Mattel : First Quarter 2021 Earnings Transcript

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EDITED TRANSCRIPT

MAT.OQ - Q1 2021 Mattel Inc Earnings Call

EVENT DATE/TIME: APRIL 22, 2021 / 9:00PM GMT

OVERVIEW:

Co. reported 1Q21 net sales of $874m, reported operating income of $31m, adjusted operating income of $28m and adjusted EPS of negative $0.10. Expects 2021 net sales to increase 6-8% in constant currency.

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APRIL 22, 2021 / 9:00PM, MAT.OQ - Q1 2021 Mattel Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Anthony P. DiSilvestro Mattel, Inc. - CFO

David Zbojniewicz Mattel, Inc. - Vice-President IR

Richard Dickson Mattel, Inc. - President & COO

Ynon Kreiz Mattel, Inc. - Executive Chairman & CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Arpine Kocharyan UBS Investment Bank, Research Division - Director and Analyst

Frederick Charles Wightman Wolfe Research, LLC - Research Analyst

Gerrick Luke Johnson BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst

Jaime M. Katz Morningstar Inc., Research Division - Senior Equity Analyst

Linda Ann Bolton-Weiser D.A. Davidson & Co., Research Division - Senior Research Analyst

Michael Ng Goldman Sachs Group, Inc., Research Division - Research Analyst

Shawn Michael Collins Citigroup Inc. Exchange Research - Research Analyst

Stephanie Marie Schiller Wissink Jefferies LLC, Research Division - Equity Analyst and MD

Tami Zakaria JPMorgan Chase & Co, Research Division - Analyst

P R E S E N T A T I O N

Operator

Thank you for standing by, and welcome to Mattel's First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your host, Vice President, Investor Relations, David Zbojniewicz. Sir, please go ahead.

David Zbojniewicz - Mattel, Inc. - Vice-President IR

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; Richard Dickson, Mattel's President and Chief Operating Officer; and Anthony DiSilvestro, Mattel's Chief Financial Officer. As you know, this afternoon, we reported Mattel's 2021 first quarter financial results. We will begin today's call with Ynon and Anthony providing commentary on our results. After which, we will provide some time for Ynon, Richard and Anthony to take your questions.

To help supplement our discussion today, we have provided you with a slide presentation. Our discussion, slide presentation and earnings release reference non-GAAP financial measures, including adjusted gross profit and adjusted gross margin; adjusted other selling and administrative expenses; adjusted operating income loss and adjusted operating income loss margin; adjusted earnings loss per share; earnings before interest, taxes, depreciation and amortization or EBITDA; adjusted EBITDA; free cash flow; free cash flow conversion; leverage ratio; and constant currency. In addition, we present changes in gross billings, a key performance indicator. Please note that we may refer to gross billings as billings in our presentation and that gross billings figures referenced on this call will be stated in constant currency, unless stated otherwise. In addition, please note that our accompanying slide presentation can be viewed in sync with today's call when you access it through the Investors section of our corporate website, corporate.mattel.com.

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APRIL 22, 2021 / 9:00PM, MAT.OQ - Q1 2021 Mattel Inc Earnings Call

The information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicator is included in our earnings release and slide presentation, and both documents are also available in the Investors section of our corporate website.

Before we begin, I'd like to remind you that certain statements made during the call may include forward-looking statements related to the future performance of our business, brands, categories and product lines. These statements are based on currently available information and assumptions, and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward-looking statements, including risks and uncertainties associated with the COVID-19 pandemic. We described some of these uncertainties in the Risk Factors section of our 2020 annual report on Form 10-K, our earnings release and the presentation accompanying this call, and other filings we make with the SEC from time to time as well as in our other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law.

Now I'd like to turn the call over to Ynon.

Ynon Kreiz - Mattel, Inc. - Executive Chairman & CEO

Thank you for joining Mattel's first quarter 2021 earnings call. I hope that you and your families are staying healthy and safe.

This was another record quarter for Mattel with truly exceptional results as we continue to improve profitability and accelerate top line growth. We are off to a very strong start to 2021. Here are some key highlights for the first quarter compared to prior year. Net sales were up 47% as reported and 46% in constant currency, the highest quarterly growth rate we have on record in over 25 years and the highest first quarter sales in absolute dollars since 2015. Adjusted gross margin improved by 350 basis points and reached 47%, the 11th consecutive quarter of improvement on a year-over-year basis. Reported operating income was $31 million, an increase of $181 million and the first positive first quarter since 2014. Adjusted operating income was $28 million, an increase of $161 million. And adjusted EBITDA was $89 million, up $155 million.

This quarter was particularly strong in that we achieved double-digit growth in gross billings in each of our 4 regions with remarkable performance in North America and EMEA, double-digit growth across all product categories and strong double-digit increases in our 3 power brands: Barbie, Hot Wheels and Fisher-Price and Thomas & Friends as well as American Girl.

In the first quarter, we significantly outpaced the industry with total company POS up more than 30%, benefiting from very strong consumer demand for our products. According to NPD, for the third quarter in a row, Mattel gained share globally driven by strong performance across all regions. We also saw growth across all sales channels with especially strong performance in e-commerce as we continue to accelerate our progress in this strategic channel. In the first quarter, e-commerce POS grew 58% year-over-year, representing 28% of our total POS in the quarter. While our exceptional growth this quarter was partially driven by favorable year-over-yearCOVID-related comparisons, we believe the strength of Mattel's results is attributable to the strength of our brands, quality and breadth of our product, our world-class supply chain, global commercial capabilities and very effective demand creation in close collaboration with our retail partners.

The strength of our performance is also evident when comparing our 2021 results to 2019 before COVID, with net sales being higher by 27% in the first quarter of 2021 versus the first quarter of 2019. Our market share gains for the third consecutive quarter also demonstrate that we are not just riding the wave but growing well ahead of the industry and driving the momentum. We expect to continue to gain market share through the rest of the year. This consistent performance and momentum reflect the success of the turnaround. We are very confident about our business trajectory and remain focused on executing our strategy to transform Mattel into an IP-driven,high-performing toy company.

Looking at the first quarter gross billings in constant currency by category versus prior year. Doll category grew by 68% driven by continued strength in Barbie, the launch of Spirit and high double-digit growth in Polly Pocket and American Girl. Doll POS was very strong, in line with shipments. The Barbie power brand delivered phenomenal growth of 86%, with POS up 66% and all product segments growing. Per NPD, Barbie strengthened its position as the #1 Global Dolls property in the first quarter. American Girl's impressive turnaround continued its momentum and was up 22%, the second consecutive quarter of positive year-over-year growth.

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APRIL 22, 2021 / 9:00PM, MAT.OQ - Q1 2021 Mattel Inc Earnings Call

Vehicles category was up 15% driven by the strong performance of Hot Wheels and Matchbox. POS in the category remains strong, also growing double digits and outpacing shipments. Hot Wheels was up 16% with growth across all product segments for this power brand. Per NPD, Hot Wheels continued to be the #1 Vehicles property globally in the first quarter.

Infant, Toddler, and Preschool category was up 29% driven by Fisher-Price and Thomas & Friends power brand. Our Infant, Toddler, Preschool category performed in line with the industry. Fisher-Price Core grew by 36%, with POS up 24% driven by Infant and Newborn. Per NPD, Fisher-Price continued to be the #1 Infant, Toddler, Preschool manufacturer globally in the first quarter. Thomas & Friends was up 5% with POS up 8%, continuing to show improvement.

Action Figures, Building Sets, Games, and Other, our challenger categories, together grew 66% driven by double-digit gains across the portfolio. Games achieved its ninth consecutive quarter of year-over-year growth, up 25%, driven by UNO, which continued to perform very well as it celebrates its 50th anniversary. Per NPD, UNO is the #1 card game globally. Building Sets were up 46% driven by strong POS and expanded distribution of MEGA, along with growth in Pokémon and Halo. Action Figures increased 101% driven by Jurassic World, WWE and Masters of the Universe. Plush continued to grow driven by Mattel's products tied to Star Wars.

Our exceptional first quarter results far exceeded expectations and clearly show that we are making significant, consistent progress on our newly evolved strategic road map. In the short term, we are improving profitability by optimizing our operations and accelerating top line growth by growing our power brands and expanding our brand portfolio. In the mid-to-long term, we continue to make progress on capturing the full value of our IP through franchise management and online retail and e-commerce. The Optimizing for Growth program is on track, and we are very confident in our ability to deliver the targeted savings of $250 million by 2023. Importantly, this program is also designed to improve operations and drive greater productivity to accelerate top line growth.

We are seeing a strong start to the second quarter, including Easter week, and we are planning for another good holiday season. The Mattel playbook is working very well, and our products continue to resonate with consumers at levels we have not seen in many years. This is all fueled by design-led innovation, brand purpose, cultural relevance and executional excellence. Given the first quarter performance and the momentum of our business, we are now raising our 2021 guidance for net sales growth in constant currency to be in the range of between 6% to 8% and adjusted EBITDA to be between $800 million and $825 million despite an increase in the expected level of cost inflation. Anthony will provide more details on our updated guidance. Beyond 2021, we are confident in our ability to achieve our goals of mid-single-digit net sales growth in constant currency in 2022 and in 2023 and an adjusted operating income margin in the mid-teens by 2023.

As it relates to our mid-to-long term strategy, we continued to make progress towards capturing the full value of our IP. Earlier this week, we announced the development of our Rock 'Em Sock 'Em Robots live-action motion picture with Universal Pictures and Vin Diesel's production company, One Race Films, with Vin Diesel to star in the film. This marks our 12th film in development. We also recently announced plans to develop Barbie Fashion Battle, a reality show where designers compete for the chance to create a fashion collection for Barbie. Our latest animated Barbie television movie, Barbie & Chelsea The Lost Birthday, had a very strong debut this past weekend in the U.S. and Canada on Netflix, ranking as the #5 and #6 movie, respectively, among all movies on the platform, not just for children. We are excited to have another animated Barbie movie premiering this fall on Netflix. Our content pipeline remains robust, and we are excited about the momentum at Mattel Films and Mattel Television.

We also continue to build out our direct-to-consumer business led by strong performance in American Girl, which saw online DTC growth of 73%. Mattel Creations, our highly curated DTC platform, is also receiving very positive consumer reaction as well as our Barbie and Hot Wheels collector platforms.

Today, being Earth Day, gives us another opportunity to emphasize that sustainability is a key priority for Mattel, and creating sustainable products and packaging is an important part of our commitment to the planet. Just last week, we announced Matchbox's product road map to make its die-cast cars, play sets and packaging with 100% recycled, recyclable or bio-based plastic by 2030. This is in line with Mattel's goal to achieve 100% use of these sustainable materials across all of our products and packaging by 2030. Expect to hear more about our sustainability commitments through our upcoming Corporate Citizenship Report to be published soon.

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APRIL 22, 2021 / 9:00PM, MAT.OQ - Q1 2021 Mattel Inc Earnings Call

In closing, this was another record quarter for the company in which we achieved incredibly strong results, reflecting the success of the turnaround as we continue to drive transformational improvements and acceleration in our business. Following the third consecutive quarter of growing market share, we are strengthening our position as a consistent leader in the toy industry. Even as markets gradually reopen, we remain focused on protecting the health and safety of our employees.

I am proud of the outstanding performance of the entire Mattel global team and the significant progress we are making on our strategy to transform into an IP-driven,high-performing toy company. The business is showing strong momentum, and we believe we are very well positioned to improve profitability and accelerate top line growth in 2021 and beyond. As always, we are committed to growing long-term shareholder value.

Anthony, over to you.

Anthony P. DiSilvestro - Mattel, Inc. - CFO

Thanks, Ynon. As you just heard, we had another outstanding quarter with results far exceeding expectations. Net sales were $874 million in the quarter compared to $594 million in the prior year, an increase of 47%. Adjusted gross margin increased by 350 basis points from 43.5% to 47%, reflecting the scale benefit of the exceptionally strong top line performance, which more than offset the impact of inflation in the quarter. Adjusted operating income was a positive $28 million compared to a loss of $133 million in the prior year. The $161 million year-over-year increase was primarily driven by our top line growth. Adjusted EPS was negative $0.10, an improvement of $0.46, and our adjusted EBITDA increased by $155 million to a positive $89 million. As I said, outstanding results and a strong start to the year.

During the quarter, we also successfully completed a $1.2 billion debt refinancing, which will significantly reduce interest expense going forward and contribute to free cash flow. We made good progress on our Optimizing for Growth program. We remain on track to achieve our 3-year target and have increased our expected savings in 2021.

Looking at gross billings by region. For the third consecutive quarter, we achieved growth in each of our 4 regions in constant currency despite COVID-19 disruption and local restrictions that impacted some locations. At the end of the first quarter, about 4% of all retail outlets that sell our products, representing about 6% of our revenues, were closed. In North America and Asia Pacific, nearly all retail outlets were opened at the end of the first quarter. In EMEA, about 7% of all retail outlets were closed, representing approximately 12% of our revenues. In Latin America, about 22% of all retail outlets were closed, representing approximately 18% of our revenues in the region.

Overall, for the quarter, gross billings outpaced POS growth, reflecting some inventory restocking by retailers. Despite the restocking, retail inventories finished the quarter below year ago levels. POS growth was driven by a combination of overall industry growth and market share gains for Mattel. North America was up 67% driven by double-digit growth across all categories, while POS increased by over 40%. EMEA was up 32%, with POS increasing by over 20% driven by growth in all major markets. Latin America increased 16%, in line with POS, driven by Mexico, Brazil and Chile. Asia Pacific increased 16%, also in line with POS, driven by China and Australia.

Adjusted gross margin was another area where we did very well, increasing by 350 basis points to 47%. Here is a breakdown of the key drivers. Fixed cost absorption had a favorable benefit of 290 basis points. This is a scale benefit associated with the exceptionally high growth in sales in the first quarter. This benefit will have a much smaller positive impact to gross margin percentage for the full year. Cost savings contributed 240 basis points to gross margin expansion. In the quarter, Optimizing for Growth delivered $20 million of savings within cost of goods sold. Cost inflation had a negative impact of 240 basis points driven by increases in materials and logistics. All other factors had a positive net impact of 60 basis points, bringing the first quarter adjusted gross margin to 47%.

Moving down the P&L. Advertising expenses were $74 million, down 3% or $2 million. Adjusted SG&A expenses declined by 2% or $6 million to $309 million driven primarily by the benefit of cost saving actions taken in 2020 and the Optimizing for Growth program, partly offset by higher compensation expense.

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