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

Hello, everyone. My name is [Audio Gap]Adjusted EBITDA for the full year in 2021. The fourth quarter is off to a good start, with less than a month of shopping days for the holidays, we feel good about the holiday season and expect to continue growing in the fourth quarter and gain market share. Looking beyond '21, we are well positioned to achieve our goals of mid-single net sales growth in constant currency in 2022 and 2023. And an adjusted operating income margin in the mid-teens by 2023 as well as exceed $1 billion in adjusted EBITDA in 2022. We will provide guidance for 2022 in our fourth quarter earnings call, but we are very encouraged about our progress to date.

That's great. Well, thanks for that update. You're about 3.5 years into your tenure as CEO, can you give a quick update on the progress you've made on your new strategy and really the turnaround goals that you laid out when you joined?

Yes. We've been very successful in executing our strategy to transform Mattel into an IP-driven, high-performing toy company. We have grown adjusted EBITDA in 3 years from $126 million in 2017 to $719 million in 2020, and I've guided this year to a range of $900 million to $925 million. So quite a journey from $126 million to $925 million in 4 years. We continue to guide net sales this year to be up approximately 15% in constant currency and have reiterated our goals to achieve mid-single-digit net sales growth in constant currency in 2022 and 2023, and adjusted operating income margin in the mid-teens in 2023. What differentiates us competitively is the strength of our franchises, our playbook and our growth potential. We own one of the strongest catalogs of children and family entertainment franchises in the world. Our playbook, which is really about brand purpose, cultural relevance, design capabilities and execution and excellence at the global scale, make our product offering stand out in a crowded marketplace. We have very strong growth momentum. We grew at 1.7x faster than the total global industry growth rate year-to-date per NPD. We have been growing and gaining market share for 5 quarters in a row. We are on track to achieve our highest full year growth rate in decades and just raised guidance for the third time this year. We also see our product resonating at levels we have not seen in years. Given all of that, given our transformation and growth strategy, we are in an excellent position to continue improving profitability and accelerating top line growth. Stepping back and reflecting on the journey to date, we are now operating as a high-performing toy company and believe that we have the assets, the organization, the scale and the strategy to take the company to the next level. Even with the significant progress we already made by no means we are done, and we believe that we have strong momentum to continue to increase and create more shareholder value.

Well, let's take a step back now and think about the [Audio Gap]

Well, this is part of our long-term strategy, already made significant progress in putting the building blocks with a Capital Light approach. [indiscernible] we have 13 films that are in development. The Barbie movie is going into next year and will be releasing in 2023 [Audio Gap] So a very exciting lineup and great film side in development. Our brands have been attracting top talent, and we have an incredible opportunity to leverage these partnerships to monetize the catalog beyond the toy aisles. These projects continue to be developed. We're working on scripts, casting, budgeting and production plans. It is part of our mid- to long-term strategy. These projects do take time given the scale and the ambition, but we are well underway. Looking -- the mandate is really to create movies that people want to watch. It's not about trying to sell more toys to the movies. It's, first and foremost, making great movies that people want to watch. And we know that if that happens, other things will happen. And we know how to sell more toys. But the mandate is to create great content that people want to watch. We have more projects in the pipeline and expect to make further announcements in the future. Mattel Television is thriving. We have 8 shows that we launched this year already, 13 more in production, and over 30 in development. So activity on the television side, we launched the Barbie Radio in partnership with iHeartMedia and Warner Music. And we also have a growing NFT opportunity. We already had 2 launches of NFT product and believe that this will offer new ways for us to collaborate with artists and create a new and exciting innovative offering for Mattel. There will be more that we will introduce in the market in 2022.

Well, it certainly sounds like an ambitious content strategy. Now I'd love to shift and talk about probably your best known franchise, which is Barbie. So as a father of 6 and 4-year-old daughters, I can tell you we've got a lot of Barbies in the house. They stream a lot of Barbie content. And the Chelsea Camper was the #1 ask on the Christmas list this year. So on 6-year-olds Chelsea is now a cooler than Barbie. But curious to hear, as you think about how you keep Barbie relevant, and can you keep that franchise as a growth driver for Mattel, how you're thinking about that?

Barbie is such an incredible story, an incredible success story. It really goes back to the Mattel Playbook, which is driving another strong year of such comprehensive performance for Barbie, with gross billings being up 26% year-to-date through the third quarter. We are seeing strength driven by diversity, inclusivity, cultural relevance and really being a pop culture. Barbie is so much more than a doll. It is really a pop icon. Per NPD, Barbie was the #1 overall toy property globally in the third quarter, not just in dollars but overall in the entire industry, #1. And in the U.S. we maintained our #1 doll property position each week in 2021 through the third quarter. Demand for Barbie and all of its segments is strong. It's strong already also in the fourth quarter, and we expect Barbie to grow for the full year double digits. So Barbie is in an excellent position, growing in the fourth quarter and expect a double-digit increase for the full year. Barbie is an example of the Mattel Playbook. It really is a great case study in terms of how do you elevate the brand purpose, create cultural relevance, maximize our design capabilities, designing innovation capabilities and leverage our executional excellence at a global scale. Barbie is the most diverse doll in the market. It continues to evolve, be more relevant, be a modern reflection of the world for today's kids and families and really being dedicated to helping create a better world for kids everywhere by focusing on diversity, equity and inclusion and sustainability. Barbie's purpose is to inspire the limitless potential in every girl. And this message has never been more relevant than it is today. Very exciting to see Barbie's progress. And when it comes to Barbie, the question really is, how high is high. Very exciting to watch Barbie and see the journey. And as a final point, I would say, just to expand really what we are seeing, the Barbie success is very much about how we run the company as a whole. Barbie is ahead of the game. But it is the same strategy, the same approach, the same methodology and in many cases, the same people that are working on our other brands. So when you think about Barbie, you need to really think about the rest of Mattel and understand that this is how we run the company as a whole and why we're so excited about the potential to capture value from our offering as a whole.

Next, I'd like to move into some of the operational excellence that you talked about. Specifically, can you tell us a little bit about how Mattel has been impacted by the recent supply chain disruptions and how having control over your manufacturing versus outsourcing? How does that benefit Mattel in the current environment?

Yes. I mean we've been managing through disruption since the beginning of the pandemic. Our supply chain and commercial organizations were successful in working through global disruption, whether that affected the entire economy. It's not that we're not impacted, but we were able to manage through those disruptions. We anticipated short supply and longer lead times and factor that into our work, into our planning, with a very specific thoughtful, methodical and mitigating actions. Some of the examples we referred to were how we expedited procurement of raw materials. We pulled forward finished goods production to increase capacity. We contracted ocean freight capacity and locked rates in advance and secured access to additional ports and shipping lanes. This is really where our scale, expertise and flexible supply chain model work to our advantage and what allowed us to be so far ahead of the game. As it relates to your specific question on owning our own manufacturing capacity, we believe that when it comes to especially dolls and diecast, this gives us a competitive advantage in terms of cost and quality. This is not something that you can ask other players to do simply. There is no one in the world that makes dolls at our scale and our quality or diecast cars at our scale and our service levels. Owning our own manufacturing also provides us with the speed and design-making flexibility and latitude across the entire supply chain. We're less dependent on other people. And given the sheer size these factories operate at full capacity, full utilization and are very, very productive. Some of the actions that we took this year in 2021 that we discussed on the third quarter earnings call, would not have been possible if we didn't own our own capacity. We were able to invest in additional tooling to make sure that we have dual capacity so we can manufacture or be ready to manufacture products in more than one factories or leveraging our diverse manufacturing footprint to optimize new shoring of production. This was possible because we own some of our capacity. So all in all, having greater control throughout the supply chain, gives us more flexibility, more capacity and allows us to be nimble and flexible as we respond to external challenges.

Well, and -- as we think about the future in 2022, hopefully, with the pandemic on the decline, I'm curious to hear your thoughts about, how does the industry look post COVID? And how is Mattel going to fit into that post-COVID landscape?

The toy industry is a growth industry, and we believe it will continue to grow in the coming years. While the industry has faced and is still facing significant supply chain challenges, it had 2 record years with growth in the U.S. of 16% in 2020 and 17% year-to-date by October this year. Play has never been more important, and parents prioritize spending -- resources spending money on children, especially when it comes to quality product and trusted brands. The toy category offers affordable price points. The items are not expensive. The toy aisle remains a strategic category for retailers. The importance of play has never been more pronounced and physical play is here to stay. Euromonitor, the most recent study is forecasting 5.4% CAGR for the next 5 years. So this is a growing industry, and it is expected to continue to grow. We believe that Mattel is well positioned to continue to grow and gain share. We see consumer demand for our brands being very strong. We continue to innovate and execute our playbook across our portfolio. The Mattel playbook applies to the same approach, as I mentioned before, same methodology, same capabilities that you see on Barbie, you see it being applied through the rest of the portfolio, which gives us a lot of confidence and expectation that we will continue to do well. The strategy is delivering growth across the portfolio. And we're seeing flagship franchises continue to grow. Barbie, Hot Wheels, Polly Pocket as some examples. We are leveraging our catalog to relaunch iconic catalog IP, including Masters of the Universe, Matchbox and Monster High, where we see significant upside potential. These were real big brands for Mattel in the past, and we see them coming back and adding more growth opportunity. And we're also strengthening Mattel standing as a partner of choice for the major entertainment companies Disney, Universal, WWE among Others, and just recently announced our agreement to -- with Disney for Lightyear which is expected to be very, very [indiscernible], it is an exciting addition to our catalog. In 2022, there are a few important movies that will be other than Lightyear. This is Jurassic World and Minions. So important third-party addition to our catalog, our portfolio, our offering and seeing multiple growth engines for the company carrying us in 2022 and beyond.

Great. [Operator Instructions] And let's move on now and talk a little bit about your plans for capital deployment and how are you going to fund all of these exciting innovation, especially the content?

Yes. We are seeing a very strong performance on cash flow, with free cash flow improving by $153 million through the end of the third quarter. On a trailing 12-month basis, free cash flow was approximately $320 million, more than $190 million higher than the prior year. On a trailing 12-month basis, we converted 33% of our adjusted EBITDA into free cash flow. This is a significant improvement from the prior year. And we believe we are well positioned to continue to improve on these metrics, important metrics in 2021 and beyond. Near term, we remain focused on continuing to pay down debt and return to investment-grade credit metrics. Growing our cash flow and enhancing our liquidity is a key priority. This will provide flexibility for us to consider other shareholder value-creating opportunities in the future. Capital structure is obviously very important. It gives us financial flexibility as we have no long-term debt maturities until March of 2023. So a lot of progress on our balance sheet and expect that to be another growth lever for Mattel.

Well, I'd like to add with asking you kind of a little bit of an open-ended question. What are some of your expectations for 2022 and beyond?

Well, these are exciting times for Mattel. With the toy industry projected to continue to grow, we believe we are well positioned to outpace the industry and continue to gain share. Our results for the past 3 years and year-to-date clearly demonstrate that the company is on a very strong trajectory to improve profitability and accelerate top line growth. Our transformation strategy is working, and we are operating as an IP-driven high-performing toy company. Our strategy is driving growth across Mattel's Power Brands, Barbie, Hot Wheels and Fisher-Price as well as a flagship franchises that I mentioned before, including American Girl, UNO, Polly Pocket, MEGA while leveraging our resources to relaunch a [indiscernible], the Masters of the Universe, Matchbox and Monster High that as you heard me saying, we're very excited by as well. And we continue to strengthen Mattel standing as a part of choice for the major entertainment companies. So all in all, we're very bullish and very confident about the toy side of the company, and there's a lot of opportunity and growth momentum that we see there. And it's reflected clearly in the numbers and we expect more to come. We're also excited by the opportunity to capture the full value of our IP, which, we believe that in success could drive a transformative value for the company. We remain very focused on driver -- driving long-term shareholder value and appreciate your interest and continue following our journey.

Well, Ynon, you talked a lot about the emotional connection, both kids and adults have with their toys. I think all of this has shown a great strategy on how to capitalize on that and that emotional connection we all have and the importance of play. So thank you so much for your time with us today, and good luck with the rest of the conference.

Thank you so much.