Mattel : 2023-Q1 Transcript

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MAT.OQ - Q1 2023 Mattel Inc Earnings Call

EVENT DATE/TIME: APRIL 26, 2023 / 9:00PM GMT

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APRIL 26, 2023 / 9:00PM, MAT.OQ - Q1 2023 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 Edward Crum Stifel, Nicolaus & Company, Incorporated, Research Division - VP and 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

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

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

Operator

Good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. First Quarter 2023 Earnings Conference Call. (Operator Instructions)

Thank you. Mr. David Zbojniewicz, Vice President of Investor Relations, you may begin your conference.

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 2023 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 questions. To 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. For today's presentation, references to POS and consumer demand exclude the impact related to our Russia business, given our decision to pause all shipments into Russia in 2022.

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APRIL 26, 2023 / 9:00PM, MAT.OQ - Q1 2023 Mattel Inc Earnings Call

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. 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-Q 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 describe some of these uncertainties in the Risk Factors section of our 2022 annual report on Form 10-K, our earnings release and presentation 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

Thank you for joining our first quarter 2023 earnings call. As anticipated, our first quarter results were negatively impacted by elevated retail inventory levels. That said, the underlying business performed well, both in absolute and relative terms, with overall growth in consumer demand for our product and market share gains for Mattel.

Looking at key financial metrics for the first quarter as compared to last year. Net sales declined 22% as reported or 21% in constant currency, and adjusted EBITDA declined $166 million to a negative $14 million. Our first quarter decline was primarily due to the negative impact from retailers managing inventory levels, which were elevated entering the year and also due to the comparison to the year-ago quarter, which benefited from retailers building earlier in the season.

Excluding Russia for comparability, total company POS was up mid-single digits with double-digit growth in our International segment and flat POS in North America. Per Circana, formerly known as the NPD Group, Mattel gained share globally in our 3 leader categories as well as in action figures and building sets. This broad-based market share gains speak to the strength of our portfolio. We believe retailers will continue to adjust inventories in the second quarter, negatively impacting gross billings and that the situation will be corrected by the end of the first half.

Reflecting our strong financial position and confidence in our strategy, we resumed share repurchases in the quarter and look to make further repurchases this year. The fundamentals of our business are strong. We expect to outpace the industry, gain market share and achieve our full year guidance.

Looking at gross billings in the quarter. All categories declined as a result of retailers managing elevated inventory levels with the exception of vehicles, which was up. With respect to the Power Brands, Barbie and Fisher-Price declined while Hot Wheels grew. The global rollout of Monster High and the launch of our Disney Princess and Frozen products are both off to a good start. POS significantly outpaced gross billings by double digits in all categories and all power brands.

We have been successfully executing our strategy to grow Mattel's IP-driven toy business and expand our entertainment offering. On the toy side of the company, we recently announced a new and separate licensing agreement for Disney's Wish releasing in November of this year, the relaunch

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APRIL 26, 2023 / 9:00PM, MAT.OQ - Q1 2023 Mattel Inc Earnings Call

of Barney and our first-ever licensing agreement with Hasbro to create co-branded toys and games, and we launched last weekend a new line of Disney, the Little Mermaid dolls as part of our Disney license agreement ahead of the upcoming theatrical release.

We also made progress in capturing value for our IP outside the toy aisle and recently announced the Hot Wheels Ultimate Challenge primetime show on NBC and the Barbie Dreamhouse Challenge, a new home makeover competition series on HGTV, both airing this summer, the Hot Wheels Rift Rally mixed reality racing game on PlayStation and iOS and new Monster High live tour, the launch of our own publishing business and a new multiyear apparel and accessories partnership with GAP.

Excitement continues to build for the Barbie movie, one of the most anticipated films of the year, which premiers worldwide on July 21. The second teaser was released earlier this month with significant global coverage. Expect more momentum in social media and marketing activities to accelerate towards the release of the movie.

In closing, while retail inventory management impacted the first quarter results, the underlying business continued to perform well, with overall positive consumer demand for our product and growth in market share. We believe the retail inventory situation will be corrected by the end of the first half and anticipate a return to shipping patterns more aligned with historical trends in the second half.

Overall, consumer demand for our product is off to a good start, and we expect to achieve our full year guidance. Our balance sheet is in a strong position and provides the flexibility to support growth. We are well positioned to continue executing our multiyear strategy and create long-term shareholder value.

And now I will turn the call over to Anthony.

Anthony P. DiSilvestro - Mattel, Inc. - CFO

Thanks, Ynon. As Ynon said, our first quarter results were negatively impacted by movements in retail inventory levels. The first quarter's decline was primarily due to the negative impact from retailers managing inventory levels, which were elevated entering the year, and also due to the comparison to the year-ago quarter which benefited from retailers building earlier in the season.

First quarter results were slightly ahead of the outlook we provided in mid-March, driven by the favorable timing of shipments at quarter end. Net sales of $815 million declined 22% or 21% in constant currency compared to the prior year. However, we saw positive POS performance in both absolute and relative terms, which grew mid-single digits in the quarter and significantly outpaced gross billings. Mattel outperformed the industry and gained market share. As a reminder, POS and consumer demand exclude the impact related to our Russia business.

Adjusted gross margin declined 660 basis points to 40% due to several factors, including inventory management costs and the negative scale impact associated with the sales decline. Adjusted operating income declined by $177 million to a negative $87 million, primarily due to the lower sales and lower adjusted gross margin.

Adjusted EPS was a negative $0.24 compared to a positive $0.08 a year ago, and adjusted EBITDA declined by $166 million to a negative $14 million. We expect consumer demand to be positive for the full year and revenue comparisons to improve through the year as shipping patterns revert to historical trends in the second half.

Turning to gross billings in constant currency. Performance across categories was primarily impacted by movements in retailer inventory levels that had an outsized impact on a seasonally small quarter. While gross billings declined 21%, including a negative 3-point impact from Russia, there was overall positive consumer demand for our products as POS increased mid-single digits.

Dolls declined 22%, primarily due to declines in Barbie, partly offset by growth in Monster High and Disney Princess and Frozen. POS for dolls increased low single digits. Barbie POS was down high single digits, but significantly better than shipping, which declined 40%. POS and shipping for Barbie were also impacted by the shift of promotions into Q2 and to better align with the theatrical release of the movie. Mattel gained over 350 basis points of market share in the dolls category in Q1, and Barbie was the #1 doll property globally per Circana.

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APRIL 26, 2023 / 9:00PM, MAT.OQ - Q1 2023 Mattel Inc Earnings Call

Vehicles grew 1% with POS up low double digits. Growth was primarily driven by Hot Wheels die-cast vehicles. Mattel gained over 530 basis points of market share in the vehicles category, achieving the highest Q1 market share on record per Circana. Infant, toddler and preschool declined 26%, while POS was down low double digits. POS declines in baby gear, as we optimize the offering, were partly offset by growth in Little People and Imaginext.

Mattel was the #1 toy company globally in the infant, toddler and preschool category and gained 60 basis points of market share in the quarter per Circana. Challenger categories in aggregate declined 38% primarily due to lower sales and action figures as we lap the theatrical tie-ins in the prior year. POS was up low double digits.

With respect to regional performance, North America declined 27%, reflecting the retail inventory headwinds. POS was flat compared to last year. Per Circana, Mattel gained market share in North America in Q1. EMEA declined 24%, including a negative 12-point impact from Russia and also reflecting the retail inventory headwinds. POS increased double digits. Latin America grew 1%. POS increased double digits. Per Circana, Mattel gained market share in Latin America in Q1, extending our #1 market position. Asia Pacific increased 17%, driven by growth in all key markets. POS declined mid-single digits, primarily due to China.

As previously noted, Retail inventory levels at year-end were above the prior year and elevated heading into 2023. This position improved in the first quarter with levels ending slightly below the prior year in both dollars and weeks of supply, while improved quarter end retail inventories remain slightly elevated, which is expected to negatively impact our second quarter gross billings as retailers continue to adjust their position.

Adjusted gross margin declined 660 basis points to 40% in the quarter. The decline was due to several factors; inventory management, primarily closed out sales and obsolescence of 420 basis points, cost inflation of 210 basis points, fixed cost absorption of 140 basis points associated with lower volume, and mix and other factors of 140 basis points. These negative factors were partly offset by price increases, primarily the carryover benefit from 2022 actions, which contributed 120 basis points and savings from the Optimizing for Growth program which had a positive impact of 120 basis points.

Moving down the P&L. Advertising expenses increased 3% to $76 million, supporting POS growth in the quarter. Adjusted SG&A increased 5% to $336 million, primarily due to market-related pay increases, partly offset by savings from the Optimizing for Growth program. Adjusted operating income was a negative $87 million compared to a positive $90 million a year ago. The decline was due to lower sales and lower adjusted gross margin. Adjusted EBITDA declined by $166 million to a negative $14 million, impacted by the same factors.

Cash from operations was a use of $206 million, reflecting the seasonality of the business compared to a use of $144 million in the prior year. The increase in use of cash was due to lower net earnings, partly offset by reduced working capital requirements. Capital expenditures were $43 million compared to $36 million a year ago, and free cash flow was a use of $249 million compared to a use of $180 million in the first quarter of 2022. On a trailing 12-month basis, we generated $187 million in free cash flow compared to $226 million in the prior year. The decline was primarily due to capital expenditures, which increased $42 million to $193 million.

With positive free cash flow, a strong financial position and confidence in our outlook, we have resumed share repurchases. In the first quarter, we repurchased $34 million of our shares and look to continue repurchases in 2023.

Taking a look at the balance sheet. We finished the quarter with a cash balance of $462 million compared to $537 million in the prior year. The decline reflects the use of cash to reduce debt and repurchase shares, mostly offset by free cash flow generated over the trailing 12 months. Total debt declined to $2.327 billion from $2.572 billion last year reflecting the repayment of $250 million of debt in the fourth quarter of last year. Accounts receivable declined by $188 million to $674 million in line with the decline in sales. Inventory was $961 million, slightly down from the prior year of $969 million as we have continued to achieve sequential improvements in year-over-year levels.

Looking ahead, we believe we are well positioned to achieve inventory reductions in 2023, which will contribute to free cash flow generation. Leverage ratio increased to 2.9x at the end of the first quarter compared to 2.4x a year ago. The increase is primarily due to the timing of our quarterly results. We expect to end 2023 with a leverage ratio of approximately 2.5x.

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