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

Good afternoon. Thank you for -- everybody for joining in. I'm Eric Handler, MKM Partners Media and Entertainment analyst. Very happy to have with me today, Ynon Kreiz, CEO of Mattel. Ynon, welcome.

Eric, thank you for inviting me.

Thank you for being here. Exciting time of the year for you guys. It should be a very interesting holiday season. But I want to talk big picture before we talk about what's going on at the moment. But you've been at Mattel now for almost 4 years and then have delivered quite well on all of your turnaround goals. So as you look ahead to the coming year, what's the next step in keeping the company moving forward?

Well, thanks for your comments. Yes, we've made a lot of progress over the last 2 years on our turnaround and transformation strategy. If you look at where we were at the start of the transformation, $126 million of adjusted EBITDA in 2017 and now on our way to exceed $900 million, we guided, as you know, to a range between $900 million to $925 million of adjusted EBITDA, so from $126 million to potentially $925 million in adjusted EBITDA is good progress on our profitability. We now expect also to achieve 15% of growth this year, which will be our highest growth rate in decades. So strong momentum entering '22 and '23, where we expect to continue to grow. We expect to exceed $1 billion of EBITDA in 2022 and reach adjusted operating income margin in the mid-teens by 2023. And so all in all, we now operate as a high-performing IP-driven toy company. We're not done. There's plenty of more room to grow. We continue to focus on improving profitability and accelerating top line growth through our strategy in terms of leveraging our power brands and expanding our brand portfolio. We are also seeing opportunities to find growth drivers and levers in our catalog in terms of reintroducing legacy brands and catalog franchises and add them to our portfolio, continue to strengthen our relationship with the entertainment companies. And on that note, we expect a very strong year in 2022 with 3 big movies in Jurassic World, Minions and Lightyear. And at the same time, we continue to position the company to capture the full value of our IP with 13 movies in development and a driving television offering that continues to grow and expand. So lots of exciting opportunities and continue to operate in an industry that in itself is also growing and expected to continue to grow. And there, we expect and look to continue to improve and increase our own market share.

Great. When you look back in the last couple of years and particularly this year, Barbie and Hot Wheels have been the primary growth drivers of the business. What's been the key that's really led to their success? And how do you keep that momentum going over the next couple of years?

Yes. Barbie and Hot Wheels are excellent examples for Mattel overall without taking anything away from the success of Barbie and Hot Wheels, it is a tale of our playbook, which we're now applying across the portfolio with the same approach, same methodology, the same capabilities and in many cases, the same people. And the way we think about this strategy is a combination of brand purpose design-led innovation, cultural relevance and executional excellence with a very clear execution on those metrics. Every brand that we developed has a mission, has its own DNA, its own set of values. We're very focused on design, understanding consumer behavior, making sure that our products resonate with consumers, leveraging insights, a combination of art and science to make sure that our product engage and deliver on their promise. We always look to deliver on cultural relevance and make sure that our brands represent what the world is today and stay true to what they offer and keep our offering timeless and timely at the same time. And of course, make sure that we are able to perform at a high level, move fast, put product on the shelf and be able to collaborate with our retail partners to achieve what we set out to do. Barbie is just an incredible success story, growing at 26% year-to-date, strength across the entire offering. Barbie was the #1 overall toy property globally in the third quarter, not just in doors across the entire industry, the #1 overall toy property. And when you see the such rich offering and what is behind Barbie, you can tell why we're so excited and believe that there's a lot of additional potential for Barbie to grow and achieve double-digit growth for the year -- for this year. And Hot Wheels, another great success story. We are now on track to achieve the fourth consecutive record year for Hot Wheels with sales up 20% year-to-date already and continuing to innovate, thrive and expand the line. And back to what I said earlier, it is about the Mattel playbook. And what you need to do is really think about Barbie and Hot Wheels as a case study as an example for the rest of Mattel and how we apply this approach across the entire portfolio and why we believe we're in such a strong position to continue to drive growth for the company.

Great. Now looking at some of your other brands, your turnaround brands this year, they're finally reaching that inflection point it seems Fisher-Price, Thomas, MEGA, -- What's been the key in getting them back on a positive growth trajectory?

Yes. I mean it's exactly, as you said, we are making great progress on the turnaround brands, Fisher-Price, Thomas, American Girl and MEGA were in decline for multiple years. And we managed to get on top of that and very specific strategy for each brand, each offering, each category, obviously, very different, but we apply this -- the Mattel playbook and executed the strategy that is seeing these brands returning to growth and becoming important contributors to our momentum. With Fisher-Price, we have continued to make very good progress through design-led product development, the purposeful commitment to helping parents solve the challenges of parenting and being very mindful of consumer-driven innovation. We already grew this year rather year-to-date by 9%. We saw growth being driven by Little People, Infant, Newborn and Imaginext. So the growth came from several categories, not just one. Per NPD, Fisher-Price was the #1 infant, toddler, and preschool property globally in the third quarter and year-to-date. Thomas is seeing really excellent improvement, and exciting product offering. We expanded distribution. We expect the brand to benefit from a more simplified and improved product range and a much more pronounced content strategy with the new series that we recently launched. And we expect to see Thomas grow this year -- Fisher-Price and Thomas, we expect to grow for the first time in 5 years in 2021 and look to see the brand continuing to turn. MEGA is another great turnaround story, seeing double-digit growth in the third quarter, great product, a lot of new innovation, more distribution, very strong licensed properties and expect to see a full year of growth driven by multiple parts of the line. And then this American Girl, which is seeing very strong results, gross billings up 17% year-to-date, very good momentum across multiple segments. This is really about product, great partnerships of marketing and very strong content. The brand is showing strong results across key metrics in terms of the number of customers, which is now up versus prior year for the sixth consecutive quarter. And we're very confident about the potential for American Girl for the full year as we ended the fourth quarter, where 50% of sales typically take place. So with all of the momentum we had year-to-date, expect American Girl to grow for the full year.

Got it. Now one of the more interesting launches you had this year was Masters of the Universe. You've had 2 animated series on Netflix. Where do you take the brand from here?

Yes. This is really exciting to see Masters of the Universe coming back and having so much momentum. As you mentioned, 2 animated series on Netflix. The second part of the first series is launching later this month. Both shows were top 10 across -- on Netflix across multiple markets upon release. And this is an incredible mythology, huge franchise. This is a movie that we're now developing that will accelerate it even more. And what is exciting about Masters of the Universe is that it's part of our high-performing growing action figure category with -- and it is adding to the momentum that we're seeing in WWE, Jurassic and Minecraft. We are seeing action figures for Mattel growing at levels that we haven't had in many years. It's up 70 -- over 70% year-to-date, was up 50% in the quarter and it's going to get even more exciting next year where -- with the addition of Lightyear and Minions movie and Jurassic World movie. So 2022 will be even a bigger year for us in action figures. And of course, Masters of the Universe will be another driver there. So a lot to be excited by in the category, and obviously, our big franchises that support it.

Specifically with Masters of the Universe, will both animated series be back next year? Should we expect in year 2 of this brand relaunch a wider array of products for Masters of the Universe. And when you think about where this brand was at its peak, I don't know how many years ago, it is -- can it get back to prior peak levels?

The strength of our model and our strategy is that we're managing Masters of the Universe as a franchise. It's a holistic approach, franchise management approach. And of course, it starts with a great toy offering. This is the best of Mattel and the best that we can bring to the table and then you take it and expand the reach and engagement and bring consumers through other platforms. So what you see on Netflix obviously amplifies the strength of the franchise and how consumers relate to it. It has a very exciting collector aspect for the older fans that used to know the franchise in the past, but also young consumers that are excited to see such a superhero mythology with so many dimensions. So we are very excited about it. We haven't provided specific numbers in terms of the scale. But we believe that what we do today serves the franchise better than in the past, given the strength of the content and our expertise in managing franchises in a crowded market. But again, we're not -- we haven't given specific reference in terms of the size of the opportunity.

Understood. So given the success that you've had with Masters of the Universe, we know next year -- towards the end of next year, we'll see a revival of Monster High. And maybe you could talk a little bit about why now was a good time to reintroduce Monster High. But -- what else do you see in the catalog that you think could be -- that could make for attractive revival candidates?

Yes. That's a really good part of the story. Starting with Monster High, yet another example of the incredible strength of our catalog being able to bring a franchise that was so strong for us, one of our most successful launches ever. It's more, not as generational as Masters of the Universe, but incredible potential. You can say it's probably even more relevant today than it was when it launched in 2010 in terms of the brand purpose, which is about fostering a more accepting world where everyone is proud to be themselves, their authentic sales. And today, this brand purpose is very timely and very relevant. We already started to put our product. We're seeing very good traction and a lot of buzz and excitement in the marketplace. This is a fashion doll brand that will coexist and live next to Barbie. So they are not in competition, they're complementary and will -- this and Monster High will also benefit from our franchise management approach with an animated series and a live action on Nickelodeon. Two big content offerings from Nickelodeon. For Mattel and Nickelodeon, that will be -- will add and strengthen the overall experience for consumers, highly invested, highly produced content offering. So we're very excited and very bullish about the toy side of the franchise, but obviously, a lot of offering in and around the toys that would be successful in and of themselves. And separately, back to your question, what else can we bring back, then there maybe another great example would be Matchbox, which is another legacy heritage brand with so many fans that has so much potential. We referred to it back when we announced it as a sleeping giant, potentially in terms of size and opportunity. We saw strong double-digit POS growth and growth in gross billing year-to-date already in 2021. And we believe we have the ability to leverage a Mattel playbook here as well in terms of the richness and the opportunity to create something that is so relevant and has a clear purpose. Now what's interesting here, too, is that Matchbox is complementary to Hot Wheels. Hot Wheels is more aspirational. Matchbox is more real, more present day, current cars. And they -- those 2 brands, obviously, in the diecast category, leveraging our expertise and capability, but not in competition. They're very complementary, and we see a lot of potential in Matchbox to come back and be reintroduced to the market.

You previously mentioned that Mattel has 13 film projects in various stages of development, including Barbie, which now has a 2023 scheduled release date. When could we see a bit -- additional films get date? And what impact do you think these movies could have on expanding Mattel's presence beyond the toy are?

Yes. This is a key part of our strategy, commercializing and extending our brands beyond the toy aisles. It is more part of our mid- to long-term strategy, but we're already seeing great progress there on the film side. This is taking longer, obviously, given the scale and the ambition that we have in the space, but seeing Barbie heading towards production in early '22, slated for release in 2023 with some of the most prolific and successful film makers and creators of our time is going to be very exciting. Likewise, we will continue to develop and evolve the other projects. We haven't announced any specific release schedule for the other movies, but they are all in the works, they're in motion. The other projects we're working on that we haven't announced yet. And we believe that we are very much on the right track. If in order to stand up to our commitment to quality and the leverage or the level of -- and scale that we are aiming for with these projects it is worth the time. It is worth getting it right, making sure that we have the right talent attached, the right script being developed, written and the right overall package. And of course, you can rush it, you can accelerate it and have movies in production, but we do not want to compromise on quality and the ambition. And therefore, we are doing it in the right place. We're actually ahead of where we expected to be. So we're very satisfied with where we are. And I know there is a lot of expectation and interest of, okay, when can we see these movies come? They're coming, and it's going to be well worth the wait in terms of what we're designing, what we're developing and what we expect that to be.

Excellent. All right. Let's talk about some of the near-term things that are going on. How are you managing all the inflationary pressures with the business right now -- And is that having any adverse impact on your optimizing for growth program?

Yes. So inflation is having an impact on our full year performance and profitability. That said, we continue to raise our expectation and increased guidance for the third time this year. So even with the impact of inflation, we are improving profitability and are able to work through supply chain disruptions overall. Some of them obviously are related to are driving inflation. Now we -- in terms of optimizing for growth, this is a program where we expect to achieve $250 million of savings by 2023. It's not just about cost reduction. It's also and primarily about improving productivity and driving better performance for the company. We are very much on track to do that. We're making very good progress. We already generated $69 million of savings year-to-date. We expect to achieve between $80 million to $90 million of savings in 2021 and very confident in meeting our goal of achieving $250 million saving by 2023. In terms of inflation, we expect that the combination of pricing and the cost savings programs that we have in place will more than offset the cost of inflation on our performance over time.

Has the impact of the pandemic caused you to make any significant permanent changes to your business?

We're learning a lot during this period, and there are a lot of lessons to take here. But what is clear is that the industry is very resilient and continue to prove its strength and importance, especially in challenging economic times. But the toy industry as a whole is a growing category and a great place to be. This is really important takeaway. The other part that is also important to understand and recognize and this became more pronounced is that quality brands or quality products and trusted brands are really key to rise above the noise level and stand out in a crowded marketplace. Parents, children and, of course, retailers plays more importance than ever now on quality product and trusted brands. And this is an area where we excel and we really focus on doing the right thing and continue to thrive as an innovative company that focuses on quality and opportunity for us to leverage the strength of our brands and the strength of our catalog. What is also interesting is to look at the growth of online retail and e-commerce, which was probably accelerated anywhere between 3 to 5 years, depending on the region. And this is another area where we excelled, where we grew at a very fast pace and we're able to continue to outperform the industry and turn that into another growth engine for our strategy. It's always been part of our one-page strategy that you're familiar with, but it got accelerated. And in seeing the results, we believe we're in a very good position to develop that into a real driver for Mattel.

Great. Now done it, as your financials have improved and you're growing, you seem to be approaching an investment-grade credit rating. How would that upgrade potentially impact the investment decisions that you see ahead of you?

Yes. We're very happy to see our performance. Our cash flow is improving. We are up by $150 million through the third -- the end of the third quarter. On a trailing 12-month basis, free cash flow was approximately $320 million, more than $191 million compared to the prior year. And all in all, continue to improve our cash flow conversion and are very well positioned to continue to improve these metrics, cash flow and overall strength of our balance sheet, which is great -- obviously, great to see. And of course, leverage ratio continuing to improve. So all of that is really giving us more flexibility, more optionality, and we expect our balance sheet and capital structure to become another growth lever that will support our strategy and allow us to find more ways to create shareholder value. We haven't been specific about how we intend to deploy the cash that we are generating. And once we reach investment grade, what would be the strategy there. But the key words, the key concept is flexibility. And of course, with that, more opportunities to create shareholder value.

Great. Last question here to just sort of wind down the half hour. As you look into next year, I've been asking this to everybody, sort of, think about the opportunity ahead. What do you see as your biggest opportunity and your biggest challenges for next year?

This is a very exciting time for Mattel. We are -- had a pivotal year. '21 is a pivotal year, where we are now entering meaningful growth phase at 15% that we guided to. This will be the highest growth rate we've had on -- going back decades. And we expect that to be -- that growth phase to continue and 2022 will be a key year on that journey. The toy industry as a whole is projected to continue to grow. And with that environment, we believe that we are in an excellent position to outpace the industry and continue to gain share and grow ahead of the industry. So this is an exciting place to be. You look at our trajectory over the last few quarters with 5 consecutive quarters of growth, 5 consecutive quarters of gaining market share. We are in the right place with the right capabilities, the right strategy and an opportunity to double down and accelerate growth and continue to improve profitability. Our strategy is the same, but the opportunity is clearly there for us to continue to accelerate top line growth and improve our profit. Mattel now is in a strong place. We're operating at a high level. Our strategy is clearly working, and we're very excited to be where we are and still in the take of the fourth quarter, but in an excellent position for 2022.

Excellent. We are out of time. Ynon, thank you so much for being here today. Greatly appreciate it.

Thank you. Thanks a lot. Appreciate the questions, Eric.

Thank you.