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

Okay. Good morning, everyone. I'm Drew Crum, I cover leisure for Stifel. We're going to kick things off this morning with Mattel, one of the largest toy manufacturers in the world, featuring a portfolio of iconic brands, including Barbie, Hot Wheels, Fisher-Price, among others. And joining me on stage, I'm pleased to welcome the company's CFO, actually welcome back, company CFO, Anthony DiSilvestro. Yes. Anthony. Good morning.

Good morning.

Good to see you.

Thanks for having us here.

Yes. let's start at a macro level. So entering 2024, most forecasts call for another down year for the toy industry, right? From your perspective, what are the contributing factors behind what's anticipated to be another down year? I know March into early April seemed to outperform, it is your company -- or is your view on the year changed in any way?

Again, thanks for having us here today. Let me provide a little bit of context to this question because I think the idea is that longer term, the toy industry has grown, and we expect it to continue to grow into the future. And I think if you go back a few years and look at the period 2019 to 2022, actually through 2022, the industry grew 25%, right? And obviously, it has some impact from the pandemic. And then in 2023, it did decline a bit, but still up 17% and compared to 2019. And we expect it to be down a little bit in 2024, but not to the extent it was down in 2023. And there's a couple of factors to consider. One is there has been generally a lighter toyetic theatrical slate. Part of that relates to the strikes that have been in Hollywood. And the other impact is a shift in consumer spending patterns post-COVID back to experiences and services and less so on products. And we see both of those kind of waning as we go through 2024 and look to 2025. And for Mattel, we expect to outpace the industry in 2024 and gain share. And as we look to 2025, we expect industry trends to improve and for Mattel to be able to grow both sales and earnings as we go into 2025.

Okay. And just you mentioned the shift in consumer spend. How would you assess the health of a Mattel consumer? And as a follow-up, toys historically been a fairly defensive category, but if the economy were to worsen, how do you see demand holding up for the category?

Yes. Good question. I mean our view of the economy more generally is in relatively in good shape. I mean inflation has moderated, not to the extent we all hoped for, right? We'd love to see it come down a little bit more, for interest rates to come done. But the economy continues to grow, employment levels are strong. I think if there's one concern generally, it's with the lower income consumers that are under a bit of pressure. But I think when you look at the toy industry, spending is holding up, right? Year-to-date, the toy industry is down just slightly and we're generally in line with the industry. So in terms of how things are unfolding, it's pretty much how we expected. We do expect to achieve our full year guidance and can reiterate that today as well. And I think the fundamentals of the industry, you mentioned it's fairly resilient in challenging economic times. And that's because, look, this is a very strategic category for retailers. It drives traffic, covers a broad array of price points. Toys are an important development for children, and parents will prioritize spending for their kids. And I think during those challenging times, well-known, trusted brands like Mattel, right? We're very well positioned to succeed. And the other thing I would point out is our product portfolio covers a multiple price points, from $1.25 for a Hot Wheel to a $200 Barbie Dreamhouse. So we can cater to those consumers that are looking for value. So again, we are well positioned, and I think we're in a good spot.

And you mentioned retailers viewing the category strategic. There's always a considerable amount of focus on retail inventory. How would you characterize your retail partners support for the segment? Are you anticipating any material changes going forward? And if so, how or what?

Yes. I mean, retailers love the toy category, right? It's strategic for them. It drives foot traffic, whether it's brick-and-mortar or whether it's on online. And as it relates to retail inventory movements, we don't really foresee any significant changes ahead. And if you look back to 2023, we did have a situation that we had to deal with, right? So we made significant progress during 2023 in getting retail inventory levels down. We ended the year down high single digits, both in dollars and weeks of supply. But that said, and despite the progress we came into 2024, slightly elevated, and -- most of this was corrected in the first quarter in 2024. So we think we're pretty clean and that retail inventory levels are now at appropriate levels to support the business going forward. And what that means for us in terms of gating, we're pretty much back to the historical trends of 35% of our gross billings in the first half, 65% in the second half. And look, there's always going to be some volatility on a quarterly basis depending on the timing of shipments. But as we pull up and look at the outlook for 2024, we do expect that our shipments will outpace POS. POS is expected to be kind of flat. But when you look at retail inventory movements year-on-year, it should be a little bit of a tailwind in 2024. So that's factored into our guidance, which is to achieve net sales comparable to last year on a constant currency basis.

So you kind of hit on my next question as it relates to POS and shipments. But how do you expect that to progress as you move through the year? You obviously have a difficult Barbie comp in the third quarter. You mentioned retailers' kind of getting back to those historical trends during the holiday period. How do you foresee the POS and shipments tracking as we move through the year?

Yes, I think it starts with the overall industry context. And as I said a couple of minutes ago, we do expect the industry to decline a little bit, but lesser extent than last year. We expect to outpace the industry and gain share. And in fact, that's what's been happening. We've gained share in dollars. We've gained share in Vehicles. We've gained share in Infant, Toddler, Preschool. So again, we are well positioned to outpace the industry in 2024, and then for our POS to be flat. Now given we're back to historical trends on shipping, given what we're wrapping last year, the retail inventory declined, that should be a bit of a tailwind. And then we've got a headwind, primarily in the third quarter, second half as we wrap the Barbie movie comp. So everything is kind of unfolding as we expected. And as I said, kind of reiterating our full year sales guidance today.

Okay. Good. Let's talk about some of your brands. Maybe starting with Barbie, arguably, one of the most important brands in the portfolio and a point of interest for investors. Given the success of the film last year and less the tougher comp that I referenced, talk about the outlook for the brand in '24, some of the puts and takes, and beyond this year, the opportunities you see for Barbie. And I think there's a lot of interest in terms of what you do with the film franchise.

Yes. Happy to address that. Absolutely. Look, Barbie is an incredible brand, and it's never been more relevant or connected to pop culture. And last year, the Barbie movie was an incredible success. It generated over $150 million of revenue between the direct movie participation, the movie toy sales and related consumer products that had an operating income margin of 60% on that, more than $150 million worth of revenue. So financially, very successful. And as importantly, the movie was a cultural phenomenon. It lifted the entire brand, particularly with the adult and collector market. And Barbie is the #1 doll property globally. It's been and continues to gain market share. And as we come into 2024, we're going to celebrate Barbie's 65th Anniversary, and Mattel knows how to throw a party. And you can expect to see significant, new product innovation. We're entering new segments with Barbie Mini Land, Barbie [ bring besties ], we're going to push out into the kind of the horse play segment, and all this will be supported with more shelf space in the second half. We're going to launch new product targeted against adult collector of pop culture fans as well. And you'll see new content on Netflix. We've announced also a mobile digital game with Take-Two, that's going to launch later in the year. So a lot of activity happening on Barbie, again, an incredible franchise and we couldn't be more optimistic about the long-term growth potential of the franchise more broadly, right, given the success that we've had in 2023.

Got it. Okay. Hot Wheels, your second largest brand in terms of gross billings. Just talk about the key drivers. It continues to grow, kind of defy logic. Where do you see that brand going and just provide an update on the film?

Yes. I think -- Hot Wheels is another great example of Mattel executing against the playbook, pushing against all the demand drivers. Mattel, obviously, we are the #1 vehicles manufactured globally. Hot Wheels is the #1 property in vehicles as well. And the beauty of this is last year was our sixth consecutive record year on Hot Wheels, and we're planning for another. So just success on top of success. And what I would point out is the growth is broad-based, right? It starts with the core diecast line and our ability to innovate and continue to grow that part of the business. We are expanding with adult collector, and again, expect it to grow, and there's a number of things that we're doing. So more innovation on the core diecast line, pushing out into the adult collector space, both at retail and through our DTC Mattel creations. We're actually continuing to expand distribution globally. And Hot Wheels is already almost everywhere, right? But there are opportunities to expand distribution. We're also pushing out into adjacent sectors like RC and Skate, which have been very, very successful. And lastly, on content, we've launched Hot Wheel's Let's Race on Netflix, very, very successful top 10, I think, in 69 markets globally and it's very, very toyetic, right? So again, that whole kind of full franchise approach. And then on the movie, we continue to advance the development with J.J. Abrams. No new announcements today in terms of timing, but that's certainly coming down the track as well. So again, the Hot Wheels franchise significant momentum, a long period of growth, and I'm very optimistic about where it goes from here.

Okay. Maybe spend a minute on Fisher-Price. Earlier in the year, you made several announcements, moves for the brand. Maybe you can talk about those and the near- and longer-term financial impact to the model?

Sure. We -- as you know, Drew, we are executing against the Infant, Toddler, Preschool strategy that we announced at our Investor Day in March. And what we're doing is we're kind of breaking down the business into 3 parts, right? The first is we call Fisher-Price the Power Brand. This includes our core Infant and Toddler business as well as the Little People franchise and the newly launched entry into the Wood segment. Wood segment is an $800 million segment and what we're -- we've recently launched into that. Now this Fisher-Price's core business continues to be managed out of East Aurora. We've just appointed a new leader that is going to run the business out in New York. And we also have a great capability there in terms of early child development. So we'll be able to leverage that. And this is the lion's share of our category, is that Fisher-Price business. The second piece is what we call Preschool Entertainment. And this includes our owned IP, such as Thomas and Barney, includes our Imaginext line, which is our form factor for bringing action figures for kids. And we also have a couple of Power Brands. Now this business was moved to our headquarters in El Segundo, really to leverage our global brand team strength, get closer to our studio partnership. So that transition is complete, and we think we'll be able to grow the business from there. And then the third component is Baby Gear and Power Wheels. These are 2 segments that we're either exiting or out-licensing, given the prospects and given the margin profile of those businesses. I mean stepping back, Mattel is the #1 player in the ITPS category. Fisher-Price is the #1 property. So we start from a position of strength. We are celebrating Fisher-Price's 94th Anniversary. So you can expect to see significant innovation in the core product line. As I said, we're entering the Wood segment. We have new collaborations on Jurassic and Star Wars in this segment. We're broadening the Thomas line. We're relaunching Barney. So there is a lot of activity. And again, Fisher-Price is one of our Power Brands and very confident that with these strategic changes and focus on those parts of the business that we believe can grow longer term, we feel that we're in a really good spot in terms of Fisher-Price and the long-term growth potential.

Good. Okay. So we've covered the Power Brands. Any others that you want to highlight? You're particularly enthusiastic on? You love all your brands just like your kids, but any others that you want to flag?

Look, I think -- and this gets to one of the core strength of Mattel, and that's our -- the breadth of our brand portfolio. Hard to pick favorites. But I think if you look at the portfolio, we believe it's one of the most iconic brand portfolios in the world, and we have many distinct brands, right, with rich heritage that can prosper in and outside of the toy aisle. I mean if you just think about dolls -- the dolls category alone, where we're the market leader. So in addition to Barbie, we've rolled out Monster High globally, which is doing well. Disney Princess and Frozen back in the portfolio also doing very, very well. And that's before you even think about American Girl, right, or Enchantimals or Polly Pocket. So a diverse portfolio of brands that we manage in that category context. So we've got the 3 Power Brands, obviously, Barbie, Hot Wheels, Fisher-Price, but there's a broad array of franchise brands, ranging from American Girl, Barney or Enchantimals, Imaginext, Little People, MEGA, Matchbox, Masters of the Universe, Monster High, Pictionary, Polly Pocket, Thomas, UNO, I mean the list goes on, right? And I think, again, it's one of our strength because these franchise brands, and we call them franchise brands because we think there's opportunities in toy and outside of toy, right? So the question is take these franchise brands and make them Power Brands, right? And I think that's the opportunity ahead of us. And then we have, and we consider ourselves as a partner of choice for the entertainment companies out there. So our relationships on brands with Microsoft or Universal, WWE or certainly Disney, where we manage those brands as if they're our own, and again, a very broad and distinct portfolio of brands.

Good. Okay. So I want to pivot away from the core toy piece to the non-toy piece? Because over the last several years, the company has championed this mantra of becoming an IP-driven toy company. And with that, you have several initiatives and ancillary opportunities. The company spends a considerable amount of time discussing film, television, digital entertainment, publishing, consumer product licensing, et cetera, et cetera. How should the investor community measure success with this part of the strategy? Or maybe asked differently, at what point does the company provide greater transparency around its financial impact?

Yes. That's a great question. I mean, if you go back to our strategy, right? It's about growing the toy business profitably. And on top of that, right, expanding into the entertainment side, and really capturing the full value of our IP across these adjacent verticals. And you named some of them, whether it's on content, either on film or TV, consumer products, digital gaming, location-based entertainment, publishing. And look, the Barbie movie is a great example of what's the potential here for us to expand beyond toy, but it's not the only one. And we've been making significant progress across many of these verticals. We've added capability with new hires across whether it's consumer products or digital or core content. And if you kind of click through them, Mattel Films is collaborating with top talent, right, to create movies that people want to see and enjoy. Again, Barbie movie being a great example. Our television studios, taking our characters and bringing them to life, right, on streaming platforms, right, or linear television. Consumer Products had a great year in 2023 and we're capitalizing on all that happened around the Barbie movie to extend that part of the business. Our digital gaming business really extends toy into the virtual world and creating games that with our IP that people want to interact with. Location-based entertainment, where people love those adventure parks, and that's an opportunity for people to come and interact and experience our brands in a different way. And then lastly, publishing where we can create stories through print around our brands. So we don't provide specific financials for any one of those. But what we do say is that in success, these can be very accretive to our top line as well as our -- to our margin structure. And look, as we get these businesses more to scale, we will definitely consider breaking them out in terms of financial reporting, so we can share our success with our investor community.

Okay. Good. One more for me, and then we'll leave a little bit of time for Q&A for the audience. But kind of looking further ahead, recognizing that you're not providing formal guidance for 2025 at this stage, the company has endorsed both top and bottom line growth for next year. Can you address the source of optimism in your outlook both for the company as well as the industry?

Yes, absolutely. And I'll start with the industry. And as I said earlier, we expect the industry fundamentals to improve. These post-pandemic shifts right back to experiences and services, we see that waning as we go through 2024. And then on the theatrical slate, right. And I think as we look out, we see this improving. And this gives us confidence that in 2025, we can grow top and bottom line. If you look at -- just looking at the entertainment slate, Moana 2 and Wicked coming out in late 2024, another Jurassic movie in mid-2025, right? And we have the toy rights to these properties. Frozen 2 coming beyond that a couple of years down the road. So the entertainment slate and the toy industry, they're important to each other, and we see significant improvement coming down the pipe. In 2025, we will celebrate Mattel's 80th. We're good at celebrations. Like I said, the 80th Anniversary of Mattel, right? So you'll see more innovation and we have -- we're well positioned, right? Our design and development capabilities, our commercial capabilities, our demand creation capabilities give us confidence that we can compete effectively and gain share. In terms of the -- moving down the P&L, our optimizing for profitable growth savings is -- this is a program we launched earlier this year, targeting $200 million of savings by 2026. And we have a very successful track record of identifying and delivering against our cost savings commitments. It's really become part of the DNA of Mattel and a very important element of the earnings growth algorithm. And then lastly, we are and have been generating significant cash flow. And to date, we've been using that accretively with respect to EPS by repurchasing our own shares. And in the first quarter of this year, we bought $100 million of our own stock. In the second quarter, we've already bought $100 million with our own stock. So that brings the cumulative total since we resumed share repurchases last year to a little over $400 million. So that will help obviously drive some bottom line performance. But to really sum it up, we believe the toy industry is a growth industry. Now it's had some ups and downs recently, but longer term, it has grown. We expect it will continue to grow over the long-term. We believe Mattel is well positioned to compete and gain share and drive top and bottom line growth, right? So we've got the toy business. And again, we have the adjacent verticals around capitalizing and monetizing our -- on our IP.

Great. Okay. We just have a couple more minutes left. Any questions from the audience? If not, I will continue. Please go ahead.

Yes. [indiscernible] little bit and whether that's a headwind to [indiscernible]?

Yes. It's a couple of things. Obviously, we see the data around birth rate. But I think there's a couple of things to point out. One is if you think about the Infant, Toddler, Preschool category, it's relatively fragmented, right? So we do see significant opportunity to gain share. We see -- if you look globally in terms of economic development, right, and GDP per capita being, again, a positive impact on the industry. And the last thing I'll point out is most of the growth in the toy industry recently has come from the adult collector market, right? So birth rates aside, right? And we think that's an opportunity. One for the industry, we think it's an opportunity for us as we focus on our adult collector business and the success of somebody like Mattel Creations. But Hot Wheels, Barbie, Masters of the Universe, all these franchises have a very significant adult collector market, which are driving a significant part of the growth. So despite the lower birth rates, again, we believe toys is a growing industry driven by these other factors that we would expect more than offset that demographic impact.

Other questions? Okay. Let me ask another one on uses of cash. You mentioned the share buybacks. Where does that fall in the pecking order in terms of priorities for uses of cash? And do you favor share repo over M&A?

Okay. Let me just -- in the time we have left, I can kind of go through our capital allocation priorities. I mean the first to make is to make investments to drive organic growth. And this is building capabilities in areas like digital or e-commerce, it's making capital investments in areas where we have a distinct competitive cost advantage like diecast cars and fashion dolls. And now it includes -- we see opportunity to make targeted investments in our entertainment verticals, right? They can accelerate the strategy and enable us to capture a more significant part of the potential economic upside. So that's one. Two is to maintain our investment-grade rating and a leverage ratio in that 2x to 2.5x level over time. Then the third is M&A, right? These are acquisitions and other corporate development opportunities that can advance our strategy, drive growth and create economic value for our shareowners. And that comes before share repurchases. So the last one more to share repurchases, a very flexible tool to manage our capital structure. Now even though it's 3 and 4, right? Our actions have been more share repurchases than M&A of late. And as I said, we've bought back over $400 million over the last, I think, 12 months.

Okay. I guess we're out of time. So thank you, Anthony, and thanks, everyone, for your participation.

Thank you.