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

Hello, everyone. This is Linda Bolton-Weiser, Managing Director and Senior Research Analyst at D.A. Davidson. I cover health and beauty / leisure and have been leading some fireside chats today at our Fifth Annual Consumer Growth Conference. So I'm pleased to have up next a talk with Mattel, ticker MAT, which we cover with a buy rating. And we've got CEO Ynon Kreiz with us. So I'll be doing a 30-minute fireside chat type format. But I do have a screen open where I can see questions that listeners would like to, if you'd want to type them in, I'll be sure to include them in the conversation as we go along.

So just to start out. So Ynon, you brought the company a long way in the last couple of years. I mean, quite frankly, almost on the brink of bankruptcy to really kind of re-emerging as a growth company. So it's been amazing to see. And you have kind of declared the turnaround complete. So you're now going into the growth phase with 8% to 10% top line growth in constant currency expected this year and then at least high single digit next year in 2023. So that is high growth. I don't see that type of growth in my universe too frequently. So as you're going now into this growth phase, as CEO, what are you focused on most? And how are you changing like what you're thinking about as you kind of go into this growth phase?

Yes. Thank you, Linda. Well, let me first say that Mattel stands with the Ukrainian people. And we are devastated and saddened by the impact that the war is having on innocent children and families. Guided by our purpose to empower the next generation to explore the wonder of childhood and reach their full potential, Mattel has announced a contribution of $1 million in toys and cash to support organizations on the front line that are aiding refugee, children and families from Ukraine. And in addition, we have paused all shipments into Russia and continue to monitor the situation. I should say that Russia and Ukraine sales are not material and combine a total of less than 3% of our sales. Nevertheless, we are taking a stand and announced these actions. Now with respect to your question, it has been a great journey. 2021 was a pivotal year for Mattel. And with our turnaround complete, my focus is to drive our evolved strategy to grow Mattel IP-driven toy business and expand our entertainment offering. Now as strong as 2021 was, next year or this year, 2022, is expected to be stronger. And as strong as 2022 is expected to be, the outlook for 2023 continues to grow and is even stronger than that. We've said before that our brands are resonating at levels we have not seen in years, and we continue to strengthen our position as a partner of choice of the major entertainment companies and continue to strengthen and leverage our formidable lineup of evergreen properties, including our own brand to drive future growth. The opportunity is exciting for Mattel. We are about to reach investment-grade credit metrics and our capital structure will soon be another growth lever. As the owner of one of the strongest portfolios of children and family entertainment franchises in the world, we are more confident than ever in our ability to capture the full value of our IP and expand our entertainment offering in new verticals, including content, consumer products and digital experiences. So all in all, a great place to be, excited to look back and see how much distance we cover but even more excited about what is coming next.

Great. So just to follow up on your announcement about Russia and Ukraine. Do you still feel comfortable with that 8% to 10% local currency even with a couple of percentage point hit from stopping those shipments?

Yes. We are in a -- still, obviously, we haven't changed our guidance. We remain confident about our ability to achieve the guidance. We see growth across multiple categories. We are seeing several growth drivers with our core leader categories, dolls, vehicles, infant/toddler/preschool. We expect growth for Barbie, for Hot Wheels, for Fisher-Price and for American Girl. We expect growth in the challenging categories as a whole, led by action figures, which will benefit from a strong theatrical lineup this year with Jurassic World, Minions and Lightyear, all of which expect to be very toyetic, and additional growth coming from building sets, MEGA with new product innovation and expanded distribution. So all in all, expect a strong year, continue to grow, achieving 8% to 10% top line and also EBITDA between $1.1 billion and $1.125 billion of adjusted EBITDA.

Great. You do have a lot of entertainment drivers this year. And really, it's like your brands are kind of almost like firing on all cylinders. But you do add the Disney Princess, Frozen franchise in 2023. So one might wonder, well, if your brands are so strong and you're going to continue to grow those brands in 2023, plus add Disney Princess, why wouldn't 2023 be even higher? And are you just starting out saying high single digits and just start at a point and maybe it will be higher than that or can you just explain kind of your thoughts there?

Yes. So when we put out the numbers for 2023, these were our targets. This is not yet a guidance. We put out those targets a year ago. And what we've done sitting here today, we updated our targets from a year ago into 2023 and added Disney Princess to that. So we did increase our goal from mid-single-digit growth to high single-digit growth, in part driven by the return of Disney Princess and Frozen to our portfolio. So sitting here today, we believe these are credible, strong indication of continued momentum. And directionally continue to increase top line, this will be the fourth year in a row of increasing our top line and driving growth. 2019 was about stabilizing the decline. 2020 too was up 3%, albeit high double digit in the second half. 2021 was high double-digit. And from here, we continue to grow in 2022 and 2023. And this is what we believe represents what we call entering growth phase for the company with a lot of momentum that we have across multiple categories, while at the same time we also look to position the company to capture the full value of our IP.

I thought I had read online that the next Frozen, Frozen 3 movie could possibly be in 2023. Do you have any insight on that?

No. Disney did not announce any new movies coming out for Frozen. It's for them to make those announcements. But irrespective of a movie, what we've proven is that we have the ability to manage evergreen franchises. Clearly, we have done that very well for Barbie and Hot Wheels that continue to perform so strongly and breaking records. With Hot Wheels at this point just broke the fourth consecutive year of its own record. So we know how to do that really well. We have demonstrated it with Jurassic World, which grew in the second year after the movie launch. So we know we have that capability. And in that regard, we don't rely on movie launches to achieve what we believe will be a great addition to our portfolio. Disney Princess is such a great franchise, great brand collection and great offering and would be an important addition to our portfolio, both at the top line and at the bottom line. And we expect that to be a win-win situation for both Mattel and Disney and be an accretive offering as part of our portfolio.

One of the things you did in the turnaround was to organize the company more by product category. How has this proven to be beneficial to driving growth?

This was an important part of our strategy. It wasn't purely a restructuring or organizational change. By doing that, this allowed us to leverage our capabilities, the strength in our management, supply chain and overall resources to be able to drive growth across multiple brands at scale. We moved from a place where we used to run the company by brands to run it by categories. And that gave us the ability to drive more innovation across all categories rather than focus on stand-alone brands. In addition, this also allowed us to implement the Mattel playbook very successfully. The combination of brand purpose, design-led innovation, cultural relevance and executional excellence is what, part of the Mattel playbook is driving our brands forward. The category structure allowed us to implement that playbook across the entire portfolio at scale. And the results speak for themselves, obviously, seeing the comprehensive performance across multiple categories across the regions and overall driving growth for the company as a whole. You will continue to see that performance in our own brands and properties. You will see it, as we said earlier, you will continue to see growth in our leader categories, in our flagship brands, in American Girl, as well as our licensed properties, Jurassic, Lightyear and Minions, which are launching this year, as well as Lightyear, which specifically part of The Walt Disney Company is expected to be very toyetic as a new release coming this year. So all in all, the category structure was an important part of our success. It is a key contributor to the fact that we've been able to grow for 6 consecutive quarters and why we are so confident in continuing to gain share going forward and outperform the industry.

Great. So one avenue of growth is to look at entering new categories. And you were very successful with entering plush. And so I assume you're looking at other categories. What are some that jump out to mind? I guess the outdoor category is actually one of the very biggest in the toy industry. Is that an attractive category? Or how do you kind of look at that category? Or are there other opportunities that you see?

Yes. Without being specific about future categories, we absolutely developed the capability to expand and enter white space very successfully. Our supply chain is now a competitive advantage, and we are able to leverage that across multiple categories. And our organization is very focused on design and innovation, which gives us the ability to focus on new opportunities and execute very successfully, plush being an obvious example. As part of our strategy, we are looking to continue to scale our business within each category. This is before you expand to new categories. And this is what we talk about expanding our power brands to new segments, revitalizing and relaunching catalog IP that gives us an entry point or a strong foundation and continue to drive growth, including in our own categories but also in new categories. We're looking to develop new brands. We're looking to add and expand our partnership with third-party IP owners as part of positioning Mattel as a partner of choice for the major entertainment companies and of course, opportunity to expand our geographical footprint. And while we are doing very well throughout the world in most countries, we have still opportunities to grow into additional areas and we see that as another white space. So white space both in terms of category as well as geography and more opportunity to grow and expand our business just like we did within the plush category.

Great. So you're planning to relaunch Monster High later this year. That was a hugely popular line several years ago when you first came out with it. It's your own brand, your own IP. There seems to be a lot of competition today in the doll category. I mean, MGA has been very active. I thought I saw a headline today saying they launched something called Junior High. That almost sounds like Monster High. So I wonder, how do you think Monster High will do this time around with all this competition? And are you pretty confident it won't somehow hurt Barbie's sales growth?

Yes. The industry is competitive and the dolls category is particularly competitive. That said, we've been able to continue to grow very strongly, outpace the industry and develop capabilities that we believe are very unique to Mattel as the global leader in this category. The launch of Monster High is going to be very exciting. It's going to have a great lineup of product offering. It's going to have a lot of content support in terms of a new animated series and a live-action movie that we're launching with Nickelodeon. The playbook for Mattel will come into play in a very pronounced way given the brand purpose that is so strong for this franchise. And given the cultural relevance and importance of diversity and inclusivity to consumers today, the brand is even more relevant than it was when it launched years ago. As part of our category structure, we expect Monster High to be very complementary to what we already do. It will be managed by the same team that is running Barbie very successfully. We'll bring all of our capabilities in supply chain, design and innovation to this franchise and could not be more excited by the opportunity to relaunch and reimagine and bring Monster High back into the market. There is already pent-up demand. We're seeing it with the initial early-stage direct-to-consumer collectible offering that we've done. We know there is demand. We know the fans are excited. And with our capabilities, as part of our portfolio management approach, we'll be able to, we believe, make it another very successful and important addition to our portfolio.

Great. So as part of the turnaround effort, you put into place a capital-light strategy. And to be honest with you, you haven't really updated us on numbers pertaining to that. And I wonder if it's because now having your own plants has sort of been a plus, a positive during the supply chain kind of bottleneck issues that we're going through. So are you kind of pulling back a little bit on capital light, slowing down the pace or are there changes to your thinking along those lines?

Capital light is now part of our Optimizing for Growth program, still a very important part of our strategy. It is a multiyear strategy and a comprehensive effort to optimize manufacturing, increase productivity and turn our supply chain to a growth driver. This is not just about optimizing cost but also driving growth and improving performance for the company overall. To date, we announced closure of 4 plants in Mexico, China, Indonesia and Canada. And obviously, that reduced our fixed cost structure meaningfully and at the same time, allowed us to focus on driving productivity and performance from the factories that we retained. We actually did keep certain factories that are strategic. And during the pandemic, that proved to be a very important part of our capabilities in that we control part of the supply chain. And we were able to leverage resources that we own and are able to optimize in times of disruption and limited capacity in some factories. In terms of our costs, we put out a target of $250 million of savings between '21 and '23, 2021 and 2023. We already achieved $97 million of savings in 2021 and are targeting another $80 million to $90 million savings in 2022 and believe we are very much on track to achieve the overall target of $250 million by 2023. This remains a key priority for what we do. It's going to be another contributor to managing our cost structure and achieving our profitability goals. We also put out a guidance for our capital expenditure for 2022, which will be in the range of $175 million to $200 million. This is an increase from the prior year as we strategically invest to increase capacity in our own dolls and vehicles facility to support the anticipated growth and where we have significant competitive cost advantage. This is another part of how we optimize and are able to leverage our supply chain capabilities. We're, of course, still committed to a capital-light model, but our scale and capabilities give us a significant advantage compared to other players. And we believe we'll be able to achieve a highly accretive return on invested capital in those areas as well.

Okay. Great. In terms of those 4 plants that you announced the closure of, can you say are they in particular product areas? Generally, can you give us some idea?

Now we haven't been specific about that. But we did say that we are focused on retaining certain capability and ownership of those facilities in dolls and vehicles where we are in a very unique position. And there are very few people in the world, if any, that can achieve what we do in our factories in terms of scale, quality and costs. If you think about the amount of dolls or the volume of what we manufacture in dolls and die-cast cars a year, there are no other people that can do the same at that quality, at the same service level and at the same cost structure. So we believe we are uniquely positioned, and that is something that we look to continue to maintain. Just to complete the answer, there was one, we did talk about building sets construction with MEGA, which was manufactured in Canada primarily. That factory did close. As we said, we're moving these capabilities elsewhere. And beyond that, again, focus on where we have a competitive advantage and looking to retain capacity strategically in those specific areas.

Okay. So can you talk a little bit about gaming? Spin Master and Hasbro now have some gaming initiatives that are big enough and important enough to kind of break out and certainly high growth, high margins. Do you feel this is an area where Mattel is behind? And if so, do you want to be bigger, more significant in that area? And what are your plans there?

Well, gaming, as part of digital experiences, is a strategic priority for Mattel and part of our strategy to capture the full value of our IP, which has always been, we refer to as -- was in the mid to long term. And now it's becoming an important priority and what we're looking to do as part of our evolved strategy. We believe we have a significant opportunity to leverage the high level of engagement of fans with our iconic brands, iconic franchises that have a large built-in fan base. And this will apply to digital games, connected play and the metaverse, including the growing space of NFTs. We have a multiyear strategy to drive revenue growth and profitability. This is in several areas, both in terms of licensing, our own publishing, as well as our own online game publisher that we co-own together with NetEase as part of a joint venture, which grew to more than $100 million in revenue in 2021, which is a very high growth addition to our portfolio. We don't consolidate it because it's a joint venture of which we own 50% of. But it's been great to see the momentum and the growth in revenue with just 2 games that we released so far in UNO and Phase 10, which delivered combined 160 million downloads and more than 1 million daily active users. We just recently launched the third game, Skip-Bo, which launched in the fall and are launching globally at scale in 2022. We also are seeing great traction in our NFT activity. We were the first toy company to launch NFTs, with 3 of our most historic Hot Wheels cars reimagined into digital collectibles for a whole new audience last summer. We had another campaign last fall for -- another Hot Wheels campaign last fall for another collectible offering comprised of 17,000 trading card packs, which sold out immediately. And recently, we launched another NFT campaign for Barbie in partnership with Balmain, the French fashion house, to create an experience for both the physical and digital world, which was very successful. This launch was very successful. We have more launches planned for 2022 as we expand in this exciting new area of consumer engagement. The one thing that is important to emphasize is that as you look to develop your digital presence, especially in the metaverse and NFTs, the 2 critical factors will be the existence of community, which we know we have given the strength of our relationship with consumers all over the world; and the collectibility value, where we believe our brands have particular strength given the heritage and legacy and appeal to older consumers. So we believe collectible is a key growth area for us. And in that context, it will play very well in the NFT and metaverse space where we have, we believe, unique opportunities and are uniquely positioned given the strength of our portfolio.

Great. Would it make sense to buy the rest of NetEase that you don't already own?

Well, too early to talk about M&A opportunities. But expanding your question or what you refer to is that given the strength of our balance sheet as we approach investment-grade credit metrics, we believe that we'll have more growth opportunities and another driver in terms of our balance sheet that will be able to help us and accelerate our growth, our organic growth in terms of what we've been able to achieve so far while we restructured the company. So sitting here today with north of $1 billion EBITDA, adjusted EBITDA leverage ratio at 2.6 and strong position in cash, cash conversion, cash generation, we believe that our balance sheet will become another growth driver for the company.

So before the company hit some difficulties, it always really had a relatively high dividend and dividend growth was sort of part of the capital allocation strategy. Is that something that you think is appropriate or what are your thoughts there?

Well, in the near term, our capital allocation priorities do not include reinstating a dividend. We outlined on the fourth quarter earnings call our priority which is, first and foremost, is to drive organic growth in the company. Second is to further reduce financial leverage and achieve our targeted leverage ratio between 2 and 2.5x debt to adjusted EBITDA and attain an investment-grade rating. Once we receive that, once we achieve that and maintain it, we will have the flexibility to consider other priorities, including M&A and share repurchases by way of optimizing our capital structure. So these are the near-term priorities. At this point, we're not thinking of dividend. But again, this is in the context of what we do near term. Further down the road, we'll have optionality to continue to take action that will optimize shareholder return and create long-term value for our shareholders.

Okay. That sounds good, Ynon. We're kind of nearing the end of our time, but is there anything that you'd like to mention in conclusion that I forgot to ask about?

No. Thank you. It's been, so far, a really exciting journey and obviously, another strong year for the company. 2021 was a pivotal year for the company on many levels. But more than anything, what makes us even more excited is the future and what we're seeing in front of us in terms of momentum, strength, resilience, a company with a strong culture that is positioned to win, continue to gain share and do great things. And I know you've been following the story. Obviously, you know the history, you know the present. And hopefully, it will be an exciting future that we will be happy to share with you.

I think so. Thank you, Ynon, and I hope you have a good rest of your day. Thank you.

Thank you so much. Thank you.