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

All right. Good afternoon, and thank you, everyone, for joining today's fireside chat with Mattel. My name is Alok Patel. I cover U.S. toy makers. And I'm pleased today to be joined by Ynon Kreiz, Chairman and CEO of Mattel. So welcome, Ynon, and we appreciate you being here.

Thank you for inviting me.

Yes. So we have about 45 minutes today for this chat. I'll start by asking questions for about 30 minutes, after which point, I'll be happy to take questions from the audience. [Operator Instructions] And I'm also available via e-mail at [email protected] if you want to send me your questions via e-mail. So to kick us off, Mattel is a leading global toy company and owner of one of the strongest catalogs of children and family entertainment franchises in the world.

And with that being said, can you walk us through Mattel's strategy, specifically discussing how Mattel differentiates itself from competitors and other toy makers?

Sure. So over the last few years, we have been executing successfully our strategy to transform Mattel into an IP-driven, high-performing toy company. What differentiates us competitively is our catalog of brands that you just mentioned, our playbook and growth potential. We own one of the strongest catalogs of children and family entertainment franchises out there. Our playbook, which is really about brand purpose, cultural relevance and design and innovation capabilities, make our product offerings stand out in a crowded marketplace. And our executional excellence at the global scale, our supply chain and commercial organization with more than 470,000 stores where our product is sold are additional competitive advantages. Given our transformation and growth strategy, we are now in an excellent position to continue improving profitability and accelerate top line growth. We are -- today after 3 years of restructuring and being in the midst of transformation, we are now operating as a high-performing toy company and believe that we have the assets, the organization, the scale and the right strategy to take the company to the next level. We just had a very strong third quarter for Mattel with continued consumer demand for our product. We have strong momentum in our business and grew, in fact, 1.7x faster than the global toy industry growth rate according to NPD. We have been growing and gaining market share for 5 quarters in a row. In fact, we are on track to achieve our highest full year growth rate in decades and just raised guidance for our third time this year. So you're seeing a lot of momentum. We are on track to reach the guidance that we provided, put us on track to reach between $900 million to $925 million of adjusted EBITDA, which will be a meaningful increase compared to where we were just 4 years ago at $126 million EBITDA. We also expect to continue driving top line growth in the fourth quarter, to increase market share and have a strong holiday season.

Yes. No, that's great. I think the iconic brands and brand recognition is definitely one of Mattel's biggest strengths. And the results reflect that, especially in Q3. So with that being said, the toy industry has proven to be quite resilient during economic downturns. And recently, Mattel and other toy makers have been a great COVID beneficiary. How would you address some of investors' concerns regarding mean reversion in toy sales in a post-pandemic economy?

Yes. So let's talk first about the toy industry. The toy industry is a great industry. It is a growth industry, and we believe it will continue to grow beyond the pandemic. It has been growing before the pandemic, of course, during the pandemic, and we believe it's in an excellent position to grow beyond the pandemic. It's proven its resilience in challenging economic times. We know that parents will always prioritize spending money on their children, especially when it comes to quality products and trusted brands. The product are -- generally are affordable at a comfortable price point. They are not difficult decisions to make. And the toy industry as a whole is a strategic category for retailers. It's experiential. It drives foot traffic. It's very sticky. And you see all the big retailers leaning into the toy industry. Because of that, looking back, the toy industry have experienced -- or has -- toys as a whole, the global industry has experienced 10 consecutive years of growth. And the industry as a whole is estimated to exceed $100 billion in 2023, according to Euromonitor. Also according to Euromonitor, they expect the industry to grow at 5.4% CAGR for the next 5 years and recently upgraded to that level. So this is based on the latest study or latest analysis, expectation for 5.4% CAGR for the next 5 years. So we believe that, for the industry, physical play has never been more important, and it is here to stay. As it relates to Mattel, we believe that Mattel is very well positioned to continue to grow and gain share. While some of the demand that we've seen has been driven by COVID, we believe that our own growth can be attributed to the strength of our brands, the quality and breadth of our product, our world-class supply chain, global commercial capabilities and very effective demand creation in close collaboration with our retail partners. Consumer demand for our product continues to be strong. We continue to innovate and execute our playbook across the portfolio. The Mattel playbook is being applied across categories, and we're seeing the results in the numbers and expect that to continue to drive our growth going forward.

Yes. No, that's great. So I think you mentioned the number reported by Euromonitor for 5.4% CAGR growth. Where does Mattel stand? And where does Mattel's growth stack up compared to that number?

Well, we guided recently new guidance for the -- we actually upgraded guidance for the third time this year. We now expect to achieve 15% growth this year. We also said that we expect to achieve mid-single digits -- sorry, we said that we have -- our goals for '22 and '23 are to achieve mid-single-digit growth for top line and exceed $1 billion EBITDA in 2022 and by 2023 achieve mid-double-digit operating income margin for the company. We haven't given guidance for '22 and '23, but we do expect to exceed the $1 billion EBITDA, as I said, and see the company continue growing in '22 and '23. So that will be today this year is a start of a growth phase for the company. In terms of our own transformation and turnaround, we've done most of the heavy lifting of the restructuring and the cost optimization and are now in growth mode and a strong double-digit growth, 15% growth for the company in 2021 will be the start of a growth phase that will extend based on what we've said and what we expect today. We've talked about the 2-year horizon beyond that. It's not that we're stopping there, but we only spoke about '22 and '23, and believe the company is in an excellent position to continue to accelerate top line growth and improve profitability.

That's great. So to keep building on some of the COVID trends, one of the trends COVID has accelerated is the rise in e-commerce, right? So can you tell us about how the broader shift towards e-commerce since the beginning of the pandemic has affected your operations? And if e-commerce is a larger portion of your sales and how do the margins on the e-commerce business stack up against the margins for the retail business?

Yes. Growing and thriving in online retail and e-commerce is a key pillar in our strategy, and we've been executing very strongly in this area during the pandemic. You can say that the industry as a whole probably accelerated by 2, 3 up to 5 years, depending on the region, in terms of shift to online shopping. And we've been leading the way. We've done exceptionally well in this area. It's been a key driver of our performance. Today, as of the third quarter, it represents between 25% to 30% of our business depending on the region. It's growing faster than our brick-and-mortar business, and we expect that to be an important lever for our growth and expansion. As part of that, we are also building our own direct-to-consumer capabilities. This is in addition to what we do in brick-and-mortar. It's a complementary business. It's not instead or we don't expect it to cannibalize it into what -- cannibalize what we do on -- in the brick-and-mortar business. But we do believe that, given the strength of our franchises, the built-in demand and consumer interest and the high engagement that shoppers have with our brands, we have an opportunity to sell product directly. We're already doing it very well with American Girl. This is a very successful franchise that is a key part of our portfolio, primarily driven by D2C and relationship -- our own relationship with consumers. And we are looking to build upon that. We launched Mattel Creation, which is -- Creations, which is a highly curated shopping experience for collectors of very special items. It's very targeted and very specific to collectors. And it's proving to be very successful, again, back to the quality and strength of our brands. And we believe we can build upon that and grow our D2C business.

Okay. Yes. No, that's great. And as e-commerce becomes a larger portion of you as a sales, nice and tight supply chains is definitely going to be essential. So leading into that, how has Mattel been impacted by the recent supply chain disruptions? And how does having control over manufacturing versus outsourcing play in managing the disruptions?

Yes. We've been very successful in designing and restructuring our commercial organization as well as our global supply chain capabilities. And both work hand in hand. Our global supply chain platform has become much more flexible and dynamic and has been very effective in managing through the disruption that we have seen over the last 18 months. And it's not that we were not impacted, but we were able to anticipate short supply and longer lead times and factor that into our planning, and we're able to implement certain actions and tactics to mitigate for the disruptions. And some of the examples we talk about are the fact that we expedited procurement of raw materials. We pulled forward production of finished goods to increase capacity. We contracted ocean freight -- ocean freight capacity and rates in advance so that we are -- we have visibility, but also some certainty in terms of capacity. And also, we secured access to additional ports and shipping lanes. And back to what I said earlier, this is really where our scale, expertise and flexible model work to our advantage and helped us perform so strongly, not just in the third quarter of this year, but also in the 4 quarters after that, and achieve 5 consecutive quarters of growth and gaining market share. A large part of that is driven by the strength of our supply chain. As it relates to the question of owning our own manufacturing facilities, so we believe that owning some of the capacity, especially for Dolls and diecast cars, did give us a competitive advantage in terms of cost, quality and service level. Owning our own manufacturing enabled us to leverage design for manufacturing principles that drive costs down, improve quality and are allowing us to increase speed to market with less dependency on third-party vendors. These are very strategic decisions that we made related to those categories specifically. And we know that owning our own manufacturing gives us the ability to accelerate decision-making and just move faster overall. And so this is not -- this is key -- this is part of our overall approach. We are still on path to be more Capital Light and continue to drive more productivity and more efficiency, but there's no question that retaining some capacity was very beneficial and advantageous to Mattel during this time.

Yes. That's great. And to point out that a lot of these inflation and costs such as freight and resin are expected to reverse over time, whereas you guys have been cutting costs aggressively through the Optimizing for Growth campaign. I think that's expected to add another $250 million of cost cuts going forward. Can you elaborate more on that strategy and where you expect to see the actual impact on the income statement?

Yes. We've done a lot of work in simplifying our business and reorganizing our cost structure. As you know, we cut -- we reduced our cost structure through -- between 2018 and 2020 by $1 billion of cost improvement and initiated the new program that we call Optimizing for Growth, where we expect to achieve another $250 million of cost savings by 2023. What is special about Optimizing for Growth is the fact that we are looking to drive further improvement in operations and greater productivity to accelerate our growth and at the same time continue to reduce our cost base. So this is not just about cost reduction. It's also about organizing the company and making certain structural changes to be able to accelerate our growth and we continue to improve productivity and performance. This is a project that will be completed by 2023. We are on track -- well on track to achieve our goal and already expect to achieve this year another $80 million to $90 million of savings in the year. It's a combination of savings. Some of it is in cost of goods sold. Some of it is in SG&A. And it's across -- it's spread in different parts of the P&L. But all in all, it will achieve both improvement in our cost structure and make the company a higher performer and more suited -- better suited for long-term growth.

Yes. Great. So speaking of long-term growth and focusing on the long-term strategy, what steps has Mattel taken to grow beyond the turnaround, right? I feel like the turnaround is kind of behind you guys at this point. So specifically focusing on content-driven strategy, what is the profitability profile for growth opportunities from a content-driven strategy versus traditional toys and adding licensing and partnerships? Can you highlight some success you've had in kind of capturing the full value of IP?

Yes. So we are very bullish and very confident about the toy side of the company that is now tracking very well. You know the trajectory. You're seeing the improvement in profits and top line, and this is now -- our business on the toy side is having great momentum, and we obviously expect more to come. The opportunity is there. And by running the company well on the toy side of the company by being a high-performing toy company, we can create significant value for shareholders and continue to perform well. And this is well on its way. In the mid to long term, as we've said, as part of our strategy, is to capture the full value of our IP. And there, we believe we have an opportunity to create in success transformative value for the company. By owning this incredible asset, one of the strongest catalogs of children and family entertainment franchises in the world, we can create significant value from additional verticals that are adjacent to the toy industry that are driven by big franchises, big brands that rise above the noise level. And the opportunities can be applied in film, television, live events, consumer products and merchandise, music, online games and all verticals and categories that are driven by big brands. We've been putting the building blocks in place. We made a lot of progress on the film side, episodic content, online games, music. And there are some very tangible examples with the 13 movies that we've announced that are now in development. The -- we have a few flagship brands there, but going all the way to brands that we haven't commercialized in decades that are now being developed into big motion pictures. The -- we've been attracting top talent and have incredible partnerships with some of the most successful film makers of our generation that are also excited to partner with us and reimagine our brands and turn them into exciting feature films. These are all in motion creatively, and we're seeing great progress and great traction. We already talked about the fact that the Barbie movie will go into production early next year. It's expected to be released in 2023. It's a partnership with Warner Bros. Margot Robbie will play Barbie. She's also a producer. Greta Gerwig will -- is writing together with Noah Baumbach. And Greta will direct the movie. And it will have an incredible cast and a set of stars that have not been formally announced, even though there's been some rumors around, but it's going to be an exciting project. And likewise, we have more movies coming for Barney, Hot Wheels, Uno, American Girl, Magic 8 Ball, Wishbone, View-Master, Major Matt Mason, Masters of the Universe, Thomas & Friends, Rock 'Em Sock 'Em and Polly Pocket. So a long list of some really exciting brands, and there'll be some exciting projects around them. And likewise, Mattel Television is also thriving. We have 8 shows that we launched this year. We have numerous shows in development or in production and in development and seeing great product coming out of Mattel Television. Exciting to watch. And so I can go on and on. I don't know how long you want me to share. There's a lot of activities that happen in around our -- under the heading of capturing value from our IP.

So just to quantify, how many projects do you have currently in the pipeline? I know some of them are going to be released in 2023. But just how many are in production? And what's the pipeline looking like?

Yes. On the television side, we currently have 13 shows in production or specials and about 30 in development, just to give you a sense of the scale. And this continues to evolve. This is very dynamic, and we're constantly looking at projects. We have our own team, experienced people that come from either the movie world, kind of Hollywood filmmaking side of the industry, television -- television production, distribution, that know the international market very well. And we have expertise in-house. Our model is Capital Light. So we're not looking to take capital risk on our own movies, but rather we partner with the best filmmakers out there that have a proven track records and success in specific genres that are relevant to our brands. And they run with the ball. And so we play quarterback. We pass the ball to the best people out there. We still retain creative control or negative control, which really means approval, and are intimately involved as producers in our projects and are able to have real impact, real understanding and will say in the shaping of this product to make sure that they remain true to the brand DNA. And at the same time, we give our partners creative freedom and flexibility to reimagine our brands in new and exciting ways.

No, that's great. And before I open up the floor for questions from the audience, I have one more. Just as a catch-all question, what are some key points you would want to draw investor attention to short or long term? I've mainly tailored my questions to address a lot of the short-term headwinds. But what are some short- and long-term tailwinds going forward that you see in the industry and that particularly affect Mattel?

These are very exciting times for our company. Our results for the past 3 years and specifically in the last few quarters clearly demonstrate that the company is on a clear trajectory to improve profitability and accelerate top line growth. Our transformation strategy is working. We are operating as an IP-driven, high-performing toy company and remain very focused on growing shareholder value and looking to finish this year on a high note, but obviously position the company for additional growth beyond this year. Also important to mention that our balance sheet continues to improve with cash flow generation for the trailing 12 months, growing almost 2.5x the prior year. We are at a leverage ratio of 2.5 -- 2.8 relative to 5.3 a year ago this time. So this -- our leverage ratio and the strength of balance sheet continues to get better and better. It gives us more flexibility and scope to do more things and improve shareholder value. I did talk about the industry. Exciting time for the toy industry. We expect the industry to continue to grow. We expect to continue to outgrow the industry. If you look at our performance year-to-date, we grew at 1.7x faster than the total toy industry growth rate year-to-date, with 5 consecutive quarters of increasing market share. So lots to be proud of. But more importantly, we look forward to continue this performance, to continue to grow top line, accelerate top line, to improve profitability, gain market share and create shareholder value.

Yes. No, that's great. And with that, I'll open up the floor for questions from the audience if they have any. I'm also going to take a moment to check my inbox, see if anybody has e-mailed me their questions, and we'll carry on here in just a second. Please feel free to use the raise hand function if you have any questions in the audience at this moment. So nothing in my inbox. And it seems like there's no questions from the audience. I have one more question that I would like to address just to give the investors another point to look at, and that's kind of more concerning with your retail relationships, right? It seems like you guys work with all the major retailers. Your POS keeps beating estimates, and there's a lot of strong demand for toys. So what kind of options are you left with in terms of pricing power going forward? I think most people understand that prices tend to be sticky. So when prices go up, they tend to maintain those levels. How much more wiggle room would you say you have going forward to increase prices and pass on some of the inflation costs that we've seen here in the recent quarters?

We raised prices in the third quarter just now, and we have not seen impact on demand. And the implementation of that program worked very well. We did it, obviously, in partnership with our customers, with our retailers. This is something that we are always very thoughtful of and we see as a strategic lever and do that if -- when we take pricing action, we do it with the consumer in mind to make sure that we -- that there is both -- we still maintain value and quality for consumer and great product out there. This is, first and foremost, to make sure that we have -- that we create incredibly exciting and innovative product and experiences. And if we do that well, good things happen. And we have done that extremely well. And we are seeing our products resonating with consumers at level that we have not seen in years. And as I said before, it's clearly showing in our momentum in market share gains. So pricing is one factor out of a whole picture, but it's a lever that, if needed, we'll use it and we'll use it thoughtfully.

Yes. No, that's great. That's everything I had. Congrats on the most recent quarter. You guys did great. Best of luck for the next one with the upcoming holiday season. What's -- are there any new toys you guys are planning on rolling out, any hot new toys for this upcoming holiday season?

We have an incredible offering. In fact, we've just been nominated for 17 awards, Toy of the Year awards, 17 different categories, which is a record and really speaks to the innovation and quality of the product that we put out there. In terms of specific product, hard to pick a few, but there is -- the Barbie Dreamhouse is always a winner during the holiday season. And this year, there's a new Dreamhouse, which we expect to do very well. There's a Hot Wheels Monster Truck Volcano Arena, which is super exciting. And Fisher-Price has new offering. The Masters of the Universe, Masterverse figures is also very exciting. American Girl has a new line that is called World by Us, with 3 new multicultural characters representing diversity. So there's a lot of product to be excited by.

Yes. No, that's great. And I just want to take a moment to thank you for joining us today for this fireside chat. We appreciate your time. And best of luck in your future quarters, and we look forward to hearing from you again. Thanks.

Thank you. Thank you so much. Thank you for inviting me.