Mattel : Third Quarter 2021 Earnings Transcript

Published: 2021-10-25 17:26:29 ET MAT

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

MAT.OQ - Q3 2021 Mattel Inc Earnings Call

EVENT DATE/TIME: OCTOBER 21, 2021 / 9:00PM GMT

OVERVIEW:

Co. reported 3Q21 reported net sales of $1.762b, adjusted operating income of $401m, reported EPS of $2.29 and adjusted EPS of $0.84. Expects full-year 2021 constant-currency net sales to grow approx. 15%.

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

©2021 Refinitiv. All rights reserved. Republication or redistribution of Refinitiv content, including by framing or similar means, is prohibited without the prior written consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

OCTOBER 21, 2021 / 9:00PM, MAT.OQ - Q3 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

Alok Patel Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

Andrew Edward Crum Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Analyst

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

Eric Owen Handler MKM Partners LLC, Research Division - MD

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

James Andrew Chartier Monness, Crespi, Hardt & Co., Inc., Research Division - Security Analyst

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

Good day, and thank you for standing by. Welcome to the Mattel, Inc. Third Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to David Zbojniewicz, Vice President of Investor Relations. 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 third 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 may reference non-GAAP financial measures including adjusted gross profit and adjusted gross margin; adjusted other selling and administrative expenses; adjusted operating income or loss; and adjusted operating income or loss margin; adjusted earnings or loss per share, from which we exclude the impact of a $510 million noncash tax benefit associated with releasing valuation allowances on deferred taxes; 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.

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. The information required by Regulation G regarding non-GAAP financial measures as well as information regarding

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

OCTOBER 21, 2021 / 9:00PM, MAT.OQ - Q3 2021 Mattel Inc Earnings Call

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.

In the second quarter of 2021, we elected to revise prior periods for certain immaterial out-of-period adjustments, which do not require us to amend previous filings. These adjustments are reflected in our third quarter earnings release and slide presentation and will be reflected in our 2021 third quarter Form 10-Q. These adjustments will also be subsequently updated on the financial history section of our Investor Relations website at a later date.

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 describe some of these uncertainties in the Risk Factors section of our 2020 annual report on Form 10-K and on our Q2 2021 quarterly report on Form 10-Q, 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 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

Welcome, and thank you for joining Mattel's third quarter 2021 earnings call. Before we begin, on behalf of everyone at Mattel, I would like to take a moment to mourn the loss last week of one of the industry's great leaders, Brian Goldner. I had the pleasure of knowing Brian for over 25 years. He was passionate. He was an optimist. He operated with integrity and was a highly respected competitor. He would be greatly missed across our industry and, certainly, by many on this call today. Our thoughts are with his family and team at Hasbro.

Turning to the third quarter results. Mattel continued its strong performance despite ongoing global supply chain disruption, high inflation, and COVID-related lockdowns. The company exceeded expectations with strong consumer demand for our products.

Key highlights for the third quarter as compared to last year are net sales grew 8% as reported and 7% in constant currency. This was the fifth consecutive quarter of year-over-year growth in net sales. Adjusted EBITDA was $463 million, essentially flat. And cash generation continued to improve with free cash flow for the trailing 12 months growing almost 2.5x to $320 million.

Looking at our performance in more detail. Gross billings, as reported, grew 8% versus the prior year and were up 18% versus the third quarter of 2019 pre-COVID. POS grew high-single digits with strength in North America, EMEA, and Latin America more than offsetting the impact of temporary retail closures in several countries in Asia Pacific.

Per The NPD Group, Mattel continued to outpace the industry with global market share gains for the fifth quarter in a row and all regions growing share in the third quarter. Also per NPD, looking at market share by region in the third quarter, Mattel gained 35 basis points in North America, 31 basis points in EMEA, 97 basis points in Latin America and 83 basis points in Australia.

Even as brick and mortar improved, e-commerce also grew and represented more than 25% of our total POS, in line with our strategy to expand in the online retail and e-commerce space.

Our supply chain and commercial organizations were successful in working through global supply chain disruption and closely collaborated with our retail partners in trying to meet consumer demand. The strong performance of our supply chain this year is attributable to our scale, expertise, and flexible model. We anticipated short supply and longer lead times and factor that into our planning with mitigating actions. For example, we expedited procurement of raw materials, pulled forward finished goods production to increase capacity, invested in additional tooling to dual source manufacturing of critical product lines, leveraged our diverse manufacturing footprint to optimize near-shoring of production contracted

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

OCTOBER 21, 2021 / 9:00PM, MAT.OQ - Q3 2021 Mattel Inc Earnings Call

ocean freight capacity and rates in advance, and secured access to additional ports and shipping lanes. The Mattel playbook is driving consumer demand across multiple categories, and our portfolio strategy is delivering growth overall.

The fourth quarter is off to a good start. We expect to continue growing for the balance of the year, gain market share and have a strong holiday season. Our strength is foundational and broad-based. For the third time this year, we are raising guidance for both revenue and adjusted EBITDA for the full year in 2021 and believe we are well-positioned to achieve our goals in 2022 and 2023.

Turning to third quarter gross billings and POS in constant currency by category versus the prior year. Dolls gross billings was up 3% led by Barbie, Universal's Spirit, and Polly Pocket and aligned with POS. Barbie grew globally, up 3%, with POS up low-single digits. Gross billings was up 26% year-to-date. Per NPD, Dolls continued to gain market share globally, and Barbie remained the #1 Global Dolls property in the third quarter and year-to-date. For the full year, Barbie is expected to grow double digits.

American Girl was flat in the quarter and up 17% year-to-date. American Girl is showing strong results across key metrics and high consumer engagement as we enter the biggest quarter with approximately 50% of sales typically occurring in the fourth quarter. For the full year, we expect American Girl to grow high-single digits.

Vehicles grew 5% led by Hot Wheels. Category POS continued to be strong, up double digits. Hot Wheels gross billings grew 4% and was up 20% year-to-date. Global demand was robust across key segments with POS up double digits. According to NPD, Hot Wheels remains the #1 Vehicle property globally in the third quarter and year-to-date. Hot Wheels is on the road to achieve its fourth consecutive record year of sales.

Infant, Toddler, and Preschool declined 1% in the quarter and was up 8% year-to-date. Category POS was up low-single digits, with particularly strong demand in North America. Fisher-Price Core declined 1%, with POS up mid-single digits. Gross billings was up 9% year-to-date. For the full year, Fisher-Price and Thomas is expected to grow for the first time in five years as the brand's turnaround continues. Per NPD, Mattel continued to grow market share in the Infant, Toddler, and Preschool category, and Fisher-Price was the #1 Infant, Toddler, and Preschool property globally in the third quarter.

Action Figures, Building Sets, Games, and Other, our Challenger categories, together, grew 25%, with exceptional strength in Action Figures and strong growth in Building Sets and Other. POS was up double digits.

Action Figures continued to benefit from very strong demand with growth of more than 50% in the quarter and 76% year-to-date, driven primarily by Jurassic World, Masters of the Universe, and WWE. Building Sets also continued to grow with new offerings and greater distribution driving a double-digit increase for the quarter and 29% year-to-date. Games saw a mid-single digit decline as we lapped high comps a year ago in the search category. POS was up in the quarter led by UNO. And per NPD, UNO continued to be the #1 card game globally. Other, which includes Plush, was up 25%, with expanded products tied to Star Wars and new license offerings driving continued growth. For the full year, our Challenger categories together are expected to grow double digits.

The Mattel team continued to execute on our strategy to improve profitability and accelerate top line growth while also capturing the full value of our IP. While COVID drove industry-wide consumer demand for toys, it has also created significant headwinds and ongoing disruption in global supply chain and retail closures. The short capacity in global supply chain also caused significant inflation in ocean freight, which is impacting profitability. That said, Mattel continued to grow well ahead of the industry for the fifth consecutive quarter, increasing market share in all our core categories, two challenger categories, and all regions in the third quarter and year-to-date, per NPD. We believe that our growth can be mostly attributed 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. Our restructured organization and Optimizing for Growth program, together with the pricing action announced last quarter, helped mitigate inflationary pressures.

As part of our growth strategy, we are also actively expanding our portfolio of licensed partnerships. We are excited to announce that we have renewed our decade-long partnership with WWE, which we expect will drive growth. We just announced an expansion of our relationship with Disney consumer products, games, and publishing for Disney and Pixar's eagerly anticipated movie Lightyear. This is the origin story of Toy Story's

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

OCTOBER 21, 2021 / 9:00PM, MAT.OQ - Q3 2021 Mattel Inc Earnings Call

Buzz Lightyear, and it is expected to be very toyetic. Mattel has the global licensing rights to develop the toy line for the franchise, which is expected to launch at retailers around the world beginning summer 2022.

We continue to make progress on our mid- to long-term strategy to capture the full value of our IP. Mattel Films is actively working on the development of the 13 live action projects announced to date, and Mattel Television has launched eight shows in 2021 with 13 more in production and over 30 in development. During the quarter, Mattel released exciting new content on Netflix, including Barbie, Polly Pocket, two Masters of the Universe series, as well as expanded global distribution for Thomas & Friends across more than 150 countries. Last week, Mattel launched Barbie Radio in partnership with iHeartMedia and Warner Music Group's Arts Music.

In online gaming, we launched the Hot Wheels Unleashed video game on all major consoles to widespread acclaim and announced the release of Mattel163's Skip-Bo mobile game launching next week. This is the third mobile game for Mattel163 joining our popular UNO and Phase 10 mobile games.

During the quarter, we advanced our role as a responsible corporate citizen with the publication of our new citizenship report, including updated environmental, social and governance strategy and goals. Last week, we announced that in 2020, we achieved 97% of recycled or FSC-certified content in the paper and wood fiber using our products and packaging, exceeding our goal of 95%. The Forestry Stewardship Council has honored Mattel with a 2021 Leadership Awards for Excellence. Mattel was also ranked among Forbes World's Best Employers and Best Employers for Women in 2021. We are proud and excited to make so much progress in this important area and continue to focus on our culture and employee well-being.

Given our results year-to-date, strong consumer demand, and expectations for continued growth in the fourth quarter with a strong holiday season, we are raising our full-year guidance. We now expect full-year net sales in constant currency to increase by approximately 15% and adjusted EBITDA to also increase and be in the range of $900 million to $925 million.

Beyond 2021, we reiterate our goals to grow net sales by mid-single digits in constant currency in 2022 and in 2023 and achieve an adjusted operating income margin in the mid-teens by 2023. We also reiterate our expectation to exceed $1 billion in adjusted EBITDA in 2022.

In closing, this was another strong quarter for Mattel with continued consumer demand for our products. We achieved growth and continued to gain market share in spite of significant and unprecedented exogenous challenges. The increased guidance puts Mattel on track to achieve its highest full year growth rate in decades.

The company is on a clear 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. We remain focused on growing shareholder value and look forward to finishing the year on a high note with a strong holiday season.

Thank you. Anthony, over to you.

Anthony P. DiSilvestro - Mattel, Inc. - CFO

Thanks, Ynon. As you just heard, this was another strong quarter, with results exceeding expectations despite supply chain and COVID-related disruptions.

Taking a closer look at our results for the third quarter and compared to the prior year. Reported net sales were $1.762 billion compared to $1.636 billion an increase of 8%, reflecting the strength of our portfolio with gains primarily in North America and across most categories globally. Excluding the impact of currency translation, net sales increased 7%.

Adjusted gross margin was 47.8%, declining 280 basis points due to the impact of cost inflation partly offset by the benefit of pricing and cost savings. Adjusted operating income was $401 million compared to $397 million, an improvement of $4 million. On an as-reported basis, EPS was $2.29 per share, including a $510 million noncash tax benefit associated with releasing our valuation allowances on deferred tax assets, reflecting improvements in profitability and future outlook. Adjusted EPS was $0.84 compared to $0.94. The year-over-year comparison is impacted by lower

REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us

This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Mattel Inc. published this content on 25 October 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 October 2021 21:25:10 UTC.