. Do you want to talk about the vision for this relaunch on Master of The Universe -- Masters of The Universe.