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

Hello, everyone. I'm Drew Crum. I'm the leisure products analyst here at Stifel. Thanks for joining us. We welcome -- we're pleased to welcome rather Mattel. Mattel is a leading global toy company, featuring brands such as Barbie, Hot Wheels, Fisher-Price, American Girl and Thomas & Friends, among others. We upgraded the shares to buy in late February and more recently added Mattel to the Stifel select list. So it's a high conviction buy for us at this point. And joining me on stage for our fireside chat, we're pleased to welcome CFO, Anthony DiSilvestro. Anthony, good morning.

Thank you. Good morning. Good morning, everyone.

So Anthony, you joined Mattel in July of 2020 and have been really instrumental in helping to navigate the company's turnaround. As you reflect on this period, talk about what you've been able to accomplish both strategically and financially over the last couple of years.

Great. Happy to. As I said, good morning, everyone. I think as you reflect on the last several years of Mattel, the 2021 capped a 3- or 4-year period of significant transformation. Over that period, net sales stabilized and then accelerated. Gross margin improved over 1,000 basis points driven by our very successful cost savings program. Adjusted EBITDA increased from a little over $100 million by 8x to just over $1 billion in 2021. And if I think about 2021, it was an especially strong year. Our net sales increased by 19%. Adjusted EBITDA increased by 43%. Free cash flow doubled to $334 million. So a very successful year for us. And this performance continued into Q1 of this year. Net sales, again, were up 19%. Adjusted EBITDA increased 65%. So the growth trajectory continues. And the strategy that we were on about regaining top line growth and restoring profitability has certainly been successful, right? This turnaround phase is now complete, we're in growth mode. And as we said on our Q1 call and reiterate today, our guidance for 2022 is to grow net sales 8% to 10% in constant currency to achieve an adjusted gross margin of approximately 47%. We are experiencing some cost inflation for adjusted EBITDA to increase from $1.007 billion last year to a range of $1.1 billion to $1.125 billion in 2022 and for us to achieve adjusted EPS in the range of $1.42 to $1.48, so significant and continued growth expectations. We've also provided goals for 2020 -- 2023, and they haven't changed, and that's to achieve constant currency net sales growth in high single digits and to achieve an adjusted operating income margin in the range of 16% to 17%. And lastly, we have a goal for EPS, and that is to exceed $1.90 in 2023, and that's driven by a combination of top line growth, margin expansion and the accretive use of free cash flow.

Great. So you hit on the part of the strategy, which is to accelerate top line. Maybe talk about some of the key drivers there.

Yes. I think it's fairly comprehensive. And we feel great about our portfolio. We have been growing in all regions. We have been growing in most of our 7 categories. We have gained share now for 2 consecutive years. And as we think about our 2022 guidance, it's comprehensive, right? We expect to grow our leader categories, dolls, vehicles, infantile or preschool. We expect to grow our power brands, Barbie, Hot Wheels, Fisher-Price and Thomas. We expect a number of our other categories to grow, in particular, action figures and building sets. Action figures is going to benefit this year. We're coming back to theatricals, right? So Jurassic World, Lightyear, Minions, right, all that's coming in 2022, and that's going to help growth. Building sets is another focus area for us, and we expect that category to grow as well. So it's a pretty comprehensive growth. We expect to gain market share again in 2022 based on our expectations. And again, this portfolio of categories and brands, I think, is one of our strengths.

Got it. Okay. So there's a lot of moving pieces there, and I can't cover the entire portfolio in the time allotted, but let's hit on some of the brand highlights maybe starting with dolls. It's your largest category. It's 38% of 2021 gross billings with the inclusion of American Girl, you had 26% share on a global basis last year. And per Euromonitor, dolls are projected to be the fastest-growing category through at least 2025. So given those dynamics and the fact that Mattel is referred to as the doll company, it feels like you guys are pretty well positioned.

Absolutely, and we expect continued growth going forward. I think one of the things that's enabled this, over the last few years, we've reorganized around categories, right? So we have a category structure for each of our 7 categories starting with dolls. And you've seen the tremendous performance in Barbie over the last few years, outperforming the industry. If Richard Dickson was here, I mean, he would articulate better than I. But we've been following this Mattel playbook, which starts with each brand having a purpose, each brand being culturally relevant, each brand capitalizing on consumer-led innovation, and we have significant design and development capabilities to do that. And lastly, the commercial execution. We're in almost 500,000 doors, right? We do significant brick-and-mortar and online through our retail partners. So great capabilities there. I think Barbie is the best example of how we've employed that Mattel playbook, right, in terms of how Barbie executes around things like a special doll for the Queen and those types of things that maintain its relevance, and then we support it with product advertising, driving consumer demand as well. As we look ahead and thinking about that category structure, dolls, it's going to -- we're going to reintroduce Monster High. So that's another doll line within the category. And then in 2023, Disney and Frozen franchise is back in the Mattel portfolio. So the doll category can manage multiple brands in a noncompetitive way. Each brand has a reason for being, its own purpose and relevance, right? And so we see continued growth momentum and upside in our doll business.

Got it. Okay. And you hit on a couple of the brands I wanted to spend a moment on, Barbie specifically, year-on-year growth in 17 of the last 18 quarters, which I think is unprecedented. How do you keep it going?

I think we keep doing what we're doing, right? And it really comes down -- it sounds like a simple playbook, but that's the foundation for everything we do. And in terms of staying true to the brand's purpose, in terms of continuing to do things that maintain the cultural relevance of Barbie. And I think one of the things that's going to further accelerate this is the Barbie movie. And so the movies we're in filming right now in London. We're scheduled for July 2023 release. This is going to be an iconic cultural event, right, in terms of who the talent is in the movie and the directors and the writers, it's going to be phenomenal. And I think that's one of the things that the Barbie brand can do and resonate. And that's going to be, again, a great event, a great catalyst. But again, we continue to innovate, bring new product, right? We turn over a good portion of the line to keep it current from a fashion standpoint, which will help as well. So we couldn't be more confident. Obviously, very pleased with the performance that we've had, but we're not done, and we see continued upside on the franchise.

And you hit on Monster High. It's a brand that I think there's a lot of intrigue around because of its past success. What gives you confidence that the relaunch will be a commercial success?

Yes. So if you look back in time, it was one of the largest doll introductions, right, historically. And we're going to reintroduce it. We're going to start in the fall of this year with content. We've got an animated series and a live action musical. We're doing this in partnership with Nickelodeon, that's going to launch in the fall. I would say, in addition to just content, it's a full 360-degree franchise approach. We're going to have consumer products. We're going to have collector. We're going to have digital, all right, games and things like that are going to help. So we're going to surround the consumer with this one. And of course, the product is going to be fantastic. We've already put some collector out there that's resonated extremely well. This is another area where we're executing against the Mattel playbook. Monster High has a unique brand purpose, right, to foster a more inclusive world that people can be proud of their uniqueness and have that celebrated. And I think in terms of where society is today, I think that's more relevant today than it ever was in the past. So we're very excited about the relaunch and the impact it can have in 2022 and beyond.

Got it. Okay. And you mentioned Disney Princess. You reacquired the license earlier this year. I know you're not ready to discuss numbers yet, but talk to us about how you intend to manage the license differently versus your prior experience, if you're willing to share.

Yes, I touched on a little bit when I talked about how we're organized, which is on a category basis, right? And so I think this is really important and it's a differentiator from what happened in the past where, even within the portfolio, there was some competition, right? I think but organizing by category, so we're going to have Barbie. We're going to have Monster High. And of course, we're very excited to have Disney Princess and Frozen in that portfolio. And I think by managing it at a category level, where each brand has a unique reason for being, right, and a strategy where they each can complement each other rather than compete, which is other, is -- makes all the difference in the world. And we are very confident that we can manage all 3 of these, right, in the right way.

Okay. Let me shift gears to Fisher-Price. It's your key power brand within the infant preschool toddler category. It's a business that's had fits and starts over the last several years but seemed to stabilize in '20. You posted gross billings growth last year, and the brand seems to be off to a good start this year. Is it time to claim victory with this brand? I mean, is it on a path to growth going forward? Or...

Yes. I wouldn't claim victory, but we feel good about the traction and the turnaround that we're seeing, right? This started with new leadership a couple of years ago, a new strategy, a comprehensive strategy where it includes marketing the brand in a different way, playing on the strength of Fisher-Price and the heritage it has with parents over a long, long, long time. And I think we start with that position of strength. And then we need to follow up with, again, the right advertising, the right product innovation. And I think that's where we're making significant strides. Cleaning up the portfolio, we had some licenses, right, that were a drag on the business for the last couple of years. we're through that period, right? And now we're starting to see growth. Thomas is another part of that portfolio, right? We're bringing new content, better content. That business is turning around as well. So we've got a couple of growth drivers within that portfolio and are very confident we can continue to grow the business going forward.

Okay. Good. Now Mattel's strategy to become an IP-driven company includes supplementing the portfolio with entertainment. And this is something that you referenced earlier. The movie tie-ins, they've been identified as a source of growth in 2022 with a particularly strong slate -- excuse me, in 2Q. I guess maybe to start with Top Gun: Maverick, it's performed exceptionally well at the box office. I know you guys had a product line out in support of it with Matchbox. Does its theatrical success have any bearing on your sales?

Yes. I think, to me, the success of Top Gun is a sign our life is reverting back to some normalcy in terms of people going to the theater, right, and enjoying movies. And I think that bodes well for our business, right? We view ourselves as a partner of choice for entertainment companies, right? And I mentioned earlier, we have a couple -- a few very important theatrical tie-ins this year with Jurassic World and Lightyear, Minions, right? We also have The Batman and Top Gun. And I think the fact that people going back to movies is certainly very, very positive. And I think we're able to leverage our capabilities and strengths around design and development and bringing those characters to life through toys. And that's an important part of our business. We think we have unique and differentiated capabilities to be able to do that. And it's been a couple of years for us now where we haven't had the kind of theatrical releases that we're having this year. So we're very, very excited about that. And it doesn't stop in 2022. We announced Trolls for 2023. And then with the Disney Princess coming back, we have a number of growth drivers. And in addition, we have a demonstrated ability to take movie properties and make them evergreen. And Jurassic World is a great example of this, where we've taken a tentpole event into an evergreen kind of a system of play around dinosaur, right? And it's been a great business for us.

Got it. Okay. And you also have several projects in various stages of development based on your owned IP. Walk us through the strategy there. And any updates you can share? I know you mentioned Barbie earlier being in production and hopefully hitting theaters next summer.

Yes. I think this goes back to our evolved strategy that we've talked about at our last Analyst Day, where there's two parts, right? One is to grow the IP-driven toy business; and then second, to expand our entertainment offerings, right? So we're very optimistic, obviously, about the toy side. There's opportunities to scale our portfolio, grow our franchise brands, continue to push out in our DTC and e-commerce initiatives, continue to improve profitability, right, by optimizing operations for things like our Optimizing for Growth program. So that's the toy side. And then we're just getting started on the entertainment side, right? These are spaces and categories that are adjacent to toys. They include content, both TV and theatrical. They include consumer products. They include digital gaming, things like NFT. So this is a huge opportunity for us. So on the content side, on the film piece, we've announced 14 projects that are in development. The Barbie movie is the furthest one along that's, in principle, photography, again, a release in 2023. We couldn't be more excited about that. But that's just the start. We have many projects coming behind Barbie. And then on the TV side, we're making great strides there as well. In 2021, we launched more content in a single year than we've ever done, right? And then in 2022, we have 13 new series and movies coming out, and then more to come after that. On the digital gaming side, we feel good about the progress we've made. We have a joint venture with NetEase called Mattel163, that business exceeded $100 million of revenue principally on 2 games alone, UNO and Phase 10. So that business is going well, right? We would do our own self-publishing and licensing. We've just launched He-Man and the Masters of the Universe on Roblox. Hot Wheels Unleashed did 1 million units in the first quarter after it was introduced. So again, we're just getting started, but we are very optimistic that we can take our IP and transport it into these other categories and adjacencies, and we're very excited about that.

Okay. Good. So a lot of positives.

Oh, yes.

But there's also growing angst around the potential for a recession. Talk about how the toy industry has performed during periods of economic weakness and Mattel specifically, if you can.

Yes. I think we're advantaged in that way. I mean the toy industry is a growth industry. It's grown for the last 10 years. It's had exceptional growth in the last 2. It's expected to continue to grow going forward. It has demonstrated its ability to grow through challenging times, obviously, through the pandemic, with all the supply chain issues, retail lockdowns, industry grew. If you look back in time, it's grown through recessionary periods. It's grown through inflationary periods. And I think it stems from the attributes that the industry has, right? And it starts with parents and caregivers prioritizing play for their children. They prioritize toys for their children. The products themselves, a broad range of product in accessible price points, everything from under $1 to a few hundred dollars, right, so there is a wide portfolio people can -- they're affordable. There are also -- the toy category is a strategic category for retailers. It drives foot traffic. It's experiential, right? So I think all those things lead to this category that's, again, proven itself to be very, very resilient.

Got it. Okay. And one of the headwinds the company has been managing through the last several quarters now is cost inflation, supply chain disruptions, et cetera. Can you just give us an update in terms of what you're seeing in the market today? And your guidance or aspirational goal for '23 is to see gross margin improvement. What gives you the confidence that you can deliver against that?

Yes. So let me start with supply chain. I'll go into gross margin, then we can kind of look ahead, right? So obviously, we've all been managing through some challenging supply chain situations over the last couple of years. And we have been successful in managing through those disruptions in terms of the ability to achieve the kind of growth that we've seen. All of our factories are fully operational. We're working very closely with our retail partners planning for the upcoming holiday season to position ourselves to meet the expected consumer demand for our products. And I think our supply chain is a strategic capability for us. We've got scale. We've got agility and demonstrated success. On the gross margin side, certainly, we've been impacted by some pretty significant cost inflation. In 2021, that was 400 basis points of gross margin. And for 2022, we expect inflation to have a more significant impact, right? And the primary drivers of that, ocean freight, logistics. In material, it's a combination of resin and zinc. Labor costs, particularly in some of our supply chain market's above normal. So those are the 4 primary drivers of the cost inflation. What we feel good about is the fact that we expect to offset most of that inflation through a combination of pricing, cost savings and the scale benefit of our top line growth. On pricing, we did take some pricing in the middle of last year, and that is having a carryover benefit into 2022. If you look at our first quarter bridge, it was 120 basis point tailwind for us. We are taking pricing again, new pricing actions in 2022 around midyear. So they'll benefit the second half. On cost savings, we launched the programming at the beginning of 2021, targeting $250 million of savings by 2023, and we're making great progress. We did nearly $100 million in 2021. We're targeting another $80 million to $90 million in 2022. The majority of that will impact our gross margin line, right? So we continue to see the cost savings. And then lastly, as we achieve the expected levels of top line growth, we get a fixed cost absorption or scale benefit in gross margin. As I look ahead to 2023, we have a goal to achieve an operating -- adjusted operating income margin of 16% to 17%. And our belief is that gross margin can be a contributor to that. We do expect cost inflation to moderate in 2023. I mentioned the pricing we're taking in 2022. That will have a carryover benefit in 2023, more scale benefit associated with our expected top line growth. And I think we remain confident when you put that all together, right, that we'll get to our operating income margin goal.

Got it. Okay. Let me ask one more, and then we'll go to the audience to see if there are any questions. So since you arrived at Mattel, one of your focus -- focal points has been on improving free cash flow, and you've achieved that, and it's given you more opportunity to redeploy cash and cash flow. Maybe you can prioritize uses of cash for the business.

Sure. And I think as you pointed out, this whole conversation starts with the fact that we've been successful now in generating significant free cash flow, and we expect that to continue going forward and to grow. We doubled in 2021, $334 million of free cash flow. That's a 33% conversion rate of EBITDA into free cash flow. So we start from this position of strength. So I think then we can start to talk about what are our capital allocation priorities going forward. And this is something we talked about in our last Analyst Day as well. Our first priority is to invest to grow our business organically. And that's a combination of building capabilities in areas like DTC or e-commerce or in the digital space, for example, NFT, so capability building type of investment. Second is targeted capacity at adding capital expenditures, right? We have a very significant and competitive cost advantage in fashion dolls and diecast. And we're investing to increase capacity in those two areas, given the significant growth we've experienced and the growth we expect to come. Priority two is to continue to reduce leverage. We've made a lot of progress on this front. We're targeting a leverage ratio of 2 to 2.5x adjusted -- debt to adjusted EBITDA. In fact, we finished our first quarter with a trailing 12-month leverage ratio of 2.4x. So we're actually inside of that range. We are targeting to achieve an investment-grade credit rating. We think that's important to us. It will give us greater financial flexibility, give us access to more liquidity and can help us manage our overall cost of capital. So again, great progress there. Once we get there, in terms of investment-grade rating, it opens up two more priorities, the next one being potential M&A and other corporate development opportunities. We will take a very disciplined approach to this. Anything we do would need to be obviously strategically compelling, help to accelerate growth and come with very attractive financial returns. So that's the third. And then fourth, we will look to share repurchases, very flexible tool that we can use to manage our capital structure going forward. So as we look at those four, right, we feel this is the right set for us in the near term. It gives us great flexibility to invest for growth, manage our capital structure and create value for our shareholders.

What about a dividend? That was not part of your list.

It had been noticeably absent from that list in the near term. Again, near-term priorities, it's something we can reconsider later. But right now, we feel we have the right set of priorities, again, gives us the right level of flexibility in the near term because we're very focused on driving growth.

Got it. Okay. Maybe time for one question, if there are any. Please.

Can you talk about the core business or the toy business and the expansion into the entertainment business? They seem to have very different investment profiles. Can you talk about how we should to understand investment profiles going forward and how you're going to use capital?

Yes. So in terms of the capital allocation, today, we've had a capital-light approach, right, on the entertainment side. We're not investing capital into the films. We bring our IP, we work with different studios, right? So again, it's this capital-light approach. That should come with some returns as well. To me, the way to think about it is we're targeting these adjacencies to be profitable and accretive in and of themselves. But there is a franchise piece to this whole thing, right? And I think Barbie is a great example where it's not just the dolls. We've got TV content that's accelerating. We're going to have the movie. We've got consumer products. We're going to have digital gaming. And I think it's the collection of those that are going to drive the growth and profitability of the franchise.

Okay. Thank you. I think we're out of time. So we'll stop there. Thanks, everyone.