Mattel : 2022-Q4 Transcript

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MAT.OQ - Q4 2022 Mattel Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 08, 2023 / 10:00PM GMT

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FEBRUARY 08, 2023 / 10:00PM, MAT.OQ - Q4 2022 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

Andrew Paul Uerkwitz Jefferies LLC, Research Division - Equity Analyst

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

Eric Owen Handler ROTH MKM Partners, LLC, Research Division - MD

Frederick Charles Wightman Wolfe Research, LLC - Research Analyst

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

Jason Daniel Haas BofA Securities, Research Division - VP

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

Megan Christine Alexander JPMorgan Chase & Co, Research Division - Research Analyst

Stephen Neild Laszczyk Goldman Sachs Group, Inc., Research Division - Research Analyst

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

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Mattel's Fourth Quarter and Full Year 2022 Earnings Call. (Operator Instructions)

At this time, I would like to turn the call over to Mr. David Zbojniewicz, Vice President of Investor Relations. Please go ahead, sir.

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 2022 fourth quarter and full year 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 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 per share; adjusted tax rate; earnings before interest, taxes, depreciation and amortization, or EBITDA; adjusted EBITDA; free cash flow; free cash flow conversion; leverage ratio; net debt; 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 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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FEBRUARY 08, 2023 / 10:00PM, MAT.OQ - Q4 2022 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. The preliminary financial results included in the press release and slide presentation represent the most current information available to management. The company's actual results when disclosed in its Form 10-K may differ from these preliminary results as a result of the completion of the company's financial closing procedures, final adjustments, completion of the review by the company's independent registered public accounting firm, and other developments that may arise between now and the disclosure of the final results.

Before we begin, I'd like to caution you that certain statements made during the call are forward-looking, including statements related to the future performance of our business, brands, categories and product lines. Any statements we make about the future are, by their nature, uncertain. 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. We described some of these uncertainties in the Risk Factors section of our 2021 annual report on Form 10-K, our first quarter 2022 quarterly report on Form 10-Q, our earnings release and the presentation and the 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

Thank you for joining our fourth quarter and full year 2022 earnings call.

Our fourth quarter results were below our expectations as the macroeconomic environment was more challenging than anticipated. We entered the quarter expecting POS to accelerate. We did see POS growth in the quarter, including double-digit growth in December, but it came later than expected and was not enough to offset lower-than-anticipated consumer demand in October and November. This led to increased discounts and promotions by retailers and a more cautious approach to their inventory replenishment as they manage their existing stock. Our gross margin was negatively affected by higher cost to manage our inventory, but lower operating expenses helped reduce the impact on our bottom-line results.

Despite the very challenging environment, we achieved full year growth in net sales in constant currency for the fourth consecutive year, including over 2021, which had the company's highest annual growth rate in decades. We lowered our debt, further improved leverage ratio and ended the year on strong financial footing. Our balance sheet is in the best position it has been in years, which will provide more flexibility to execute our strategy.

Looking at key financial metrics in the fourth quarter as compared to the prior year. Net sales declined 22%, or 19% in constant currency. Adjusted operating income declined $185 million to $79 million. Adjusted earnings per share declined $0.35 to $0.18, and adjusted EBITDA declined $163 million to $158 million. POS for the quarter was up mid-single digits and up in all four regions. Mattel outpaced the industry and gained market share in the fourth quarter per NPD. Putting it in historical context, this was Mattel's highest fourth quarter POS in eight years.

Looking at key financial metrics for the full year as compared to the prior year. Net sales were flat or up 3% in constant currency, with growth in gross billings in all four regions. Adjusted operating income declined 10% to $689 million. Adjusted earnings per share declined 4% to $1.25. Adjusted EBITDA declined by 4% to $968 million. And leverage ratio improved to 2.4x compared to 2.6x a year ago. POS for the year grew low single digits and was up in all four regions. This was the highest full year POS in nine years and second highest on record.

Comparing 2022 results to 2019, before the pandemic, net sales in constant currency were up more than 20% and adjusted EBITDA more than doubled.

The toy industry continued to show its resilience despite macroeconomic challenges. Per NPD, following two years of double-digit growth and a record year in 2021, the toy industry finished flat compared to the prior year and up 22% compared to 2019, prior to the pandemic. We believe the toy industry is a growth industry, and we expect it will continue to grow over time. That said, given continuing macroeconomic headwinds and market volatility that may impact consumer demand, we expect the industry to be flat to slightly up in 2023.

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FEBRUARY 08, 2023 / 10:00PM, MAT.OQ - Q4 2022 Mattel Inc Earnings Call

Looking at gross billings in constant currency by category. In the fourth quarter, Dolls, Infant, Toddler, and Preschool, or ITPS, and our Challenger categories in aggregate were down significantly as retailers reduced replenishment orders. Vehicles was up strongly. POS significantly outpaced gross billings and was positive for Dolls, Vehicles and Challenger categories and flat for ITPS.

For the full year, Vehicles and Challenger categories gross billings grew meaningfully, while Dolls and ITPS declined. POS for Vehicles and Challenger grew low double digits, while for Dolls and ITPS, POS declined low single digits. Per NPD, Mattel was the #1 toy company in the U.S. overall and #1 globally in our leader categories, Dolls, Vehicles and Infant, Toddler, and Preschool, for both the fourth quarter and full year.

As it relates to our power brands. Barbie and Fisher-Price and Thomas & Friends were down significantly as retailers reduced replenishment orders. Hot Wheels was up strongly. POS for each of our power brands significantly outpaced gross billings for the quarter. For the full year, Barbie was down following two years of double-digit growth, including the highest year on record. We are very confident about Barbie's strength and continued long-term growth. Hot Wheels performed extremely well and achieved its fifth consecutive record year. Fisher-Price and Thomas declined. Hot Wheels' POS was up low double digits, while Barbie and Fisher-Price and Thomas' POS were down low single digits. Per NPD, for both the fourth quarter and full year, Barbie, Hot Wheels and Fisher-Price were each the #1 global property in their respective categories, and Barbie was the #2 global property overall.

Looking at our multiyear performance, we have been successfully executing our strategy to grow Mattel's IP-driven toy business and expand our entertainment offering. Our portfolio is well balanced by category, genre, target demographics and retail channel. Inherently, there will be puts and takes by individual brand varying by quarter and by year. But our business model leverages our global assets and capabilities and allows us to scale our portfolio as a whole.

While the fourth quarter was below our expectations, the full year results tell a more complete story in the context of our multiyear growth trajectory. Notably, quarterly results were heavily skewed by the volatility and timing of retail inventory movement throughout the year, not by the underlying marketplace performance of our business, with growth in POS for both the fourth quarter and the year.

2022 was another year where we made meaningful progress on key priorities. Here are just a few highlights. We expanded Hot Wheels to new categories such as remote control and skate. We revitalized and relaunched Monster High, which was the #1 relaunch property within Dolls in the U.S. in the fourth quarter. We continued to strengthen our relationships with the major entertainment companies with additions or extensions of key licenses, including Disney Princess and Disney Frozen, Pokemon and Universal's Trolls.

We have grown Mattel Creations, our collector DTC business, which is capitalizing on the strength of our franchises and built-in fan base, increasing traffic by over 40% and volume by over 85%. We achieved $106 million of cost savings in 2022 from our Optimizing for Growth program and increased the targeted 2023 cost savings goal to $300 million from $250 million.

We also made meaningful progress on capturing the full value of our IP. We partnered with Skydance Media to develop a Matchbox live action motion picture as part of our growing development slate and announced that J.J. Abrams' Bad Robot will produce the Hot Wheels movie with Warner Bros. The Barbie movie completed principal photography and is in post-production towards its global theatrical release this summer. On the television side, we launched 11 series and specials, including our first live action movie musical, Monster High, which premiered on Nickelodeon and Paramount+. The Mattel Adventure Park is under construction and is expected to open in the fourth quarter of 2023. And the Mattel163 mobile gaming joint venture with NetEase grew to over $175 million in revenue.

As we look ahead to 2023, we continue to foresee a period of volatility and macroeconomic challenges impacting consumer demand. Additionally, there are two significant factors that will impact our 2023 performance. These are elevated retailer inventory levels, which will have a one-time negative impact on our top line; and incentive compensation returning to target levels, which will increase SG&A.

With that context, in 2023, we expect Mattel's full year net sales in constant currency to be comparable to 2022 and for adjusted EBITDA to be in the range of $900 million to $950 million. Our guidance assumes growth in consumer demand for our product and positive POS for the year. We aim to outpace the toy industry and gain market share. Beyond 2023, we believe our strategy will drive top and bottom-line growth.

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FEBRUARY 08, 2023 / 10:00PM, MAT.OQ - Q4 2022 Mattel Inc Earnings Call

In closing, while the fourth quarter was below expectations, the full year growth in constant currency and increase in consumer demand for our product speak to the strength of our portfolio as a whole, even in a challenging macroeconomic environment. We believe we are well positioned to continue executing our multiyear strategy to grow our IP-driven toy business and expand our entertainment offering and create long-term shareholder value. Reflecting our improved financial position and confidence in our strategy, we expect to resume share repurchases in 2023.

We are committed to Mattel's purpose to empower the next generation to explore the wonder of childhood and reach their full potential, and to our mission to create innovative products and experiences that inspire, entertain and develop children through play. We look forward to updating you on the progress of our strategy at our upcoming virtual investor presentation.

And now Anthony will cover the financials in more detail.

Anthony P. DiSilvestro - Mattel, Inc. - CFO

Thanks, Ynon. As Ynon mentioned, Mattel's fourth quarter performance was below expectations. I will start with a discussion of those items which negatively impacted our performance relative to guidance.

Our consumer takeaway or POS was below expectations as the macroeconomic environment proved more challenging than anticipated. Retailers reduced replenishment orders more than we anticipated, and we incurred higher costs to manage our inventories, including closeout sales as well as the negative fixed cost absorption impact from lower sales in the fourth quarter. With the shortfall to expectations, we significantly reduced incentive compensation, which mitigated the earnings impact in 2022.

With that context, while POS increased by mid-single digits in the fourth quarter, net sales were $1.402 billion, down 22% compared to the prior year or down 19% in constant currency. Adjusted gross margin declined by 620 basis points, reflecting the impact of managing inventory levels and cost inflation. Adjusted operating income declined by $185 million to $79 million, adjusted EPS declined by $0.35 to $0.18, and adjusted EBITDA declined by $163 million to $158 million.

Looking at our full year results. Net sales were flat as reported or up 3% in constant currency. Adjusted gross margin declined 230 basis points to 45.9% due primarily to cost inflation, higher cost of managing inventories and increased royalties, partly offset by price increases and cost savings. Adjusted operating income was $689 million compared to $763 million in the prior year, while adjusted EPS declined by $0.05 to $1.25. Adjusted EBITDA declined by $39 million or 4% to $968 million, primarily due to the lower adjusted gross margin, partly offset by lower adjusted SG&A.

Turning to gross billings in constant currency, beginning with the fourth quarter. As we've discussed on prior calls, first half gross billings outpaced POS as retailers were replenishing lower inventory exiting the prior year and building inventory levels ahead of the holiday season. We expected this to reverse in the third quarter and accelerate in the fourth quarter, with POS outpacing gross billings.

Although POS did improve and outpaced shipping in the fourth quarter, consumer demand was lower and came later than expected. This caused retailers to reduce replenishment orders throughout the quarter, which impacted our performance across categories and regions. With that context, while POS increased by mid-single digits in the quarter, total company gross billings declined 19%.

Looking at gross billings in the fourth quarter by category. Dolls was down 24% with declines in Barbie and American Girl, partly offset by growth in Monster High and early shipments of Disney Princess and Disney Frozen. Barbie gross billings declined 30% with POS down 1%. Barbie outpaced the industry in the fourth quarter and gained global market share per NPD. Vehicles grew 10%, driven by double-digit growth in Hot Wheels and the successful launches of remote control and skate. Infant, Toddler, and Preschool declined 31%, while POS was flat. Mattel was #1 globally in the infant/toddler/preschool category and gained share in the quarter per NPD.

Challenger categories in aggregate declined 22% due to lower sales of Action Figures, Games and Plush. Building sets was comparable to the prior year.

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